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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[ X ] ANNUAL REPORT UNDER SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1998
[ ] TRANSITION REPORT UNDER SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 002-93477-D
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I-STORM, INC.
(Name of small business issuer in its charter)
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NEVADA 87-0410127
(State or other jurisdiction of incorporation or (I.R.S. Employer Identification Number)
organization)
2440 West El Camino Real, Suite 520 94040-1400
Mountain View, California (Zip Code)
(Address of principal executive offices)
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(650) 962-5420
(Issuer's telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act: None.
Securities registered under to Section 12(g) of the Exchange Act: Common Stock,
no par value.
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [ ] No [X]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will 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. [ ]
The issuer's revenue for the fiscal year ended December 31, 1998 totaled
$2,856,000.
The aggregate market value of registrant's Common Stock held by non-affiliates
based upon the closing bid price on June 30, 1999, as reported by the OTC
Bulletin Board, was approximately $10,094,700.
As of June 30, 1999, there were 5,457,304 shares of the registrant's Common
Stock outstanding.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
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FORWARD LOOKING INFORMATION
This annual report contains certain forward-looking statements and
information relating to the Company that are based on the beliefs of the
Company or management as well as assumptions made by and information currently
available to the Company or management. When used in this document, the words
"anticipate," "believe," "estimate," "expect" and "intend" and similar
expressions, as they relate to the Company or its management, are intended to
identify forward-looking statements. Such statements reflect the current view
of the Company regarding future events and are subject to certain risks,
uncertainties and assumptions, including the risks and uncertainties noted.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially from
those described herein as anticipated, believed, estimated, expected or
intended. In each instance, forward-looking information should be considered in
light of the accompanying meaningful cautionary statements herein.
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
OVERVIEW
I-Storm, Inc. ("I-Storm" or "the Company") is a full service online
E-commerce provider specializing in the architecture, management and operation
of outsourced E-commerce and E-business channel solutions for Fortune 500
companies. Headquartered in Silicon Valley, I-Storm launched the I-Storm
CyberStore strategy in May 1998, a joint venture program to finance, design,
develop, and operate electronic commerce storefronts in partnership with
brand-name consumer, financial and technology product companies. In May 1998,
I-Storm also entered into a relationship with Oracle Corporation, a leading
supplier of software for information management to develop and produce
co-branded E-commerce sites for high profile world class branded companies.
Electronic commerce or "E-commerce" is the direct retail sale of goods
and services over the Internet. Over the past five years, I-Storm has developed
electronic and on-line commerce on behalf of major international manufacturing
and technology corporations including: Netscape, E*Trade, Inc., US Robotics,
Inc., Hewlett-Packard Company, Sun Microsystems, Inc., Mitsubishi, Inc., and
others. In particular, the Company designed and developed the Egghead(TM)
Software and the Cisco Systems, Inc. Internet retail transaction sites, two
successful E-commerce sites on the Web today.
I-Storm, Inc. is the parent company of LVL Communications Corporation
("LVL"), a Silicon Valley Internet marketing services and technology company.
In 1996, LVL was inducted into the Inc. Magazine Hall of Fame in recognition of
its being one of the 500 fastest-growing private companies in America for six
consecutive years from 1991 through 1996.
I-Storm, Inc. acquired LVL through a subsidiary merger in July 1998. LVL
had emerged from Chapter 11 Bankruptcy proceedings on April 16, 1998 with full
creditor approval of a Plan of Reorganization filed on March 23, 1998. LVL had
entered bankruptcy proceedings only after the collection default of a major
corporate client. LVL obtained $1,083,000 in 1998 bridge financings
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from private investors to fund its reorganization costs, and successfully
merged with I-Storm, formerly named Digital Power Holding Company ("Digital"),
an inactive public company. In March 1999, I-Storm terminated its advertising
service business to focus on E-commerce and CyberStore development. The Company
presently earns no revenue from its former advertising services business
clients. Collectively, herein, LVL shall be referred to with I-Storm as "the
Company."
The Company is headquartered in Mountain View, California in an 11,500
square foot leased office facility. The Company has 19 full time employees.
INDUSTRY BACKGROUND
The Internet, as a channel of distribution, is dramatically changing the
way products are bought and sold. The advantages to buying online are obvious
to those who use this new electronic commerce ("E-commerce") channel:
convenience, lower cost, greater choice and deeper support. Corporate America
understands the benefits to selling online: broader customer access, deeper
customer relationships and lower costs of distribution. The Internet has
spawned a number of highly successful retail businesses that have grown to
multi-million dollar operations in less than two years. Examples of client and
non-client E-commerce sites are as follows:
Between 1996, 1997 and 1998, Internet book retailer Amazon.com grew
sales from less than $16 million in 1996 to $148 million in 1997 to an
annual run-rate of $460 million in 1998 (I-Storm/LVL non-client).
Cisco Systems, Inc. booked over $100 million in sales on the Internet in
1996. By the end of 1997, its Internet sales were running at a $3.2
billion annual rate. In 1998, Cisco's Internet sales were running at a
$5.8 billion annual rate. LVL built the E-commerce mechanism for Cisco's
credit card authorization, software use and automatic product download
(former I-Storm/LVL client).
Auto-by-Tel, a web-based automotive marketplace that was formed in 1995,
processed $1.8 billion in auto sales request in 1996. As of the end of
November 1997, the Auto-by-Tel web-site was generating $500 million a
month in auto sales ($6 billion annualized) (I-Storm/LVL non-client).
However, despite these success stories, the challenges that face most
branded product companies--lack of creative expertise, technical and
organizational hurdles, commitment of required resources, and the perceived
long-term return on investment--make it very difficult for them to effectively
develop the technically superior in-house marketing and advertising resources
necessary to generate revenue through the Internet.
I-STORM, INC.
I-Storm, Inc. is the parent company of LVL, a marketing communications
and Internet technology company located in Silicon Valley and founded by
Calbert Lai and Stephen Venuti in 1986, which has launched a strategy to
finance, design, develop, and operate powerful E-commerce
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storefronts in partnership with brand-name consumer technology product
companies ("Product Partners").
Over the past five years the Company has pioneered on-line commerce on
behalf of major international manufacturing and technology corporations
including: Netscape, E*Trade, Inc., US Robotics, Inc., Hewlett-Packard Company,
Sun Microsystems, Inc., Mitsubishi, Inc. and others. In particular, the Company
designed and developed the Egghead(TM) Software and Cisco Systems, Inc. retail
transaction sites, two of the most powerful E-commerce sites on the Web today.
Based upon these highly successful ventures, in May 1998, the Company formally
launched its "I-Storm CyberStore" strategy to create significant long-term
value for its shareholders.
Under the I-Storm CyberStore approach, the Company intends to provide
all necessary financial and professional resources required to build and
operate an electronic commerce storefront capable of selling technology-related
and other products direct to consumers and businesses (an "I-Storm
CyberStore"). Each I-Storm CyberStore is expected to exclusively feature a
Product Partner's brand names exclusively and would be seamlessly tied to the
Product Partner's corporate, product-specific and other web-sites. From a
customer's point-of-view, the I-Storm CyberStore would be a "company store"
dedicated to the Product Partner's entire line of products, including parts,
accessories and related products. The Company is presently negotiating to build
CyberStores and is not currently earning revenue from a CyberStore.
EFFICIENCIES AND LEVERAGE OF AN E-COMMERCE CHANNEL
The potential benefits of online E-commerce selling are clear. The
E-commerce channel offers customer and product-specific data dissemination with
lower distribution costs while increasing efficiencies by leveraging a
business's current infrastructure. Marketing and communications can be targeted
to individual customers, increasing effectiveness and lowering costs by
reducing the need for broad communication vehicles. Sophisticated consumers can
be educated about highly technical and application specific products and
customize their product choices within moments after review of I-Storm
CyberStore product summaries. Moreover, online retail stores are not limited by
expensive shelf space and can offer a full assortment of products, including
hard-to-sell discontinued and out-of-stock merchandise. Inventory is easier to
monitor and control which leverage increased manufacturing productivity and
enable supply chain management.
Businesses that wish to establish a major marketing presence on the
Internet encounter significant challenges. The technical requirements to
building a successful E-commerce business are complex. There are many products
that solve parts of the problem, but few integrative and comprehensive
solutions. Integration with existing legacy systems, including inventory, order
tracking, financial systems, telesales systems and other major elements of
large corporate structures, can be overwhelming.
Organizational hurdles complicate the issues. Manufacturers who have had
no direct exposure to retail customers suddenly find themselves needing
different skill sets and expertise outside of their core competence. In short,
although most recognize the potential reward of E-commerce, corporate America
is moving slowly to take advantage of the channel for three major reasons: the
difficulty in
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building and operating a successful store; the significant capital outlay
required to enter the channel seriously; and the uncertain timeline for
profitability.
I-Storm's solution is to finance, design, develop, and operate powerful
commercial Internet web-sites in partnership with brand-name consumer product
companies on an outsourced basis. The Company intends to leverage its
reputation as a provider of online marketing and E-commerce solutions to build
and co-own nationally and internationally branded selling sites. The key
elements of the Company's strategy to accomplish this goal are to: (i) partner
with major brands, (ii) provide risk capital and expertise in exchange for
ownership, and (iii) build, operate and manage branded I-Storm CyberStores on
an outsourced basis.
The benefits to potential Product Partners are many. First and foremost,
these companies can rapidly enter this new channel at little or no capital
investment. Second, these companies can have a site, well integrated with their
core business, which has its own dedicated store management team with the
skills and motivation to succeed. I-Storm intends to help large companies
realize the benefits of E-commerce while minimizing the risks of entering the
channel.
I-STORM CYBERSTORE STRATEGY
Utilizing the advertising, marketing and Internet expertise of its
wholly-owned subsidiary, LVL, I-Storm is negotiating to build and manage
premier E-commerce web sites that are capable of generating sales of $10
million to $100 million within one or two years from their introduction in
partnership with world class branded product companies.
I-Storm's strategy is to finance, design, develop and operate electronic
commerce storefronts in partnership with top-tier brand-name consumer and
technology product companies on an partnership basis. The Company is leveraging
its reputation as a provider of online marketing and E-commerce solutions to
build and co-own the most powerful branded selling sites. The key elements of
the Company's strategy to accomplish this goal are: (i) negotiate exclusive
partnerships with leading consumer brand companies; (ii) provide capital and
E-commerce expertise in return for ownership; and (iii) establish long-term
control of branded retail web sites.
When reviewing a company as a potential Product Partner, I-Storm looks
for evidence of a large web-enabled and educated customer base and for products
that can be effectively and specifically described and purchased over the
Internet. The Company's strategy, based upon its experience in developing
commercial web sites for Egghead(TM) Software and Cisco Systems, Inc., is to
pursue Product Partner candidates where at least 10% of the Product Partner's
revenue can be sold over the Internet to web-enabled customers. This includes
both consumers and businesses, particularly small office/home office ("SOHO")
businesses. For example, in the fourth quarter of 1997, the Egghead(TM)
Software web site sold over $11 million of product and accounted for
approximately 15% of Egghead's revenue. Today, Egghead(TM) Software Internet
sales are running at a $140 million annual rate. Currently, the Cisco Systems,
Inc. ("Cisco") web site sells over $3 billion annually and accounts for over
25% of Cisco's overall revenue.
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Ownership of the I-Storm CyberStore is proposed to be structured as a
joint venture or royalty partnership that splits returns between the Company
and the Product Partner in a manner permitting the Company to consolidate sales
and pre-tax profits while sharing a portion of those profits with the Product
Partner.
Under such a joint venture or royalty partnership structure, I-Storm
will propose to design, build and operate the I-Storm CyberStore, including
Internet-based advertising and promotion, and customer development. The Product
Partner would provide its brand name, product line, and would be responsible
for inventory and order fulfillment. Product shipments would be made from the
Product Partner's inventory directly to the customer with I-Storm handling
billing, collections, and sales order processing. After an initial period of
four or five years, it is expected that the Product Partner would have the
option to purchase the Company's ownership of the I-Storm CyberStore at fair
market value and assume complete control of the business.
The development of I-Storm CyberStores through an I-Storm Product
Partnership is intended to provide manufacturers with a quick, low risk path to
a profitable, customer-direct channel within the constraints of their existing
corporate strategy and infrastructure. The Company expects to benefit by being
able to access the massive product, manufacturing, and brand-name investment
resident in Product Partners' businesses.
EXTENDING I-STORM'S CORE BUSINESS INTO E-COMMERCE
Much of the Company's capabilities have been developed over the past
twelve years through LVL's history of selling and marketing technology products
to commercial and consumer customers on a consultant basis on behalf of
fee-based clients. LVL's interactive group has designed, developed, or
consulted with respect to approximately 35 client E-commerce and/or information
web-sites over the past three and one-half years. Exemplative of LVL's creation
of successful retail I-Storm CyberStore-type sites are Egghead(TM) Software
("Egghead") and Cisco System's Internet Junction:
Egghead, Inc.: In early 1995, LVL created one of the web's first
online E-commerce sites for Egghead(TM) Software. The site features
full online shopping and purchasing capabilities with an inventory of
over 3,000 products. In 1997 the online store sold more than $40
million of product, outselling any of Egghead's 200 traditional
storefronts and accounting for over 10% of Egghead's total retail
sales. The average sale through the site was more than twice that of
Egghead's retail outlets and it generated higher gross margins. The
site has been credited with adding over 400,000 new customer names to
Egghead's customer database. In March 1998, Egghead announced that it
was closing all of its traditional locations to sell strictly through
its web-site. In 1998, Egghead's Internet sales are running at a $140
million annual rate.
Cisco Systems, Inc.: In 1996, when Cisco Systems, Inc. purchased
Internet Junction, a manufacturer of Internet software, Cisco decided
that "online" would be the only retail distribution channel through
which customers could purchase the software. Cisco asked LVL to build
the commerce mechanism that could perform credit card authorization
and verification, creation of a software key, and automatic download
of the product. By the end of
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1997, Cisco's Internet sales were running at a $3.2 billion annual
rate. In 1998, Cisco's Internet sales were running at a $5.8 billion
annual rate.
RELATIONSHIP WITH ORACLE CORPORATION
In May 1998, Oracle Corporation ("Oracle"), a global supplier of
software for enterprise information management, entered into a Memorandum of
Understanding with I-Storm to potentially produce and manage world-class
electronic marketing sites for high profile consumer brand companies. Under the
proposed arrangement, it is anticipated that I-Storm would have the right to
own and develop each E-commerce site for the target account, and Oracle would
subcontract its software and technical consulting services on an "as-needed
project basis." Both Oracle and I-Storm propose to jointly invest the pre-sales
and up-front marketing resources needed to win the target account. The
E-commerce sites would be co-branded with both the "On Oracle" and the
"I-Storm" commerce marks. On July 6, 1999, Oracle and I-Storm reaffirmed their
commitment to work together to provide services to Fortune 500 companies
pursuing aggressive and focused channel-building programs. To date the Company
has not earned revenue as a result of its relationship with Oracle.
I-STORM CYBERSTORE ECONOMICS
The economic model for individual I-Storm CyberStores takes advantage of
two key factors: (i) the ability to leverage the Product Partner's existing
inventory and fulfillment systems, and (ii) the existing brand names and large
marketing/advertising budgets. This combination will allow the I-Storm
CyberStore to manage operating expenses effectively and efficiently while
benefiting greatly from existing communications programs that drive web traffic
and product demand. The following percentages have been developed by I-Storm's
management based upon its experience working with traditional retail selling
distribution, and from its knowledge of the retail products sales industry.
Typical retailers of computer products (CompUSA, Computer City, etc.)
are burdened with high overhead costs associated with storefronts and sales
personnel. I-Storm's management estimates that in such traditional retail
situation gross profit is typically calculated as 14% of sales, and operating
expenses in this category range between 9-10% of sales. Retailers also need to
spend substantial amounts of advertising and promotional dollars in order to
drive traffic to their particular chain.
Typical "Internet-only" retailers (Amazon.com, CDNow, Software.net, N2K)
work with margins in the range of 15-20%. They have similar operating expenses
(in the range of 9-10% of sales). However, most of these "Internet-only" stores
are required to spend a substantial percentage of sales on advertising and
marketing (in the range of 15-20%) in order to create a brand and drive
customer traffic.
The I-Storm CyberStore model proposes to take advantage of its Product
Partner's existing infrastructure to substantially decrease operating expenses
as well as to leverage its Product Partner's large advertising and marketing
expenses. Because I-Storm CyberStores will be designed to utilize their Product
Partner's inventory, warehousing, and fulfillment systems, overall operating
expenses
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should be significantly reduced. Unlike "Internet-only" companies and
traditional retailers, I-Storm CyberStores will not need to spend large amounts
of independent advertising dollars since they will directly benefit from the
millions of dollars their Product Partners already spend to generate awareness
and sales. Based on its work with Egghead, Cisco, and other technology
manufacturers, the Company expects between 10-15% of total sales to come
through the Internet within two years of opening and operating an I-Storm
CyberStore.
I-STORM CORPORATE PARTNERS AND ADVISORS
The Company is teaming with companies and individuals who can strengthen
I-Storm's ability to develop and operate I-Storm CyberStores effectively. These
companies and individuals include:
ORACLE CORPORATION: Oracle Corporation is a leading supplier of
corporate database software in more than 140 countries, with
approximately 12,000 employees worldwide, dedicated to designing,
integrating, and programming database solutions. With annual revenues
exceeding $6 billion, Oracle is the global supplier of enterprise
information management software to many of the Internet's leading
commercial web-sites. Under the May 5, 1998 Memorandum of Understanding
with I-Storm, both I-Storm and Oracle proposed to develop a mutual
scaleable model for the ongoing development of profitable world-class
electronic marketing sites, as well as to establish three to ten high
profile consumer branded product sites, and as of July 6, 1999, Oracle
and I-Storm reaffirmed this commitment.
I-STORM ADVISORY BOARD: In May of 1998, I-Storm held its first meeting
of the I-Storm Advisory Board. This organization was created to provide
the new business with experience and contacts in key areas of
merchandising and marketing. The Company intends to continually add
members to the Advisory Board. Certain members of the I-Storm Advisory
Board are as follows:
Matthew Howard is a thirty-year veteran in executive management
for major U.S. retailers. Mr. Howard has served as Senior
Executive Vice President of both Marketing and Merchandising
for Sears, as President of Computer City, a subsidiary of Tandy
Corporation, and as an Executive Vice President of Montgomery
Ward.
Peter Janssen was a member of the start up team that developed
the Sears Business Systems Center. After 18 years at Sears, Mr.
Janssen left to head sales and marketing for several technology
start-up companies, including Mindset, the Amdek Division of
Wyse, Nexgen Microsystems, and Acer Computers, where he was
responsible for Acer's entry into the consumer channels of
distribution and growing that division to $500 million in four
years.
Mr. Janssen was brought into Egghead(TM) Software, as head of
Merchandising and Marketing and was instrumental in increasing
sales by 20% and reducing inventory by 40%. Together with LVL,
Mr. Janssen implemented one of the first E-commerce Internet
sites, Egghead.com.
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For the past two and one-half years, Mr. Janssen has headed his
own firm, Peter Janssen & Associates ("PJA"), a technology
consulting firm specializing in helping technology companies
develop and implement their sales marketing and channel
marketing strategies and tactics. Since its founding, PJA has
worked with Texas Instruments, Motorola, Acer, Toshiba, Thomson
Consumer Electronics, Philips, Symantec, CalComp and 20 smaller
start-up companies.
I-STORM CYBERSTORE PARTNERSHIPS
The Company has approached a targeted number of brand-name consumer
product companies regarding the I-Storm CyberStore program. As a result, on
December 7, 1998, the Company signed a letter of understanding with Sun
Microsystems, Inc. ("Sun"), a leading manufacturer and global provider of
network computing systems, including UNIX based workstations, microprocessors,
Internet/intranet services, and Java(TM) software. Sun's products command a
significant share of a rapidly growing segment of the computer industry and are
used for many demanding commercial and technical applications in various
industries. The Sun Letter of Intent authorizes the Company to do a feasibility
study on establishing an I-Storm CyberStore dedicated to exclusively selling
Sun and compatible products to retail customers for profit.
Further, on June 16, 1999, the Company entered into a three-year
E-commerce Sales and Marketing Agreement with AIG Warranty Services and
Insurance Agency ("AIG"). During the three-year term of the Sales and Marketing
Agreement, I-Storm will be the exclusive on-line marketer of AIG's on-line
warranties and service contract agreements.
In 1998, the Company also signed letters of understanding and pursued
feasibility studies for the construction of CyberStores, as follows:
Garden Botanika: Garden Botanika ("GBOT") is a marketer of all-natural
personal care products through direct mail and 267 company-owned retail
locations. Total GBOT revenue is $114 million per year, of which
approximately 5% of revenue is generated through catalog sales. Its
catalog business, at 5% of total revenues, is secondary to its retail
stores.
The High-Tech Group: The High-Tech Group ("HTG") is a premier provider
of merchandise and membership fee services in the credit card
syndication industry, and holds the rights to market products and
merchandise to over 75 million existing credit card holders of major oil
companies, banks and departments stores such as AMOCO, BP, Bank One,
Chase Manhattan, Montgomery Ward and Sears.
Abercrombie and Kent: Abercrombie and Kent is a specialty provider of
luxury vacations and adventure travel to seven continents and over 100
countries.
Philips Electronics, Inc. Philips Electronics, Inc. is a $39 billion
manufacturer of consumer electronics and other products. The Philips
Mobile Computing Group ("PMCG") is a product division based in San Jose,
California, which is rolling out a line of handheld, sub-notebook, and
notebook computers intended for mobile professional users.
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Although PMCG, Garden Botanika, HTG Group and Abercrombie and Kent
signed letters of intent with the Company in 1998, there can be no assurance
that the Company will enter into final CyberStore Agreements with any of these
potential Product Partners, and the Company has not entered into any such
agreements as of June 30, 1999. The Company, to date has not constructed
CyberStores for these entities, nor has the Company received any revenue from
these entities.
LVL COMMUNICATIONS CORPORATION
LVL, a marketing and internet technology company headquartered in
Mountain View, California, has a twelve-year track record of creative and
technical success in serving marketers of consumer-oriented technology
products. Founded in 1986 by Calbert Lai and Stephen Venuti, and also known as
"Lai, Venuti and Lai," LVL specialized in offering a wide range of strategic
communication services that help its clients market their products, services
and messages to targeted segments of the consumer population. These services
included market research, corporate and product market strategy development,
identity definition, product branding, consumer and technical media services,
advertising and promotion and interactive advertising development. In
particular, LVL is a provider of integrated communications to consumers that
take advantage of emerging technologies and new media, including electronic
communications such as the Internet, the World Wide Web, on-line services,
PC-related media (CD-ROMs, multi-media, etc.) was inducted into Inc. Magazine's
Hall of Fame as one of the 500 fastest-growing companies in America for six
consecutive years from 1991 through 1996.
LVL's business has been built upon its ability to provide its corporate
clients with the intellectual structure and creative resources necessary to
design and deliver market communications to appropriate consumer audiences
using traditional and new media. In 1997, the Company was named "Agency of the
Year" by Marketing Computers magazine for its integration of traditional and
new media disciplines to increase a company's marketing efficiencies and
effectiveness.
Although LVL achieved the foregoing recognition for twelve
year-operation of its advertising and marketing services business in Silicon
Valley, LVL suffered substantial losses in 1997 as a result of the payment
default of a major corporate client. Although in 1998 LVL was able to
reorganize under Chapter Eleven bankruptcy proceedings with creditor approval,
and although the Company has changed its focus from traditional advertising
services to providing joint venture-based E-commerce channels and CyberStore
development, there can be no assurance that the Company as a newly-reorganized
corporation will achieve profitability or remain as a going concern. The
Company presently has no revenue from any former LVL advertising services
business client.
PRE-MERGER LVL SERVICES AND CLIENTS
The following is a list of customers that represented $50,000 or more in
annual billings for LVL in various twelve-month periods from December 1996
through December 1998:
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Netscape US Robotics, Inc. Bay Networks, Inc. Hewlett-Packard Company
Disney Cisco Systems, Inc. Mitsubishi, Inc. Bank of America
Group, Inc. DirectTV, Inc. Philips Electronics, Inc. 3COM
E*Trade Sun Microsystems, Inc. Acer, Inc.
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Because of the project-oriented nature of its services, LVL's traditional
services revenues tended to be concentrated in a handful of clients at any one
time. The Company's largest client accounted for approximately 50% of the
Company's revenues for the period commencing January 1, 1998 and ending
December 31, 1998. For the period commencing from July 17, 1998 and ending
December 31, 1998, five clients accounted for 79% of the Company's revenue with
no client accounting for more than 26.3% of the Company's revenue for that
period.
In March 1999, the Company reorganized its internal corporate
structure and terminated the advertising services business formerly handled in
LVL Advertising, Inc. The Company phased out this traditional advertising
business to focus its managerial, technical and capital resources on its
strategy of financing, developing and operating E-commerce storefronts with
Product Partners. As a result, the Company presently has no revenue from any
former advertising services business client.
I-STORM COMPETITION
Use of the Internet is growing at very high rates and many well
financed companies are operating or developing web-based businesses currently.
At the same time, barriers to entry into web-based commerce are low and an
extremely large number of individuals and small companies are offering goods of
all types for sale over the Internet on web-sites of varying levels of
sophistication.
The markets for the Company's services are highly competitive and are
driven by client demands for better service (more effective programs, quicker
response times, and implementation of new electronic tools or media) and
perceived price and performance of its services. Although the Company has built
a market position for itself in its traditional services area, there are few
barriers to entry in the advertising business and interactive marketing
business. The Company has no significant proprietary technology that would
preclude or inhibit competitors from entering the marketing communications
market and it expects to face additional competition from new entrants in the
market in the future. In particular, the niche that the Company traditionally
serves is considered to be an attractive, high-growth segment of the
advertising industry. Current and prospective competitors include
international, national, and regional advertising agencies, specialized
communications firms currently operating in a single medium (such as the
Internet), and firms such as CKS Group, Inc. and Think New Ideas, Inc., Organic
On-Line, Studio Archetype, and Agency.com which all share the Company's market
focus. Although the Company is actively implementing its CyberStore concept in
conjunction with Oracle Corporation, a leading global enterprise software
supplier, the Company also faces a highly competitive market in this segment of
its services. E-commerce competitors include: Claremont, Andersen Consulting,
Cambridge Technologies, IBM and EDS.
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EMPLOYEES OF THE COMPANY
As of December 31, 1998, the Company and its subsidiaries employed 26
full-time and one part-time employees. The Company employs highly skilled
computer and creative-oriented personnel from the Silicon Valley area. Seven
employees had annual salaries of $100,000 or more.
As of June 30, 1999, the Company and its subsidiaries employed 19
full-time and one part-time employees. The number of employees decreased as a
result of the Company's cessation in March 1999 of the advertising line of
business, formerly managed by LVL Advertising, Inc. As of June, 1999, six
employees have annual salaries of $100,000.
Neither the Company's nor the subsidiaries' employees are unionized.
Management believes that it has good working relations with its employees.
ADDITIONAL RISK FACTORS RELATED TO BUSINESS OPERATIONS
OPERATING LOSSES
The Company realized significant operating losses in 1997 and 1998.
There can be no assurance that the Company will generate profit or positive
cash flows from operating activities in the future. The Company terminated its
traditional advertising services business in March 1999 and presently receives
no revenue from those former clients. If the Company is unable to achieve
profitability or positive cash flows from operating activities, it will not be
able to meet its working capital or future debt service requirements, which
would have a material adverse effect on the Company's ability to continue to
operate. See "Financial Statements."
MANAGEMENT OF GROWTH; ONGOING CAPITAL REQUIREMENTS
The conduct of the Company's business and the continued implementation
of its business plans and operations will require the availability of
additional funds in the future. While the Company currently has no material
commitments for capital or other expenditures, other than as set forth herein,
it is the Company's intention to continue to implement the growth of its
business and expand its operations, which may require additional financing. If
needed, there can be no assurance that the Company will be able to successfully
negotiate or obtain additional financing.
NEW E-COMMERCE BUSINESS STRATEGY
The Company is engaging a new E-commerce business strategy with respect
to the partnership of I-Storm CyberStores with brand-name consumer product
companies ("Product Partners") to finance, design, develop and operate Internet
commercial web-sites. The Company terminated its traditional advertising
services business in March 1999. Although the Company believes it has the
critical blend of skills necessary to develop and successfully operate such
Product Partner ventures, there can be no assurance that the Company will be
able to establish or maintain strategic alliances with any Product Partner, or
that any associated I-Storm CyberStore will generate sufficient revenue to
produce a profit. In addition, I-Storm's ability to maintain its partnerships
with Product Partners
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<PAGE> 13
and develop new Product Partners depends to a significant degree on the quality
of its services and its ability to generate revenue and profit from its initial
I-Storm CyberStores. Further, the success of I-Storm's CyberStore business will
be driven in large part by the strength of the brand-names and product lines of
its Product Partners. The Company expects to have little influence on the
products and non-Internet-related advertising strategies of its Product
Partners.
INDUSTRY CONSOLIDATION, CLIENT RELATIONSHIPS
The Company's ability to continue to generate new business is dependent
upon the Company's continued relationship with key executives of its clients.
In addition, consolidation in clients' industries can result in the immediate
loss of substantial clients and revenue streams without any advanced notice.
Such occurrences can cause the Company to incur substantial and unchanged
overhead, while experiencing a rapid loss of revenue. There can be no
assurances that such consolidation or loss of clients will not occur in the
future.
MARKET ACCEPTANCE OF THE COMPANY'S APPROACH; SERVICE DEVELOPMENT; RAPID
TECHNOLOGICAL CHANGE; DEPENDENCE UPON THE INTERNET ABSENCE OF PRESENT
CYBERSTORES
The Company provides an integrated approach to meet the marketing
communications and E-commerce needs of its clients. To compete successfully
against specialized service providers, the Company believes that its products
and services in each marketing communication discipline will need to be
competitive with the services offered by the firms that specialize in each
discipline. The Company's ability to derive revenues will depend in part upon a
robust industry and the infrastructure for providing Internet access and
carrying Internet traffic. If the necessary infrastructure or complementary
products are not developed, or if the Internet does not become a viable
commercial marketplace, the Company's business, operating results and financial
condition could be materially adversely affected. There also can be no
assurance that the Company will be successful in providing competitive
solutions to clients through its integrated marketing communication services
and products, or through the establishment of E-commerce web sites. Failure to
do so could result in the loss of existing customers or the inability to
attract and retain new clients, either of which developments could have a
material adverse effect on the Company's business, financial condition and
operating results. Although the Company's strategic business plan contemplates
the development of E-commerce CyberStores in conjunction with
brand-recognizable Product Partners, there can be no assurance that any such
CyberStores will be developed.
HIGH COSTS TO MAINTAIN SKILLED LABOR FORCE
A high percentage of the Company work force is either highly-skilled
computer or creative-oriented personnel, both of which are extremely expensive
and contribute to a high monthly payroll compared to other companies of its
size and revenues. The Company is headquartered in Mountain View, one of the
most expensive areas in the already costly Silicon Valley, where demand for
skilled employees and real estate has skyrocketed. Out of the Company's 19
full-time employees, 11 of them are paid salaries of more than $60,000 per
year, and of those, 6 have annual salaries in excess of $100,000. As in most
service industry companies, the Company's fixed costs are a high percentage of
its monthly overhead and cannot be easily or quickly reduced in the event of
decrease in
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<PAGE> 14
business. Such high fixed costs can rapidly cause such a company to operate at
a deficit. The inability to attract, hire or retain the necessary technical and
managerial personnel could have a material adverse effect upon the Company's
operating result and financial condition.
GOING CONCERN QUALIFICATION
As discussed elsewhere in this 10-KSB Report, and by the Company's
Accountants in the notes to the Financial Statements, the bankruptcy
proceedings significantly affected the Company's capital structure, liquidity
and capital resources. These factors and others discussed elsewhere and in the
notes to the "Financial Statements" raise substantial doubt about the ability
of the Company to continue as a going concern and about the ability of the
Company to realize its Reorganization Asset. The Financial Statements do not
include any adjustments that might result from the outcome of this uncertainty.
VOTING CONTROL BY THE OFFICERS AND DIRECTORS OF THE COMPANY'S COMMON STOCK
As of June 30, 1999, the Company's executive officers, directors and
controlling stockholders directly or beneficially hold most of the outstanding
shares of Common Stock. The Company's officers, directors and controlling
stockholders currently are, and in the foreseeable future will continue to be,
in a position to control the Company by being able to nominate and elect a
majority of the Company's Board of Directors. The Board of Directors
establishes corporate policies and has the sole authority to nominate and elect
the Company's officers to carry out those policies.
DEPENDENCE ON KEY PERSONNEL
The Company is dependent on the efforts of Calbert Lai, co-founder,
President and Director, and Stephen Venuti, co-founder, Executive Vice
President and General Manager, as well as a group of other talented employees
with industry relationships and technical knowledge of the Company's
operations. The loss of any of them or the inability of the Company to recruit
and train additional key technical and sales personnel in a timely manner,
could materially and adversely affect the business of the Company and its
future prospects. There can be no assurance that the Company will be able to
continue to attract and retain the qualified personnel necessary for the
development of its business. The Company does not maintain key person life
insurance policies on any of its officers and employees. The Company intends to
provide key man life insurance for Calbert Lai, Steven Venuti, its officers and
key employees. If the Company is unable to obtain adequate financing in the
near future, it will not be able to retain its existing personnel.
NASDAQ OR AMEX LISTING
The Plan of Reorganization imposed a requirement that the Company apply
for NASDAQ listing within 90 days of the date upon which LVL became a
subsidiary of the Company, also known as the "Effective Date" of the Plan.
The Plan of Reorganization contemplated that the Company would raise
sufficient equity financing within 90 days of the Effective Date to satisfy a
minimum NASDAQ capital listing
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<PAGE> 15
requirement of $4,000,000. Because of operational cash flow needs and the
expense and time required to prepare an audited financial statements to
accompany this Form 10-KSB and other required SEC reports, the Company did not
apply for listing on NASDAQ within this time frame, also in part because at the
time it could not satisfy the NASDAQ capital listing requirements. Although the
Company presently anticipates that it will file shortly for either NASDAQ or
AMEX listing, and will promptly complete the filing of all requisite SEC
reports, there can be no assurance that the Company will have sufficient
capital to meet NASDAQ or AMEX listing requirements or that NASDAQ or AMEX will
accept the Company for listing.
LVL's Plan of Reorganization was approved without objection from
creditors. Creditors, however, retain a right to challenge actions of LVL and
its parent, the Company, with respect to the implementation of any aspect of
the Plan of Reorganization, including a late filing of the NASDAQ application.
Presently, no creditor has voiced an objection or presented a formal challenge
to any actions taken by LVL or the Company pursuant to the Plan of
Reorganization.
ABSENCE OF CASH DIVIDENDS AND NO CASH DIVIDENDS ANTICIPATED
The future payment by the Company of cash dividends on its Preferred or
Common Stock, if any, rests within the discretion of its Board of Directors and
will depend, among other things, upon the Company's earnings, its capital
requirements and its financial condition, as well as other relevant factors.
The Company does not anticipate making any cash distributions upon its
Preferred or Common Stock in the foreseeable future. The payment of dividends
on the Shares is subordinate to the payment of dividends on Series A and B
Preferred Stock.
FUTURE SALES OF COMMON STOCK BY MANAGEMENT AND OTHERS
Under the Plan of Reorganization, 1,095,284 shares of freely tradable
Common Stock have been issued to officers, directors or to beneficial owners
holding 10% or more of the Company's Common Stock, under an exemption from
Securities Act registration, pursuant to Section 1145 of the Bankruptcy Code
and Section 3(a)(7) of the 1933 Securities Act, and 2,494,716 shares of freely
tradable Common Stock have been issued to those who are not officers, directors
or to beneficial owners holding 10% or more of the Company's Common Stock. Of
this freely tradable Common Stock, 2,290,756 shares are subject to lock-up
agreements restricting their sale for a period of until February 2000. These
lock-up agreements may be modified or waived upon the mutual consent of the
Company and the placement agent which facilitated the sale in early 1999 of the
Company's Series B Cumulative Convertible Preferred Stock.
Additionally, as of December 31, 1998, 1,597,800 shares of Common
Stock that have not been registered pursuant to the Securities Act have been
issued to officers, directors or to beneficial holders holding 10% or more of
the Company's Common Stock. In the event a public market for the Company's
Common Stock were to develop in the future, of which no assurances can be
given, sales of this unregistered Common Stock may be made by management and
others pursuant and in compliance with the provisions of Rule 144 of the
Securities Act. In general, under Rule 144, a person who has satisfied a
one-year holding period may, under certain circumstances, sell within any
three-month period a number of shares which does not exceed the greater of one
percent of the then
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<PAGE> 16
outstanding shares of Common Stock or the average weekly trading volume in
shares during the four calendar weeks immediately prior to such sales. Rule 144
also permits, under certain circumstances, the sale of shares without any
quantity or other limitation by a person who is not an affiliate of the Company
and who has satisfied a two-year holding period. Future sales of such shares
made under Rule 144 may have an adverse effect on the then prevailing market
price, if any, of the Common Stock and adversely affect the Company's ability
to obtain future financing in the capital markets as well as create a potential
market overhang.
ITEM 2. DESCRIPTION OF PROPERTY.
As of December 31, 1998, the Company's headquarters was located on
15,847 square feet of leased office space at 480 Cowper Street, Palo Alto,
California 94301. The Company was occupying the space on a month-to-month basis
following the expiration of a 15-year lease.
In March of 1999, the Company moved its headquarters to a leased office
facility at 2440 West El Camino Real, Suite 520, Mountain View, California
94040-1400. The new location consists of approximately 11,500 square feet and
the Company has entered into a two-year lease for the facility.
ITEM 3. LEGAL PROCEEDINGS.
PLAN OF REORGANIZATION AND MERGER OF LVL INTO DIGITAL'S WHOLLY-OWNED SUBSIDIARY
The Company has been reorganized pursuant to a Plan of Reorganization
("Plan of Reorganization") filed by LVL on March 23, 1998, that has recently
been confirmed by the United States Bankruptcy Court ("Bankruptcy Court") for
the Northern District of California ("Order") without creditor objection on
April 16, 1998. The Order approved the merger of LVL into Digital, an inactive
public company, or into its wholly-owned subsidiary, and to take a series of
steps to protect certain prior creditor interests.
In contemplation of the merger, on May 6, 1998, I-Storm Acquisition
Corp. entered into a Stock Purchase Agreement with the holders of a majority of
the common stock of Digital, Chiracahua Company, Melinda Johnson and Leonard
Burningham, to purchase 600,000 shares of Digital's outstanding common stock
for $150,000, with an option to purchase an additional 100,000 shares of
Digital's outstanding common stock from existing shareholders at $2.00 per
share, exercisable any time from May 6, 1998 through May 6, 1999.
Digital had been organized under the laws of the State of Nevada on
February 24, 1984, under the name "Interventure." Digital had been an inactive
public company from 1989 through 1998, and other than maintaining and restoring
the Company's good standing certificate, Digital's only material business
operation was to seek prospective business or assets to acquire. Digital had no
revenues from 1989 to 1998. In March 1998, Digital voluntarily filed a Form
10-SB with the Securities and Exchange Commission.
On July 15, 1998, pursuant to the Plan of Reorganization and with
appropriate approval from the California Secretary of State's Office, the two
wholly-owned subsidiaries of LVL, LVL Interactive, Inc. and LVL Advertising,
Inc., merged into LVL, the parent company, leaving LVL as
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<PAGE> 17
the sole surviving California corporation. On July 17, 1998, the wholly-owned
subsidiary of Digital, Digital Acquisition Corporation, merged into LVL, with
approval from the California Secretary of State's Office, resulting in LVL
becoming the wholly-owned subsidiary of Digital, a Nevada corporation. On July
20, 1998, Digital was renamed "I-Storm, Inc." by amendment to its Articles of
Incorporation.
Under the Plan of Reorganization, the Company will be required to pay
certain secured claims, including principal and interest, over a period of five
years, in equal quarterly annual installments. Asserted secured claims were
held by Dot Printers, Inc., for the amount of $210,000, and by George Rice &
Sons, for the amount of $24,589.71. The Company is presently challenging the
secured status of these claims, as well as the claims of certain other
creditors to approximately $386,500 as secured debt, although there can be no
assurance that the Company will prevail in its position. The Company will also
retain a prior factoring relationship with Pacific Business Funding
Corporation, which has provided a secured receivables line of credit to LVL,
prior to the Plan. The Company will also issue 600,000 shares of Series A
Preferred Stock to certain unsecured creditors under the Plan. The holders of
such Series A Preferred Stock shall have the right to receive cumulative
dividends at a rate of $0.05 per share, per year, prior and in preference to
any payment of any dividend on the Common Stock of the Company or any other
equity security of the Company. The dividends, rights and preferences of the
Series A Preferred Stock will also be senior to those of the Common Stock and
of any other equity security of the Company. Upon the occurrence of certain
Liquidation Preference Events, the holders of Series A Preferred Stock are
entitled to receive a preference payment equal to $6.67 per share for each
share of Series A Preferred Stock, plus an amount equal to all declared but
unpaid dividends thereon, prior to any distribution of funds and assets to any
other class of shareholder. Such Liquidation Preference Events are the
liquidation, dissolution or winding up of the Company, or the sale, merger or
combination of Company, a public offering in excess of $25 million, a merger or
consolidation of the Company in which its shareholders do not retain a majority
of the voting power in the surviving corporation, or a sale of all or
substantially all of Company's assets. Should there be insufficient assets to
permit payment of the foregoing in full to all holders of the Series A
Preferred Stock, then the assets of the Company will be distributed ratably to
the holders of Series A Preferred Stock and then to the Common Stock of the
Company.
Although the Board of Directors authorized the issuance of 600,000
shares of Series A Preferred Stock on July 23, 1998, the Company has awaited
the final determination by the Bankruptcy Court of the pool of unsecured
creditors that will be entitled to share on a pro rata basis in accordance with
their claims, in order to make an appropriate issuance of such Series A
Preferred Stock.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders in the fourth
quarter of 1998.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is traded on the OTC Bulletin Board under the
symbol "ISTM." The Company's shares of Preferred Stock are not listed on any
exchange or quoted on the OTC Bulletin Board. Prior to the third quarter of
1998, there was no public market for the Company's Common Stock. Only a limited
public market for the Company's Common Stock existed in the third and fourth
quarters of 1998 and bid prices may not be indicative of fair market value or a
sustained trading market. The range of high and low bid information for the
Company's Common Stock for each full quarterly period during the Company's last
two fiscal years, is as follows:
<TABLE>
<CAPTION>
PERIOD HIGH BID LOW BID
------ -------- -------
<S> <C> <C>
Fiscal 1997
-----------
1st quarter - -
2nd quarter - -
3rd quarter - -
4th quarter - -
Fiscal 1998
-----------
1st quarter - -
2nd quarter - -
3rd quarter $7.00 $0.25
4th quarter $4.00 $0.25
Fiscal 1999
-----------
1st quarter $10.75 $3.25
2nd quarter $8.00 $3.50
</TABLE>
These quotations were obtained from OTC Electronic Bulletin Board
quarterly quote summaries, and reflect interdealer prices, without retail
markup, markdown, or commission and may not represent actual transactions.
Trades were not made on a daily basis. On December 30, 1998, the closing bid
price for the Company's Common Stock was $3.50. As of the same date, there were
274 holders of record of Common Stock. As of June 30, 1999, the closing bid
price was $4.125 and the number of holders of record was 244.
The trading price of the Company's Common Stock has been and in the
future is expected to be subject to extreme fluctuations in response to both
business-related issues, such as quarterly variations in operating results, the
timing of commencement or completion of client projects, reductions or
increases in client spending on marketing communications services,
announcements of new services or business acquisitions by the Company or its
competitors, and the gain or loss of client accounts, and stock market related
influences, such as changes in estimates of securities analysts, the presence
or absence of short-selling of the Company's stock, and events affecting other
companies that
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the market deems to be comparable to the Company. In addition, the stock market
has from time to time experienced extreme price and volume fluctuations that
have particularly affected the market price of many technology-oriented
companies and that often have been unrelated or disproportionate to the
operating performance of these companies. These broad market fluctuations may
adversely affect the market price of the Company's Common Stock. The trading
prices of many high technology and Internet-related companies' stocks are at or
near their historical highs and reflect price/earning ratios substantially
above historical norms. There can be no assurance that the trading price of the
Company's Common Stock will remain at or near any current or previous level.
The Company currently intends to retain future earnings to fund the
development and growth of its business and therefore does not anticipate paying
cash dividends within the foreseeable future. Any future payment of dividends
will be determined by the Company's Board of Directors and will depend on the
Company's financial condition, results of operations and other factors deemed
relevant by its Board of Directors.
SALES OF UNREGISTERED STOCK
PRIVATE PLACEMENT OFFERING OF THE SERIES C PREFERRED STOCK
The Company has recently raised a total of $4,550,000 in gross proceeds
from a private placement offering of Series C Cumulative Convertible Preferred
Stock ("Series C Preferred Stock"), made pursuant to Section 506 of Regulation
D, at a price per share of $12.25. The offering of such Series C Preferred
Stock ("the Offering") commenced on February 22, 1999 and concluded on May 31,
1999. A total of 371,429 shares of Series C Preferred Stock were offered and
sold by the Company with the assistance of financial consultants who received a
consulting fee equal to 12% of gross proceeds or $546,000. Additionally,
certain consultants received warrants to purchase 2,040 shares of Series C
Preferred Stock at an exercise price of $12.25. After deducting the consulting
fees, a total of $4,004,000 in proceeds was received by the Company from the
Offering. The net proceeds are being used for the development of I-Storm
E-commerce stores, for normal operating expenses during the Company's
development stage, and for general working capital purposes.
The Series C Preferred Stock has a par value of $0.01 per share. Each
share is entitled to cumulative annual dividends, when and as declared by the
Board of Directors, at an annual rate of nine percent (9%) each year, in
quarterly installments of $0.28 on February 15, May 15, August 15, and November
15, of each year, payable at the option of the Company either in shares of
Series C Preferred Stock or in cash. The right of the Series C Preferred Stock
to payment of either cash or common stock dividends is subordinate to the right
to cash or stock dividend payments of Series A Preferred Stock or Series B
Preferred Stock. The shares of Series C Preferred Stock are convertible into
Common Stock at any time following the closing of the Offering, at the option
of the holder, into such number of shares of the Company's Common Stock as
shall equal $12.25 divided by the lower of $3.50 (the "Conversion Price"), or
should the closing bid price for any five consecutive trading days during the
period commencing 11 months after the Final Closing of the Offering and ending
one month thereafter be less than $3.50, the Conversion Price shall be
readjusted to that price, provided, however, that in no event shall the
Conversion Price be reduced below $2.80. The number of shares of Common Stock
to be issued upon conversion shall also be subject to certain antidilution
provisions.
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<PAGE> 20
Each share may be converted into Common Stock at the Conversion Price at the
option of the Company, at any time after one year from the Final Closing of the
Offering, upon the payment to the holder of any unpaid accumulated dividends,
in cash or Common Stock, at the option of the Company. The Common Stock
exercisable upon conversion of the Shares shall have piggy-back registration
rights effective from the Final Closing of this Offering and shall have demand
registration rights effective from the Final Closing until 12 months
thereafter.
PRIVATE PLACEMENT OFFERING OF SERIES B PREFERRED STOCK
The Company raised a total of $4,996,439 in gross proceeds from a
private placement offering of Series B Cumulative Convertible Preferred Stock
("Series B Preferred Stock"), made pursuant to Section 506 of Regulation D, at
a price per share of $12.25. The offering of such Series B Preferred Stock
("the Offering") commenced on December 11, 1998 and concluded on February 18,
1999. A total of 407,900 Shares of Series B Preferred Stock were offered and
sold through Weatherly Securities Corp. ("Weatherly"), a placement agent which
received a 10% placement fee and a 3% non-accountable expenses allowance, or
13% of the gross proceeds of the sale of such Series B Preferred Stock
Offering, less certain expenses, for a total of $599,512. Weatherly also
received as compensation for the Offering Warrants to purchase 40,790 shares of
Series B Preferred Stock. After deducting the placement agent's fees and
expenses, a total of $4,396,927 in proceeds was received by the Company from
the Offering. The majority of such proceeds was used to fully retire its
outstanding bridge loans, which had been incurred both pre- and
post-bankruptcy; to almost fully retire its loans under a factoring agreement,
and to pay down many of its outstanding expenses and professional fees. The
balance of the proceeds is being used for the development of I-Storm
CyberStores and for general working capital purposes.
The Series B Preferred Stock has a par value of $0.01 per share. Each
share is entitled to cumulative annual dividends, when and as declared by the
Board of Directors, at an annual rate of nine percent (9%) each year, in
quarterly installments of $0.28 on February 15, May 15, August 15 and November
15 of each year, payable at the option of the Company either in shares of
Series B Preferred Stock or in cash. The right of the Series B Preferred Stock
to payment of either cash or common stock dividends is subordinate to the right
to cash or stock dividend payments of Series A Preferred Stock. The shares of
Series B Preferred Stock are convertible into Common stock at any time
following the closing of the Offering, at the option of the holder, into such
number of shares of the Company's Common Stock as shall equal $12.25 divided by
the lower of $3.50 (the "Conversion Price"), or should the closing bid price
for any five consecutive trading days during the period commencing 11 months
after the Final Closing of the Offering and ending one month thereafter be less
than $3.50, the Conversion Price shall be readjusted to that price, provided,
however, that in no event shall the Conversion Price be reduced below $2.80.
The number of shares of Common Stock to be issued upon conversion shall also be
subject to certain antidilution provisions. Each Share may be converted into
Common Stock at the Conversion Price at the option of the Company, at any time
after four years from the Final Closing of the Offering, upon the payment to
the holder of any unpaid accumulated dividends, in cash or Common Stock, at the
option of the Company. The Common Stock exercisable upon conversion of the
Shares shall have piggy-back registration rights effective from the Final
Closing of this Offering and shall have demand registration rights effective
from the Final Closing until 12 months thereafter.
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<PAGE> 21
BRIDGE FINANCING
Prior to confirmation of the Plan of Reorganization, Trident III, L.L.C.
("Trident") provided LVL $600,000 in pre-confirmation bridge financing, which
has been used for reorganization costs and for working capital purposes. In
consideration and repayment of this pre-confirmation bridge financing, Trident
has been issued 600,000 shares of non-voting Common Stock in the Company,
redeemable at $1.00 per share, and 440,000 shares of non-redeemable voting
Common Stock. These shares were issued pursuant to the Order and Plan of
Reorganization and are exempt from registration under the federal securities
laws pursuant to Section 1145 of the Bankruptcy Code.
Trident has also provided $258,000 in post-confirmation bridge financing
to the Company for reorganization and working capital purposes. In partial
consideration for this post-confirmation bridge financing, Trident has been
issued an additional 91,200 shares of non-redeemable non-voting Common Stock in
the Company which is unregistered Common Stock subject to Rule 144
restrictions. Trident was also entitled to receive interest, at a rate of 10%
per annum, on any outstanding unpaid balance of the total of $258,000 in
post-confirmation bridge financing which it has provided to the Company in
connection with the reorganization. In January 1999, Trident was repaid all
post-confirmation bridge financing with accrued interest from the proceeds of
the Series B Preferred Stock offering.
The Company also received $100,000 in pre-confirmation bridge financing,
used for reorganization costs and working capital purposes as follows: a
$50,000 Promissory Note from Pac Rim Access Group, Inc., repayable with accrued
interest at a rate of 10% per annum; and a $50,000 Promissory Note from
Masamitsu Ishihara, repayable with accrued interest at a rate of 10% per annum.
In January 1999, these amounts were repaid in full from the proceeds of the
Series B Preferred Stock offering.
The Company has received an additional $300,000 in post-confirmation
bridge financing (the "July 1998 Bridge Financing") as follows: (i) a $150,000
Promissory Note from Four M International, repayable with accrued interest at a
rate of 10% per annum; and (ii) $75,000 in Promissory Notes from each of
Frederick Meyers and Richard David, for a total of $150,000, repayable with
accrued interest at a rate of 10% per annum. Each of the foregoing Promissory
Notes will be paid from the earlier of the First Closing of this Offering, or
July 31, 1999. As part of the July 1998 Bridge Financing, the Company issued
warrants to purchase Common Stock of the Company, exercisable at $0.001 per
share to each of these bridge financiers as follows: (i) 60,000 warrants to
Four M International; and (ii) 30,000 warrants, to each of Frederick Meyers and
Richard David, for a total of 60,000 warrants. The proceeds of this bridge
financing was used for reorganization costs and working capital purposes. In
January 1999, these amounts were repaid in full from the proceeds of the Series
B Preferred Stock offering.
The Company received an additional $425,000 in post-confirmation bridge
financing (the "September 1998 Bridge Financing") as follows: (i) a $300,000
Promissory Note from the Security Trust IRA for Robert L. Wilson, repayable
with accrued interest at a rate of 10% per annum; (ii) a $100,000 Promissory
Note from Wink Capital Management, Ltd., repayable with accrued interest at a
rate of 10% per annum; and (iii) a $25,000 Promissory Note from Philip Cory
Roberts, repayable
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<PAGE> 22
with accrued interest at a rate of 10% per annum. As part of the September 1998
Bridge Financing, the Company issued warrants to purchase Common Stock of the
Company, exercisable at $0.001 per share to each of these bridge financiers as
follows: (i) 120,000 warrants to Security Trust IRA for the benefit of Robert
L. Wilson, or its designees; (ii) 40,000 warrants to Wink Capital Management,
Ltd.; and (iii) 10,000 warrants to Philip Cory Roberts. The proceeds of this
bridge financing were used for working capital purposes. In January 1999, these
amounts were repaid in full from the proceeds of the Series B Preferred Stock
offering.
ISSUANCE OF COMMON STOCK AND OPTIONS TO CONSULTANTS
In August 1998, the Board approved the issuance of shares of Common
Stock to certain consultants for strategic management and financial consultants
of the Company as follows: Benchmark Equity Group, Inc. ("Benchmark"), 557,800
shares; Jeffrey W. Tomz, 42,200 shares; Fordham Financial Management, Inc.,
100,000 shares; Weatherly Securities Corp. 1,000,000 shares; Pound Capital,
Inc, 225,000 shares; and New Leaf, L.L.C., 75,000 shares. Benchmark received an
additional 40,000 shares in January 1999 related to further bridge financing
services.
In July 1999, the Board approved the grant of performance based options
to purchase 150,000 shares of Common Stock of the Company to NSA, a provider of
business consulting services, exercisable at $2.25 per share. The options will
cliff-vest in five years, subject to performance conditions and are also
accelerable, based upon certain performance conditions.
In July 1999, the Board approved the grant of performance based options
to purchase 10,000 shares of Common Stock of the Company to each of Mary Su and
Jerry Klemushin, a provider of business consulting services, exercisable at
$2.25 per share. The options will cliff-vest in five years, subject to
performance conditions and are also accelerable, based upon certain performance
conditions.
In April 1999, consultant Michael Kane became entitled, subject to Board
approval, for services rendered, to 10,000 options exercisable at $6.37 per
share.
In May 1999, Mackenzie Shea, Inc. or its designees became entitled,
subject to Board approval, to a warrant to purchase 2,040 shares of Series C
Preferred Stock, exercisable for five years for a price of $12.25 per share.
The Company believes that the transactions set forth above were exempt
from registration with the Commission pursuant to Section 4(2) of the
Securities Act as transactions by an issuer not involving any public offering.
No broker-dealer or underwriter was involved in the foregoing transactions. All
certificates representing such securities were appropriately legended.
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ISSUANCE OF COMMON STOCK, OPTIONS AND WARRANTS PURSUANT TO THE ORDER AND PLAN
OF REORGANIZATION
On July 23, 1998, the Board of Directors approved the issuance of
certain shares of Common Stock, Series A Preferred Stock and warrants in
accordance with the Order of the Bankruptcy Court, confirming the Plan of
Reorganization. Such shares of Common Stock, Series A Preferred Stock, and
warrants, and the Common Stock underlying such warrants are or will be issued
pursuant to Section 1145 of the United States Bankruptcy Code, and as such, are
exempt from registration under the federal securities laws, except with respect
to an underwriter of such securities.
The Board approved issuances of Shares of Common Stock, Series A
Preferred Stock and warrants as follows: Calbert Lai, 297,642 shares of Common
Stock; Stephen Venuti, 297,642 shares of Common Stock; Don Sanders, 4,016
shares of Common Stock; Mackenzie Shea, Inc., or its designees, 500,000 shares
of Common Stock; Thomas A. Schultz, or his designees, 500,000 shares of Common
Stock; and 440,000 shares of Common Stock to Trident III, L.L.C.
The Company, pursuant to the Order and Plan of Reorganization, also
issued 600,000 shares of non-voting common Stock to Trident III, L.L.C. which
was initially redeemable at $1.00 per share. In January 1999, Trident III,
L.L.C. notified the Company that it wished to waive the right to redeem this
Common Stock; accordingly, Trident III, L.L.C. presently holds 600,000 shares
of non-redeemable non-voting stock, issued pursuant to the Order and Plan of
Reorganization.
In accordance with the Order and Plan of Reorganization, the Company
also issued 25,000 warrants to purchase Common Stock, exercisable at $0.50 per
share, to Mascia and Associates and 50,000 warrants to Pacific Business
Funding, Inc., both creditors under the Plan. The Company also authorized the
issuance of 275,000 service warrants, exercisable at $0.50 per share, to
various service providers, all in accordance with the Plan.
Each of the foregoing shares of Common Stock, Series A Preferred Stock,
and the common stock underlying the exercise of the warrants, except for shares
of Common Stock issued to Trident III, L.L.C., were issued subject to an
eighteen-month lock-up agreement negotiated between the Company and its
placement agent for Series B Preferred Stock, as required by the Bankruptcy
Court. Pursuant to the Bankruptcy Court's instructions, releases from the
lock-up agreement were on a pro rata basis. As of December 31, 1998, the
placement agent and the Company had agreed to release ten percent (10%) of the
foregoing securities from the lock-up. The shares of Calbert Lai and Stephen
Venuti are also subject to a further lock-up imposed by the Bankruptcy Court .
Shares of Messrs. Lai and Venuti may only be released the earlier of the time
of thirty-six months after July 17, 1999,a liquidation preference event, or the
date the closing bid price reported on the NASDAQ market system for the common
stock of I-Storm has exceeded the conversion price of the Series A Preferred
Stock for the consecutive trading days.
EMPLOYEE STOCK OPTION PLAN UNDER THE PLAN OF REORGANIZATION ("1998 A STOCK
OPTION PLAN")
In August 1998, the Board approved the establishment of an employee
stock option plan ("the 1998 A Stock Option Plan") consisting of options to
purchase 1.4 million shares of Common Stock,
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pursuant to the Plan of Reorganization, and the options and underlying stock
set aside for issuance upon exercise of such warrants are also exempt from
registration under Section 1145 of the Bankruptcy Code. As of December 31,
1998, options to be issued from the 1998 A Stock Option Plan were as follows:
Calbert Lai, 600,000 options, Stephen Venuti, 300,000 options Timothy Cohrs,
75,000 options, Stuart Mangrum, 127,500 options, David Beach, 100,00 options.
The remaining 197,500 options were distributed among 30,000 employees and
consultants with no recipient being distributed more than 10,000 options.
All of the 1998 A Stock Option Plan options are exercisable at $0.50 per
share. Except for options granted to Calbert Lai and Stephen Venuti, all such
options will vest ratably over a period of three years on an annual basis. With
respect to Messrs. Venuti and Lai, one-half of these options will vest ratably
over a period of not less than three years from the date of grant, and the
remaining one half shall not vest until the Company has had sales of at least
$12 million for any 12 consecutive month period and the Company is profitable
on a quarterly basis through the same 12 month period.
ADDITIONAL EMPLOYEE STOCK OPTION PLAN
In June 1999, the Board approved the establishment of an employee stock
option plan proposed in 1998 consisting of 1.5 million shares of common stock.
Such options and the stock underlying such options shall not be exempt from
registration under the federal securities laws.
FORWARD LOOKING STATEMENT
This Management's Discussion and Analysis contains certain
forward-looking statements and information relating to the Company that are
based on the beliefs of the Company or management as well as assumptions made
by and information currently available to the Company or management. When used
in this document, the words "anticipate", "believe, " "estimate, " "expect" and
"intend" and similar expressions, as they relate to the Company or its
management, are intended to identify forward-looking statements. Such
statements reflect the current view of the Company regarding future events and
are subject to certain risks, uncertainties and assumptions, including the
risks and uncertainties noted. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those described herein as anticipated,
believed, estimated, expected or intended. In each instance, forward-looking
information should be considered in light of the accompanying meaningful
cautionary statements herein.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
RESULTS OF OPERATION
On April 16, 1998, the Company's Reorganization Plan was confirmed by
the United States Bankruptcy Court and the Company emerged from bankruptcy
reorganization. The Plan of Reorganization resulted in a net reduction of
approximately $6,734,000 in principal and accrued interest on the Company's
Accounts Payable. As a result of the Reorganization, the recording of the
restructuring transaction and the implementation of Fresh Start Reporting, the
Company's results of
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<PAGE> 25
operations after July 17, 1998 (the cutoff date used for financial reporting
purposes) are not comparable to results reported in prior periods. See Note 1
to the accompanying consolidated financial statements for information on
consummation of the Plan of Reorganization and implementation of Fresh Start
Reporting. To facilitate a meaningful comparison of the Company's operating
performance in fiscal years 1998, 1997 and 1996, the following discussion of
results of operations on a consolidated basis is presented on a traditional
comparative basis for all periods. Consequently, the prior years' information
presented below does not comply with accounting requirements for companies upon
emergence from bankruptcy, which requirements call for separate reporting for
the newly reorganized company and the predecessor company.
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1997
RESULTS OF OPERATIONS
The Company's net loss for the year ended December 31, 1998 was
approximately $5,183,000 and arose primarily as a result of operating losses
and expenses associated with the Company's reorganization and subsequent merger
with Digital. The Company's net loss for the year ended December 31, 1997 was
approximately $2,872,000, primarily due to operating losses. The Company's
operating loss for the year ended December 31, 1998 was $4,701,000 as compared
to an operating loss of $2,438,000 for the year ending December 31, 1997. The
increase in operating loss of approximately $2,263,000 was caused primarily by
a decline in gross profit from the prior year of approximately $1,563,000 and
an decrease in operating expenses of approximately $932,000. Included in the
fiscal 1998 net loss is non-cash depreciation and amortization of approximately
$280,000 due primarily to amortization of the Company's Reorganization asset of
$3,060,000 million as of December 31, 1998.
Revenue for the years ended December 31, 1998 and 1997 were $2,913,000
and $6,108,000, respectively, a decrease of approximately $3,195,000 due to the
change in focus of the Company from generating advertising service revenue to
seeking financing for the newly-merged corporation and developing E-commence
partnerships. Gross profit for the years ended December 31, 1998 and 1997 were
$439,000 and $2,002,000, or 15% and 33 % of sales, respectively. The decrease
in gross profit was primarily a result of the Company's shift away from
advertising service revenue toward E-commerce development activities.
Operating expenses for the years ended December 31, 1998 and 1997 were
$7,614,000 and $8,546,000, respectively. The decrease in operating expenses of
approximately $932,000 from the period a year earlier was primarily due to
financial consultants fees and attorneys' fees of $406,000 related to the
Company's reorganization, merger, and financing activities.
Interest and Other expenses for the years ended December 31, 1998 and
1997 were $482,000 and $434,000, respectively. As of December 31, 1998, the
outstanding debt of the Company was approximately $1,457,000, primarily all of
which is classified as current.
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The Company's auditors issued a going concern report. There can be no
assurance that management's plans to reduce working capital deficiency or
obtain additional financing will be successful.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, the Company had current assets of $312,000 and
$778,000 in December, 31, 1997, while cash and cash equivalents were $5,000 at
year end 1998 compared to $0 at year end 1997. The Company's working capital
(deficit) at December 31, 1998 was $(3,445,000) as compared with a working
capital (deficit) of $(7,956,000) at December 31, 1997. This decrease in the
working capital (deficit) of approximately $4,558,000 is the result of a
reduction of Current Liabilities of $5,010,000 offset by an decrease of Current
Assets of $462,000.
As of December 31, 1998, the Company owed $1,457,000 under notes payable
to certain shareholders. The Company also has a Factoring Agreement in place
with a lender secured by the Company's accounts receivable and other assets,
with a factoring liability as of December 31, 1998 of $1,144,000 up from
$821,000 as of December 31, 1997. The Company is in compliance with all
material covenants of the shareholder notes payable and Factoring Agreement as
of year end 1998.
For the year ended December 31, 1998, net cash utilized by operations
was $1,907,000 compared to cash utilization of $321,000 for the year ended
December 31, 1997, primarily as a result of the Company's Reorganization and a
net loss for the year of $5,183,000.
As of December 31, 1998, Company management believes that the current
cash balance, cash from operations, and anticipated borrowings will not be
sufficient to meet the Company's liquidity needs for the next 12 months. The
Company is pursuing additional equity investment to fund its operating expenses
and working capital needs for the coming year. There can be no assurance that
the Company will be able to obtain sufficient capital under acceptable terms to
fund its operations and investment strategy. Without additional capital, there
is substantial doubt about the ability of the Company to continue as a going
concern and about the ability of the Company to realize its Reorganization
Asset.
INVESTING
Capital expenditures for the years ended December 31, 1998 and 1997 were
$12,000 and $287,000, respectively.
FINANCING
PRIVATE PLACEMENT OFFERING OF SERIES C PREFERRED STOCK
The Company has recently raised a total of $4,550,000 in gross proceeds
from a private placement offering of Series C Cumulative Convertible Preferred
Stock ("Series C Preferred Stock"), made pursuant to Section 506 of Regulation
D, at a price per share of $12.25. The offering of such Series C Preferred
Stock ("the Offering") commenced on February 22, 1999 and concluded on
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<PAGE> 27
May 31, 1999. A total of 371,429 Shares of Series C Preferred Stock were
offered and sold by the Company with the assistance of financial consultants
who received a consulting fee equal to 12% of the gross proceeds or $546,000.
After deducting the consulting fees, a total of $4,004,000 in proceeds was
received by the Company from the Offering. The net proceeds are being used for
the development of I-Storm E-commerce stores, for normal operating expenses
during the Company's development stage, and for general working capital
purposes.
The Series C Preferred Stock has a par value of $0.01 per share. Each
share is entitled to cumulative annual dividends, when and as declared by the
Board of Directors, at an annual rate of nine percent (9%) each year, in
quarterly installments of $0.28 on February 15, May 15, August 15, and November
15, of each year, payable at the option of the Company either in shares of
Series C Preferred Stock or in cash. The right of the Series C Preferred Stock
to payment of either cash or common stock dividends is subordinate to the right
to cash or stock dividend payments of Series A Preferred Stock. The shares of
Series C Preferred Stock are convertible into Common stock at any time
following the closing of the Offering, at the option of the holder, into such
number of shares of the Company's Common Stock as shall equal $12.25 divided by
the lower of $3.50 (the "Conversion Price"), or should the closing bid price
for any five consecutive trading days during the period commencing 11 months
after the Final Closing of the Offering and ending one month thereafter be less
than $3.50, the Conversion Price shall be readjusted to that price, provided,
however, that in no event shall the Conversion Price be reduced below $2.80.
The number of shares of Common Stock to be issued upon conversion shall also be
subject to certain antidilution provisions. Each Share may be converted into
Common Stock at the Conversion Price at the option of the Company, at any time
after one year from the Final Closing of the Offering, upon the payment to the
holder of any unpaid accumulated dividends, in cash or Common Stock, at the
option of the Company.
The Common Stock exercisable upon conversion of the Shares shall have
piggy-back registration rights effective from the Final Closing of this
Offering and shall have demand registration rights effective from the Final
Closing until 12 months thereafter.
PRIVATE PLACEMENT OFFERING OF SERIES B PREFERRED STOCK
The Company raised a total of $4,996,775 in gross proceeds from a private
placement offering of Series B Cumulative Convertible Preferred Stock ("Series
B Preferred Stock"), made pursuant to Section 506 of Regulation D, at a price
per share of $12.25. The offering of such Series B Preferred Stock ("the
Offering") commenced on December 11, 1998 and concluded on February 18, 1999. A
total of 407,900 Shares of Series B Preferred Stock were offered and sold
through Weatherly Securities Corp. ("Weatherly"), a placement agent which
received a 10% placement fee and a 3% non-accountable expenses allowance, or
13% of the gross proceeds of the sale of such Series B Preferred Stock
Offering, less certain expenses, for a total of $599,512. Weatherly also
received as compensation for the Offering Warrants to purchase 40,790 shares of
Series B Preferred Stock. After deducting the placement agent's fees and
expenses, a total of $4,259,306 in proceeds was received by the Company from
the Offering. The majority of such proceeds was used to fully retire its
outstanding bridge loans, which had been incurred both pre- and
post-bankruptcy; to almost fully retire its loans under a factoring agreement,
and to pay down many of its outstanding expenses and professional fees.
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The balance of the proceeds is being used for the development of I-Storm
CyberStores and for general working capital purposes.
The Series B Preferred Stock has a par value of $0.01 per share. Each
share is entitled to cumulative annual dividends, when and as declared by the
Board of Directors, at an annual rate of nine percent (9%) each year, in
quarterly installments of $0.28 on February 15, May 15, August 15 and November
15 of each year, payable at the option of the Company either in shares of
Series B Preferred Stock or in cash. The right of the Series B Preferred Stock
to payment of either cash or common stock dividends is subordinate to the right
to cash or stock dividend payments of Series A Preferred Stock. The shares of
Series B Preferred Stock are convertible into Common stock at any time
following the closing of the Offering, at the option of the holder, into such
number of shares of the Company's Common Stock as shall equal $12.25 divided by
the lower of $3.50 (the "Conversion Price"), or should the closing bid price
for any five consecutive trading days during the period commencing 11 months
after the Final Closing of the Offering and ending one month thereafter be less
than $3.50, the Conversion Price shall be readjusted to that price, provided,
however, that in no event shall the Conversion Price be reduced below $2.80.
The number of shares of Common Stock to be issued upon conversion shall also be
subject to certain antidilution provisions. Each Share may be converted into
Common Stock at the Conversion Price at the option of the Company, at any time
after four years from the Final Closing of the Offering, upon the payment to
the holder of any unpaid accumulated dividends, in cash or Common Stock, at the
option of the Company. The Common Stock exercisable upon conversion of the
Shares shall have piggy-back registration rights effective from the Final
Closing of this Offering and shall have demand registration rights effective
from the Final Closing until 12 months thereafter.
BRIDGE FINANCING
Prior to confirmation of the Plan of Reorganization, Trident III, L.L.C.
("Trident") provided LVL $600,000 in pre-confirmation bridge financing, which
has been used for reorganization costs and for working capital purposes. In
consideration and repayment of this pre-confirmation bridge financing, Trident
has been issued 600,000 shares of non-voting Common Stock in the Company,
redeemable at $1.00 per share, and 440,000 shares of non-redeemable voting
Common Stock. Trident has also provided $228,000 in post-confirmation bridge
financing to the Company for reorganization and working capital purposes. In
partial consideration for this post-confirmation bridge financing, Trident has
been issued additional 91,200 shares of non-redeemable non-voting Common Stock
in the Company. Trident is also entitled to receive interest, at a rate of 10%
per annum, on any outstanding unpaid balance of the total of $228,000 in
post-confirmation bridge financing which it has provided to the Company in
connection with the reorganization. In January 1999, Trident converted $600,000
in pre-confirmation bridge financing into 600,000 shares of non-voting Common
Stock. In January 1999, Trident has been repaid all post-confirmation bridge
financing with accrued interest.
The Company also received $100,000 in pre-confirmation bridge financing
as follows: a $50,000 Promissory Note from Pac Rim Access Group, Inc.,
repayable with accrued interest at a rate of 10% per annum; and a $50,000
Promissory Note from Masamitsu Ishihara, repayable with accrued interest at a
rate of 10% per annum. Each of the foregoing Promissory Notes will be paid from
the
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earlier of the First Closing of this Offering or April 8, 1999. In January
1999, these amounts were repaid in full.
The Company has received an additional $300,000 in post-confirmation
bridge financing (the "July 1998 Bridge Financing") as follows: (1) a $150,000
Promissory Note from Four M International, repayable with accrued interest at a
rate of 10% per annum; (2) $75,000 in Promissory Notes from each of Frederick
Meyers and Richard David, for a total of $150,000, repayable with accrued
interest at a rate of 10% per annum. Each of the foregoing Promissory Notes
will be paid from the earlier of the First Closing of this Offering, or July
31, 1999. As part of the July 1998 Bridge Financing, the Company issued
warrants to purchase Common Stock of the Company, exercisable at $0.001 per
share to each of these bridge financiers as follows: (1) 60,000 warrants to
Four M International; and (2) 30,000 warrants, to each of Frederick Meyers and
Richard David, for a total of 60,000 warrants. In January 1999, these amounts
were repaid in full.
The Company has received an additional $425,000 in post-confirmation
bridge financing (the "September 1998 Bridge Financing") as follows: (1) a
$300,000 Promissory Note from the Security Trust IRA for Robert L. Wilson,
repayable with accrued interest at a rate of 10% per annum; (2) a $100,000
Promissory Note from Wink Capital Management, Ltd., repayable with accrued
interest at a rate of 10% per annum; and (3) a $25,000 Promissory Note from
Philip Cory Roberts, repayable with accrued interest at a rate of 10% per
annum. As part of the September 1998 Bridge Financing, the Company is presently
issuing warrants to purchase Common Stock of the Company, exercisable at $0.001
per share to each of these bridge financiers as follows: (1) 120,000 warrants
to Security Trust IRA for the benefit of Robert L. Wilson, or its designees;
(2) 40,000 warrants to Wink Capital Management, Ltd.; and (3) 10,000 warrants
to Philip Cory Roberts. In January 1999, these amounts were repaid in full.
The Company owed approximately $1,083,000 in short-term debt financing
at December 31, 1998. All of such short-term debt was subsequently repaid from
the proceeds of the Series B Stock Offering in January 1999.
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1996
RESULTS OF OPERATIONS
The Company's operating loss for the year ended December 31, 1997 was
$2,438,000 as compared to an operating loss of $3,497,000 for the same period
in 1996. This decrease in operating loss was primarily attributable lower
operating expenses resulting from the downsizing of Company operations.
The Company's sales for the years ended December 31, 1997 and 1996 were
$6,108,000 and $8,321,000, respectively. The decrease in sales of approximately
$2,213,000 is primarily attributable to the loss of a major client and the
Company's inability to replace lost revenue with new clients during the year.
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Cost of sales for the years ended December 31, 1997 and 1996 were
$4,106,000 and $3,805,000 or 67% and 46% of sales, respectively. Gross profit
for the years ended December 31, 1997 and 1996 were $2,002,000 and $4,516,000
or 33% and 54% of sales, respectively.
Operating expenses for the years ended December 31, 1997 and 1996 were
$4,440,000 and $8,013,000, respectively. Interest expense for the years ended
December 31, 1997 and 1996 was $320,000 and $225,000, respectively. As of
December 31, 1997, the outstanding debt of the Company was approximately
$8,161,000.
CASH USED FOR OPERATIONS
For the year ended December 31, 1997, cash used for operations was
$321,000 as compared to $959,000 of cash generated from operations for the year
ended December 31, 1996. The Company intends to use future debt or equity
financing or debt-to-equity conversions to help satisfy past due amounts and to
pay down its debt obligations. There is no assurance that the Company will be
able to raise the necessary capital under acceptable terms, in any, or succeed
in its attempt to convert debt to equity. Should the Company fail to raise
necessary cash, it runs the risk of ceasing operations or being forced to
reorganize through bankruptcy.
YEAR 2000 READINESS DISCLOSURE
This Readiness Disclosure is provided to advise of I-Storm's Year 2000
Compliance program for both I-Storm's internal systems and web sites designs.
As used herein, "Year 2000 Compliant" means that I-Storm has confirmed that
under the conditions of I-Storm's internal testing, I-Storm's internal systems
and web sites designs will perform as follows: (i) date calculations will
neither cause any abnormal termination of performance nor generate inconsistent
results and (ii) when sorting by date, all records will be sorted in accurate
sequence. Please note that this Readiness Disclosure is not provided as a
certification, representation, warranty or guarantee, express or implied,
regarding Year 2000 Compliance and does not create or modify any contractual
relationships.
I-Storm has allocated both personnel and other resources towards
achieving the Year 2000 Compliance of all of I-Storm's internal systems. In
implementing its Year 2000 Compliance program, I-Storm has identified and
inventoried all Year 2000 sensitive components in our internal systems and are
working to achieve the Year 2000 Compliance of all its components. I-Storm has
also made reasonable efforts to contact all vendors and suppliers that provide
I-Storm with Year 2000 sensitive components in order to determine the
compliance of such components. It is the intent of I-Storm's Year 2000
Compliance program to either repair or replace any components of our internal
systems which are determined not to be Year 2000 Compliant.
I-Storm is working towards full Year 2000 Compliance for all of its
products and services. Because I-Storm does not control other companies'
products, including other companies' hardware and software, I-Storm does not
promise that any other companies' products or software will not suffer any
errors or malfunctions related to Year 2000. While I-Storm tests all of its web
site designs, I-Storm does not certify that these sites will perform as tested
when used with other companies' products, when modified or customized, or when
used under circumstances not reflected in the testing
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I-Storm has performed. To date, I-Storm has not encountered any problems
associated with Year 2000 Compliance in its products, services, or internal
systems, and will continue to take all reasonable steps to ensure the same.
In 1998, I-Storm incurred insignificant costs with respect to Year 2000
compliance expenses. I-Storm expects that it may incur approximately $70,000 in
1999 for Year 2000 compliance costs Although I-Storm foresees no other
significant Year 2000 compliance expenses, there is always a possibility of
unforeseen further expenses in 1999 and beyond with respect to Year 2000
compliance.
ITEM 7. FINANCIAL STATEMENTS.
See Index to Consolidated Financial Statements on page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On July 23, 1998, the Board of Directors of the Company approved the
engagement of Arthur Andersen LLP as independent public accountants for the
Company. The Company had no disagreements with its former accountants,
Petrovich and Pugh (former accountants for LVL), or Jones, Jensen & Co. (former
accountants for Digital). The former accountants did not resign or decline to
stand for reelection. The former accountants' reports on the financial
statement did not for either of the past two years contain an adverse opinion
or disclaimer of opinion other than a report of risk of failure to continue as
an ongoing concern; nor were such reports modified as to uncertainty, audit
scope or accounting principles. There were no disagreements with the former
accountants on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
The Company has established a five-member Board of Directors. On June
30, 1999, members of the Board of Directors were as follows:
<TABLE>
<CAPTION>
NAME AGE OFFICE
---- --- ------
<S> <C> <C>
Frank M. DeLape 44 Director and Chairman of the Board
Calbert Lai 42 Director
Thomas A. Schultz 48 Director
John Matthews 38 Director
Matthew Howard 58 Director
</TABLE>
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FRANK M. DELAPE, Chairman of the Board. Mr. DeLape has served as the
CEO of Benchmark Equity Group, Inc. (Benchmark) since its formation in April
1994. Through Benchmark and its affiliates, Mr. DeLape has financed a number
of public companies in a multiple of industries such as telecommunications,
internet-services, retailing, business services and computer technology. Mr.
DeLape also served as a director of THINK New Ideas, Inc. from January 1996
until February 1998. Mr. DeLape has served as President, Secretary, Treasurer
and a director of Oak Tree Capital, Inc., a financial consulting firm, since
its formation in January 1996.
CALBERT LAI, Director. Co-founder and President of the Company since
1986, Mr. Lai has developed and expanded LVL's core business and product lines,
and has directed the Company's strategic marketing and consulting business for
highly recognizable brand names in the technology industry, such as IBM,
Netscape, Hewlett-Packard, Sun Microsystems, Cisco Systems, Mitsubishi
Electronics America, Acer Group, Fujitsu PC Corporation, 3COM/PalmPilot, NEC,
Philips Mobile Computer Group and Egghead.Com. A recognized expert in the
marketing of technology products to consumers and end users, Mr. Lai was
responsible for the launch into U.S. retail channels of the Acer PC, in 1993,
and the PalmPilot(TM), in 1996.
THOMAS A. SCHULTZ, Director. Mr. Schultz is a consultant to the Company
and a director. He has been the President and Chief Executive Officer of Vista
Technologies, Inc., a public surgical center firm from February 1996 to March
1997. Prior to joining Vista Technologies, Inc., Mr. Schultz served as
Chairman/Chief Executive Officer of Crystallume, a public corporation, from
February 1986 to January 1996. Mr. Schultz also serves on the Board of
Directors of Adrenalin Corporation, a public company. He is a CEO and director
of Cellgate, Inc., a private corporation and a director of Security Capital
Management and Electronic Design, Inc., also private corporations.
MATTHEW HOWARD, Director. Mr. Howard is a thirty-year veteran in
executive management for major U.S. retailers. Mr. Howard has served as Senior
Executive Vice President of both Marketing and Merchandising for Sears, as
President of Computer City, a subsidiary of Tandy Corporation, and as an
Executive Vice President of Montgomery Ward.
JOHN MATTHEWS, Director. In June 1999, the Board appointed John Matthews
to fill a vacancy left by Richard Snyder in April 1999. Mr. Matthews has been
the Chairman of the Board and Chief Executive Officer of Weatherly Securities
Corp. since June 1996. Mr. Matthews previously served as the Chief Operating
Officer of Americorp Securities, Inc., a New York based investment-banking
firm, from June 1992 to May 1996. From 1990 to 1992, Mr. Matthews was a Vice
President of Vantage Securities, Inc., an investment-banking firm located in
Melville, New York. In 1990, prior to entering the securities industry, Mr.
Matthews served as a Director of the New York Office of Senator Daniel Patrick
Moynhihan (D-NY). His responsibilities included managing the Senator's staff,
coordinating all intergovernmental relations in New York, serving as the
Senator's senior ombudsman, as well as directing legislative initiatives and
constituent services for the State of New York.
From August 1, 1998 to April 1999, Richard Snyder, 53, served as a
member of the Board of Directors. Mr. Snyder had served as Senior Vice
President and General Manager of Dell Computers Americas and as Senior Vice
president of World Wide Sales, Marketing and Support for Compaq Computer
Corporation. Mr. Snyder also spent 18 years at Hewlett-Packard where he headed
the $5
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<PAGE> 33
billion Ink Jet printer business and was responsible for achieving a 65% market
share and creating the "Desk Jet" brand. Mr. Snyder currently serves on the
Board of Directors of VTEL Corp., InfinOp, Inc. and Guardian-On-Board, Inc. Mr.
Snyder left the Board of Directors in April 1999, and his vacancy was filled by
the appointment of John Matthews in June 1999.
The Company pays outside Board members a per diem of $1,000 per day and
reimburses directors for any reasonable expenses pertaining to attending
meetings, including travel, lodging and meals. In addition, for services as a
Board member, the Company has granted outside Board members options to purchase
25,000 shares of the Company's Common Stock at $3.50 per share which vest over
one year, and the Chairman of the Board will receive options to purchase 50,000
shares at $3.50 per share which shall also vest over one year.
All directors hold office for terms of one (1) year and until the next
annual meeting of stockholders scheduled to vote on such class of Directors and
the election and qualification of their respective successors. Officers are
elected annually by the Board of Directors and, subject to existing employment
agreements, serve at the discretion of the Board.
COMMITTEES OF THE BOARD OF DIRECTORS
AUDIT COMMITTEE. The Company's audit committee (the "Audit Committee")
is responsible for making recommendations to the Board of Directors concerning
the selection and engagement of the Company's independent certified public
accountants and for reviewing the scope of the annual audit, audit fees, and
results of the audit. The Audit Committee also reviews and discusses with
management and the Board of Directors such matters as accounting policies and
internal accounting controls, and procedures for preparation of financial
statements. Thomas Schultz, Chairman of the Audit Committee, Matthew Howard and
Richard Snyder were members of the 1998 Audit Committee. Mr. Matthews has
replaced Mr. Snyder as a member of the 1999 Audit Committee.
COMPENSATION COMMITTEE. The Company's compensation committee (the
"Compensation Committee") approves the compensation for executive employees of
the Company. Frank DeLape, Thomas Schultz and Matthew Howard were members of
the Compensation Committee.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's officers and directors, and persons who
own more than ten percent of a registered class of the Company's equity
securities, to file reports of ownership and changes in ownership of equity
securities of the Company with the Securities and Exchange Commission ("SEC").
Officers, directors, and greater than ten percent shareholders are required by
SEC regulation to furnish the Company with copies of all Section 16(a) forms
that they file.
Except as set forth below, based solely upon a review of Forms 3 and
Forms 4 furnished to the Company pursuant to Rule 16a-3 under the Exchange Act
during its most recent fiscal year and Forms 5 with respect to its most recent
fiscal year, the number of (i) late reports, (ii) transactions that were not
reported on a timely basis during the fiscal year ended March 31, 1998, and
(iii) any known
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<PAGE> 34
failure to file a required report by officers, directors and beneficial owners
of more than 10% of the Company's common stock is as follows: Calbert Lai: one
late report and one transaction not reported on a timely basis; Steven Venuti:
one late report and two transactions not reported on a timely basis: Thomas
Schultz, one late report; Frank DeLape, one late report; Matthew Howard, one
late report and Richard Snyder, one late report. Such late reports have
subsequently been filed.
ITEM 10. EXECUTIVE COMPENSATION.
The following table sets forth the aggregate cash compensation paid for
services rendered to the Company during the last three years by each person
serving as the Company's Chief Executive Officer during the last year and the
Company's three most highly compensated executive officers serving at the end
of the year ended December 31, 1998 whose compensation was in excess of
$100,000.
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
-------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------------------------------------- ------------------------ ---------
SECURITIES
NAME AND OTHER RESTRICTED UNDERLYING LTIP ALL OTHER
PRINCIPAL YEAR SALARY($) BONUS($) ANNUAL STOCK OPTIONS/ PAYOUTS($) COMPENSATION
POSITION COMPENSATION($) AWARDS($) SARS(#) ($)
- --------------- ------- --------- --------- ---------------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Calbert Lai 1998 150,000 0 N/A 0 600,000 0 N/A
President and 1997 124,719 0 N/A 0 - 0 N/A
Treasurer 1996 332,500 0 N/A 0 - 0 N/A
1998 150,000 0 N/A 0 300,000 0 N/A
Stephen Venuti 1997 124,719 0 N/A 0 - 0 N/A
Vice President 1996 332,500 0 N/A 0 - 0 N/A
1998 260,000(1) 0 N/A 0 75,000 0 N/A
Timothy Cohrs 1997 180,520 0 N/A 0 - 0 N/A
Vice President 1996 87,670(1) 0 N/A 0 - 0 N/A
Stuart Mangrum 1998 104,428 0 N/A 0 127,500 0 N/A
Vice President 1997 59,492(2) 0 N/A 0 0 N/A
1996 - 0 N/A 0 0 N/A
David Beach 1998 97,435 0 N/A 0 100,000 0 N/A
Chief Information 1997 74,374 0 N/A 0 0 N/A
Architect 1996 63,587 0 N/A 0 0 N/A
</TABLE>
(1) Mr. Cohrs entered into an employment agreement with LVL Communications
Corporation in July 1996. Mr. Cohrs left the employ of I-Storm in March
1999, and he received a pro rata portion of his annual compensation to
March 31, 1999.
(2) Mr. Mangrum was employed by the Company from April 1997 - December 1997.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information with respect to the
options granted during the year ended, for the persons named in the Summary
Compensation Table (the "Named Executive Officers"):
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<PAGE> 35
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
NUMBER OF PERCENT OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO
OPTIONS/SARS EMPLOYEES IN EXERCISE OR BASE
NAME GRANTED (#) FISCAL YEAR PRICE ($/SH) EXPIRATION DATE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Calbert Lai 600,000 61.0% $.50 8/1/03
- ---------------------------------------------------------------------------------------------------------------------
Stephen Venuti 300,000 30.5% $.50 8/1/03
- ---------------------------------------------------------------------------------------------------------------------
Timothy Cohrs 75,000 8.5% $.50 8/1/03
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
AGGREGATE OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES
The following table sets forth certain information with respect to
options exercised during 1998 by the Named Executive Officers and with respect
to unexercised options held by such persons at the end of 1998.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS/SARS IN-THE-MONEY OPTIONS/SARS
SHARES AT FY-END (#) AT FY-END ($)
ACQUIRED ON VALUE --------------------------- -----------------------------
NAME EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Calbert Lai - 0 50,000 550,000 $175,000 $1,925,000
- ---------------------------------------------------------------------------------------------------------------------
Stephen Venuti - 0 25,000 275,000 $87,500 $962,500
- ---------------------------------------------------------------------------------------------------------------------
Timothy Cohrs - 0 6,252 68,748 $21,882 $239,618
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
EMPLOYMENT AGREEMENTS
In 1998, the Company entered into employment agreements with Calbert Lai,
President and Treasurer, Stephen Venuti Vice President, and Timothy Cohrs Vice
President. As of March 1999, Mr. Cohrs ceased his employment with the Company as
a result of the Company's decision to pursue the E-commerce line of business,
and to terminate the advertising line of business.
Mr. Lai entered into an employment agreement with the Company, dated
July 15, 1998, for a term of 36 months at an annual base salary of $150,000,
with eligibility for a performance bonus of up to 50% of base salary, as
determined by performance criteria to be established by the Board of Directors.
Mr. Lai has received employee stock options, pursuant to the 1998 A Stock
Option Plan to purchase 600,000 common shares of the Company at $0.50 per
share, of which 300,000 shares will shall vest ratably over a period of 36
months from the Employment Date; and of which 300,000 shares will only vest
upon the Company's sales revenue meeting or exceeding twelve million dollars
($12,000,000) for any twelve-month period from the Employment Date and upon the
Company's quarterly revenue exceeding operating expenses for the same
twelve-month period.
Mr. Venuti entered into an employment agreement with the Company, dated
July 15, 1998, for a term of 36 months at an annual base salary of $150,000,
with eligibility for a performance bonus of up to 50% of base salary, as
determined by performance criteria to be established by the Board of Directors.
Mr. Venuti has also received employee stock options, , pursuant to the 1998 A
Stock Option Plan, to purchase 300,000 common shares of the Company at $0.50
per share, of which 150,000 shares will shall vest ratably over a period of 36
months from the Employment Date; and of which 150,000 shares will only vest
upon the Company's sales revenue meeting or exceeding twelve million dollars
($12,000,000) for any twelve-month period from the Employment Date and upon the
Company's quarterly revenue exceeding operating expenses for the same
twelve-month period.
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<PAGE> 36
Mr. Cohrs entered into an employment agreement with the Company on July
15, 1998, for a term of 36 months at a current annual salary of $240,000 per
year, with eligibility for a performance bonus of up to 50% of base salary, as
determined by performance criteria to be established by the Board of Directors.
Mr. Cohrs also received employee stock options, , pursuant to the 1998 A Stock
Option Plan, to purchase 75,000 common shares of the Company at $0.50 per
share, of which 37,500 shares will shall vest ratably over a period of 36
months from the Employment Date; and of which 37,500 shares will only vest upon
the Company's sales revenue meeting or exceeding twelve million dollars
($12,000,000) for any twelve-month period from the Employment Date and upon the
Company's quarterly revenue exceeding operating expenses for the same
twelve-month period. Mr. Cohrs and the company mutually terminated this
agreement in March 1999 upon the cessation of the advertising services
business. At the time of termination, 7,292 of Mr. Cohrs' options were vested,
and no further warrants were due him.
In August 1998, David Currie, Vice President of Technology, was granted
100,000 employee stock options to purchase Common Stock, exercisable at $0.50
per share, pursuant to the 1998 A Stock Option Plan.
In August 1998, Stuart Mangrum, Vice President of Technology, was
granted 125,500 employee stock options to purchase Common Stock, exercisable at
$0.50 per share, pursuant to the 1998 A Stock Option Plan.
FURTHER EXECUTIVE COMPENSATION
Pending before the Board of Directors, as of June 30, 1999, is a
proposal to issue options to purchase Series C Preferred Stock, exercisable at
$12.25 per share, as follows: Calbert Lai, 255,000 options; Steven Venuti,
126,000 options.
CONSULTING AGREEMENTS
The Company entered into a twelve-month consulting agreement with
Benchmark Equity Group, Inc. ("Benchmark"), dated August 31, 1998, pursuant to
which the Company is obligated to pay $175,000 in twelve monthly installments
to Benchmark for merger and acquisitions consulting services rendered to either
LVL or the Company, commencing as of March 1, 1998. Benchmark also entered into
an agreement in April 1998 to provide consulting services to LVL and its
successor entity in consideration of 600,000 shares of unregistered Common
Stock, and the Board of Directors approved the issuance of this Common Stock to
Benchmark or its designees on August 1, 1998, subject to a 12-month lock-up
agreement.
In September 1997, the Company engaged Mackenzie Shea, Inc. ("MSI") as a
consultant to assist the Company in structuring a reorganization and
post-organization operating entity. MSI or its designees were issued 500,000
shares of the Company's Common Stock in August 1998, and MSI was paid a
$170,500 cash fee in compensation for such services through December 31, 1998.
The shares are exempt from registration under the federal securities laws, in
accordance with Section 1145 of the
35
<PAGE> 37
Bankruptcy Code. The shares are subject to an 18-month lock-up agreement,
commencing August 1, 1998. Ten percent of such shares to date have been
released from the lock-up agreement.
Additionally, MSI or its designees will receive 2,040 options to
purchase Series C Preferred Stock, exercisable at $12.25 per share, for
consulting services rendered to the Company, as of June 30, 1999.
In September 1997, the Company engaged Thomas Schultz as a consultant to
assist the Company in structuring a reorganization and post-organization
operating entity. Mr. Schultz or his designees were issued 500,000 shares of
the Company's Common Stock in August 1998, The shares are exempt from
registration under the federal securities laws, in accordance with Section 1145
of the Bankruptcy Code. The shares are subject to an 18-month lock-up
agreement, commencing August 1, 1998. Ten percent of such shares to date have
been released from the lock-up agreement. Mr. Schultz also was paid a total
cash fee of $166,365 in full compensation for such services to December 31,
1998. Mr. Schultz has also received $100,000 in consulting fees from January 1,
1999 through June 30, 1999. Mr. Schultz is a director of the Company.
In March 1998, the Company engaged Fordham Financial Management, Inc.
("Fordham") as a consultant for financial consulting services in connection
with certain bridge financings. Fordham was paid a fee of 100,000 shares of
Common Stock of the Company as of August 1, 1998. Fordham's shares of Common
Stock are unregistered and are subject to an 18-month lock-up restriction
commencing August 1, 1998.
In August 1998, the Company engaged Weatherly Securities Corp.
("Weatherly") to provide investment banking services and strategic planning for
the management, capitalization and business development of the Company for a
flat fee of 1,000,000 shares of Common Stock of the Company, valued at $0.25
per share. The shares of Common Stock issued to Weatherly were fully vested as
of August 1, 1998, are unregistered shares and are subject to an eighteen month
lock-up agreement.
In August 1998, the Company engaged Pound Capital Corp. ("Pound") to
provide investment banking services and strategic planning for the management,
capitalization and business development of the Company for a flat fee of
225,000 shares of Common Stock of the Company, valued at $0.25 per share. The
shares of Common Stock issued to Pound were fully vested as of August 1, 1998,
are unregistered shares and are subject to an 18-month lock-up agreement.
In August 1998, the Company engaged New Leaf, L.L.C. ("New Leaf") to
provide investment banking services and strategic planning for the management,
capitalization and business development of the Company for a flat fee of 75,000
shares of Common Stock of the Company, valued at $0.25 per share. The shares of
Common Stock issued to New Leaf were fully vested as of August 1, 1998, are
unregistered shares and are subject to an 18-month lock-up agreement.
Robert Tomz entered into a consulting arrangement with the Company on
December 8, 1998, whereby he was entitled to receive monthly compensation of
$8,000 a month and warrants to purchase 14,000 shares of Common Stock,
exercisable at $2.00 per share, each month for a period of 12 months commencing
January 11, 1999. Mr. Tomz also served briefly as Acting Chief Financial
36
<PAGE> 38
Officer of the Company from January 1 to March 15, 1999. Mr. Tomz and the
Company terminated this consulting arrangement on June 15, 1999, and
renegotiated the consulting fee so that Mr. Tomz received in total $90,000 and
84,000 warrants to purchase Common Stock of the Company exercisable at $2.00
per share.
A financial consulting agreement was entered into between the Company
and Irfan Salim to provide managerial and financial consulting services to the
Company commencing April 1, 1999 on a month-to-month basis at a rate of $16,666
per month. Subject to approval of the Board of Directors, Mr. Salim also
received 15,000 warrants exercisable over a period of five years, which vested
in January 1999 to purchase Common Stock of the Company at an exercise price of
$8.50.
A business consulting agreement was entered into between Peter Janssen
and the Company in June 1998. Under this consulting agreement, Mr. Janssen was
paid $35,000 in 1998. Mr. Janssen's consulting agreement has been extended for
the year of 1999 for a monthly fee of $16,666.
A business consulting agreement was entered into between Matthew Howard,
a director, and the Company in June 1998. Under this consulting agreement, Mr.
Howard was paid $20,000 in 1998. Mr. Howard's consulting agreement has been
extended for the year of 1999 for a monthly fee of $5,000. As of July 1999, the
Board is presently considering the grant of options to purchase 150,000 shares
of Common Stock of the Company exercisable at $2.00 per share to Mr. Howard in
further consideration of his performance under the consulting agreement. Under
this proposal, 50,000 options would vest immediately upon grant, and the
remainder would vest ratably over a twenty-four month period.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
ISSUANCE OF STOCK TO DIRECTORS AND OFFICERS
Pursuant to the Plan of Reorganization, the Company has issued 297,642
shares of Common Stock to each of Calbert Lai and Stephen Venuti, and 500,000
shares of Common Stock to Thomas A. Schultz, or his designees, as set forth
below. Further, Benchmark Equity Group, Inc., an affiliate of Frank DeLape, a
director, has been issued 597,800 shares of Common Stock, as of June 30, 1999.
Additionally, Mr. DeLape has received options to purchase 50,000 shares of
Common Stock at $3.50 per share for one year's service as the Chairman of the
Board of Directors of the Company on July 23, 1998, and all other non-employee
directors have received options to purchase 25,000 shares at $3.50 per share
for one year's service on the Board of Directors of the Company, to be issued
on July 23, 1998.
Pending before the Board of Directors, as of June 30, 1999, is a
proposal to issue options to purchase Series C Preferred Stock , exercisable at
$12.25 per share, as follows: Calbert Lai, 255,000 options; Steven Venuti,
126,000 options.
In September 1997, the Company engaged Thomas Schultz as a consultant to
assist the Company in structuring a reorganization and post-organization
operating entity. Mr. Schultz was paid a fee of $166,365 in 1998 in
compensation for such services until December 31, 1998. As of June 30,
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<PAGE> 39
1999, Mr. Schultz had received an additional $100,000 in consulting fees. Mr.
Schultz is a director of the Company. Mr. Schultz or his designees was also
issued 500,000 shares of the Company's Common Stock in August 1998, pursuant to
the Plan of Reorganization. The shares are exempt from registration under the
federal securities laws, in accordance with Section 1145 of the Bankruptcy Code.
The shares are subject to an 18-month lock-up agreement, commencing August 1,
1998. Ten percent of such shares to date have been released from the lock-up
agreement.
Since June 30, 1998, members of the I-Storm Advisory Board have each
been paid $5,000 per month for their services on the board. Members of the
Advisory Board. as of June 30, 1999 were Peter Janssen, Matthew Howard, Cary
Beighley and Joseph John. Mr. Richard Snyder also served on the Advisory Board
in 1998, and received $35,000 for his services. The following members of the
Advisory Board have received options to purchase Common Stock, exercisable at
$3.50: Peter Janssen, 50,000 options; Cary Beighley, 25,000 options; Matthew
Howard, 25,000 options; and Joseph John, 25,000 options.
CONSULTING AGREEMENTS
The Company is a party to a 12-month consulting agreement with Benchmark
Equity Group, Inc. ("Benchmark"), dated August 31, 1998, pursuant to which the
Company is obligated to pay $175,000 in twelve monthly installments to
Benchmark for consulting services rendered to either LVL or the Company,
commencing as of March 1, 1998. As of February 1, 1999, 11 months of the
Consulting Agreement have been paid in full. Benchmark also entered into an
earlier agreement, in April 1998, to provide consulting services to LVL and its
successor entity in consideration of 600,000 shares of Common Stock, and the
Board of Directors approved the issuance of this Common Stock to Benchmark or
its designees on July 23, 1998. Frank DeLape, Chairman of the Board, is the
President of Benchmark Equity Group, Inc. The Company is party to a management
consulting agreement with Matthew Howard, a director, for a fee of $5,000 per
month. Mr. Howard's consulting arrangement commenced August 1, 1998.
PROXY AGREEMENTS
In August 1998, Benchmark Equity Group, Inc. ("Benchmark") entered into
an irrevocable proxy agreement with each of Thomas A. Schultz, and/or his
designees, Calbert Lai and Stephen Venuti, which irrevocably appoints Benchmark
as a proxy with full substitution power to vote all of the Common Stock of the
Company which Calbert Lai, Stephen Venuti and Thomas A. Schultz, and/or his
designees own, for a period that commenced on August 19, 1998, and will
continue until the earlier of (i) twelve months from the date of commencement,
or (ii) the receipt by the Company of $3,000,000 in equity financing. MSI,
and/or its designees, also entered into an irrevocable proxy agreement with
Benchmark on substantially similar terms, which commenced March 1998 for a
period of 12 months. These proxy agreements were released upon the first
closing of the Series B Preferred Stock Offering in January 1999.
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<PAGE> 40
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
The following is a list of exhibits filed as part of this filing. Where
so indicated by asterisk, the exhibits were previously filed and are
hereby incorporated by reference.
Exhibit No.
2.1 Plan of Merger Among LVL Advertising, Inc., LVL Interactive,
Inc. and LVL Communications Corporation effective as of July
15, 1998.*
2.2 Plan of Merger Among LVL Communications Corporation and Digital
Acquisition Corp. effective as of July 17, 1998.
2.3 Order and Plan of Reorganization of LVL Communications
Corporation as confirmed by the United States Bankruptcy Court
for the Northern District of California, dated April 16, 1998.
3.1 Certificate of Incorporation of the Company, as amended.*
3.3 By-laws, as amended.*
4.1 Certificate of Designation for Series A Preferred Stock.
4.2 Certificate of Designation for Series B Preferred Stock.
4.3 Certificate of Designation for Series C Preferred Stock.
9.1 Form of Voting Trust Agreement, dated May 6, 1998.
10.1 Employment Agreement dated July 15, 1998 between the Company
and Calbert Lai.
10.2 Employment Agreement dated July 15, 1998 between the Company
and Stephen Venuti.
10.3 Employment Agreement dated July 15, 1998 between the Company
and Timothy Cohrs.
10.4 Stock Purchase Agreement dated May 6, 1998 among I-Storm
Acquisition Corp., Digital Power Holding Company, Chiricahua
Company, Melinda Johnson and David C. Merrell.
10.5 Consulting Agreement dated March 31, 1998 between the Company
and Benchmark Equity Group, Inc.
10.6 Consulting Agreement dated December 9, 1998 between the Company
and Robert L. Tomz and Amendment thereto, dated March 19, 1999.
10.7 Form of Note between the Company and each of Four M
International, Richard David, Frederick Meyers, PacRim Access
Group, Masamitsu Ishihara, Wink Capital Management, Ltd.,
Security Trust IRA for the Benefit of Robert L. Wilson and
Philip Cory Roberts.
10.8 Form of Lock-Up Agreement
10.9 Convertible Note issued by the Company to Trident III, L.L.C.,
dated February 5,1998 and Amendment thereto, dated July 28,
1998.
10.10 Office Lease Agreement dated March 10, 1999 between the Company
and Sobrato Development Companies #850 for offices in Mountain
View, California.
10.11 I-Storm, Inc. Stock Option Plan, dated July 23, 1998.
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<PAGE> 41
16 July 23, 1998 Board resolution approving change in Independent
Public Accountant.*
21 Subsidiaries of the registrant.
27 Financial data schedule.
- --------------
* The foregoing documents were filed with the Company's form 8-K dated August
21, 1998.
(b) REPORTS ON FORM 8-K
The Company filed no reports on Form 8-K in the last quarter of the
fiscal year ended December 31, 1998. Subsequent to year end, the Company filed
a report on Form 8-K on March 4, 1999. Such report covered the Company's
closing of a private placement of Series B Preferred Stock.
* * * * *
[THE REST OF THIS PAGE IS INTENTIONALLY LEFT BLANK.]
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<PAGE> 42
SIGNATURES
In accordance with Section 13 of the Exchange Act, the Registrant has
caused this report to be signed on its behalf by the undersigned, hereunto duly
authorized.
<TABLE>
<CAPTION>
I-STORM, INC.
(Registrant)
<S> <C>
Dated: August 11 , 1999 By: /s/ Calbert Lai
---- --------------------------------------
Calbert Lai, President and Director
</TABLE>
In accordance with Section 13 of the Exchange Act, this report has been
signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Calbert Lai President and Director August 11, 1999
- -------------------------- ----
Calbert Lai
/s/ Calbert Lai Treasurer and Chief August 11, 1999
- -------------------------- Financial Officer ----
Calbert Lai
/s/Stephen Venuti Secretary and Vice President August 11, 1999
- -------------------------- ----
Stephen Venuti
/s/ Frank DeLape Director August 11, 1999
- -------------------------- ----
Frank DeLape
/s/ Matthew Howard Director August 7, 1999
- -------------------------- ----
Matthew Howard
/s/ John Matthews Director August 11, 1999
- -------------------------- ----
John Matthews
/s/Thomas Schultz Director August 11, 1999
- -------------------------- ----
Thomas Schultz
</TABLE>
41
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To I-Storm, Inc.:
We have audited the accompanying consolidated balance sheets of I-Storm, Inc.
(a Nevada corporation in the development stage) as of December 31, 1998, July
17, 1998, and December 31, 1997, and the related consolidated statements of
operations and comprehensive loss, shareholders equity (deficit) and cash flows
for the periods then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of I-Storm, Inc. as of December
31, 1998, July 17, 1998, and December 31, 1997, and the results of its
operations and its cash flows for the periods then ended in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to
the financial statements, the Company emerged from Chapter 11 bankruptcy
effective July 17, 1998 and is in the development stage with no significant
operating results to date. The bankruptcy proceedings significantly affected
the Company's capital structure, liquidity, and capital resources. These
factors and others discussed in Note 1 raise substantial doubt about the
ability of the Company to continue as a going concern and about the ability of
the Company to realize its Reorganization Asset. Management's plans in regard
to these matters are also described in Note 1. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
ARTHUR ANDERSEN LLP
San Jose, California
July 16, 1999
<PAGE> 44
I-STORM, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1998, JULY 17,1998, AND DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
Post Emergence Predecessor
---- --------- -----------
December 31, July 17, December 31,
1998 1998 1997
---------------------------------------------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 5 $ 295 $ --
Accounts receivable, net of allowance for doubtful
accounts of $51, $50 and $31 44 86 85
Factored accounts receivable, net of allowance for
doubtful accounts of $349, $66, and $0 105 508 571
Prepaid expenses and other current assets 158 92 122
---------------------------------------------
Total current assets 312 981 778
Property and equipment, net 81 122 974
Other assets 32 54
Reorganization asset, net of amortization of $147, $0, and $0 3,060 3,131 --
---------------------------------------------
Total assets $ 3,485 $ 4,234 $ 1,806
=============================================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of capital lease obligations $ -- $ 32 $ --
Notes payable 1,197 100 157
Factoring liability 1,144 700 821
Accounts payable 912 417 7,151
Accrued liabilities 504 690 605
---------------------------------------------
Total current liabilities 3,757 1,939 8,734
---------------------------------------------
Long-term notes payable (Note 4) 260 528 --
Capital lease obligation, less current portion -- -- 2
---------------------------------------------
Total noncurrent liabilities 260 528 2
---------------------------------------------
Redeemable common stock, at $1.00 per share, 600,000 shares
outstanding at December 31, 1998 and July 17, 1998 and
none outstanding at December 31, 1997 (Note 6) 600 600 --
---------------------------------------------
Commitments and contingencies (Note 5)
Shareholders' equity (deficit):
Preferred stock, $0.01 par value and paid in capital
Series A cumulative convertible preferred stock;
liquidation preference of $4,002:
Designated--600 share; outstanding--0 shares
Subscribed--600 shares at December 31, 1998 and
July 17, 1998 and 0 shares at December 31, 1997 600 600 --
Series B cumulative convertible preferred stock:
Designated--1,700 shares; outstanding--none -- -- --
Series C cumulative convertible preferred stock:
Designated--1,225 shares; outstanding--none -- -- --
Common stock, $0.01 par value:
Authorized--25,000
Outstanding--3,726 shares in 1998, 1,000 shares at July
17, 1998, and 11,590 shares in 1997
Subscribed 1,482 shares in 1998, 2,040 shares at July
17, 1998, none in 1997 51 30 2,342
Notes receivable from holders of common stock -- -- (2,332)
Subscribed warrants to purchase common stock 110 47 --
Additional paid-in capital 867 490 --
Accumulated deficit (2,760) -- (6,940)
--------------------------------------------
Total shareholders' equity (deficit) (1,132) 1,167 (6,930)
--------------------------------------------
Total liabilities and shareholders' equity (deficit) $ 3,485 $ 4,234 $ 1,806
============================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-1
<PAGE> 45
I-STORM, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Post-Emergence Predecessor
Period from
Inception Period from
(July 17, 1998) January 1, 1998 Year Ended
to December 31, to July 16, December 31,
1998 1998 1997
----------------------------------------------------------
<S> <C> <C> <C>
Revenues 837 2,076 6,108
Costs and expenses:
Cost of revenues 911 1,563 4,106
Selling, general, and administrative 1,892 2,672 4,440
Research and development 429 -- --
Amortization of reorganization asset 147 -- --
----------------------------------------------------------
Total operating expenses 3,379 4,235 8,546
----------------------------------------------------------
Loss from operations (2,542) (2,159) (2,438)
Interest expense (218) -- (320)
Other income (expense), net -- (264) (114)
----------------------------------------------------------
Total other income (expense) (218) (264) (434)
----------------------------------------------------------
Net loss and comprehensive loss (2,760) (2,423) (2,872)
==========================================================
Net loss per share:
Basic and diluted (0.56) (0.21) (0.25)
==========================================================
Shares used in computing net loss per share:
Basic and diluted 4,914 11,590 11,590
==========================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE> 46
I-STORM, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Convertible Warrants to
Preferred Stock Common Stock Purchase
----------------------------------------------- Common Notes
PREDECESSOR Shares Amount Shares Amount Stock Receivable
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997 -- $ -- 11,590 $ 2,342 $ -- $ (2,332)
Net loss -- -- -- -- -- --
------------------------------------------------------------------------------
Balance, December 31, 1997 -- -- 11,590 2,342 -- (2,332)
Net loss -- -- -- -- -- --
Issuance of new preferred and common stock and
warrants in accordance with the POR 600 600 3,040 30 47 --
Application of fresh-start accounting -- -- (11,590) (2,342) -- 2,332
------------------------------------------------------------------------------
POST-EMERGENCE
- --------------
Balance at inception (July 17, 1998) 600 600 3,040 30 47 --
Issuance of common stock for services -- -- 2,000 20 -- --
Issuance of common stock related to
debt financing -- -- 128 1 -- --
Issuance of warrants related to debt
financing -- -- -- -- 73 --
Exercise of warrants -- -- 40 -- (10) --
Net loss -- -- -- -- -- --
------------------------------------------------------------------------------
Balance, December 31, 1998 600 $ 600 5,208 $ 51 $ 110 $ --
==============================================================================
</TABLE>
<TABLE>
<CAPTION>
Total
Additional Shareholders'
Paid-in Accumulated Equity
PREDECESSOR Capital Deficit (Deficit)
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, January 1, 1997 $ -- $ (4,068) $ (4,058)
Net loss -- (2,872) (2,872)
----------------------------------------------
Balance, December 31, 1997 -- (6,940) (6,930)
Net loss -- (2,423) (2,423)
Issuance of new preferred and common stock and
warrants in accordance with the POR 490 -- 1,167
Application of fresh-start accounting -- 9,363 9,353
----------------------------------------------
POST-EMERGENCE
- --------------
Balance at inception (July 17, 1998) 490 -- 1,167
Issuance of common stock for services 336 -- 356
Issuance of common stock related to
debt financing 31 -- 32
Issuance of warrants related to debt
financing -- -- 73
Exercise of warrants 10 -- --
Net loss -- (2,760) (2,760)
----------------------------------------------
Balance, December 31, 1998 $ 867 $ (2,760) $ (1,132)
==============================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 47
I-STORM, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Post Emergence
Predecessor
Period from
Inception Period from
(July 17, 1998) January 1, 1998 Year Ended
to December 31, to July 16, December 31,
1998 1998 1997
------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (2,760) $ (2,423) $ (2,872)
Adjustments to reconcile net loss to net cash used in
operating activities:
Loss on disposal of fixed assets -- 30 200
Depreciation and amortization 192 88 252
Forgiveness of current obligations in exchange for fixed
assets -- 738 --
Valuation of common stock issued for services 356 -- --
Provision for bad debts 284 85 --
Changes in assets and liabilities:
Accounts receivable 42 (20) 2,698
Unbilled receivables -- -- 98
Factored accounts receivable 120 (3) (571)
Prepaid expenses and other assets (3) 84 34
Accounts payable (756)
Deferred revenue 495 655 2,025
Accrued liabilities (16) 149 (1,429)
------------------------------------------------------
Net cash used in operating activities (1,290) (617) (321)
------------------------------------------------------
Cash flows from investing activities:
Purchase of fixed assets (8) (4) (287)
------------------------------------------------------
Cash flows from financing activities:
Proceeds from notes payable 554 528 --
Repayment of notes payable -- (57) (52)
Factoring liability, net 444 (121) 612
Payments on capital leases -- (34) (125)
Proceeds from issuance of redeemable common stock -- 600 --
Payment on notes receivable from shareholders -- -- 100
Proceeds from the exercise of warrants 10 -- --
------------------------------------------------------
Net cash provided by financing activities 1,008 916 535
------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (290) 295 (73)
Cash and cash equivalents at beginning of period 295 -- 73
------------------------------------------------------
Cash and cash equivalents at end of period $ 5 $ 295 $ --
======================================================
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Valuation of common stock related to debt financing $ 32 $ -- $ --
Valuation of warrants issued in conjunction with debt $ 63 $ -- $ --
Notes payable issued to secured creditors for pre-petition
claims and taxes (See Note 5) $ 275 $ -- $ --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 48
I-STORM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. DESCRIPTION OF THE COMPANY:
COMPANY FORMATION AND FINANCIAL REORGANIZATION
I-Storm, Inc. (the "Company" or "I-Storm") was created through the merger of
LVL Communications Corporation ("LVL") and Digital Acquisition Corporation, a
wholly owned subsidiary of Digital Power Holding Company ("Digital"), a Nevada
public shell corporation on July 17, 1998, resulting in LVL becoming a wholly
owned subsidiary of Digital. Digital has been renamed "I-Storm, Inc." The
merger was accounted for as a reverse acquisition under the purchase method
with LVL being the surviving entity.
Since December 1989, Digital has not engaged in any material business
operations. Its only activities since that time have consisted of restoring and
maintaining its good standing in the State of Nevada.
I-Storm is an Internet advertising, marketing and communications agency, and
the developer of the "I-Storm CyberStore" concept, a joint venture program to
finance, design, develop, and operate electronic commerce storefronts in
partnership with brand-name consumer and technology product companies as of
December 31, 1998. LVL has developed electronic and on-line commerce
("E-commerce") on behalf of international manufacturing and technology
corporations.
On March 23, 1998, LVL and its two wholly owned subsidiaries, LVL Advertising,
Inc. ("LVLA"), and LVL Interactive, Inc. ("LVLI"), filed a voluntary petition
in the United States Bankruptcy Court for the Northern District of California
("Bankruptcy Court") seeking protection under Chapter 11 of the U.S. Bankruptcy
Code. The Chapter 11 proceedings of the Companies were jointly administered by
the Bankruptcy Court. LVL and its subsidiaries operated their business as
debtors-in-possession, subject to Bankruptcy Court approval for certain
transactions, while they developed a reorganization plan to restructure LVL. On
April 16, 1998, the Bankruptcy Court confirmed the First Amended Plan of
Reorganization ("POR") which became effective on July 17, 1998. The principal
terms of the POR are as follows:
1. LVLA and LVLI merged into LVL.
2. LVL became a wholly owned subsidiary of Digital.
3. The outstanding shares of common stock of LVL ("Old Common Stock")
and options to purchase Old Common Stock were canceled effective
July 17, 1998.
4. Certain founders and shareholders of LVL received 600,000 shares
of common stock of the Company, subject to certain restrictions on
the sale and disposition of these shares.
F-5
<PAGE> 49
I-STORM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
5. Certain secured claims are to be repaid by the Company pursuant to
the original terms of the agreements or will be repaid over five
years in equal quarterly installments at an annual interest rate
of 10%.
6. An investor in LVL, Trident III, LLC ("Trident") that provided
$600,000 in pre-confirmation bridge financing was issued 600,000
shares of redeemable non-voting common stock and 440,000 shares of
non-redeemable common stock.
7. All unsecured claims will receive a pro rata portion of 600,000
shares of Series A Cumulative Convertible Preferred Stock ("Series
A"). Claims of less than $5,000 may elect to receive 10% of their
claim in cash in lieu of receiving shares of Series A ("Cash
Option"). Claims exceeding $5,000 may elect to reduce their claim
to $5,000 and receive $500 in lieu of receiving shares of Series
A. The pool of 600,000 shares of Series A was reduced by the
percentage dollar amount of claims electing the Cash Option.
8. The Company issued warrants to purchase common stock to certain
investors and service providers during the reorganization.
The Company also concluded the following additional transactions relating to
the restructuring of the Company:
1. Trident provided $228,000 in post-confirmation bridge financing and
received 91,200 shares of non-voting common stock.
2. The Company has also received $100,000 in pre-confirmation bridge
financing and $300,000 in post-confirmation bridge financing from
other investors. The Company issued warrants to purchase 80,000
shares of common stock at $0.50 per share and 120,000 shares of
common stock at $0.001 per share, respectively, in conjunction with
these financings.
3. I-Storm issued warrants to purchase 290,000 shares of common stock
at $0.25 per share in conjunction with post-confirmation bridge
financing of $725,0000.
SIGNIFICANT RISKS AND UNCERTAINTIES
The Chapter 11 proceedings significantly affected I-Storm's capital structure,
liquidity and capital resources. During 1997 and 1998, the Company's operations
generated substantial losses. I-Storm expects that in the near term, it will
continue to sustain losses from operations (before giving effect to the
non-cash charges that it will incur with respect to the amortization of a $3.1
million bankruptcy Reorganization Asset over the next ten years).
The Company is in the development stage, has yet to generate any significant
revenues and has no assurance of future revenues. The Company is subject to the
risks and challenges associated with other companies at a similar stage of
development, including: dependence on
F-6
<PAGE> 50
I-STORM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
key individuals, successful development, marketing and sales of products and
services, and competition from larger companies with greater financial,
technical, management, marketing, and sales resources.
In order to achieve successful operations, the Company will require additional
capital to sustain and expand its business. I-Storm has raised net proceeds of
approximately $5.7 million since December 31, 1998. I-Storm is currently
seeking additional equity financing and is seeking to list its stock on a
nationally-recognized exchange. There can be no assurance that I-Storm will be
able to obtain financing or that the terms of the financing will be favorable
to I-Storm. These factors raise substantial doubt about the ability of I-Storm
to continue as a going concern and about the ability of I-Storm to realize its
Reorganization Asset. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
In addition to the need for additional financing, I-Storm is subject to a
number of other risk factors including, but not limited to, a limited operating
history as a reorganized entity; significant concentration of revenue from a
few customers; highly competitive markets with limited barriers to entry; and
implementation of its new E-Commence CyberStore concept.
FRESH START ACCOUNTING
AICPA Statement of Position 90-7, "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code," prescribes the use of "fresh start
accounting" when the sum of the allowed claims plus post-petition liabilities
exceeds the value of pre-confirmation assets and the entity experiences a
change in control as pre-reorganization equity holders effectively receive less
than 50% of new common stock issued pursuant to the POR. Under these
circumstances, a new reporting entity is created and assets and liabilities
should be recorded at their fair values. This accounting treatment is referred
to as "fresh start reporting."
Distributions in settlement of allowed claims, other transactions pursuant to
the POR and fresh start reporting adjustments have been applied to I-Storm's
pre-confirmation balance sheet resulting in the accompanying July 17, 1998
consolidated balance sheet of I-Storm. Since fresh start accounting results in
a new reporting entity, amounts included in the accompanying consolidated
financial statements as of or subsequent to July 17, 1998 are not intended to
be comparable to financial statements as of or for any previous period.
Fresh start reporting equity value was determined in good faith by the Board of
Directors of I-Storm. I-Storm has valued the Series A Cumulative Convertible
Preferred Stock at $1.00 per share, representing proceeds to the unsecured
creditors of approximately $0.10 per $1.00 of liabilities. Redeemable common
stock has also been valued at $1.00 based on the redemption features of the
common stock. Common stock has been valued at $0.25 per share based on the
value of the last transaction involving Digital's common stock. Warrants to
purchase common stock to be issued pursuant to the POR have been valued at
approximately $0.13 based on an option-pricing model.
F-7
<PAGE> 51
I-STORM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
The reorganization and the adoption of fresh start reporting resulted in the
following adjustments to the Company's Consolidated Balance Sheet as of July
17, 1998 (in thousands):
UNAUDITED INFORMATION
<TABLE>
<CAPTION>
Reorganization and
Predecessor Fresh Start Adjustments Reorganized
Company ----------------------- Company
July 17, 1998 Debit Credit July 17, 1998
--------------- ------------ -------------- -----------------
<S> <C> <C> <C> <C>
Current assets: $ 1,360 $ -- $ 379 (a) $ 981
Property and equipment, net 307 -- $ 185 (b) 122
Reorganization asset -- 3,131 (c) -- 3,131
--------------- ------------- -------------- -----------------
Total assets $ 1,667 $ 3,131 $ 564 $ 4,234
=============== ============= ============== =================
Liabilities and equity: $ 9,574 $ 7,635 (d) -- 1,939
Long-term notes payable 403 -- 125 (e) $ 528
Redeemable common stock -- -- 600 (f) 600
Preferred A -- -- 600 (g) 600
Common 11 -- 19 (h) 30
Warrants -- -- 47 (i) 47
Paid in capital 724 234 (j) -- 490
Accumulated deficit (9,045) -- 9,045 (k) --
--------------- ------------- -------------- -----------------
Total liabilities and equity $ 1,667 $ 7,869 $ 10,436 $ 4,234
=============== ============= ============== =================
</TABLE>
Explanation of the above adjustment columns are as follows:
(a) To adjust current assets to fair market value.
(b) To adjust property and equipment to fair market value.
(c) To establish the reorganization value in excess of identifiable assets
as follows (in thousands):
<TABLE>
<S> <C>
New debt $ 125
New equity 1,266
--------------
Reorganization value 1,391
Plus: Fair value of liabilities 2,842
Less: Fair value of assets (1,102)
--------------
$ 3,131
==============
</TABLE>
(d) To reflect the cancellation of old accounts payable and notes payable.
(e) To reflect the addition of bridge debt pursuant to the Reorganization
Plan.
F-8
<PAGE> 52
I-STORM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
(f) To reflect the issuance of 600,000 shares of Redeemable Common
pursuant to the Reorganization Plan.
(g) To reflect the issuance of 600,000 shares of Convertible Preferred A
pursuant to the Reorganization Plan.
(h) To reflect the net issuance of Common shares pursuant to the
Reorganization Plan.
(i) To reflect the issuance of 350,000 shares of Common Warrants pursuant
to the Reorganization Plan.
(j) To reflect net adjustments to Capital pursuant to the Reorganization
Plan.
(k) To reflect the elimination of stockholders' deficit of the Predecessor
Company.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements reflect the activities of
I-Storm and its wholly-owned subsidiary after elimination of all intercompany
accounts and transactions.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the period. Actual results
could differ from those estimates.
STATEMENTS OF CASH FLOWS
For purposes of the statements of cash flows, I-Storm considers all highly
liquid investments purchased with original maturities of three months or less
to be cash and cash equivalents. Cash and cash equivalents consist of amounts
on deposit at a commercial bank.
I-Storm paid cash of $80,360, $57,797 and $208,328, for interest in the periods
ended December 31, and July 17, 1998, and the year ended December 31, 1997.
I-Storm paid cash of $0, $4,176 and $11,028, for taxes in the periods ended
December 31, 1998 and July 17, 1998, and the year ended December 31, 1997.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject I-Storm to concentrations of
credit risk consist principally of accounts receivable. I-Storm performs
periodic credit evaluations of its customers' financial condition and generally
does not require collateral.
F-9
<PAGE> 53
I-STORM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated using the
straight-line method over the estimated useful lives (three to seven years) of
the assets.
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31, July 17, December 31,
1998 1998 1997
---------------------------------------------------
<S> <C> <C> <C>
Computer equipment $ 61 $ 61 $ 141
Furniture and fixtures 61 61 241
Leasehold improvements 0 0 875
---------------------------------------------------
122 122 1,257
Less: Accumulated depreciation (41) 0 (283)
---------------------------------------------------
$ 81 $ 122 $ 974
===================================================
</TABLE>
AMORTIZATION OF REORGANIZATION ASSET
At July 17, 1998, the reorganization value of I-Storm in excess of its net
assets was determined to be $3,131,000. This intangible asset was classified as
a reorganization asset ("Reorganization Asset") in the accompanying
consolidated balance sheet of I-Storm and will be amortized on a straight-line
basis over ten years. As of December 31, 1998, the value of the Reorganization
Asset was approximately $3,060,000. The carrying value of the Reorganization
Asset will be reviewed periodically for impairment, and if the facts and
circumstances suggest that it may not be recoverable, as determined based on
the undiscounted cash flows of I-Storm over the remaining amortization period,
the carrying value of the Reorganization Asset will be adjusted in accordance
with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of."
F-10
<PAGE> 54
I-STORM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31, July 17, December 31,
1998 1998 1997
-----------------------------------------------------
<S> <C> <C> <C>
Professional fees $ 175 $ 367 $ 176
Payroll and payroll-related liabilities 139 162 115
Sales taxes 0 35 17
Other accrued liabilities 190 158 265
-----------------------------------------------------
$ 504 $ 722 $ 573
=====================================================
</TABLE>
STOCK-BASED COMPENSATION
The Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation," in October 1995. This accounting standard permits the use of
either a fair value based method of accounting or the method defined in
Accounting Principles Board Opinion 25 ("APB 25"), "Accounting for Stock Issued
to Employees" to account for stock-based compensation arrangements. Companies
that elect to employ the method prescribed by APB 25 are required to disclose
the pro forma net income (loss) that would have resulted from the use of the
fair value based method. I-Storm has elected to account for its stock-based
compensation arrangements under the provisions of APB 25, and accordingly, it
has included the pro forma disclosures required under SFAS No. 123 in Note 8.
REVENUE RECOGNITION
I-Storm's revenues consist principally of services related to development and
maintenance of web sites. I-Storm recognizes revenue as the services are
provided. To the extent costs incurred and anticipated costs to complete
projects in progress exceed anticipated billings, a loss is accrued for the
excess.
COMPREHENSIVE INCOME (LOSS)
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
which I-Storm adopted beginning on January 1, 1998. SFAS No. 130 establishes
standards for reporting and display of comprehensive income (loss) and its
components in a full set of general purpose financial statements. The objective
of SFAS No. 130 is to report a measure of all changes in equity of an
enterprise that result from transactions and other economic events of the
period other than transactions with shareholders ("comprehensive income ").
Comprehensive income (loss) is the total of net income (loss) and all other
non-owner
F-11
<PAGE> 55
I-STORM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
changes in equity. For the periods ended December 31, 1998 and July 17, 1997,
and the year ended December 31, 1997, I-Storm's comprehensive loss was equal to
net loss.
COMPUTATION OF BASIC AND DILUTED NET LOSS PER SHARE AND PRO FORMA BASIC AND
DILUTED NET LOSS PER SHARE
In accordance with SFAS No. 128, "Earnings Per Share," basic net loss per
common share has been computed using the weighted average number of shares of
common stock outstanding during the period less shares subject to repurchase.
Basic and diluted pro forma net loss per common share, as presented in the
statements of operations, has been computed as described above and also gives
effect to the conversion of the convertible preferred stock if anti-dilutive
(using the if-converted method) from the original date of issuance.
<TABLE>
<CAPTION>
Period Ended Period Ended Year Ended
December 31, July 16, December 31,
(in thousands) 1998 1998 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net loss:
Basic and diluted: $ (2,760) $ (2,423) $ (2,872)
Weighted average shares used in computing basic
and diluted net loss per common share $ 4,914 $ 11,590 $ 11,590
=====================================================
Basic and diluted net loss per common share $ (0.56) $ (0.21) $ (0.25)
=====================================================
</TABLE>
SEGMENT REPORTING
During 1998, I-Storm adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." SFAS No. 131 requires a new basis of
determining reportable business segments (i.e., the management approach). This
approach requires that business segment information used by management to
assess performance and manage company resources be the source for information
disclosure. On this basis, I-Storm has only one business segment, the
development and implementation of the eStore concept.
During the periods ended December 31, 1998 and July 17, 1998, and the year
ended December 31, 1997, I-Storm's revenue was generated in the United States.
F-12
<PAGE> 56
I-STORM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which requires companies to record
derivative financial instruments on the balance sheet as assets or liabilities,
measured at fair value. Gains or losses resulting from changes in the values of
those derivatives would be accounted for depending on the use of the derivative
and whether it qualifies for hedging accounting. The key criterion for hedge
accounting is that the hedging relationship must be highly effective in
achieving offsetting changes in fair value or cash flows. In June 1999, the
FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133," which
amends SFAS No. 133 to be effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000 (or January 1, 2001 for I-Storm). This Statement
will not have a material impact on the financial condition or results of the
operations of I-Storm.
3. FACTORED ACCOUNTS RECEIVABLE:
I-Storm has entered into a factoring agreement with a financial institution.
Under this arrangement, I-Storm sells to the financial institution all
third-party receivables that meet certain criteria outlined in the agreement.
The financial institution has the right to charge back any receivables that are
not paid within 90 days of the invoice date to I-Storm. As I-Storm does not
surrender control over the factored receivables, the amounts received from the
transfer are treated as secured borrowings until either payment is received by
the financial institution or the receivable is put back to I-Storm. The
factoring agreement expired on March 25, 1999. As of December 31, 1998, July
17, 1998, and December 31, 1997, I-Storm had $1,144,000, $700,000, and
$821,000, respectively, outstanding in factoring liability related to the
factoring agreement. Subsequent to December 31, 1998, I-Storm has completely
paid off the factoring liability.
The following table shows the component elements of factored accounts
receivable from customers (in thousands):
<TABLE>
<CAPTION>
December 31, July 17, December 31,
1998 1998 1997
-------------------------------------------------------
<S> <C> <C> <C>
Factored accounts receivable:
Billed $ 454 $ 512 $ 477
Unbilled -- 62 94
-------------------------------------------------------
454 574 571
Less: Allowance for doubtful accounts (349) (66) --
-------------------------------------------------------
$ 105 $ 508 $ 571
=======================================================
</TABLE>
F-13
<PAGE> 57
I-STORM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
Factored unbilled accounts receivable represents revenue recognized on a
percentage-of-completion basis for which billings had not been presented to the
customer because the amounts were not billable at the balance sheet date. The
unbilled accounts receivable are generally billable upon completion of the
respective project.
4. NOTES PAYABLE:
As of December 31, 1998, I-Storm had a note payable agreement with Trident,
under which I-Storm was able to borrow up to $1 million at 10% per annum. As
discussed in Note 1, Trident provided $600,000 in pre-confirmation bridge
financing and $228,000 in post-confirmation bridge financing. In consideration
for the pre-confirmation bridge financing, I-Storm issued Trident 600,000
shares of redeemable common stock and 440,000 shares of non-redeemable common
stock. In partial consideration for the post-confirmation bridge financing,
Trident has been issued additional 91,200 shares of non-redeemable non-voting
common stock. At December 31, 1998, I-Storm had $321,000 outstanding under this
note payable agreement classified as notes payable in the accompanying balance
sheet and $600,000 outstanding classified as redeemable common stock.
Subsequent to December 31, 1998, these notes have been repaid.
As of December 31, 1998, I-Storm had notes payable agreements with certain
individuals in amounts aggregating $250,000 at 10% per annum. The notes are
collateralized via a security interest in all of I-Storm's assets, subject to
certain other security interests. In conjunction with the issuance of the notes
payable, I-Storm issued warrants to purchase 60,000 shares of common stock in
I-Storm exercisable at $0.50 per share. The warrants expire on March 31, 2003.
At December 31, 1998, the outstanding balance under these agreements was
$250,000 and is classified as notes payable in the accompanying balance sheet.
Subsequent to December 31, 1998, these notes have been repaid.
As of December 31, 1998, I-Storm also had notes payable agreements with certain
individuals in amounts aggregating $275,000 at 10% per annum. I-Storm issued
warrants to purchase 50,000 shares of common stock, exercisable at $0.001 per
share. At December 31, 1998, the balance outstanding under these agreements was
$275,000 and is classified as notes payable in the accompanying balance sheet.
Subsequent to December 31, 1998, these notes have been repaid.
As of December 31, 1998, I-Storm also had notes payable agreements with certain
individuals in amounts aggregating $300,000 at 10% per annum. I-Storm issued
warrants to purchase 120,000 shares of common stock, exercisable at $0.001 per
share. At December 31, 1998, the balance outstanding under these agreements was
$300,000 and is classified as notes payable in the accompanying balance sheet.
Subsequent to December 31, 1998, these notes have been repaid.
All of the notes payable agreements listed above expire upon the earlier of:
(i) various dates from March 31, 1999 through October 31, 1999; (ii) the date
of I-Storm's receipt of $3 million
F-14
<PAGE> 58
I-STORM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
from one or more debt or equity financings; or (iii) upon the sale, transfer or
disposition of any or all of the assets of I-Storm.
As of December 31, 1998, I-Storm had federal and state payroll and sales taxes
due totaling $202,000. As a result of the Chapter 11 filing, I-Storm has five
years to pay the taxes.
Under the POR, the Company is required to pay secured claims totaling $73,000,
including principal and interest (10% per annum), over a period of five years,
in equal quarterly installments.
I-Storm's notes payable obligations described above are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1998
(in thousands)
------------------------
<S> <C>
Note payable agreement with Trident at 10% per annum $ 321
Notes payable agreements with certain individuals at
0% per annum 861
Federal and State payroll and sales taxes 202
Secured creditors 73
-----------------
Total debt outstanding 1,457
Less: Current portion 1,197
-----------------
Total long-term notes payable $ 260
=================
</TABLE>
5. COMMITMENTS AND CONTINGENCIES:
As of December 31, 1998, I-Storm leases its facility on a month to month basis.
There are no future minimum required payments for this facility.
In March 1999, I-Storm entered into a two year operating lease for a new
facility. The future minimum required payments under this lease are as follows
(in thousands):
<TABLE>
<CAPTION>
<S> <C>
1999 $ 253
2000 348
2001 29
-----------
$ 630
===========
</TABLE>
In conjunction with I-Storm's bankruptcy proceedings in 1998, I-Storm's
creditors had filed claims of approximately $621,000 as secured creditors.
Subsequent to December 31, 1998, claims for approximately $548,000 were
converted to unsecured claims and were allocated their pro rata portion of
Series A Cumulative Convertible Preferred Stock. The remaining
F-15
<PAGE> 59
I-STORM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
claims of $73,000 will be repaid in equal quarterly installments over five
years at 10% per annum (see Note 4).
6. REDEEMABLE COMMON STOCK:
In conjunction with the POR, I-Storm issued 600,000 shares of redeemable common
stock to Trident in consideration for $600,000 of pre-confirmation bridge
financing. These shares are redeemable at $1.00 per share, at Trident's option,
in the event that I-Storm raises $3 million in debt or equity financing.
Subsequent to December 31, 1998, Trident elected to convert the redeemable
common stock into non-redeemable common stock.
7. PREFERRED STOCK:
As of December 31, 1998, I-Storm was authorized to issue 2,000,000 shares of
preferred stock of which 600,000 shares are designated Series A Cumulative
Convertible Preferred Stock ("Series A"). Pursuant to the POR, these shares
will be issued on a pro rata basis to the class of unsecured creditors. These
shares will be issued upon the identification of these claims and the
determination of shares to be issued or the Cash Option elected, and have been
reflected as subscribed shares in the accompanying balance sheet. The shares of
Series A to be issued pursuant to the POR have been valued at $1.00 per share
as determined in good faith by the Board of Directors. Pursuant to the POR,
these shares may not be transferred or sold until twelve months after the
merger of LVL into Digital.
The rights, restrictions, and preferences of Series A are as follows:
- The holders of Series A shall, upon the vote of the majority of the
Board of Directors, be entitled to receive, out of funds legally
available therefore, cumulative annual dividends at a rate of $0.05 per
annum per share, respectively, prior and in preference to any payment
of any dividend on the common stock, payable in cash or common stock
at the option of the Board of Directors. Such dividends shall be paid
when and as declared by the Board of Directors, and unpaid dividends
shall accumulate for the benefit of the holders. The dividend rights
and preferences of the Series A shall be senior to those of common
stock. After the dividend preferences of the Series A due in a given
year have been paid in full, all remaining dividends in such year, if
any, shall be paid according to preference to remaining equity
interests.
- In the event of any liquidation, dissolution, or winding up of
I-Storm, or the sale, merger, or combination of I-Storm, a public
offering in excess of $25 million, and merger or consolidation of
I-Storm in which its shareholders do not retain a majority of the
voting power in the surviving corporation, or a sale of substantially
all of I-Storm's assets (singularly or collectively referred to as a
"Liquidation Preference Event"), the holders of the Series A will be
entitled to receive an amount equal to $6.67 per share for the Series
A, plus an amount equal to all declared but unpaid dividends (the
"Preference Amount"). After the Preference Amount on all outstanding
shares of
F-16
<PAGE> 60
I-STORM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
Series A has been paid, any remaining funds and assets of I-Storm
legally available for distribution shall be paid pro rata solely among
the holders of common stock. If I-Storm has insufficient assets to
permit payment of the Preference Amount in full to all holders of
Series A, then the assets of I-Storm shall be distributed ratably to
the holders of Series A in proportion to the Preference Amount each
such holder would have been entitled to receive.
- The Series A shall be redeemable in part or in full at the option of
I-Storm on thirty days advance written notice to the holders of Series
A at a redemption price of $6.67 per share. Upon receipt of notice of
I-Storm's intention to redeem the Series A, each holder of Series A
shall have an option to convert to common stock as described below.
Any partial redemption shall be made on a pro rata basis.
- Each holder of Series A shall have the right to convert the Series A
into shares of common stock in part or in full at any time, including
within thirty days after notice by I-Storm of its intention to redeem
the Series A or of a Liquidation Preference Event. The initial
conversion rate for the Series A shall be one-to-one. All rights
incident to a share of Series A (including but not limited to rights
to any declared but unpaid dividends) will terminate automatically
upon any conversion of such share into common stock. The number of
shares of common stock issuable upon conversion of each share of
Series A shall be subject to adjustment from time to time upon the
occurrence of certain events.
- The holders of Series A shall have the right to vote as a class on (i)
the merger, sale, liquidation, or dissolution of I-Storm, (ii) a sale
of all or substantially all of I-Storm's assets, (iii) any increase in
the number of authorized shares of any class or series of equity
securities of I-Storm, (iv) creation of any new class or series of
equity securities in LVL, (v) any increase in the number of members of
the Board of Directors of I-Storm and LVL, and (vi) election of one
member of the Board of Directors of I-Storm and LVL.
8. COMMON STOCK:
At December 31, 1998, common stock consists of 3,326,000 shares outstanding,
and an additional 1,482,000 shares subscribed. The subscribed shares consist of
shares to be issued pursuant to the POR that had not been issued as of December
31, 1998. The Board of Directors authorized the issuance of these shares on
July 23, 1998. The shares of common stock to be issued pursuant to the POR have
been valued at $0.25 per share, as determined in good faith by I-Storm's Board
of Directors. Each issued and outstanding share of common stock entitles the
holder to one vote on all matters submitted to a vote of stockholders. Upon any
liquidation, dissolution or winding up of the affairs of I-Storm, holders of
common stock are entitled to receive pro rata all of the assets available for
distribution to shareholders, only after payment or provision for payment of
all debts and other liabilities of I-Storm, including a pro-rata distribution
of assets, first, to the holders of Series A.
F-17
<PAGE> 61
I-STORM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
Shares of common stock issued pursuant to the POR and shares issued upon the
exercise of warrants issued pursuant to the POR may not be transferred or sold
within six months of the merger of LVL and Digital for holders of common stock
that had provided financing to I-Storm. Shares may not be transferred or sold
within eighteen months of the merger of LVL and Digital for holders of common
stock that had not provided financing to I-Storm. The Board of Directors may
release all or a portion of these restrictions at its discretion.
1998 STOCK OPTION PLAN
As provided in the POR and subject to stockholder approval, in 1998, I-Storm
established the 1998 Stock Option Plan (the "1998 Option Plan") covering
1,400,000 shares of common stock. Options granted under the 1998 Option Plan may
be either incentive stock options or nonstatutory stock options, as designated
by the Board of Directors. Options granted under the 1998 Option Plan expire on
the tenth anniversary of the date of grant. The 1998 Option Plan provides that
the exercise price of each incentive stock option will be no less than 100% of
the fair market value of the common stock at the date of the grant. The exercise
price of each nonstatutory stock option will be no less than 85% of the fair
market value of the common stock at the date of the grant. The exercise price to
an optionee who possesses more than 10% of the total combined voting power of
all classes of stock will be no less than 110% of the fair market value of the
common stock at the date of the grant and is not exercisable after the
expiration of five years from the date of grant. Vesting provisions of
individual options under the 1998 Option Plan may vary as the Board of Directors
has the authority to set exercise dates, payment terms and other provisions for
each grant. As of December 31, 1998, there were no shares outstanding under the
1998 Option Plan. In accordance with APB No. 25, no compensation expense has
been recognized related to options granted to employees, as there were no
options granted to employees as of December 31, 1998.
SUBSCRIBED WARRANTS TO PURCHASE COMMON STOCK
I-Storm has issued 350,000 warrants to purchase common stock at $0.50 per share
to creditors and to other entities and individuals as specified by the POR. The
warrants are exercisable for a period of five years commencing from their issue
date pursuant to the POR. The Board of Directors authorized the issuance of
these warrants on July 23, 1998. I-Storm has valued these warrants at
approximately $0.13 per share based on an option pricing model.
WARRANTS TO PURCHASE COMMON STOCK
I-Storm has issued warrants to purchase 290,000 shares of common stock at an
exercise price of $0.001 per share in connection with a bridge financing of
$825,000. The warrants are exercisable for a period of five years commencing
from their issue date. I-Storm has valued these warrants at approximately $0.25
per share based on an option pricing model. As of December 31, 1998, warrants
for 40,000 shares have been exercised.
F-18
<PAGE> 62
I-STORM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
COMMON STOCK ISSUED FOR SERVICES
During 1998, the Board of Directors authorized the issuance of 2,000,000 shares
of common stock valued at $0.25 per share to entities in consideration for
financial services and financing provided to I-Storm.
RESERVED FOR FUTURE ISSUANCE
The following shares of common stock are reserved for future issuance:
<TABLE>
<CAPTION>
<S> <C>
Subscribed common stock 2,040,000
1998 Stock Option Plan 1,400,000
Conversion of preferred stock 600,000
Warrants 600,000
---------------
4,640,000
===============
</TABLE>
9. INCOME TAXES:
I-Storm accounts for income taxes pursuant to SFAS No. 109, "Accounting for
Income Taxes." A valuation allowance has been recorded for the total deferred
tax assets as a result of uncertainties regarding the realization of the assets
based upon the lack of profitability in recent years, the uncertainty of future
profitability, and limitations on the utilization of net operating losses due
to I-Storm's reorganization.
10. RELATED PARTIES:
The Company entered into a twelve-month consulting agreement with Benchmark
Equity Group, Inc. ("Benchmark"), dated August 31, 1998, pursuant to which the
Company is obligated to pay a total of $175,000 in twelve monthly instalments
to Benchmark for merger and acquisitions consulting services rendered to either
LVL or the Company, commencing as of March 1, 1998. Benchmark also entered into
an agreement in April 1998, to provide consulting services to LVL and its
successor entity in consideration of 600,000 shares of unregistered Common
Stock, and the Board of Directors approved the issuance of this Common Stock to
Benchmark or its designees on August 1, 1998, subject to a month lock-up
agreement.
In September 1997, the Company engaged Mackenzie Shea, Inc. ("MSI") as a
consultant to assist the Company in structuring a reorganization and
post-organization operating entity. MSI or its designees were issued 500,000
shares of the Company's Common Stock in August 1998, and MSI was paid a $20,000
cash fee in 1998 in full compensation for such services. The shares are exempt
from registration under the federal securities laws, in accordance with Section
1145 of the Bankruptcy Code. The shares are subject to an eighteen month
lock-up
F-19
<PAGE> 63
I-STORM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
agreement, commencing August 1, 1998. Ten percent of such shares to date have
been released from the lock-up agreement.
In September 1997, the Company engaged Thomas Schulz as a consultant to assist
the Company in structuring a reorganization and post-organization operating
entity. Mr. Schulz or its designees were issued 500,000 shares of the Company's
Common Stock in August, 1998, and Mr. Schulz also was paid a fee for such
services. Mr. Schulz is a director of the Company. The shares are exempt from
registration under the federal securities laws, in accordance with Section 1145
of the Bankruptcy Code. The shares are subject to an eighteen month lock-up
agreement, commencing August 1, 1998. Ten percent of such shares to date have
been released from the lock-up agreement.
In August 1998, the Company engaged Weatherly Securities Corp. ("Weatherly") to
provide investment banking services and strategic planning for the management,
capitalization and business development of the Company for a flat fee of
1,000,000 shares of Common Stock of the Company, valued at $0.25 per share. The
shares of Common Stock issued to Weatherly were fully vested fully as of August
1, 1998, are unregistered shares and are subject to an eighteen month lock-up
agreement.
In August 1998, the Company engaged Pound Capital Corp. ("Pound") to provide
investment banking services and strategic planning for the management,
capitalization and business development of the Company for a flat fee of
225,000 shares of Common Stock of the Company, valued at $0.25 per share. The
shares of Common Stock issued to Pound were fully vested as of August 1, 1998,
are unregistered shares and are subject to an eighteen month lock-up agreement.
Robert Tomz entered into a consulting arrangement with the Company on December
8, 1998 whereby he was entitled to receive monthly compensation of $8,000 a
month and warrants to purchase 14,000 shares of Common Stock, exercisable at
$2.00 per share each month for a period of twelve months commencing January 11,
1999. Mr. Tomz also served briefly as Acting Chief Financial Officer of the
Company from January 1 to March 15, 1999. Mr. Tomz and the Company terminated
this consulting arrangement on June 15, 1999, and renegotiated the consulting
fee so that Mr. Tomz received in total $90,000 and 84,000 warrants to purchase
Common Stock of the Company exercisable at $2.00 per share.
Pursuant to the Plan of Reorganization, the Company has issued 297,642 shares
of Common Stock to each of Calbert Lai and Stephen Venuti, and 500,000 shares
of Common Stock to Thomas A. Schulz, or his designees, as set forth below.
Further, Benchmark Equity Group, Inc., an affiliate of Frank DeLape, a
director, has been issued 557,800 shares of Common Stock. Additionally, Mr.
DeLape, has received options to purchase 50,000 shares of Common Stock at $3.50
per share for one year's service as the Chairman of the Board of Directors of
the Company on July 23, 1999, and all other non-employee directors have
received options to purchase 25,000 shares at $3.50 per share for one year's
service on the Board of Directors of the Company, to be issued on July 23,
1999.
F-20
<PAGE> 64
I-STORM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
The Company is a party to a twelve month consulting agreement with Benchmark
Equity Group, Inc. ("Benchmark"), dated August 31, 1998, pursuant to which the
Company is obligated to pay $175,000 in twelve monthly instalments to Benchmark
for consulting services rendered to either LVL or the company, commencing as of
March 1, 1998. As of February 1, 1999, 11 months of the Consulting Agreement
has been paid in full. Benchmark also entered into an earlier agreement, in
April 1998, to provide consulting services to LVL and its successor entity in
consideration of 600,000 shares of Common Stock, and the Board of Directors
approved the issuance of this Common Stock to Benchmark or its designees on
July 23, 1998. Frank DeLape, Chairman of the Board, is the President of
Benchmark Equity Group, Inc. The Company has a management consulting agreement
with Matthew Howard, a director, for a fee of $5,000 per month. Mr. Howard's
consulting arrangement commenced August 1, 1998.
11. SUBSEQUENT EVENTS:
Subsequent to December 31, 1998, I-Storm raised net proceeds of $4,396,927 in
connection with the issuance of 407,900 shares of Series B Cumulative
Convertible Preferred Stock ("Series B") offered in a Regulation D private
placement at par value of $0.01 per share for an offering price of $12.25 per
share. The Series B shares shall pay a quarterly cumulative dividend at 9% per
annum, payable in cash or common stock at the option of the Board of Directors,
and shall be convertible into common stock at a conversion price of not greater
than $3.50 per share and not less than $2.80 per share.
Subsequent to December 31, 1998, I-Storm raised net proceeds of $4,004,000 in
connection with the issuance of 371,429 shares of Series C Cumulative
Convertible Preferred Stock ("Series C") offered in a Regulation D private
placement at par value of $0.01 per share for an offering price of $12.25 per
share. The Series C shares shall pay a quarterly cumulative dividend at 9% per
annum, payable in cash or common stock at the option of the Board of Directors,
and shall be convertible into common stock at a conversion price of not greater
than $3.50 per share and not less than $2.80 per share.
Subsequent to December 31, 1998, the Board of Directors authorized the issuance
of options to purchase 50,000 shares of common stock to the Chairman of the
Board of Directors. Each director other than the Chairman shall be granted
options to purchase 25,000 shares of common stock. These options will be
granted annually for each full year of service and vest one year from the date
of grant. The exercise price of options granted for the current year of service
is $3.50 per share. The Board of Directors also authorized the issuance of
options to purchase 50,000 and 25,000 shares of common stock to the Chairman
and members of the Advisory Board of I-Storm, respectively, under the same
terms as the options granted to the Chairman and members of the Board of
Directors. Individuals may only receive options as a member of either the Board
of Directors or the Advisory Board, but not as a member of both boards.
F-21
<PAGE> 1
Exhibit 2.2
AGREEMENT OF MERGER AND PLAN OF REORGANIZATION
This Agreement of Merger and Plan of Reorganization, dated as of the 16th
day of July, 1998, is entered into by and between Digital Acquisition
Corporation ("Digital Acquisition"), a California corporation and LVL
Communications Corporation (the "Surviving Corporation"), a California
corporation.
W I T N E S S E T H:
WHEREAS, Digital Acquisition is a corporation duly organized and existing
under the laws of the State of California,
WHEREAS, the Surviving Corporation is a corporation duly organized and
existing under the laws of the State of California,
WHEREAS, Digital Acquisition has an authorized capitalization consisting
of 100,000 shares of common stock, with no par value ("Common Stock");
WHEREAS, the Surviving Corporation has an authorized capitalization
consisting of 30,000,000 shares of common stock, with no par value ("Surviving
Corporation Common Stock");
WHEREAS, the Surviving Corporation is subject to an April 16, 1998 Order
of the United States Bankruptcy Court for the Northern District of California
(the "Order") confirming a First Amended Plan of Reorganization (the "Plan of
Reorganization"), and the Board of Directors of the Surviving Corporation wish
to comply with this Order and First Amended Plan of Reorganization;
WHEREAS, the respective Boards of Directors of the Surviving Corporation
and Digital Acquisition, and a majority of the holders of the outstanding voting
shares of Digital Acquisition, have determined that it is advisable that Digital
Acquisition be merged into the Surviving Corporation on the terms and conditions
hereinafter set forth; and
WHEREAS, the respective Boards of Directors of the Surviving Corporation
and Digital Acquisition intend that this Agreement of Merger and Plan of
Reorganization shall qualify as a reorganization under Section 368(a)(1) of the
Internal Revenue Code;
NOW, THEREFORE, in consideration of the mutual covenants, agreements,
representations and warranties herein contained, it is agreed that, in
accordance with the applicable statutes of the State of California, Digital
Acquisition shall be at the effective date of the merger merged with and into
the Surviving Corporation, which shall be the surviving corporation, and that
the terms and conditions of such merger and the mode of carrying it into effect
shall be as follows:
<PAGE> 2
ARTICLE I
MERGER OF DIGITAL ACQUISITION INTO THE
SURVIVING CORPORATION; SURVIVING CORPORATION
TO SUCCEED TO PROPERTIES AND OBLIGATIONS OF DIGITAL ACQUISITION
At the effective date of the merger, Digital Acquisition shall be merged
with and into the Surviving Corporation, the separate existence of Digital
Acquisition shall cease and the Surviving Corporation shall continue in
existence as the surviving corporation, and, without other transfer or
assumption, succeed to and possess all the estate, properties, rights,
privileges, immunities and franchises, as well of a public as of a private
nature, of Digital Acquisition; and all property, real, personal and mixed, and
all debts due on whatever account, including subscriptions to shares, and all
other choses in action, and all and every other interest, of or belonging to or
due to Digital Acquisition, shall be taken and deemed to be transferred to and
vested in the Surviving Corporation without further act or deed, as provided in
Sections 1100 and 1400 of the California Corporations Code.
If at any time the Surviving Corporation shall consider or be advised
that any further assignments, conveyances or assurances in law are necessary or
desirable to carry out the provisions hereof, the proper officers and directors
of Digital Acquisition as of the effective date of the merger shall execute and
deliver any and all proper deeds, assignments and assurances in law, and do all
things necessary or proper to carry out the provisions hereof.
ARTICLE II
ARTICLES OF INCORPORATION
OF SURVIVING CORPORATION; GOVERNING LAW
From and after the effective date of the merger and until thereafter
amended as provided by law, the Articles of Incorporation and Bylaws of the
Surviving Corporation shall continue to be its Articles of Incorporation and
Bylaws, until altered or amended. The Surviving Corporation shall be governed
under the laws of the State of California. The address of the principal office
of the Surviving Corporation in the State of California shall be 480 Cowper
Street, Palo Alto, California 94301.
ARTICLE III
CONVERSION OF CAPITAL STOCK OF DIGITAL ACQUISITION
INTO THE COMMON STOCK OF THE SURVIVING CORPORATION
(a) At the effective date of the merger, each share of outstanding
Common Stock and all shares of treasury stock of Digital Acquisition and all
rights in respect thereof, shall forthwith cease to exist and be canceled,
except for the rights set forth below and except as provided by law in respect
of shares as to which the holders may exercise appraisal rights.
2
<PAGE> 3
(b) At the effective date of the merger, each treasury share of
Preferred Stock of the Surviving Corporation shall be canceled.
(c) At the effective date of the merger, there shall be delivered in
conversion of and exchange for one share of Digital Acquisition Common Stock
outstanding immediately prior to the merger, 300 shares of the Common Stock of
the Surviving Corporation.
(d) Each holder of a certificate or certificates representing shares
of Digital Acquisition Common Stock outstanding immediately prior to the merger
shall, upon presentation of such certificate or certificates for surrender to
the Surviving Corporation, be entitled to receive in exchange therefor a
certificate or certificates representing the shares of a fully paid and
non-assessable Surviving Corporation Common Stock to which such holder shall be
entitled upon the aforesaid basis of exchange. Until so surrendered, each
outstanding certificate which prior to the merger represented shares of Digital
Acquisition Common Stock shall be deemed, for all corporate purposes, to
evidence ownership of the number of shares of Surviving Corporation Common Stock
into which the same shall have been converted and exchanged.
(e) No scrip or fractional share certificates of Surviving Corporation
Stock will be issued, and outstanding fractional share interests will not
entitle the owner thereof to vote, to receive dividends or to any rights of a
stockholder with respect to such fractional interest.
(f) Each share of the capital stock of the Surviving Corporation
outstanding immediately prior to the merger shall continue to be outstanding and
shall be one share of capital stock of the Surviving Corporation.
ARTICLE IV
BYLAWS
When the merger becomes effective, the Bylaws of the Surviving
Corporation shall be and become the Bylaws of the Surviving Corporation.
ARTICLE V
DIRECTORS
When the merger becomes effective, the Board of Directors of the
Surviving Corporation, pursuant to Section 1400 of the California Corporations
Code, shall appoint or reaffirm the following members of the Board of Directors
to serve until their respective successors are appointed, as provided in the
Bylaws of the Surviving Corporation: Frank M. DeLape, Calbert Lai, Thomas
Schultz, and Russell Knittle, and one further director pursuant to the Order and
Plan of Reorganization.
3
<PAGE> 4
ARTICLE VI
SHAREHOLDERS AND BOARD OF DIRECTORS APPROVAL; EFFECTIVE DATE
This Plan and Agreement of Merger has been approved by a majority of the
holders of the outstanding voting shares of Digital Acquisition, and, pursuant
to Section 1400 of the California Corporations Code, by the Board of Directors
of the Surviving Corporation, as provided by the applicable laws of the State of
and California. If this Plan and Agreement of Merger is not abandoned pursuant
to the provisions of Article VI hereof, Articles of Merger containing this Plan
and Agreement of Merger, and of such other instruments as may be required,
respectively, by the laws of the State of California, shall be executed,
verified and delivered as soon as practicable, to the Office of the Secretary of
State California. The merger shall become effective at such time as the
Secretary of State of California have issued a certificate of merger with
respect to such merger, the date of the later of such issuances being herein
sometimes referred to as the "effective date of the merger."
ARTICLE VII
ABANDONMENT
This Plan and Agreement of Merger may be abandoned at any time before the
effective date of the merger, by action of either of the Boards of Directors of
Digital Acquisition or the Surviving Corporation.
In the event of abandonment of this Plan and Agreement of Merger by the
Board of Directors of either Digital Acquisition or the Surviving Corporation as
approved above, written notice shall forthwith be given to the other party.
ARTICLE VIII
MODIFICATION AND WAIVER
Digital Acquisition and the Surviving Corporation, by mutual consent of
their respective Boards of Directors, may amend, modify and supplement this Plan
and Agreement of Merger in such manner as may be agreed upon by them in writing
at any time before or after action thereon by the shareholders of Digital
Acquisition or by the Board of Directors of the Surviving Corporation or both;
provided, however, that no such amendment, modification or supplement shall
affect the rights of the shareholders of Digital Acquisition or the Surviving
Corporation in a manner which is materially adverse to such shareholders in the
judgment of the respective Board of Directors. Either Digital Acquisition or the
Surviving Corporation may, pursuant to action by its Board of Directors, by an
instrument in writing, extend the time for or waive the performance of any of
the obligations of the other or waive compliance by the other with any of the
covenants or conditions contained in this Plan and Agreement of Merger;
provided, however, that no such
4
<PAGE> 5
waiver or extension shall affect the rights of the shareholders of Digital
Acquisition or the Surviving Corporation in a manner which is materially adverse
to such shareholders in the judgment of the Board of Directors so acting.
ARTICLE IX
COUNTERPARTS
This Plan and Agreement of Merger may be executed in multiple
counterparts, each of which when so executed shall be deemed to be an original,
but all of which together shall constitute one and the same instrument.
IN WITNESS WHEREOF, Digital Acquisition and the Surviving Corporation,
each pursuant to the approval and authority duly given by resolutions adopted by
its Board of Directors, have each caused this Plan and Agreement of Merger to be
executed by its officers thereunto duly authorized.
ATTEST DIGITAL ACQUISITION CORPORATION
By: By:
------------------------------------ -------------------------------
Jeffrey W. Tomz, Secretary Frank M. DeLape, President
ATTEST LVL COMMUNICATIONS CORPORATION
By: By:
------------------------------------ -------------------------------
Stephen Venuti, Secretary Calbert Lai, President
5
<PAGE> 1
EXHIBIT 2.3
William C. Lewis, Esq., Bar No. 77193
Sally A. Morello, Esq., Bar No. 122814
LAW OFFICES OF WILLIAM C. LEWIS
510 Waverley Street
Palo Alto, CA 94301-2009
Telephone: (650) 322-3300
Facsimile: (650) 327-9720
Attorneys for Debtors
UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
) Case Nos:
)
In re: )
)
LVL COMMUNICATIONS ) 985-2216 MM
CORPORATION, LVL ) 985-2219 MM
ADVERTISING, INC., and LVL ) 985-2222 MM
INTERACTIVE, INC., ) Jointly Administered Under
) Chapter 11
Debtors. )
)
- --------------------------------- ) ORDER CONFIRMING
DEBTORS' FIRST AMENDED
JOINT PLAN OF
REORGANIZATION
Date: April 16, 1998
Time: 3:00 P.M.
Judge: Marilyn Morgan
Confirmation of Debtors' First Amended Joint Plan of Reorganization came
on for hearing on April 16, 1998 at 3:00 P.M. before The Honorable Marilyn
Morgan, United States Bankruptcy Judge. William C. Lewis, Esq., appeared on
behalf of Debtors. Other appearances, if any, were noted in the record. The
Joint Plan of Reorganization under Chapter 11 of the Bankruptcy Code and
Debtors' Joint Disclosure Statement filed by Debtors on March 23, 1998, having
ORDER CONFIRMING DEBTORS' FIRST AMENDED JOINT PLAN OF REORGANIZATION
-1-
<PAGE> 2
been transmitted to creditors and equity security holders; and
Notice of modification to Debtors' Joint Plan of Reorganization having
been transmitted to creditors and equity security holders on March 20, 1998, an
Amendment to Joint Plan of Reorganization having been filed on March 23, 1998,
and Debtors' First Amended Joint Plan of Reorganization ("Plan") which
incorporated and integrated the provisions of Debtors' Joint Plan of
Reorganization and the Amendment thereto, having been filed by Debtors on
April 15, 1998; and
Debtors and their representatives having solicited acceptances of the
Plan and participated in the offer, issuance and sale under the Plan of
securities of Reorganized LVL in good faith and in compliance with the
applicable provisions of the Bankruptcy Code within the meaning of Section
1125(e) of the Bankruptcy Code; and
Reorganized LVL being a successor to the Debtor within the meaning of
Section 1145 of the Bankruptcy Code; and
In connection with the distribution of Equity Securities of Reorganized
LVL to holders of claims and interests in Debtors, all of the conditions to
availability of the exemption set forth in Section 1145 of the Bankruptcy Code
having been met; and
It having been determined after hearing on notice that the requirements
of confirmation set forth in 11 U.S.C. Section 1129(a) have been satisfied;
IT IS ORDERED that:
1. Debtors' Joint Disclosure Statement is approved.
2. The Plan filed by Debtors on April 15, 1998 is confirmed. A
copy of the confirmed Plan is attached hereto as Exhibit "A."
ORDER CONFIRMING DEBTORS' FIRST AMENDED JOINT PLAN OF REORGANIZATION
-2-
<PAGE> 3
3. The Court makes the following findings with regard to the
assumption and assignment of the Lease: The assignment of the Lease from Debtors
to Steelcase, Inc., is being made for reasonably equivalent value and is not
being made with actual intent to hinder, delay or defraud creditors or the
estate; therefore, the transfer is not a fraudulent conveyance.
4. Any indemnity claim Steelcase, Inc., may have against Debtors is
hereby granted administrative priority in the within jointly administered cases.
5. Steelcase, Inc., shall have relief from the automatic stay to
obtain possession of the Premises in the event Debtors do not vacate the
Premises as set forth in the Assumption Agreement or any Sublease entered into
by Debtors with Steelcase, Inc., extending the date on which Debtors are to
vacate the Premises.
6. Title to Debtor Commercial Lease, as subsequently amended
(collectively "Commercial Lease"), with RRC Partners, dated as of February 15,
1996 for the premises located at 499 University Avenue (480 Cowper Street),
Palo Alto, California, shall pass to Steelcase, Inc., free and clear of all
liens (specifically excluding the lien of Union Bank and the lien(s) of Santa
Clara County for real property taxes) and such liens shall be extinguished and
shall be of no further force or effect. Such extinguished liens shall include,
but are not limited to, the liens, if any, of Trident III, LLC; The Dot Printer,
Inc.; George Rice & Sons; K/P Corporation; Collectronics, Inc. dba Great Western
Collection; Colorgraphics, Inc. (Abstract of Judgment recorded October 10, 1997
as Instrument No. 13895015 of Official Records, Santa Clara County, CA);
ORDER CONFIRMING DEBTORS' FIRST AMENDED JOINT PLAN OF REORGANIZATION
-3-
<PAGE> 4
Lyon Financial Services, Inc. (Manifest Group); Miller Freeman, Inc.; Pacific
Video Resources (Abstract of Judgment recorded January 26, 1998 as Instrument
No. 14025328 of Official Records, Santa Clara County, CA); W. Bradley Electric,
Inc. (Abstract of Judgment recorded October 3, 1997 as Instrument No. 13887537
of Official Records, Santa Clara County, CA); and Paula Weinstock.
7. The Order Approving Assumption and Assignment of Unexpired
Commercial Real Property Lease has been executed contemporaneously herewith and
is incorporated by reference herein.
8. The offer and sale under the Plan of Equity Securities of
Reorganized LVL in exchange for claims against Debtors or administrative
expenses in the cases concerning Debtors are exempt from the provisions of
Section 5 of the Securities Act of 1933, as amended, and any state or local law
requiring the registration or qualification for offer or sale of such Equity
Securities or registration or licensing of an issuer of, underwriter of, or
broker or dealer in such Equity Securities, except to the extent that (a) the
availability of such exemption with respect to Equity Securities issued to
insiders of Debtors is limited by the Plan or (b) such Equity Securities are to
be issued to underwriters, as such term is defined in Section 1145(b) of the
Bankruptcy Code.
9. The Committee shall continue to serve in the case until all
agreements, documents, and securities required or permitted in connection with
the Plan are entered into, executed and delivered, and/or issued. Without
limiting the generality of the foregoing, the Committee shall have the right to
(a) investigate and require the Debtors
ORDER CONFIRMING DEBTORS' FIRST AMENDED JOINT PLAN OF REORGANIZATION
-4-
<PAGE> 5
to file objections to the allowance of any claim or interest pursuant to the
provisions hereof relating to Disputed Claims, (b) approve the form, prior to
the effectiveness thereof, of all agreements, documents, and securities required
or permitted in connection with this Plan (including the agreement for merger or
acquisition with Digital Power Holding Company, the amended Articles of
Incorporation thereof, and the provisions of any stock options or warrants
required or permitted hereunder) for the purpose of assuring that such
agreements, documents, and securities conform to the terms of this Plan, and (c)
employ and cause the Debtors and/or Reorganized LVL to compensate professionals
for services rendered after Confirmation in such amounts as the Committee shall
consider appropriate (subject to the right of the Debtors or Reorganized LVL to
request review by the Bankruptcy Court of the reasonableness of such
compensation). The Committee's right under clause (b) of the preceding sentence
shall include the right to bring a motion before the Bankruptcy Court to compel
modification of such agreements, documents, and/or securities to cause them to
conform to the terms of this Plan.
10. A quarterly fee shall be paid by Debtors to the United States
Trustee, for deposit into the Treasury, for each quarter (including any fraction
thereof) until this case is converted, dismissed, or closed pursuant to a final
decree, as required by 28 U.S.C. Section 1930(a)(6).
11. At the end of the first quarter after entry of this Order, Debtors
shall file a postconfirmation status report, the purpose of which is to explain
the progress made toward substantial consummation of the confirmed Plan. The
report shall include a statement of receipts and
ORDER CONFIRMING DEBTORS' FIRST AMENDED JOINT PLAN OF REORGANIZATION
-5-
<PAGE> 6
disbursements, with the ending cash balance, for the entire quarter. The report
shall also include information sufficiently comprehensive to enable the Court to
determine: (1) whether the Order confirming the Plan has become final; (2)
whether deposits, if any, required by the Plan have been distributed; (3)
whether any property proposed by the Plan to be transferred has been
transferred; (4) whether Debtors under the Plan have assumed the business or the
management of the property dealt with by the Plan; (5) whether payments under
the Plan have commenced; (6) whether accrued fees due to the United States
Trustee under 28 U.S.C. Section 1930(a)(6) have been paid; and (8) whether all
motions, contested matters and adversary proceedings have been finally
resolved. Further reports must be filed at the end of every quarter thereafter
until entry of a final decree, unless otherwise ordered by the Court.
12. A copy of each report shall be served, no later than the day upon
which it is filed with the Court, upon the United States Trustee and such other
persons or entities as may request such report in writing by special notice
filed with the Court.
13. Upon Debtors filing an application for a final decree, Debtors
shall serve the application on the United States Trustee, together with a
proposed final decree. The United States Trustee shall have five (5) days within
which to object or otherwise comment upon the Court's entry of the final decree.
14. Debtor shall pay Dana Commercial Credit ("Dana") $46,636.57 on or
before close of business on May 7, 1998 by delivering said funds to Buchalter,
Nemer, Fields & Younger. Said payment shall represent
ORDER CONFIRMING DEBTORS' FIRST AMENDED JOINT PLAN OF REORGANIZATION
-6-
<PAGE> 7
payment in full of all obligations owed Dana by Debtors and Dana shall transfer
title, free and clear of all liens, to Debtors of the equipment leased from
Dana. In the event Dana does not receive such payment in a timely manner, Dana
may file for relief from the automatic stay to proceed with any action Dana
deems necessary to take possession of the leased equipment. Further, Dana may
file a claim in the Chapter 11 bankruptcy cases.
15. This Court hereby retains jurisdiction as set forth in the Plan.
Dated: April 16, 1998 MARILYN MORGAN
-----------------------------
MARILYN MORGAN
UNITED STATES BANKRUPTCY JUDGE
ORDER CONFIRMING DEBTORS' FIRST AMENDED JOINT PLAN OF REORGANIZATION
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<PAGE> 8
William C. Lewis, Esq., Bar No. 77193 FILED
Sally A. Morello, Esq., Bar No. 122814 APR 15 1998
LAW OFFICES OF WILLIAM C. LEWIS KEENAN G. CASADY, CLERK
510 Waverley Street United State Bankruptcy Court
Palo Alto, CA 94301-2009 San Jose, California
Telephone: (415) 322-3300
Facsimile: (415) 327-9720
Attorneys for Debtors
UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
In re: ) Case Nos:
)
)
LVL COMMUNICATIONS CORPORATION, ) 985-2216 MM
LVL ADVERTISING, INC., and LVL ) 985-2219 MM
INTERACTIVE, INC., ) 985-2222 MM
)
) Jointly Administered Under
Debtors. ) Chapter 11
- ------------------------------- )
DEBTORS' FIRST AMENDED JOINT
PLAN OF REORGANIZATION
Date: April 16, 1998
Time: 3:00 P.M.
Judge: Marilyn Morgan
EXHIBIT "A"
DEBTORS' FIRST AMENDED JOINT PLAN OF REORGANIZATION
-i-
<PAGE> 9
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
DEFINITIONS..............................................................1
Defined Terms ......................................................1
"Administrative Expense Claim"..................................1
"Allowed Claim" or "Allowed Interest" ..........................1
"Allowed Secured Claim" ........................................2
"Ballot"........................................................2
"Bankruptcy Code" ..............................................2
"Bankruptcy Court"..............................................2
"Bankruptcy Rules"..............................................2
"Cash"..........................................................2
"Claimant"......................................................2
"Confirmation"..................................................2
"Confirmation Order"............................................2
"Creditors' Committee"..........................................2
"Debtor" or "Debtors" ..........................................3
"Digital" ......................................................3
"Disputed Claim" or "Disputed Interest" ........................3
"Distribution"..................................................3
"Effective Date"................................................3
"Employee Shareholders" ........................................3
"Equity Security"...............................................4
"Final Order" ..................................................4
"Plan"..........................................................4
"Preference Recoveries" ........................................4
DEBTORS' FIRST AMENDED JOINT PLAN OF REORGANIZATION
</TABLE>
-ii-
<PAGE> 10
<TABLE>
<S> <C>
"Priority Claim"............................................... 4
"Priority Creditor"............................................ 4
"Pro Rata"..................................................... 4
"Reorganized LVL".............................................. 5
"Tax Claim".................................................... 5
"Unclaimed Property"........................................... 5
"Unimpaired Claims"............................................ 5
"Unpaid Claim Reserve"......................................... 5
"Unsecured Claims"............................................. 5
"Unsecured Claimants".......................................... 5
Undefined Terms................................................. 5
CLASSIFICATION OF CLAIMS AND INTERESTS........................... 5
Nonclassified Claims.......................................... 5
Classified Claims............................................. 6
Specification and Treatment of Claims and Interests........... 6
TREATMENT OF NONCLASSIFIED CLAIMS................................ 7
Administrative Expenses & Priority Claims..................... 7
SPECIFICATION AND TREATMENT OF CLASSIFIED CLAIMS................. 8
Class 1--Pacific Business Funding Corp........................ 8
Class 2--Bridge Investor (Trident)............................ 9
Class 3--Dot Printing......................................... 9
Class 4-A--George Rice & Sons................................ 10
</TABLE>
DEBTORS' FIRST AMENDED JOINT PLAN OF REORGANIZATION
-iii-
<PAGE> 11
<TABLE>
<S> <C>
Class 4-B--Judgment Creditors........................................... 10
Class 5--Unsecured Creditors............................................ 11
Dividend Preferences......................................... 12
Liquidation Preference....................................... 12
Redemption................................................... 13
Conversion Right............................................. 14
Antidilution Provisions...................................... 14
Voting Rights................................................ 15
Board Representation......................................... 15
Information Rights........................................... 15
Exemptions................................................... 16
Contractual Limitations...................................... 16
Class 6-A--LVL Common Shareholders...................................... 18
Class 6-B--LVL Rights Holders........................................... 18
Class 6-C--LVLA and LVLi Equity Holders................................. 19
MEANS FOR IMPLEMENTATION OF THE PLAN
SOURCE OF FUNDS......................................................... 19
Formation and Capitalization of Reorganized Debtor...................... 19
Liquidity and Transferability of Post-Confirmation Equity Interests..... 21
Current and Post-Confirmation Management and Consultants................ 22
Insider Shareholder Notes............................................... 24
Media Obligations....................................................... 25
Treatment of Security Interests......................................... 25
</TABLE>
DEBTORS' FIRST AMENDED JOINT PLAN OF REORGANIZATION
-iv-
<PAGE> 12
<TABLE>
<S> <C>
Employee Benefits..................................................... 25
Steelcase Lease Assumption............................................ 25
Continuing Creditors' Committee....................................... 26
RECOVERY OF AVOIDABLE TRANSFERS............................................... 27
UNPAID CLAIMS RESERVE......................................................... 27
UNCLAIMED PROPERTY............................................................ 28
RETENTION, ENFORCEMENT AND WAIVER OF CLAIMS................................... 29
TREATMENT OF EXECUTORY CONTRACTS AND UNEXPIRED LEASES......................... 29
TAXES......................................................................... 30
REVESTING..................................................................... 30
BAR DATE AND NOTICE........................................................... 30
Pre-Petition Claims........................................................ 30
Administrative Claims...................................................... 30
POST-CONFIRMATION BUSINESS TRANSACTIONS....................................... 31
RETENTION OF JURISDICTION..................................................... 31
POST-CONFIRMATION NOTICES..................................................... 32
UTILITIES..................................................................... 33
Exhibit "A"--Fujitsu and S3 Media Creditors
Exhibit "B"--Executory Contracts
</TABLE>
DEBTORS' FIRST AMENDED JOINT PLAN OF REORGANIZATION
-v-
<PAGE> 13
LVL Communications Corporation ("LVL"), LVL Advertising, Inc. ("LVLA"),
and LVL interactive, Inc. ("LVLi"), (collectively referred to hereinafter as
"Debtor" or "Debtors") propose this First Amended Joint Plan of Reorganization
under Chapter 11 of the Bankruptcy Code.
I. DEFINITIONS
A. Defined Terms
1. "Administrative Expense Claim" means any cost or expense of
administration of the Chapter 11 cases allowed under Section 503(b) of the
Bankruptcy Code, including, without limitation, any actual and necessary
expenses to the extent allowed by the Bankruptcy Court under Section 330 of the
Bankruptcy Code.
2. "Allowed Claim" or "Allowed Interest" means a claim
against, or Equity Security interest in, the Debtors to the extent that
a. If the claim or interest arose or is deemed to have
arisen on or before the Filing Date, (1) proof of the claim or interest either
is timely filed or is deemed filed under Code Section 1111(a) and (2) the
claim or interest either is not the subject of a timely filed objection or is
allowed by a Final Order; or
b. If the claim arose after the Filing Date and is not
deemed to have arisen on or before such date, (1) the claim is of a kind that
can be voluntarily paid from the Debtors' estate without specific Bankruptcy
Court approval and is so paid or (2) the claim has been allowed by a Final
Order; and
c. Such claim is not subject to disallowance pursuant to
Section 502(d) of the Code.
DEBTORS' FIRST AMENDED JOINT PLAN OF REORGANIZATION
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<PAGE> 14
3. "Allowed Secured Claim" means the Allowed Claim determined
to be secured under provisions of Section 506 of the Bankruptcy Code.
4. "Ballot" means the form distributed to holders of claims
and interests on which is to be stated an acceptance or rejection of Debtors'
Plan.
5. "Bankruptcy Code" means Title 11 of the United States Code
and any amendments applicable to this case.
6. "Bankruptcy Court" means the United States Bankruptcy Court
for the Northern District of California or, in the event such court ceases to
exercise jurisdiction over this Chapter 11 case, such court or adjunct thereof
which thereafter exercises jurisdiction over this Chapter 11 case.
7. "Bankruptcy Rules" means the Federal Rules of Bankruptcy
Procedure, as amended, as applicable to cases pending before the Bankruptcy
Court.
8. "Cash" means cash and cash equivalents including, but not
limited to, checks and other similar forms of payment or exchange.
9. "Claimant" means a holder of an Allowed Claim.
10. "Confirmation" means entry of the Confirmation Order.
11. "Confirmation Order" means the entered order of the
Bankruptcy Court confirming the Debtors' Plan.
12. "Creditors' Committee" means the committee of unsecured
creditors formed at a general meeting of creditors held on June 24, 1997 and
any committee appointed under Section 1102 of the Code.
DEBTORS' FIRST AMENDED JOINT PLAN OF REORGANIZATION
-2-
<PAGE> 15
13. "Debtor" or "Debtors" means LVL Communications Corporation,
a California corporation, LVL Advertising, Inc., a California corporation, and
LVL interactive, Inc., a California corporation, collectively.
14. "Digital" means Digital Power Holding Company, a Nevada
corporation in good standing, subject to the reporting requirements under the
Securities Exchange Act of 1934, with 1,000,000 shares of common stock
outstanding.
15. "Disputed Claim" or "Disputed Interest" means a claim
against, or equity security interest in, a Debtor (a) which has been included
in the Debtors' schedules as disputed, contingent, or unliquidated, unless
proof of such claim has been filed which has not been objected to, or (b) as to
which the Debtor or any other party in interest has interposed an objection in
accordance with the Bankruptcy Code and the Bankruptcy Rules, which objection
has not been withdrawn or determined by a Final Order.
16. "Distribution" means the Cash or Equity Security to be
distributed under the Plan to holders of Allowed Claims, Allowed Interests or
other parties in interest under the terms of the Plan.
17. "Effective Date" means the date on which acquisition of
Debtors by Digital or merger of Debtors into Digital takes place, which shall
occur as soon as practicable after the order confirming the Plan becomes a
Final Order, but in no event later than 90 days after the Final Order.
18. "Employee Shareholders" means Steve Sousa, Ron Ewing and
Ed Dilworth, collectively.
DEBTORS' FIRST AMENDED JOINT PLAN OF REORGANIZATION
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<PAGE> 16
19. "Equity Security" means any equity interest in Debtors or
in Reorganized LVL including, but not limited to, preferred and common stock,
options and warrants.
20. "Final Order" means an order of the Bankruptcy Court as to
which (a) any appeal that has been taken, with respect to which there has been
a stay pending appeal, has been finally determined or dismissed, or (b) the
time for appeal has expired and a notice of appeal has not been filed timely,
or (c) a notice of appeal has been timely filed for which there is no stay
issued pending appeal.
21. "Plan" means this First Amended Joint Plan of
Reorganization together with any amendments or modifications thereto which may
be filed by Debtors.
22. "Preference Recoveries" means proceeds, if any, from
pending or future preference actions commenced by Debtors.
23. "Priority Claim" means any claim, other than an
Administrative Expense Claim or a Tax Claim, to the extent entitled to priority
in payment under Section 507(a) of the Bankruptcy Code.
24. "Priority Creditor" means any creditor that holds a
Priority Claim.
25. "Pro Rata" means proportionately so that the ratio of the
consideration distributed on account of an Allowed Claim or Allowed Interest in
a class to the consideration distributed on account of all Allowed Claims or
Allowed Interests in the class is the same as the ratio of such Allowed Claim
or Allowed Interest to all Allowed Claims or Allowed Interests in the class,
subject to the provisions set forth in the Plan regarding fractional
distributions.
DEBTORS' FIRST AMENDED JOINT PLAN OF REORGANIZATION
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<PAGE> 17
26. "Reorganized LVL" means Digital subsequent to Digital's
merger with LVL or LVL becoming a wholly owned subsidiary of Digital.
27. "Tax Claim" means any claim that is entitled to priority in
payment under Section 507(a)(8) of the Bankruptcy Code.
28. "Unclaimed Property" means any distributions which remain
unclaimed ninety (90) days following each distribution under the Plan.
29. "Unimpaired Claims" means any claims which are not impaired
under Debtors' Plan in accordance with Section 1124 of the Bankruptcy Code.
30. "Unpaid Claim Reserve" means an account which will contain
funds and/or Reorganized LVL Equity Securities designated for Claimants who
hold Disputed Claims. The funds held in the Unpaid Claim Reserve will be
maintained in an interest bearing account.
31. "Unsecured Claims" means all Allowed Claims other than
Allowed Secured Claims, Administrative Expense Claims, Priority Claims, Tax
Claims, and claims of Classes 1, 2, 3, 4-A, 4-B, 6-A, 6-B and 6-C.
32. "Unsecured Claimants" means any Claimant that is the holder
of an Unsecured Claim.
B. Undefined Terms: A term used, but not defined in Debtors' Plan,
but defined in the Bankruptcy Code has the meaning given to that term in the
Bankruptcy Code.
II. CLASSIFICATION OF CLAIMS AND INTERESTS
A. Nonclassified Claims: Priority claims pursuant to 11 U.S.C.
Section 507(a) are not classified under this Plan.
DEBTORS' FIRST AMENDED JOINT PLAN OF REORGANIZATION
-5-
<PAGE> 18
B. Classified Claims: All Allowed Claims (except Allowed Claims
treated under Article III of this Plan) and Allowed Interests are placed in the
following Classes:
<TABLE>
<S> <C>
Class 1: Pacific Business Funding Corporation secured
claim and warrants;
Class 2: Trident III, LLC, secured claim;
Class 3: Dot Printer claim;
Class 4-A: George Rice & Sons claim;
Class 4-B: Miscellaneous Claimants with judicial liens;
Class 5: Unsecured Claims;
Class 6-A: LVL common shareholders;
Class 6-B: Holders of rights to acquire common stock of LVL;
and
Class 6-C: LVLA and LVLi Equity Holders.
</TABLE>
C. Specification and Treatment of Claims and Interests: The treatment
of the claims and interests described below applies only to Allowed Claims and
Allowed Interests. Distributions to holders of claims or interests that are not
Allowed Claims or Allowed Interests as of the Effective Date will be made, in
accordance with the Plan provisions for such classes of claims and interests,
after each such claim or interest becomes an Allowed Claim or Allowed Interest.
Debtors may file an objection to the allowance of any claim or interest no
later than 60 days after the Effective Date (the "First Claim Objection Date").
Within the 30 days following receipt of a report from Debtors identifying all
claims and indicating claims which Debtors have objected to, the Creditors'
Committee may identify to Reorganized LVL additional objections to claims which
the Creditors' Committee believes should be filed ("Creditor Objection Notice")
and Debtors shall file such objections within 60 days following receipt of the
Creditor Objection Notice if timely received.
DEBTORS' FIRST AMENDED JOINT PLAN OF REORGANIZATION
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<PAGE> 19
III. TREATMENT OF NONCLASSIFIED CLAIMS
Administrative Expenses & Priority Claims
1. Except as provided in paragraphs 2 and 3, below, the holders of
Allowed Claims entitled to priority under Section 507(a) of the Bankruptcy
Code, except professional fees requiring court approval under Section 330 of
the Bankruptcy Code, shall be paid on the Effective Date or as soon thereafter
as such a claim becomes an Allowed Claim, except to the extent a holder of such
claim has agreed to other treatment. Professional fees shall be paid upon court
approval of a duly noticed fee application. All such Administrative Expense
Claims and Priority Claims shall retain their priority status until paid in
full. Such priority status shall continue in the event such claims are not paid
under this Plan, including, but not limited to, conversion of this case to
Chapter 7. Post Confirmation fees to professionals shall be paid in full,
monthly, unless otherwise agreed with such professionals. The Court shall
retain jurisdiction to address Debtors' objections to any fees.
2. The holders of Allowed Claims entitled to priority pursuant to 11
U.S.C. Section 507(a)(8) may be paid monthly by Debtors over a period of up to
six years or sooner at the discretion of Debtors, with interest at the rate
allowed by law.
3. Administrative Expense Claims for goods and services incurred in
the ordinary course of Debtors' business will be paid in accordance with
Debtors' agreement with the holders thereof.
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IV. SPECIFICATION AND TREATMENT OF CLASSIFIED CLAIMS
Holders of Allowed Claims shall receive the distributions set forth in
this Article on account of, and in complete satisfaction of, all such Allowed
Claims.
All stock issued pursuant to this Plan shall be issued on the Effective
Date or as soon thereafter as is practicable. No fractional shares will be
issued, but will instead be rounded to the next nearest whole number.
1. Class 1 is impaired and consists of the Allowed Secured Claim
of Pacific Business Funding Corporation ("PBF"). PBF's Allowed Secured Claim is
comprised of the indebtedness and obligations of Debtors to PBF under certain
factoring agreements in effect at the commencement of the Chapter 11 cases,
which provide for a receivables line of credit (the "Factoring Agreements") and
related warrants for acquisition of Debtors' Equity Securities. The obligations
and indebtedness of Debtors under the Factoring Agreements are secured by a
security interest in all of the Debtors' personal property assets, described in
the Factoring Agreements as all "Collateral." This Plan shall not alter the
legal, equitable, or contractual rights of PBF except that all warrants held by
PBF to purchase shares of Debtors' Equity Securities shall be canceled on the
Effective Date and, on the Effective Date, PBF shall receive warrants to
purchase 50,000 shares of Reorganized LVL common stock at $0.50 per share.
PBF shall continue to be paid under and pursuant to the terms of
the Factoring Agreements and shall retain its liens upon and security interest
in all Collateral until it receives full and final payment of all
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"Obligations" under and as defined in the Factoring Agreements. In the event
PBF continues to provide financing to Reorganized LVL, PBF may enter into a new
factoring agreement with Reorganized LVL and may incorporate in such new
factoring agreement all of the Obligations of Debtors to PBF under the
Factoring Agreements. All of the Debtors' obligations under any new factoring
agreement, including the Obligations under the Factoring Agreements, shall be
secured by all of the personal property assets of Reorganized LVL.
2. Class 2 Bridge Investor is Trident III, LLC ("Trident").
Trident loaned Debtors $600,000 ("Bridge Funding'), secured by Debtors'
leasehold interest in 499 University Avenue (480'Cowper Street), Palo Alto,
California ("Leasehold"). When the Order confirming the Plan becomes a Final
Order, Trident's security interest in the Leasehold shall terminate. Trident
shall be issued 600,000 shares of redeemable common stock in Reorganized LVL,
redeemable at $1.00 per share. These shares shall be redeemable only in the
event that there is a post-confirmation financing for a minimum of $3 million.
In addition, Trident shall be issued 440,000 shares of non-redeemable common
stock in Reorganized LVL.
3. Class 3 is impaired and consists of the Allowed Secured
Claim, if any, of The Dot Printer, Inc., a California corporation ("Dot"). To
the extent the Bankruptcy Court determines that Dot is secured pursuant to 11
U.S.C. Section 506, such amount shall be paid in full in equal quarterly
payments, including principal and interest, over a period of five (5) years
from the Effective Date, including interest at the rate of ten percent (10%)
per annum or such other interest rate as may be
DEBTORS' FIRST AMENDED JOINT PLAN OF REORGANIZATION
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determined by the Bankruptcy Court if Dot objects to such rate. Any unsecured
portion of Dot's claim will be treated as a non-priority, unsecured claim in
Class 5, below. To the extent secured by Section 506 of the Bankruptcy Code and
not otherwise avoidable, Dot will retain its lien (other than a lien on the
leasehold being transferred to Steelcase under the Plan) with the same
validity, priority and effect it held immediately prior to the filing date of
the Chapter 11 cases.
4. Class 4-A is impaired and consists of the Allowed Secured Claim,
if any, of George Rice & Sons, a division of World Color Press, Inc., a
Delaware corporation ("Rice"). To the extent the Bankruptcy Court determines
that Rice is secured and/or is not avoidable pursuant to 11 U.S.C. Sections
506 and 547 or other provisions of the Bankruptcy Code, such amount
shall be paid in full in equal quarterly payments, including principal and
interest, over a period of five (5) years from the Effective Date, including
interest at the rate of ten percent (10%) per annum or such other interest rate
as may be determined by the Bankruptcy Court if Rice objects to such rate. Any
unsecured portion of Rice's claim will be treated as a non-priority, unsecured
claim in Class 5, below. To the extent secured by Section 506 of the Bankruptcy
Code and not otherwise avoidable, Rice will retain its lien (other than a lien
on the leasehold being transferred to Steelcase under the Plan) with the same
validity, priority and effect it held immediately prior to the filing date of
the Chapter 11 cases.
Class 4-B is impaired and consists of the Allowed Secured Claims,
if any, of any other Creditors who obtain judgment liens or any other type of
judicial liens (including but not limited to attachments,
DEBTORS' FIRST AMENDED JOINT PLAN OF REORGANIZATION
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temporary protective orders, liens pursuant to an Order of Examination, or
personal or real property judgment liens) against Debtors' assets. To the extent
the Bankruptcy Court determines that any Class 4-B creditor is secured and/or is
not avoidable pursuant to 11 U.S.C. Sections 506 and/or 547 or other provisions
of the Bankruptcy Code, such amount shall be paid in full in equal quarterly
payments, including principal and interest, over a period of five (5) years from
the Effective Date, including interest at the rate of ten percent (10%) per
annum or such other interest rate as may be determined by the Bankruptcy Court
if any Class 4-B creditor objects to such rate. Any unsecured portion of any
Class 4-B creditor's claim will be treated as a non-priority, unsecured claim in
Class 5, below. To the extent secured by Section 506 of the Bankruptcy Code and
not otherwise avoidable, any Class 4-B creditor will retain its lien (other than
a lien on the leasehold being transferred to Steelcase under the Plan) with the
same validity, priority and effect it held immediately prior to the filing date
of the Chapter 11 cases.
5. Class 5 is impaired and consists of all non-priority Allowed
Unsecured Claims. Each Claimant with an Allowed Claim in Class 5 shall receive a
pro rata portion of 600,000 shares of Series A Convertible Preferred Stock
("Preferred Stock") in Reorganized LVL, unless such Claimant elects to receive
Cash in lieu of such portion pursuant to the next paragraph.
Class 5 Claimants holding claims of $5,000 or less may elect to receive
10% of their Allowed Claims, in Cash, on the Effective Date, in lieu of
receiving Preferred Stock in Reorganized LVL. In addition, Class 5 Claimants
holding Allowed Claims in excess of $5,000 may elect to
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reduce their Allowed Claims to $5,000 and receive $500 on the Effective Date
(10% of the reduced Allowed Claim), in lieu of receiving Preferred Stock in
Reorganized LVL. The election by any Class 5 Claimants to receive cash on the
Effective Date rather than Preferred Stock in Reorganized LVL pursuant to this
provision is hereinafter referred to as the "Cash Option." The pool of 600,000
preferred shares of Reorganized LVL will be reduced by the percentage in dollar
amount of Allowed Claims electing the Cash Option.
The Preferred Stock shall have the rights, privileges and preferences as
follows:
a. Dividend Preferences. The holders of the Preferred
Stock shall, upon the vote of the majority of the Board of Directors, be
entitled to receive, out of any funds legally available therefor, cumulative
dividends at a rate of $0.05 per share, per year, prior and in preference to
any payment of any dividend on the common stock. Such dividends shall be paid
when, as and if declared by the Board of Directors. The dividend rights and
preferences of the Preferred Stock shall be senior to those of the common
stock. After the dividend preferences of the Preferred Stock due in a given
year have been paid in full, all remaining dividends in such year, if any,
shall be paid equally on the common stock and the Preferred Stock.
b. Liquidation Preference. In the event of any
liquidation, dissolution or winding up of Reorganized LVL, or the sale, merger
or combination of Reorganized LVL, a public offering in excess of $25 million,
a merger or consolidation of Reorganized LVL in which its shareholders do not
retain a majority of the voting power in the
DEBTORS' FIRST AMENDED JOINT PLAN OF REORGANIZATION
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surviving corporation, or a sale of all or substantially all of Reorganized
LVL's assets (singularly or collectively referred to as a "Liquidation
Preference Event") or a Liquidating Preference Event of LVL Subsidiary (as
hereafter defined) if LVL is not merged into Digital, the holders of the
Preferred Stock will be entitled to receive an amount equal to $6.67 per share
for the Preferred Stock, plus an amount equal to all declared but unpaid
dividends thereon (the "Preference Amount"). After the Preference Amount on all
outstanding shares of Preferred Stock has been paid, any remaining funds and
assets of Reorganized LVL legally available for distribution to shareholders
shall be distributed pro rata solely among the holders of the common stock. If
Reorganized LVL has insufficient assets to permit payment of the Preference
Amount in full to all holders of the Preferred Stock, then the assets of
Reorganized LVL shall be distributed ratably to the holders of the Preferred
Stock in proportion to the Preference Amount each such holder would otherwise
be entitled to receive. Reorganized LVL shall give Class 5 Claimants holding
Preferred Stock thirty (30) days advance written notice prior to a Liquidation
Preference Event and such persons shall have the right to convert to common
stock as described below during such thirty (30) day period.
c. Redemption. The Preferred Stock shall be redeemable
in part or in full at the option of Reorganized LVL on thirty (30) days advance
written notice to the holders of the Preferred Stock for a redemption price of
$6.67 per share. Upon receipt of notice of Reorganized LVL's intention to
redeem the Preferred Stock, each holder of the Preferred Stock shall have the
option to convert to common stock
DEBTORS' FIRST AMENDED JOINT PLAN OF REORGANIZATION
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as described below. Any partial redemption shall be made on a pro rata basis.
d. Conversion Right. Each holder of the Preferred Stock
shall have the right to convert the Preferred Stock into shares of common stock
in part or in full at any time, including within 30 days after notice by
Reorganized LVL of its intention to redeem the Preferred Stock or of a
Liquidation Preference Event. The initial conversion rate for the Preferred
Stock shall be one-for-one. All rights incident to a share of Preferred Stock
(including but not limited to rights to any declared but unpaid dividends) will
terminate automatically upon any conversion of such share into common stock.
e. Antidilution Provisions. The number of shares of
common stock issuable upon conversion of each share of Preferred Stock shall be
subject to adjustment from time to time upon the occurrence of certain events
described below and the number of shares of common stock issuable for each
share of the Preferred Stock at any given time shall be subject to adjustment
as follows: In the event Reorganized LVL shall (i) pay a dividend or make a
distribution on its shares of common stock in shares of common stock, (ii)
subdivide or reclassify its outstanding common stock in shares of common stock
into a greater number of shares, or (iii) combine or reclassify its outstanding
common stock into a smaller number of shares, the conversion ratio in effect at
the time of the record date for such dividend or distribution or of the
effective date of such subdivision, combination or reclassification shall be
proportionately adjusted so that the holder of the Preferred Stock converted
after such date shall be entitled to receive the aggregate
DEBTORS' FIRST AMENDED JOINT PLAN OF REORGANIZATION
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number and kind of shares which, if the Preferred Stock had been converted by
such holder immediately prior to such date, the holder would have owned upon
such conversion and been entitled to receive upon such dividend, subdivision,
combination or reclassification. Such adjustment shall be made successively
whenever any such event listed above shall occur. The conversion ratio shall
be adjusted upon issuance of additional common stock or rights to acquire common
stock at a price of less than $1.00 per share, except those rights
specifically required or permitted in connection with this Plan.
f. Voting Rights. The holders of the Preferred Stock shall have
the right to vote as a class on (i) the merger, sale, liquidation or
dissolution of Reorganized LVL and/or LVL Subsidiary, (ii) a sale of all or
substantially all of Reorganized LVL's or LVL Subsidiary's assets, (iii) any
increase in the number of authorized shares of any class or series of
Reorganized LVL Equity Securities, (iv) creation of any new class or series of
Equity Securities in Reorganized LVL and/or LVL Subsidiary, (v) any increase in
the number of members of the Board of Directors of Reorganized LVL and LVL
Subsidiary, and (vi) election of one member of the Board of Directors of
Reorganized LVL and LVL Subsidiary.
g. Board Representation. The rights of the holders of the
Preferred Stock to elect a member of the Board of Directors shall terminate once
(1) more than 50% of the Preferred Stock has converted to common stock, (2) a
Liquidation Preference Event has occurred, or (3) more than 50% of the Preferred
Stock has been redeemed.
h. Information Rights. Reorganized LVL will furnish holders of
the Preferred Stock with annual unaudited consolidated
DEBTORS' FIRST AMENDED JOINT PLAN OF REORGANIZATION
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c. Class 6-C is impaired and consists of LVL, the holder of
Equity Securities in LVLA and LVLi. LVL holds 100% of the Equity Securities of
LVLA and LVLi. All Equity Securities held by LVL in LVLA and LVLi shall be
canceled on the Effective Date and in conjunction with the merger of LVLA and
LVLi into LVL.
V. MEANS FOR IMPLEMENTATION OF THE PLAN: SOURCE OF FUNDS
A. Formation and Capitalization of Reorganized Debtor: Digital will
merge with LVL or acquire Debtors' shares and will issue or reserve up to
4,900,000 shares of newly issued common stock and common stock equivalents upon
court Confirmation of Debtor's Plan.
Upon the Effective Date, (a) LVLA and LVLi shall be merged into LVL, and
(b) LVL shall be merged into Digital or become its wholly owned subsidiary ("LVL
Subsidiary"). Concurrently, Digital shall file amended Articles of Incorporation
which (a) rename the corporation "LVL Communications, Inc.," (b) authorize
600,000 shares of Series A Preferred Stock with the rights, privileges and
preferences set forth in IV.5., above, (c) authorize a number of shares of
common stock which is at least the number of shares required or permitted to be
issued in connection with this Plan, and (d) prohibit the issuance of non-voting
Equity Securities to the extent required by Section 1123 of the Bankruptcy Code.
LVL will pay $150,000 to the Digital shareholders as partial consideration for
the transaction.
Concurrently, Reorganized LVL shall issue (a) the warrants to be
distributed to PBF, (b) the common stock to be issued to Trident, (c) the
Preferred Stock, and (d) common stock to the holders of Allowed Claims in Class
6-A.
DEBTORS' FIRST AMENDED JOINT PLAN OF REORGANIZATION
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In addition:
(a) Reorganized LVL may establish a stock option plan under which
options may be granted to acquire not more than 1,400,000 shares of common stock
of Reorganized LVL, provided that (i) such options may only be granted to
existing and future employees and consultants of Reorganized LVL, (ii) the
exercise price under such options shall be not less than the fair market value
of such shares on the date of grant, and (iii) such options shall vest ratably
over a period of not less than three years from the date of grant. The
individual employees to receive such options and the numbers of shares to be
covered by each option shall be determined by the Compensation Committee of the
Board of Directors. Stock options to be granted to Steve Venuti and Cal Lai
shall vest as follows: (1) one-half of the options shall vest ratably over a
period of not less than three years from the date of grant, and (2) the
remaining one-half of the options shall not vest until Reorganized LVL has had
sales of at least $12 million for any 12 consecutive month period and
Reorganized LVL is profitable on a quarterly basis throughout that same 12 month
period.
(b) Reorganized LVL may also issue 1,000,000 or more shares of
common stock at $1.25 or more per share to accredited investors for
post-Confirmation financing ("Post-Confirmation Investment"). In addition,
Trident and/or its affiliate will receive warrants in conjunction with the
Post-Confirmation Investment. Further, Reorganized LVL may issue 1,000,000
shares of common stock to MSI. Any shares issued to MSI shall be deemed control
securities whose resale is limited by Rule 144.
DEBTORS' FIRST AMENDED JOINT PLAN OF REORGANIZATION
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(c) Reorganized LVL may issue warrants to acquire its common
stock at an exercise price of not less than $0.50 per share to the following:
(i) 25,000 shares to Wayne Mascia and Associates, (ii) 25,000 shares to
underwriters and others in connection with the issuance of notes to Trident, and
(iii) 250,000 shares to underwriters and others in connection with obtaining
Post-Confirmation Investment, provided that none of such warrants may be issued
to MSI or its affiliates.
No other rights to acquire Equity Securities may be issued by Reorganized
LVL in connection with this Plan, nor may any shares of LVL Subsidiary or rights
to acquire such shares be issued. However, this restriction shall not prohibit
Reorganized LVL from issuing additional Equity Securities after consummation of
these transactions contemplated by the Plan as long as such issuances do not
violate the terms of this Plan.
Confirmation of the Plan is conditioned upon Trident having loaned Debtors
a minimum of $400,000 prior to filing of their Chapter 11 cases.
B. Liquidity and Transferability of Post-Confirmation Equity
Interests: Not later than 90 days after the Effective Date, Reorganized LVL
shall file an application for listing of its common stock on NASDAQ and shall
diligently pursue such application.
No representations are made to any party concerning the tax attributes and
effects of issuance of shares, options and warrants pursuant to the Plan. You
are advised to consult your own tax adviser.
THE STOCK OF REORGANIZED LVL IS STOCK WHICH WILL NOT HAVE A MARKET
INITIALLY AND WHICH DEBTORS ANTICIPATE WILL BECOME ACTIVELY TRADED. REORGANIZED
LVL WILL HAVE NO
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CONTROL OVER MARKET REACTIONS AND MAKES NO REPRESENTATION THAT IT WILL SUCCEED
IN CREATING AN ACTIVE TRADING MARKET OR ACHIEVING ANY SPECIFIC VALUE.
C. Current and Post-Confirmation Management and Consultants: Cal Lai
will continue to act as Chief Executive Officer of Reorganized LVL with a base
annual salary of $150,000, plus bonuses based on gross profit of Reorganized LVL
not to exceed fifty percent (50%) of base annual salary. A Chief Operating
Officer will be hired for Reorganized LVL with a base annual salary of
approximately $150,000.
The Board of Directors of Reorganized LVL shall consist initially of five
(5) directors: (i) one director elected by the holders of the Preferred Stock as
a class; (ii) Calbert Lai, (iii) the new Chief Operating Officer of Reorganized
LVL; (iv) one nominee of Trident who will be replaced by a nominee of the
parties making the Post-Confirmation Investment ("Investment Group"), if any;
and (v) Tom Schultz, or a nominee of the non-insider common shareholders. If LVL
is not merged into Digital but, instead, remains as the LVL Subsidiary, the
Board of Directors of LVL Subsidiary shall have the same size and composition as
the Board of Directors of Reorganized LVL and such Board shall be subject to the
same rights and responsibilities as to the LVL Subsidiary as does the Board of
Reorganized LVL.
The Boards of Directors of LVL and LVL Subsidiary shall have two
committees, the Compensation Committee and the Audit Committee which shall
continue in force as long as 50% of the Preferred Stock remains outstanding. The
Compensation Committee and the Audit Committee shall each consist of three (3)
members as follows:
DEBTORS' FIRST AMENDED JOINT PLAN OF REORGANIZATION
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Person elected by holders of Preferred Stock as a class Tom Schultz,
or a nominee of the non-insider shareholders Nominee of Trident or
Investment Group
MSI has provided services to Debtors pre-Confirmation, and will continue
to provide services to Reorganized LVL post-Confirmation. For its services
rendered to Debtors, and subsequently Reorganized LVL, MSI will receive:
1. $20,000 non-refundable retainer paid $10,000 upon
engagement and $10,000 upon close of escrow on the Bridge Funding;
2. 750,000 shares of Reorganized LVL common stock on the
Effective Date (50% to MSI and 50% to Tom Schultz);
3. 250,000 shares of Reorganized LVL common stock (50% to MSI
and 50% to Tom Schultz) shall be issued on the Effective Date, held in escrow,
and released to MSI and Tom Schultz only upon the occurrence of one of the
following events:
(a) The net worth of Reorganized LVL increases by
$1,000,000 (excluding the effect of the lease assignment to Steelcase, Inc., and
any other non-financing transactions outside the ordinary course of business)
from immediately after the Effective Date to the end of the eighth month which
ends after the Effective Date; or
(b) A total of $1,000,000 in proceeds is received by
Debtors and/or Reorganized LVL from the Bridge Funding and any
Post-Confirmation Investment received within eight months after the Effective
Date.
DEBTORS' FIRST AMENDED JOINT PLAN OF REORGANIZATION
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In the event that neither event (a) nor event (b) occurs within the
preceding time period, Reorganized LVL shall repurchase said 250,000 shares for
the total amount of $1.
4. A monthly fee of $10,000 payable for one year, beginning
upon engagement, to be paid as cash becomes available from operations or from
the proceeds of Debtors' financing efforts;
5. Separately budgeted per diem or project fees for specific
activities or projects undertaken from time to time by MSI at the request of
Debtors; and
6. Reimbursement of legal, travel, and other out-of-pocket
expenses pre-approved by Debtors.
Resale of shares issued to MSI will be restricted by Rule 144 and the same
Lock-Up Provisions as Classes 1, 5 and 6-A.
Tom Schultz has acted as Chief Operating Officer for LVL on a contract
basis. He will be compensated by Debtors and/or Reorganized LVL for his services
to Debtors and/or Reorganized LVL on an hourly basis until the hiring of a full
time Chief Operating Officer. After such time, his sole Cash compensation shall
be one-half of the MSI $10,000 monthly fee and he shall cease to act as Chief
Operating Officer. Mr. Schultz will serve on Reorganized LVL's Board of
Directors, Compensation Committee and Audit Committee.
D. Insider Shareholder Notes: On the Effective Date (a) all note
obligations created in conjunction with the purchase of Equity Securities of
Debtors held by Employee Shareholders shall be canceled, (b) such cancellation
shall discharge any and all claims which the Employee Shareholders may have or
have had against Debtors for any reason
DEBTORS' FIRST AMENDED JOINT PLAN OF REORGANIZATION
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based on any act or omission prior to the commencement of the Chapter 11 cases,
and (c) all Equity Securities in Debtors owned by Employee Shareholders shall
also be canceled (the "Canceled Employee Shares"). These provisions do not
affect Don Sanders.
E. Media Obligations: A compromise among the Debtors, the media
creditors listed on Exhibit "A" ("Media Creditors"), S3 and Fujitsu is being
negotiated pursuant to which, at confirmation of the Plan S3 would pay up to
$125,000 to LVL and Fujitsu would pay up to $100,000 to LVL in full satisfaction
of their respective obligations to LVL, and the media creditors listed on
Exhibit "A" who consent to this settlement will be deemed to have released S3
and Fujitsu from all claims arising from advertising placed on their behalf by
LVL. Such payments by S3 and/or Fujitsu will be reduced, pro rata, for any Media
Creditor who does not consent to the compromise or eliminated entirely if S3 or
Fujitsu rejects the settlement because it has not been consented to by all Media
Creditors associated with its obligation.
F. Treatment of Security Interests: All security interests and liens
including, but not limited to judicial liens and attachments, are extinguished
at Confirmation except security interests existing in favor of PBF and any
security interests determined to be held by Classes 3, 4-A and 4-B Claimants
which are preserved under the express terms of this Plan.
G. Employee Benefits: Accrued vacation pay and other employee
benefits for employees who are employed by Debtors as of the date of
commencement of the Chapter 11 cases shall continue to be paid in the ordinary
course of business by Reorganized LVL.
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H. Steelcase Lease Assumption: Debtor shall assume and assign the
lease with RRC Partners for the premises located at 499 University Avenue (480
Cowper Street), Palo Alto, California to Steelcase, Inc., pursuant to the
agreement Debtor entered into with Steelcase, Inc., regarding such assignment.
On the Effective Date the following contractual requirements shall be performed:
(1) to the extent the automatic stay remains in effect after the Effective Date,
such automatic stay shall be vacated to permit Steelcase, Inc., to obtain
possession of the premises and to perform under the terms of the Steelcase
Agreement; (2) Steelcase, Inc., shall be granted possession of the subject
premises as of May 1, 1998 free and clear of all liens and encumbrances; and (3)
any indemnity claim that Steelcase, Inc., establishes as valid against LVL shall
be granted administrative priority in the bankruptcy case. Confirmation of this
Plan shall be deemed to be approval of such assumption and assignment by the
Bankruptcy Court and constitute a finding that the Steelcase, Inc., transaction
is not a fraudulent conveyance.
I. Continuing Creditors' Committee Notwithstanding Confirmation, the
Committee shall continue to serve in the case until all agreements, documents,
and securities required or permitted in connection with the Plan are entered
into, executed and delivered, and/or issued. Without limiting the generality of
the foregoing, the Committee shall have the right to (a) investigate and require
the Debtor to file objections to the allowance of any claim or interest pursuant
to the provisions hereof relating to Disputed Claims, (b) approve the form,
prior to the effectiveness thereof, of all agreements, documents, and
DEBTORS' FIRST AMENDED JOINT PLAN OF REORGANIZATION
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securities required or permitted in connection with this Plan (including the
agreement for merger or acquisition with Digital Power Holding Company, the
amended Articles of Incorporation thereof, and the provisions of any stock
options or warrants required or permitted hereunder) for the purpose of assuring
that such agreements, documents, and securities conform to the terms of this
Plan, and (c) employ and cause the Debtors and/or Reorganized LVL to compensate
professionals for services rendered after Confirmation in such amounts as the
Committee shall consider appropriate (subject to the right of the Debtors or
Reorganized LVL to request review by the Bankruptcy Court of the reasonableness
of such compensation). The Committee's right under clause (b) of the preceding
sentence shall include the right to bring a motion before the Bankruptcy Court
to compel modification of such agreements, documents, and/or securities to cause
them to conform to the terms of this Plan.
VI. RECOVERY OF AVOIDABLE TRANSFERS
The Debtors may commence any adversary proceeding to recover transfers
avoidable under the Bankruptcy Code within the time specified in the Bankruptcy
Code.
VII. UNPAID CLAIMS RESERVE
1. Except to the extent the Bankruptcy Court shall determine that a
sufficient reserve for Disputed Claims is less than the full amount asserted by
the holder thereof, in determining the amount of distributions due to the
holders of Allowed Claims and to be reserved for Disputed Claims, the
appropriate Pro Rata calculations required by
DEBTORS' FIRST AMENDED JOINT PLAN OF REORGANIZATION
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section IV of this Plan shall be made as if all Disputed Claims were Allowed
Claims.
2. On the Effective Date, all distributions that would be delivered
to holders of Disputed Claims if they were Allowed Claims shall be deposited by
the Debtors in the Unpaid Claims Reserve.
3. All Cash held in the Unpaid Claims Reserve shall be invested in
such investments as are permitted under Section 345 of the Bankruptcy Code.
The earnings on such investments shall be first applied to reimburse the Debtors
for their costs and expenses incurred in connection with the maintenance of the
Unpaid Claims Reserve and the making of distributions subsequent to the
Effective Date. All earnings in excess of such costs and expenses shall be held
in the Unpaid Claims Reserve and shall be distributed only in the manner set
forth below.
4. When a Disputed Claim becomes an Allowed Claim, the distributions
due on account of such Allowed Claim shall be released from the Unpaid Claims
Reserve and disbursed to the holder of such Allowed Claim. If the objection is
resolved in favor of the Debtors, the funds (including interest) and/or
Reorganized LVL Equity Securities will be distributed Pro Rata among the other
members of the Class to which the Claimant belongs.
VIII. UNCLAIMED PROPERTY
1. Unclaimed Property shall be deposited in the Unpaid Claims
Reserve to be held in trust for the benefit of the holders of Allowed Claims
entitled thereto. For a period of ninety (90) days following each attempted
distribution, Unclaimed Property shall be held in the Unpaid Claims Reserve
solely for the benefit of the holders of Allowed Claims
DEBTORS' FIRST AMENDED JOINT PLAN OF REORGANIZATION
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which have failed to claim such Property. During such ninety (90) day period,
Unclaimed Property due the holder of an Allowed Claim shall be released from the
Unpaid Claims Reserve and disbursed to such holder upon presentation of proper
proof by such holder of its entitlement thereto.
2. At the end of ninety (90) days after each attempted distribution,
the holders of Allowed Claims entitled to Unclaimed Property shall cease to be
entitled thereto. The Unclaimed Property shall then be treated as a portion of
funds available to pay creditors in the same class as the holder of Allowed
Claims that failed to claim his distribution. Such unclaimed funds shall be
promptly distributed Pro Rata to the other holders of Allowed Claims in the same
class as the holder of Allowed Claims that failed to claim his distribution.
IX. RETENTION, ENFORCEMENT AND WAIVER OF CLAIMS
Debtors shall retain and may enforce claims held by it or its estate
except such claims which have been waived, relinquished, or released in
accordance with this Plan.
X. TREATMENT OF EXECUTORY CONTRACTS AND UNEXPIRED LEASES
All executory contracts and unexpired leases to which Debtors were parties
at the time the cases commenced will be rejected with the exception of the
executory contracts and unexpired leases listed on Exhibit "B" attached hereto
and incorporated by reference herein. The executory contracts and unexpired
leases listed on Exhibit "B" will be assumed at the Effective Date and assigned
to Reorganized LVL or LVL Subsidiary. The last date to file claims for rejected
contracts and/or unexpired leases shall be 30 days after the Effective Date. Any
entity
DEBTORS' FIRST AMENDED JOINT PLAN OF REORGANIZATION
-29-
<PAGE> 39
with a claim that arises from the rejection of an executory contract or
unexpired lease shall have the rights of a Class 5 unsecured claimant to the
extent such claim becomes an Allowed Claim in that Class.
XI. TAXES
No representations are made to any party concerning the tax attributes and
affects of this Plan. You are advised to consult your own tax adviser.
XII. REVESTING
Except as provided in the Plan or in the Confirmation Order, on the
Effective Date, Reorganized LVL shall be vested with all the property of
Debtors' estates free and clear of all claims, liens, security interests,
charges and other interests of the creditors arising prior to Confirmation.
XIII. BAR DATE AND NOTICE
1. Pre-Petition Claims: In accordance with Federal Rules of
Bankruptcy Procedure, Rule 3003(c)(3), the Court will establish a bar date as
the last day by which creditors would be permitted to file Proofs of Claim in
this case (the "Bar Date"). Pursuant to Bankruptcy Code Section 502 and Federal
Rules of Bankruptcy Procedure, Rule 3003(c)(2), any creditor whose claim is not
scheduled by Debtors or was scheduled as disputed, contingent or unliquidated,
and who fails to file a Proof of Claim on or before the Bar Date, will not be
treated as a creditor with respect to such claim for purposes of voting on, and
receiving a distribution under, the Plan. Debtors intend to file objections to
all late filed claims and to all duplicate, excessive or otherwise defective
claims.
2. Administrative Claims: Any creditor who has an Administrative
Expense Claim (other than for ordinary business
DEBTORS' FIRST AMENDED JOINT PLAN OF REORGANIZATION
-30-
<PAGE> 40
expenses payable in the ordinary course and other than professionals) shall file
a proof of claim or application for payment with the Court for such
administrative expenses on or before 45 days after the Effective Date and serve
a copy thereof on Debtors. Administrative Expense Claims filed after the
deadline set forth herein shall be barred and Debtors have no obligation to pay
such late filed claims. This provision specifically excludes administrative
claims of professionals employed in this Bankruptcy Case.
XIV. POST-CONFIRMATION BUSINESS TRANSACTIONS
Reorganized LVL shall have the flexibility to conduct its advertising and
interactive businesses as it deems necessary as long as Reorganized LVL does not
violate provisions of the Plan. Such business conduct may include, but is not
limited to, selling assets, selling equipment, entering into new lease
agreements, purchasing equipment and entering into new contracts. Reorganized
LVL may, at the same time, seek an opportunity for a merger or acquisition.
XV. RETENTION OF JURISDICTION
Notwithstanding Confirmation, the Bankruptcy Court shall retain full
jurisdiction as provided in 28 U.S.C. Section 1334 to enforce the provisions,
purposes, and intent of this Plan including, without limitation:
1. Determination of the allowability and priority of claims and
interests;
2. Determination of requests for payment of claims entitled to
priority under Section 507(a)(1) of the Bankruptcy Code, including compensation
of parties entitled thereto;
DEBTORS' FIRST AMENDED JOINT PLAN OF REORGANIZATION
-31-
<PAGE> 41
3. Resolution of controversies and disputes regarding interpretation
of this Plan;
4. Implementation of the provisions of this Plan and entry of orders
in aid of Confirmation of this Plan, including, without limitation, appropriate
orders to protect the Debtor from creditor action;
5. Modification of this Plan pursuant to Section 1127 of the
Bankruptcy Code and amendments to this Plan after substantial consummation;
6. Adjudication of any causes of action brought by the Debtor;
7. Any determination or estimation necessary or appropriate under
Section 505 of the Bankruptcy Code or other determination or estimation relating
to tax returns filed or to be filed by the Debtors for periods through the end
of the fiscal year in which the Effective Date occurs, including the
determination of the amount of taxes, net operating losses, tax attributes, tax
benefits, tax refunds, and related matters of the Debtors; and
8. Entry of a final decree closing this case.
XVI. POST-CONFIRMATION NOTICES
In the event it is necessary to provide notice to creditors after the Plan
is confirmed, notice will be mailed only to the following: (1) parties affected
by the noticed action, (2) committees appointed in the case, (3) Debtors, (4)
Reorganized LVL, (5) United States Trustee, and (6) parties requesting special
notice of post-confirmation matters.
DEBTORS' FIRST AMENDED JOINT PLAN OF REORGANIZATION
-32-
<PAGE> 42
XVII. UTILITIES
All deposits made to utility companies during the pendency of this case
shall be returned to Debtors within fifteen (15) days after the Effective Date
of this Plan.
Date: April 15, 1998
LVL COMMUNICATIONS
CORPORATION
A California Corporation
By: /s/
-------------------------------------
Cal Lai
Chief Executive Officer
LVL ADVERTISING, INC.
A California Corporation
By: /s/
-------------------------------------
Cal Lai
Chief Executive Officer
LVL INTERACTIVE, INC.
A California Corporation
By: /s/
-------------------------------------
Steve Venuti
Chief Executive Officer
LAW OFFICES OF WILLIAM C. LEWIS
By: /s/
---------------------------------------
William C. Lewis
Attorneys for Debtors
DEBTORS' FIRST AMENDED JOINT PLAN OF REORGANIZATION
-33-
<PAGE> 43
Fujitsu Media Aging
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
CMP
- -----------------------------------------------------------------------------------------------------------------
Invoice # Date Current 30 - Day 60 - Day 90+ - Day Total
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
49244 8/7/96 $40,499.78
00376 8/12/96 $7,588.37
00614 8/12/96 $13,587.25
- -----------------------------------------------------------------------------------------------------------------
Total $61,675.40 $61,675.40
=================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Ziff-Davis
- -----------------------------------------------------------------------------------------------------------------
Invoice # Date Current 30 - Day 60 - Day 90+ - Day Total
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
304548001 7/16/96 $20,797.67
304548001A 7/16/96 $8,576.77
305446001A 7/19/96 $8,604.49
305446002 7/19/96 $45,265.29
306417001 7/25/96 $32,779.33
309151001 8/13/96 $16,537.92
310137001 8/19/96 $19,089.92
- -----------------------------------------------------------------------------------------------------------------
Total $154,631.39 $154,631.39
=================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
McGraw-Hill
- -----------------------------------------------------------------------------------------------------------------
Invoice # Date Current 30 - Day 60 - Day 90+ - Day Total
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
04615950 7/19/96 $35,309.28
04615996 7/31/96 $73,776.17
04616044 8/15/96 $73,776.17
- -----------------------------------------------------------------------------------------------------------------
Total $182,861.62 $182,861.62
=================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Fortune
- -----------------------------------------------------------------------------------------------------------------
Invoice # Date Current 30 - Day 60 - Day 90+ - Day Total
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
71896 7/18/96 $55,097.56
6424300 7/22/96 $64,145.25
- -----------------------------------------------------------------------------------------------------------------
Total $119,242.81 $119,242.81
=================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
PC World
- -----------------------------------------------------------------------------------------------------------------
Invoice # Date Current 30 - Day 60 - Day 90+ - Day Total
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
264507 7/18/96 $9,834.61
264508 7/18/96 $41,097.50
- -----------------------------------------------------------------------------------------------------------------
Total $50,932.11 $50,932.11
=================================================================================================================
</TABLE>
Page 1
<PAGE> 44
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Forbes
- ---------------------------------------------------------------------------------------------------------------
Invoice # Date Current 30 - Day 60 - Day 90+ - Day Total
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
48535 8/1/96 $46,827.16
46855 8/16/96 $54,516.58
- ---------------------------------------------------------------------------------------------------------------
Total $101,343.76 $101,343.76
===============================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Transportation Media Inc.
- ---------------------------------------------------------------------------------------------------------------
Invoice # Date Current 30 - Day 60 - Day 90+ - Day Total
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
004203 8/1/96 $16,352.60
037790 8/1/96 $17,425.00
038200 9/1/96 $11,475.00
038141 9/1/96 $17,425.00
- ---------------------------------------------------------------------------------------------------------------
Total $62,677.60 $62,677.60
===============================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Dow Jones & Company, Inc.
- ---------------------------------------------------------------------------------------------------------------
Invoice # Date Current 30 - Day 60 - Day 90+ - Day Total
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
24349963 7/31/96 $165,611.95
- ---------------------------------------------------------------------------------------------------------------
Total $165,611.95 $165,611.95
===============================================================================================================
</TABLE>
Total $899,176.64
Current $0.00
30 - Day $0.00
60 - Day $0.00
90+ - Day $899,176.64
Page 2
<PAGE> 45
S31 Media Aging
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Ziff-Davis
- ---------------------------------------------------------------------------------------------------------------
Invoice # Date Current 30 - Day 60 - Day 90+ - Day Total
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
316210001 9/27/96 $11,493.53
316889001 10/2/96 $33,545.85
321519001 10/28/96 $11,493.63
322890001 11/6/96 $37,273.17
325814001 11/19/96 $6,637.63
316055001 11/20/96 $23,983.06
327422001 11/22/96 $12,621.45
327422002 11/22/96 $5,299.89
327422003 11/22/96 $5,299.89
328098002 11/26/96 $2,793.41
328098001 11/26/96 $2,793.41
328098004 11/26/96 $5,746.76
328098003 11/26/96 $2,793.41
329087001 12/5/96 $7,867.22
329087002 12/5/96 $7,867.22
329087003 12/5/96 $17,290.50
332548002 12/24/96 $5,299.89
332548001 12/24/96 $5,299.89
332548003 12/24/96 $12,621.45
333280003 12/26/96 $2,793.41
333280002 12/26/96 $2,793.41
333280001 12/26/96 $2,793.41
333280004 12/26/96 $5,746.76
335013003 1/9/97 $17,290.50
335013002 1/9/97 $7,867.22
335013001 1/9/97 $7,887.22
336754001 1/22/97 $19,211.67
336636001 1/22/97 $12,621.45
338361001 1/28/97 $6,047.71
341871001 2/18/97 $19,211.67
- ---------------------------------------------------------------------------------------------------------------
Total $0.00 $19,21l.67 $303,053.92 $322,265.59
===============================================================================================================
</TABLE>
Page 1
<PAGE> 46
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
PC World
- -----------------------------------------------------------------------------------------------------------------------------
Invoice # Date Current 30 - Day 60 - Day 90+ - Day Total
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
279615 9/25/96 $31,450.00
292754 11/26/96 $15,725.00
298253 12/20/96 $17,061.63
- -----------------------------------------------------------------------------------------------------------------------------
Total $0.00 $0.00 $64,236.63 $64,236.63
=============================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Wired
- -----------------------------------------------------------------------------------------------------------------------------
Invoice # Current 30 - Day 60 - Day 90+ - Day Total
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
961023 9/5/96 $18,188.86
961424 11/7/96 $31,527.35
970153 12/9/96 $35,735.70
- -----------------------------------------------------------------------------------------------------------------------------
Total $85,451.91 $85,451.91
=============================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Addicted To Noise
- -----------------------------------------------------------------------------------------------------------------------------
Invoice # Date Current 30 - Day 60 - Day 90+ - Day Total
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
212005 10/7/96 $5,100.00
301001 12/3/96 $5,100.00
- -----------------------------------------------------------------------------------------------------------------------------
Total $10,200.00 $10,200.00
=============================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Rolling Stone
- -----------------------------------------------------------------------------------------------------------------------------
Invoice # Date Current 30 - Day 60- Day 90+ - Day Total
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
34399 9/9/96 $92,310.00
34980 11/4/96 $40,273.00
35521 12/2/96 $46,155.00
- -----------------------------------------------------------------------------------------------------------------------------
Total $178,738.00 $178,738.00
=============================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Jumbo
- -----------------------------------------------------------------------------------------------------------------------------
Invoice # Date Current 30 - Day 60- Day 90+ - Day Total
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
269 10/31/96 $5,950.00
289 11/30/96 $5,950.00
318 1/3/97 $5,950.00
- -----------------------------------------------------------------------------------------------------------------------------
Total $0.00 $17,850.00 $17,850.00
=============================================================================================================================
</TABLE>
Page 2
<PAGE> 47
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Sports Illustrated
- ------------------------------------------------------------------------------------------------------------------------
Invoice # Date Current 30 - Day 60 - Day 90+ - Day Total
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
6562230 10/14/96 $101,904.38
6655200 11/25/96 $50,952.19
6744390 1/27/97 $53,518.12
- ------------------------------------------------------------------------------------------------------------------------
Total $0.00 $206,374.69 $206,374.69
========================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Popular Science
- ------------------------------------------------------------------------------------------------------------------------
Invoice # Date Current 30 - Day 60 - Day 90+ - Day Total
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
4308740 11/10/96 $30,481.00
4336640 1/10/97 $28,751.20
- ------------------------------------------------------------------------------------------------------------------------
Total $0.00 $59,232.20 $59,232.20
========================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Spotmedia Communications
- ------------------------------------------------------------------------------------------------------------------------
Invoice # Date Current 30 - Day 60 - Day 90+ - Day Total
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
247 11/1/96 $3,188.00
277 12/1/96 $3,188.00
332 1/1/97 $3,188.00
- ------------------------------------------------------------------------------------------------------------------------
Total $0.00 $9,564.00 $9,564.00
========================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
CNET: The Computer Network
- ------------------------------------------------------------------------------------------------------------------------
Invoice # Date Current 30 - Day 60 - Day 90+ - Day Total
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
6206 11/30/96 $12,112.50
6207 11/30/96 $12,112.50
6272 1/13/97 $12,112.50
6290 1/31/97 $12,112.50
- ------------------------------------------------------------------------------------------------------------------------
Total 30 - Day $0.00 $48,450.00 $48,450.00
========================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
KNDD
- ------------------------------------------------------------------------------------------------------------------------
Invoice # Date Current 30 - Day 60 - Day 90+ - Day Total
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
36784501 12/24/96 $10,132.00
- ------------------------------------------------------------------------------------------------------------------------
Total $10,132.00 $10,132.00
========================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
KUBE-FM
- ------------------------------------------------------------------------------------------------------------------------
Invoice # Date Current 30 - Day 60 - Day 90+ - Day Total
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
54640601 12/29/96 $11,288.00
- ------------------------------------------------------------------------------------------------------------------------
Total $11,288.00 $11,288.00
========================================================================================================================
</TABLE>
Page 3
<PAGE> 48
<TABLE>
<CAPTION>
Invoice # Date Current 30 - Day 60 - Day 90+ - Day Total
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
110105 11/30/96 $2,592.50
120055 12/22/96 $8,457.50
- -------------------------------------------------------------------------------------------------------------------
Total $11,050.00 $11,050.00
===================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Audio House Inc.
- -------------------------------------------------------------------------------------------------------------------
Invoice # Date Current 30 - Day 60 - Day 90+ - Day Total
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
612192 12/22/96 $9,010.00
- -------------------------------------------------------------------------------------------------------------------
Total $9,010.00 $9,010.00
===================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
KIIS FM
- -------------------------------------------------------------------------------------------------------------------
Invoice # Date Current 30 - Day 60 - Day 90+ - Day Total
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
120100 12/29/96 $15,470.00
- -------------------------------------------------------------------------------------------------------------------
Total $15,470.00 $15,470.00
===================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
KFOG
- -------------------------------------------------------------------------------------------------------------------
Invoice # Date Current 30 - Day 60 - Day 90+ - Day Total
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
120184 12/29/96 $11,220.00
- -------------------------------------------------------------------------------------------------------------------
Total $11,220.00 $11,220.00
===================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
KISW
- -------------------------------------------------------------------------------------------------------------------
Invoice # Dale Current 30 - Day 60 - Day 90+ - Day Total
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
30413801 12/22/96 $15,096.00
- -------------------------------------------------------------------------------------------------------------------
Total $15,096.00 $15,096.00
===================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
KYLD
- -------------------------------------------------------------------------------------------------------------------
Invoice # Date Current 30 - Day 60 - Day 90+ - Day Total
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
120090 12/29/96 $2,585.00
- -------------------------------------------------------------------------------------------------------------------
Total $2,585.00 $2,585.00
===================================================================================================================
</TABLE>
Page 4
<PAGE> 49
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
KMEL
- ----------------------------------------------------------------------------------------------------------------------
Invoice # Date Current 30 - Day 60 - Day 90+ - Day Total
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
120169 12/29/96 $6,375.50
- ----------------------------------------------------------------------------------------------------------------------
Total $6,375.50 $6,375.50
======================================================================================================================
</TABLE>
Total $1,094,589.52
Current $0.00
30 - Day $0.00
60 - Day $19,211.67
90+ - Day $1,075,377.85
Page 5
<PAGE> 50
LEASE COMPANIES 10/30/97
<TABLE>
<CAPTION>
Lease #/
COMPANY CONTACT/TITLE ADDRESS/PHONE AMOUNT OWED
<S> <C> <C> <C>
AT&T Capitol Corp Kathy Sanchez 800-835-5699 x6245 $8,914.12
(Syquest, Quantum hard P.O. Box 85047 #00394847
drives/Quark software) Louisville, KY 40285 #00314014
AT& T Credit
Corporation P.O. Box 85340 about $12,000
(Merlin Legend voice Louisville, KY 40285 10044W207626-
mail system, accessories) Attn: Frank Taylor 00011, 00020,
00030, 00040,
00050, 00060,
00080, 00090,
00100, 00110,
00140
Copelco Steve Russell 609-231-9600 x 4103 $10,016.32
(Office Furniture) P.O. Box 8500-1700 #0546910
Philadelphia, PA 19178 #0427760
Goodman & Metz
(legal for 16000 Ventura Blvd., Ste. 905
Copelco) Encino, CA 91436
818-386-2889
Attn: Jordan Metz
Dana Commercial Darryl Bo 201 Big Beaver Road $17,414.27
(Duos, docking station, P.O. Box 7100 #334788
Mac computers, monitors) Troy, MI 48007 #340359
Juke box, Pinnacle OPT Attn: Darrell Bowe
disk, Phaser printer) Ph: 800-821-3921
</TABLE>
<PAGE> 51
<TABLE>
<CAPTION>
Lease #/
COMPANY CONTACT/TITLE ADDRESS/PHONE AMOUNT OWED
<S> <C> <C> <C>
Greentree Vendor Vicki Maulner P.O. Box 6167 $3,515.91
Services (formerly Carol Stream, IL 60197
Cambridge) 201-712-3566 $3,798.96
(Sun Sparc station, #7191107
CD ROM drive, peripherals #7191906
for workstation)
IKON Office Jean Bell 510-988-4245 $19,431.25
(formerly Alco) #6583116001
(Canon Color copier, Lease 19058
Flery)
(Payment) File #73004
P.O. Box 60000
San Francisco, CA 94160-3004
(Correspondence) 1550 Parkside Dr.
Walnut Creek, CA 94596
LeaseTec Elaine Stuart 1401 Pearl Street $5,483.61
(Sun Ultra 170 Boulder, CO 80302 #CA4009
computer, upgrades, 303-443-8064 #L5503
Netscape server,
critical network gear)
Lucent Technologies Maggie Fields American Bureau of $9787.19
(voice mail add-on) Collections West, Inc #00181557463
(collections) 2500 Red Hill Avenue File#742-690
Suite 200
Santa Ana, CA 92705-9946
Ph: 714-261-1146
</TABLE>
<PAGE> 52
<TABLE>
<CAPTION>
Fax: 714-281-9149
Lease #/
COMPANY CONTACT/TITLE ADDRESS/PHONE AMOUNT OWED
<S> <C> <C> <C>
Lucent Hal Glassberg Glassberg, Pollack & Auerbach
Technologies 44 Montgomery St. Ste 1660
(legal) San Francisco, CA 94104
Ph: 415-291-8320
Fax: 415-219-8111
Lucent Technologies P.O. Box 10193
Van Nuys, CA 91410-0193
800-247-700
Manifest Group Deb Johnson P.O. Box 5179 $10,016.32
(5 Quadras, Mac7100s,) Sioux Falls, SD 57117 #502859
9 monitors, keyboards, 800-325-2236 x3249
external drives, etc.)
Rockford
Industries Eric Treanor 800-736-0220 $11,374.90
(Lasermaster printer) 1055 Westlakes Drive #24120283
(collections) Berwyn, PA 19312 or #13719
Rockford Industries 800-736-02200
P.O. Box 105819
Atlanta, GA 30348-5819
</TABLE>
* NOTE: Dollar amounts shown for leases are figures the lease companies--these
include accelerated payments FOR ENTIRE LEASES, LATE CHARGES AND OTHER AMOUNTS
THEY SAY NEED TO BE PAID TO REINSTATED LEASES.
<PAGE> 53
<TABLE>
<CAPTION>
12/19/97 Rental Agremeent #/ PERSONAL GUARANTEE/
COMPANY CONTACT/TITLE ADDRESS/PHONE AMOUNT OWED KEEP OR RETURN EQUIP.
<S> <C> <C> <C> <C>
Xerox Corporation Western Admin Center Cust. #691901417 No guarantee: rental,
(color copier, Fiery, P.O. Box 25074 Keep equipment.
2 B&W copiers) Santa Ana, CA 92799
</TABLE>
<PAGE> 54
LVL Communications lease for space at 499 Cowper Street, Palo Alto, CA,
from RRC Partners, a California limited liability company
LVL Communications lease for space at 1546 7th Street, Santa Monica,
CA, from 7th Street Partners, Ltd., a California Limited Partnership
Agreement to Assume Lease dated December 9, 1997 between LVL
Communications Corporation and Steelcase, Inc., for an assignment of the 499
Cowper Street Lease, and all related agreements
Exclusive Authorization and Right to Lease with Wayne Mascia and
Associates dated August 28, 1997, as amended by letter dated November 13, 1997
Agreement to Engage Mackenzie Shea, Inc. as Business Consultants for
LVL Communications, Inc., effective as of September 9, 1997, as amended by the
Plan
401(k) Plan
Accrued vacation pay and other employee benefits for employees who are
employed by the Debtors as of the date of commencement of the Chapter 11 Cases
Hartford Ins. Co. of the Midwest Package Policy #57UUCFH1184
Hartford Casualty Co. Umbrella Policy #57XHUYZ9729
Hartford Fire Ins. Co. Package Policy #57SBAEN8572
Hartford Casualty Co. Umbrella Policy #57XHUXK9788
State Fund Workers' Compensation Policy #1463048
<PAGE> 1
Exhibit 4.1
CERTIFICATE OF DESIGNATION, PREFERENCES
AND RIGHTS OF SERIES A PREFERRED STOCK
OF
I-STORM, INC.
I-STORM, INC. (the "Company"), a corporation organized and existing under
the laws of the State of Nevada, does hereby certify that:
Pursuant to authority vested in the Board of Directors by Article V of the
Articles of Incorporation of the Company and the provisions of the Nevada
Revised Statutes, the Board of Directors has duly adopted the following recitals
and resolutions:
WHEREAS, the Articles of Incorporation presently authorize the Company to
issue up to 2,000,000 shares of Preferred Stock in any class or series, but do
not yet designate any such class or series, nor has the Company issued any
Preferred Stock of any class or series; and
WHEREAS, the Board of Directors is authorized by the Articles of
Incorporation to issue, to determine and fix the rights, preferences and
privileges, and restrictions of one or more series of Preferred Stock, and the
Board of Directors has determined to establish the number of shares constituting
that series and to designate such series;
NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors hereby amends
Article V of the Articles of Incorporation and fixes and determines the
designation of the number of shares constituting, and the rights, preferences,
privileges and restrictions relating to a new series of Preferred Stock, as
follows:
1. DESIGNATION AND ISSUANCE. The series of Preferred Stock provided for
by this resolution shall be designated "Series A Cumulative Convertible
Preferred Stock" (hereinafter referred to as the "Series A Preferred Stock").
The "date of issuance" of the Series A Preferred Stock shall be deemed to occur
concurrently with the effective date of the Amended Plan of Reorganization of
LVL Communications Corporation that has been confirmed by the April 16, 1998
Order of the Bankruptcy Court for the Northern District of California.
2. AUTHORIZATION. The number of shares constituting the Series A
Preferred Stock shall be 600,000 shares having a par value of $0.01 per share.
3. DIVIDENDS. The holders of the Series A Preferred Stock shall be
entitled to cumulative dividends at an annual rate of five cents ($.05), which
shall be declared by a majority of the Board of Directors, on a quarterly basis
on November 15, February 15, May 15 and August 15, payable in cash or, at the
option of the Company, in shares of Common Stock. Dividends on Series A
Preferred Stock shall commence to accrue from the day on which such shares have
been issued. Unpaid dividends will accumulate and be payable prior to the
payment of any dividends or any distribution on any of the equity securities
issued by the Company.
<PAGE> 2
4. CONVERSION RIGHTS. Subject to the antidilution provisions of Section 5
hereof, each share of Series A Preferred Stock may be converted, at the option
of the holder, into one share of the Company's Common Stock at a conversion
ratio of one share of Series A Preferred Stock for one fully paid and
non-assessable share of Common Stock ("Conversion Ratio"); provided, that any
unpaid dividends accumulated on the Series A Preferred Stock, as set forth in
Section 3, shall be paid to the holders of the Series A Preferred Stock on the
date of conversion, either in cash, or at the option of the Company, in shares
of Common Stock.
(a) Promptly after the receipt of certificates representing Series A
Preferred Stock and the surrender of Series A Preferred Stock, the Company shall
issue and deliver, or cause to be issued and delivered, to the holder a
certificate or certificates for the number of whole shares of Common Stock
issuable upon the conversion of such Series A Preferred Stock. No fractional
shares shall be issued upon conversion of the Series A Preferred Stock into
shares of Common Stock. To the extent permitted by law, the conversion shall be
deemed to have been effected as of the close of business on the date of issuance
of the Common Stock ("Conversion Date") (or on the next preceding business day
if the Conversion Date is not a business day) and at that time the rights of the
holder of Series A Preferred Stock, as such holder, shall cease, and the holder
of the Series A Preferred Stock shall become the holder of record of shares of
Common Stock.
(b) Notwithstanding anything herein to the contrary, on any
liquidation of the Company, the right of conversion of the Series A Preferred
Stock shall terminate at the close of business on the last full business day
prior to the date fixed for payment of the amount distributable on the Series A
Preferred Stock.
5. ANTIDILUTION PROVISIONS. The Conversion Ratio and the number of shares
issuable upon conversion shall be subject to adjustment as follows:
(a) In case the Company shall (i) declare any dividend or any other
distribution on its Common Stock payable in shares of its Common Stock, (ii)
subdivide its outstanding shares of Common Stock, into a greater number of
shares; (iii) combine its outstanding shares of Common Stock into a smaller
number of shares, or (iv) issue any shares of its capital stock by
reclassification of the Common Stock (including any such reclassification in
connection with a consolidation or merger in which the Company is the continuing
corporation), then, and in each case, the Conversion Ratio in effect at the time
of the record date for such dividend or of the effective date of such
distribution, subdivision, combination or reclassification shall be
proportionately adjusted so that the holder of any shares of the Series A
Preferred Stock, surrendered for conversion after such time, shall be entitled
to receive the kind and amount of shares such holder would have owned or have
been entitled to receive had such share of the Series A Preferred Stock been
converted immediately prior to the time of such dividend, distribution,
subdivision, combination, or reclassification. Such adjustment shall be made
successively whenever any event listed above shall occur.
(b) In case the Company shall issue rights or warrants to any holders
of its Common Stock entitling them to subscribe for or purchase shares of Common
Stock at a price per share of less than $1.00 except any such rights or warrants
that have been issued as
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<PAGE> 3
specified in the Plan of Reorganization for LVL Communications Corporation as
confirmed pursuant to the April 16, 1998 Order of the United States Bankruptcy
Court for the Northern District of California. The Conversion Ratio of Series A
Preferred Stock shall be adjusted to equal the number of shares such holder
would have been entitled to receive had such share of Series A Preferred Stock
been converted immediately prior to such issuance, multiplied by a fraction, the
numerator of which shall be $1.00, and the denominator of which shall be the
exercise price per share of any such warrant or right.
(c) In case of any capital reorganization or reclassification of the
capital stock of the Company, or a consolidation or merger of the Company with
or into any other corporation (other than a consolidation or merger in which the
Company is the surviving or continuing corporation), or in case of any sale or
transfer of all or substantially all of the assets of the Company, the holder of
each share of the Series A Preferred Stock, shall have after such
reorganization, reclassification, consolidation, merger, sale or transfer, the
right to convert such share of the Series A Preferred Stock solely into the kind
and amount of shares of stock and other securities and property which such
holder would have been entitled to receive had such share of Series A Preferred
Stock been converted immediately prior to such consolidation, merger, sale or
transfer.
(d) Whenever there is an adjustment in the Conversion Ratio and/or
the number or kind of securities issuable upon conversion of the Series A
Preferred Stock, as provided herein, the Company shall promptly file in the
custody of its Secretary, a certificate signed by an officer of the Company,
showing in detail the facts requiring such adjustment, the number and kind of
securities issuable upon conversion of Series A Preferred Stock upon such
adjustment, and the Conversion Ratio; and notice of such adjustment along with a
duplicate officer's certificate shall be sent by registered mail, postage paid,
to the holder, at its address as it shall appear in the Company's Stock
Register.
6. GENERAL VOTING RIGHTS. At all times as there is Series A Preferred
Stock outstanding, the holders of Series A Preferred Stock shall have the right
(a) to approve by majority vote, voting as a single class, one vote per share,
whether by written action or special meeting of such holders, to the exclusion
of the holders of the Company's Common Stock, on (i) the merger, sale,
liquidation or dissolution of the Company or any of its subsidiaries; (ii) a
sale of all or substantially all of the Company's assets or any of its
subsidiaries; (iii) any increase in the number of authorized shares of any class
or series of the Company equity securities or any of its subsidiaries; (iv) and
creation of any new class or series of equity securities in the Company or any
of its securities; (v) any increase in the number of members of the Board of
Directors of the Company or its subsidiaries; and
(b) to elect, by majority vote, voting as a single class, one vote
per share, whether by written action or special meeting of such holders, to the
exclusion of the holders of the Company's Common Stock, one member of the Board
of Directors of the Company and its subsidiaries until such time as more than
50% of the Series A Preferred Stock has either converted to Common Stock, or
been redeemed, or a Liquidation Preference Event has occurred, as set forth in
Section 9 hereof. The vote of a majority of the holders of the shares of Series
A Preferred Stock in favor of or against any of the foregoing actions shall
constitute the vote of the Series A Preferred Stock Class.
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<PAGE> 4
7. EXCLUSIVE VOTING RIGHTS.
(a) The holders of Series A Preferred Stock shall have the right to
approve by majority vote, voting as a single class, one vote per share, whether
by written action or special meeting of such holders, to the exclusion of the
holders of the Company's Common Stock, or any other class of stock, to vote upon
the issuance of dividends to the holders of the Company's Common Stock or to any
other class of stock, and no such issuance of dividends shall occur without such
vote of the Series A Preferred holders.
(b) If at any time, a default in payment of Preference Dividends (as
defined in the last sentence of subsection (d)) shall exist, the holders of the
Series A Preferred Stock shall have the right by majority vote, voting together
as a single class, whether by written action or special meeting of such holders,
to the exclusion of the holders of the Company's Common Stock or any other
stock, to elect such number of additional directors ("Default Directors") as
shall provide the holders of Series A Preferred Stock with control over a
majority of the directorships of the Company; and concurrently, the Board of
Directors shall increase the number of directors of the Company by such number
of Default Directors.
(c) Each Default Director elected by the holders of shares of Series
A Preferred Stock pursuant to Section 7(b) hereof, shall continue to serve as
such director for the full term to which he shall have been elected,
notwithstanding that prior to the end of such term a default in payment of
Preference Dividends shall cease to exist. Any Default Director may be removed
by, and shall not be removed except by, the vote of the holders of record of the
outstanding shares of Series A Preferred Stock, voting together as a single
class of the holders of shares of the Series A Preferred Stock called for such
purpose. So long as a default in any payment of Preference Dividends shall
exist, any vacancy in the office of any Default Director shall be filled by the
majority vote of the holders of the outstanding shares of Series A Preferred
Stock, voting together as a single class.
(d) For purposes hereof, a "default in payment of Preference
Dividends" on the Series A Preferred Stock shall be deemed to have occurred
whenever the amount of accrued and unpaid dividends upon the Series A Preferred
Stock shall be equivalent to six full quarterly dividends or more, and, having
so occurred, such default shall be deemed to exist thereafter until, but only
until, all accrued dividends on all shares of Series A Preferred Stock then
outstanding shall have been paid to the last dividend payment and the then
current quarterly dividend has been paid or declared and set aside for payment.
8. REDEMPTION. The Series A Preferred Stock shall be redeemable, in
part or in full, at the option of the Company upon thirty (30) days advance
written notice to the holders of Series A Preferred Stock for a redemption price
of $6.67 per share. Upon receipt of notice of the Company's intention to redeem
the Series A Preferred Stock and until the effective date of the redemption,
each holder of the Series A Preferred Stock shall have the option to convert to
Common Stock as described in Section 4 hereof. Any partial redemption shall be
made on a pro rata basis.
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<PAGE> 5
9. LIQUIDATION PREFERENCE.
(a) In the event of any liquidation, dissolution, or winding up of
the Company or its subsidiaries, or the sale, merger or combination of the
Company or any of its subsidiaries, a public offering of the stock of the
Company or its subsidiaries in excess of $25 million, a merger or consolidation
of the Company in which its shareholders do not retain a majority of the voting
power in the surviving corporation, or a sale of all or substantially all of the
Company's or any of its subsidiaries' assets ("Liquidation Preference Event"),
and prior to any payment or distribution with respect to any equity securities
ranking junior to the Series A Preferred Stock, the holders of Series A
Preferred Stock shall be entitled to receive an amount equal to $6.67 per share
for the Preferred Stock, plus an amount equal to all declared and unpaid
dividends thereon ("Preference Amount").
(b) After the Preference Amount is paid in full on all outstanding
shares of Series A Preferred Stock, the Series A Preferred Stock shall cease to
exist and the holders will cease to have to any further claim on funds or assets
of the Company. If the Company has insufficient assets to permit payment of the
Preference Amount in full to all holders of the Series A Preferred Stock, then
the assets of the Series A Preferred Stock shall be distributed ratably to the
holders of the Series A Preferred Stock proportionate to the Preference Amount
each such holder would otherwise be entitled to receive.
(c) The Company shall give each holder of Series A Preferred Stock
thirty days advance written notice prior to a Liquidation Preference Event, and
such persons shall have the right to convert to Common Stock as described in
Section 4 prior to the effective date of the Liquidation Preference Event.
10. REGISTRATION RIGHTS. This Series A Preferred Stock, and any Common
Stock to be issued upon exercise of the conversion privilege set forth in
Section 4 hereof, is being issued pursuant to an exemption from registration
under the Securities Act pursuant to Section 1145 of the United States
Bankruptcy Code. In the event that such exemption should ever terminate, or
should counsel for the holders of the Series A Preferred Stock opine that such
registration exemption is inapplicable, the following provisions shall apply:
(a) "Registrable Securities" shall mean: (i) any share of Series A
Preferred Stock; (ii) the Common Stock issued or issuable upon conversion of any
share of Series A Preferred Stock; and (iii) any Warrant or Common Stock or
other securities of the Company issued as (or issuable upon the conversion or
exercise of any warrant, right or other security which is issued as) a dividend
or other distribution with respect to, or in exchange for, any share of Series A
Preferred Stock. The holder of any such Registrable Securities under this
Section 10 shall be referred to as the "Registered Securities Holder."
(b) If the Company, at any time that there is Series A Preferred
Stock outstanding, elects to register (including for this purpose a registration
statement effected by the Company for securityholders other than the Registered
Securities Holder) any of its securities under the Securities Act in connection
with the public offering of such securities solely for cash (other than a
registration on Form S-4, Form S-8 or any form which does not include
substantially the same information as would be required to be included in a
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<PAGE> 6
registration statement covering the sale of the Registrable Securities), the
Company shall promptly give the Registered Securities Holder written notice of
such registration. Upon the written request of the Registered Securities Holder
given within twenty (20) days after receipt of such written notice from the
Company, the Company shall, subject to the provisions of this Section 10, cause
to be registered under the Securities Act all of the Registrable Securities
that the Registered Securities Holder has requested to be registered; provided,
however, that the Registrable Securities shall be subject to restrictions on
transfer for such number of days after the effective date of the subject
registration statement as may be specified by the managing underwriter
(c) The Company shall indemnify any Registered Securities Holder of
Common Stock issued upon the conversion of Series A Preferred Stock, and each
person, if any, who controls such Registered Securities Holder within the
meaning of Section 15 of the Act or Section 20(a) of the Securities Exchange Act
of 1934 (the "Exchange Act"), as amended, against all loss, claim, damage,
expense or liability (including all expenses reasonably incurred in
investigating, preparing or defending against any claim whatsoever) to which any
of them may become subject under the Act, the Exchange Act or otherwise, arising
from such registration statement.
(d) Effective twelve months after the Final Closing and for a period
of twelve months thereafter, any Registered Securities Holder shall have the
one-time demand registration right to provide notice to the Company on behalf of
all holders, requiring the Company to register the Registrable Securities. In
such event, the Company will do any and all things necessary to effect such
registration and to have the registration statement declared effective as soon
as practicable following such demand.
11. RANKING. With respect to the payment of dividends, and upon
liquidation, the shares of the Series A Preferred Stock shall rank senior to the
shares of Common Stock of the Company and to any other equity securities.
Further, notwithstanding anything stated to the contrary in the foregoing
sections:
(a) Unless the vote or consent of the holders of a greater number of
shares shall then be required by law, the affirmative vote or consent of the
holders of at least a majority of the outstanding shares of Series A Preferred
Stock, voting as a class, will be required for any amendment to the Company's
Articles of Incorporation (or any certificate amendatory thereof or supplemental
thereto) which will adversely affect the powers, preferences or rights of the
holders of Series A Preferred Stock or authorize any class of stock ranking
senior to or on a parity with the Series A Preferred Stock.
(b) So long as any shares of Series A Preferred Stock remains
outstanding, neither the Company nor its subsidiaries will, without the
affirmative vote or consent of at least a majority of the shares of Series A
Preferred Stock then outstanding, voting as a class, merge or consolidate with
any other corporation, or sell or otherwise dispose of all or substantially all
of its assets unless (i) under the terms of such merger, consolidation or sale
or other disposition of assets, (A) the Series A Preferred Stock shall remain
outstanding with no adverse changes in its preferences, qualifications,
limitations, restrictions or special or relative rights, or (B) each holder of
Series A Preferred Stock shall receive, in exchange for such Series A Preferred
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<PAGE> 7
Stock, securities of the surviving, resulting or acquiring entity which shall in
the aggregate possess preferences, qualifications, limitations, restrictions or
special or relative rights which are at least as favorable as those possessed by
the Series A Preferred Stock immediately prior to the effective date of such
merger, consolidation or sale or other disposition of assets, and adequate
provision shall be made whereby such securities received in exchange for the
Series A Preferred Stock shall thereafter be convertible into the number of
shares of the Company's Common Stock (or into such shares of stock, securities
or assets as may be issuable or payable with respect to, or in exchange for, the
number of shares of the Company's Common Stock or the other shares of stock,
securities or assets, as the case may be) into which the Series A Preferred
Stock would have been convertible immediately prior to such merger,
consolidation or sale or other disposition of assets and (ii) immediately after
such merger, consolidation or sale or other disposition of assets, there shall
be no outstanding shares of any class of stock ranking senior to or on a parity
with the Series A Preferred Stock.
(THIS SECTION IS INTENTIONALLY LEFT BLANK)
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<PAGE> 8
The foregoing amendment was duly adopted by the Board of Directors of the
Company pursuant to the discretion granted by Section V of its Fourth Amended
and Restated Articles of Incorporation, without the requirement of shareholder
action, on July 23rd, 1998 pursuant to the provisions of the Nevada Revised
Statutes.
IN WITNESS WHEREOF, I-Storm, Inc. has caused this Certificate of
Designation, Preferences and Rights of Series A Preferred Stock to be executed
by its President and attested to by its Secretary this __th day of July, 1998.
I-STORM, INC.
By: By:
---------------------------- -----------------------------
Stephen Venuti, Secretary Calbert Lai, President
STATE OF CALIFORNIA :
: ss
COUNTY OF :
----------------
On this ____ day of July, 1998, personally appeared before me, the
undersigned, a notary public, Calbert Lai and Stephen Venuti, who being by me
first duly sworn, declared that they are the President and Secretary,
respectively, of the above-named corporation, acknowledged that they signed the
foregoing Amended Articles of Incorporation, and verified that the statements
contained therein are true.
WITNESS MY HAND AND OFFICIAL SEAL.
--------------------------------------
, Notary Public
----------------------
Residing in County
------------------
8
<PAGE> 1
Exhibit 4.2
AMENDED CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS
OF SERIES B CUMULATIVE CONVERTIBLE PREFERRED STOCK
OF
I-STORM, INC.
I-STORM, INC. (the "Company"), a corporation organized and existing under
the laws of the State of Nevada, does hereby certify that:
Pursuant to authority vested in the Board of Directors by Article V of the
Articles of Incorporation of the Company and the provisions of the Nevada
Revised Statutes, the Board of Directors has duly adopted the following recitals
and resolutions:
WHEREAS, the Board of Directors is authorized by the Articles of
Incorporation to issue, to determine and fix the rights, preferences, privileges
and restrictions of one or more series of Preferred Stock, and the Board of
Directors has determined to establish the number of shares constituting that
series and to designate such series;
WHEREAS, the Articles of Incorporation presently authorize the Company to
issue up to 3,000,000 shares of Preferred Stock in any class or series and the
Company has designated 600,000 of such shares of Preferred Stock to be Class A
Preferred Stock; and the Board of Directors now intends to establish a new class
of preferred stock;
NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors hereby amends
Article V of the Articles of Incorporation and fixes and determines the
designation of the number of shares constituting, and the rights, preferences,
privileges and restrictions relating to a new series of preferred stock, as
follows:
1. DESIGNATION. The series of preferred stock provided for by this
resolution shall be designated "Series B Cumulative Convertible Preferred Stock"
(hereinafter referred to as the "Series B Preferred Stock").
2. AUTHORIZATION. The number of shares constituting the Series B
Preferred Stock shall be 1,700,000 shares having a par value of $0.01 per share.
3. DIVIDENDS. The holders of the Series B Preferred Stock shall be
entitled to cumulative dividends at an annual rate of nine percent (9%) of the
offering price of $12.25 per share, when and as declared by the Board of
Directors, payable on a quarterly basis on November 15, February 15, May 15 and
August 15, in cash, or at the option of the Company, in shares of Common Stock.
Unpaid dividends will accumulate and be payable prior to the payment of
dividends on the Common Stock, but not before the payment of dividends on Series
A Cumulative Convertible Preferred Stock ("Series A Preferred Stock").
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<PAGE> 2
4. CONVERSION RIGHTS.
(a) Subject to the antidilution provisions, each share of Series B
Preferred Stock may be converted, (i) at the option of the holder, at any time
after the last day upon which subscriptions are accepted for the Series B
Preferred Stock ("Final Closing of the Offering") of the Series B Preferred
Stock, (ii) and at the option of the Company, at any time after four years after
the Final Closing of the Offering, into such number of shares of the Company's
Common Stock as shall equal $12.25 divided by the lower of $3.50 or the closing
bid price for any five (5) consecutive trading days during the period commencing
11 months after the Final Closing of the Offering and ending one month
thereafter; provided, however, that in no event shall the Conversion Price be
reduced below $2.80; provided, that any unpaid dividends accumulated on the
Series B Preferred Stock, as set forth in Section 3, shall be paid to the
holders of the Series B Preferred Stock on the date of conversion, either in
cash, or at the option of the Company, in shares of Common Stock.
(b) Promptly after the receipt of certificates representing Series B
Preferred Stock and the surrender of Series B Preferred Stock, the Company shall
issue and deliver, or cause to be issued and delivered, to the holder a
certificate or certificates for the number of whole shares of Common Stock
issuable upon the conversion of such Series B Preferred Stock. The date of the
issuance of such Common Stock shall be the "Conversion Date." No fractional
shares shall be issued upon conversion of the Series B Preferred Stock into
shares of Common Stock. To the extent permitted by law, the conversion shall be
deemed to have been effected as of the close of business on the Conversion Date
(or on the next preceding business day if the Conversion Date is not a business
day) and at that time the rights of the holder of Series B Preferred Stock, as
such holder, shall cease, and the holder of the Series B Preferred Stock shall
become the holder of record of shares of Common Stock and shall solely be
entitled to the rights and preferences of the holders of shares of Common Stock.
(c) Notwithstanding anything herein to the contrary, on any
liquidation of the Company, the right of conversion of the Series B Preferred
Stock shall terminate at the close of business on the last full business day
before the date fixed for payment of the amount distributable on the Series B
Preferred Stock.
5. ANTIDILUTION RIGHTS. The Conversion Price and the number of shares
issuable upon conversion shall be subject to adjustment as follows:
(a) In case the Company shall (i) declare a dividend on its Common
Stock payable in shares of its Common Stock, (ii) subdivide its outstanding
shares of Common Stock, into a greater number of shares, (iii) combine its
outstanding shares of Common Stock into a smaller number of shares, or (iv)
issue any shares of its capital stock by reclassification of the Common Stock
(including any such reclassification in connection with a consolidation or
merger in which the Company is the continuing corporation), then, and in each
case, the Conversion Price in effect at the time of the record date for such
dividend or of the effective date of such subdivision, combination or
reclassification shall be proportionately adjusted so that the holder of any
shares of the Series B Preferred Stock surrendered for conversion after such
time shall be entitled to receive the kind and amount of shares such holder
would have owned or have been entitled to receive had such shares of the Series
B Preferred Stock been converted immediately
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<PAGE> 3
prior to the time of such dividend, subdivision, combination, or
reclassification. Such adjustment shall be made successively whenever any event
listed above shall occur.
(b) In case of any capital reorganization or reclassification of the
capital stock of the Company, or a consolidation or merger of the Company with
or into any other corporation (other than a consolidation or merger in which the
Company is the surviving or continuing corporation), or in case of any sale or
transfer of all or substantially all of the assets of the Company, the holder of
each share of the Series B Preferred Stock, shall have after such
reorganization, reclassification, consolidation, merger, sale or transfer, the
right to convert such share of the Series B Preferred Stock solely into the kind
and amount of shares of stock and other securities and property which such
holder would have been entitled to receive had such share of Series B Preferred
Stock been converted immediately prior to such consolidation, merger, sale or
transfer.
(c) Whenever there is an adjustment in the Conversion Price and/or
the number or kind of securities issuable upon conversion of the Series B
Preferred Stock, as provided herein, the Company shall promptly file in the
custody of its Secretary, a certificate signed by an officer of the Company,
showing in detail the facts requiring such adjustment, the number and kind of
securities issuable upon conversion of Series B Preferred Stock upon such
adjustment, and the Conversion Price; and notice of such adjustment along with a
duplicate officer's certificate shall be sent by registered mail, postage paid,
to the holder at its address as it shall appear in the Company's Stock Register.
6. The Corporation shall at all times reserve and keep available and free
of preemptive rights out of its authorized but unissued Common Stock, solely for
the purpose or effecting the conversion of the Series B Preferred Shares, such
number of shares of Common Stock (or such other shares or securities as may be
required) as shall from time to time be sufficient to effect the conversion of
all outstanding Series B Preferred Shares, and if at any time the number of
authorized but unissued shares of Common Stock (or any such other shares or
other securities) shall not be sufficient to effect the conversion of all then
outstanding Series B Preferred Stock, the Corporation shall take such action as
may be necessary to increase it authorized but unissued shares of Common Stock
(or other shares or other securities) to such number of shares as shall be
sufficient for such purposes.
7. VOTING RIGHTS. (a) Except as otherwise required by law or as set forth
in this Section 7, the holders of Series B Preferred Stock shall not have any
voting rights.
(b) So long as any shares of Series B Preferred Stock are outstanding, in
addition to any other vote or consent of shareholders required in the Articles
of Incorporation or the ByLaws of the Company, the consent of the holders of at
least sixty-six and two-thirds per cent (66 2/3%) of Series B Preferred Stock at
the time outstanding, such consent given in person or by proxy, either in
writing without a meeting, or by vote at any meeting called for the purpose of
obtaining such consent, shall be necessary for effecting or validating :
(i) Any amendment , alteration or repeal of any of the provisions of
the Articles of Incorporation, or of the ByLaws of the
Corporation, which affects adversely the voting powers, rights or
preferences of the holders of Series B Preferred Stock; provided,
however that the amendment of the
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<PAGE> 4
provisions of the Articles of Incorporation so as to authorize or
create or to increase the authorized amount of , any junior stock
or parity stock shall not be deemed to affect adversely the
voting powers, rights or preferences of the holders of Series B
Preferred;
(ii) The authorization of or creation of, or the increase in the
authorized amount of, any stock of any class or any security
convertible into stock of any class, ranking prior to Series B
Preferred Stock in the distribution of assets on any liquidation,
dissolution, or winding up of the Company or in the payment of
dividends;
(iii) The merger or consolidation of the Company with or into any
other corporation, unless after such merger or consolidation, if
the Company should be the surviving corporation, there shall be
no class of stock and no other securities either authorized or
outstanding, ranking prior to the Series B Preferred Stock,
except for the Series A Preferred Stock, in the distribution of
assets on any liquidation, dissolution or winding up of the
Company, or in the payment of dividends; or if the Company should
not be the surviving corporation, the holders of Series B
Preferred Stock immediately preceding such merger or
consolidation shall receive the same number of shares of stock in
the surviving corporation, which shall have the same rights and
preferences in the surviving corporation, as in the Company.
(iv) The purchase or redemption of any shares of any series of parity
stock or junior stock (whether pursuant to mandatory redemption
or sinking fund provisions, optional redemption provisions or
otherwise) unless the full dividend on all shares of Series B
Preferred Stock then outstanding shall have been paid or
declared, and a sum sufficient, or shares sufficient, for the
payment of such dividends shall have been set apart by the
Company.
8. REGISTRATION RIGHTS.
(a) "Registrable Securities" shall mean: (i) any share of Series B
Preferred Stock; (ii) the Common Stock issued or issuable upon conversion of any
share of Series B Preferred Stock; and (iii) any Warrant or Common Stock or
other securities of the Company issued as (or issuable upon the conversion or
exercise of any warrant, right or other security which is issued as) a dividend
or other distribution with respect to, or in exchange for, any share of Series B
Preferred Stock, excluding in all cases, however, any Registrable Securities
sold to the public pursuant to a registration under the Securities Act or an
applicable exemption therefrom.
(b) If (but without any obligation to do so) the Company at any time
commencing on the date of issuance proposes to register (including for this
purpose a registration statement effected by the Company for securityholders
other than the Holder) any of its securities under the Securities Act of 1933
(the "Act") in connection with the public offering of such securities solely for
cash (other than a registration on Form S-4, Form S-8 or any form which does not
include substantially the same information as would be required to be included
in a registration statement covering the sale of the Registrable Securities),
the Company shall promptly give the
4
<PAGE> 5
Holder written notice of such registration. Upon the written request of the
Holder given within twenty (20) days after receipt of such written notice from
the Company, the Company shall, subject to the provisions of this Section 6,
cause to be registered under the Securities Act all of the Registrable
Securities that the Holder has requested to be registered; provided, however,
that the Registrable Securities shall be subject to restrictions on transfer for
such number of days after the effective date of the subject registration
statement as may be specified by the managing underwriter.
(c) If any of the Holder of the Registrable Securities should notify
the Company within twenty (20) days after receipt of any such notice of its or
their desire to include any such securities in such proposed registration
statement, the Company shall afford each of the Holder of the Registrable
Securities the opportunity to have any such Registrable Securities registered
under such registration statement.
Notwithstanding the provisions of this Section 8(c), the Company
shall have the right at any time after it shall have given written notice
pursuant to this Section 8(c) (irrespective of whether a written request for
inclusion of any such securities shall have been made) to elect not to file any
such proposed registration statement, or to withdraw the same after the filing
but prior to the effective date thereof.
(d) Effective after the Final Closing until twelve months thereafter,
any holder shall have the one-time demand registration right to provide notice
to the Company on behalf of all holders, requiring the Company to register the
Common Stock. In such event, the Company will do any and all things necessary to
effect such registration and to have the registration statement declared
effective as soon as practicable following such demand.
(e) In the event that the Company should register the Registrable
Securities under either Section 8(c) or 8(d) hereof, the Company shall bear the
expense of any accounting and registration costs associated with such
registration under the Act.
9. RANKING. With respect to the payment of dividends and upon
liquidation, the shares of the Series B Preferred Stock shall rank senior to the
shares of Common Stock of the Company and junior to the shares of Series A
Preferred Stock.
10. REDEMPTION RIGHTS. Neither the Company nor the holders of Class B
Preferred Stock shall have any redemption rights with respect to the Class B
Preferred Stock.
11. LIQUIDATION, DISSOLUTION AND WINDING UP In the event of any liquidation,
dissolution or winding up of the Company, whether voluntary or involuntary, each
holder of Series B Preferred Stock shall have the right to a ratable
distribution of assets of the Company from any of the Company's assets then
available for distribution after the satisfaction of the liquidation,
dissolution and winding up preferences of the holders of the Series A Preferred
Stock, and before the satisfaction of the liquidation, dissolution and winding
up preferences of the holders of Common Stock, all in accordance with the Nevada
Revised Statutes. Whenever the distribution provided for in this Section 11
shall be payable 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
not less than a majority of the directors then serving on the Board of Directors
of the Company. A reorganization of the Company, or a consolidation or merger of
the Corporation with or into another corporation
5
<PAGE> 6
or entity or a sale of or other disposition of all or substantially all of the
assets of the Company, shall not be treated as a liquidation, dissolution or
winding up of the Company within the meaning of this Section 11.
(THIS SECTION INTENTIONALLY LEFT BLANK)
6
<PAGE> 7
The foregoing amendment was duly adopted by the Board of Directors without
the requirement of shareholder action by meeting held on January 11, 1999,
pursuant to the Articles of Incorporation and the provisions of the Nevada
Revised Statutes.
IN WITNESS WHEREOF, I-Storm, Inc. has caused this Amended Certificate of
Designation, Preferences and Rights of Series B Preferred Stock to be executed
by its President and attested to by its Secretary this 25th day of January,
1999.
ATTEST: I-STORM, INC.
By: /s/ Stephen Venuti By: /s/ Calbert Lai
----------------------------- ---------------------------
Stephen Venuti, Secretary Calbert Lai, President
STATE OF CALIFORNIA :
: ss
COUNTY OF SANTA CLARA :
On this 25th day of January, 1999, personally appeared before me, the
undersigned, a notary public, Calbert Lai and Stephen Venuti, who being by me
first duly sworn, declared that they are the President and Secretary,
respectively, of the above-named corporation, acknowledged that they signed the
foregoing Amended Certificate of Designation, and verified that the statements
contained therein are true.
WITNESS MY HAND AND OFFICIAL SEAL.
[SIG]
---------------------------------------
/s/ Sally A. Morello, Notary Public
--------------------
Residing in Santa Clara County
7
<PAGE> 1
Exhibit 4.3
CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS
OF SERIES C CUMULATIVE CONVERTIBLE PREFERRED STOCK
OF
I-STORM, INC.
I-STORM, INC. (the "Company"), a corporation organized and existing
under the laws of the State of Nevada, does hereby certify that:
Pursuant to authority vested in the Board of Directors by Article V of
the Articles of Incorporation of the Company and the provisions of the Nevada
Revised Statutes, the Board of Directors has duly adopted the following recitals
and resolutions:
WHEREAS, the Board of Directors is authorized by the Articles of
Incorporation to issue, to determine and fix the rights, preferences, privileges
and restrictions of one or more series of Preferred Stock, and the Board of
Directors has determined to establish the number of shares constituting that
series and to designate such series;
WHEREAS, the Articles of Incorporation presently authorize the Company
to issue up to 4,000,000 shares of Preferred Stock in any class or series and
the Company has designated 600,000 of such shares of Preferred Stock to be Class
A Preferred Stock; and the Board of Directors now intends to establish a new
class of preferred stock;
NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors hereby
amends Article V of the Articles of Incorporation and fixes and determines the
designation of the number of shares constituting, and the rights, preferences,
privileges and restrictions relating to a new series of preferred stock, as
follows:
1. DESIGNATION. The series of preferred stock provided for by
this resolution shall be designated "Series C Cumulative Convertible Preferred
Stock" (hereinafter referred to as the "Series C Preferred Stock").
2. AUTHORIZATION. The number of shares constituting the Series C
Preferred Stock shall be 1,225,000 shares having a par value of $0.01 per share.
3. DIVIDENDS. The holders of the Series C Preferred Stock shall
be entitled to cumulative dividends at an annual rate of nine percent (9%) of
the offering price of $12.25 per share, when and as declared by the Board of
Directors, payable on a quarterly basis on November 15, February 15, May 15 and
August 15, in cash, or at the option of the Company, in shares of Common Stock.
Unpaid dividends will accumulate and be payable prior to the payment of
dividends on the Common Stock, but not before the payment of dividends on Series
A Cumulative Convertible Preferred Stock ("Series A Preferred Stock") and Series
B Cumulative Convertible Preferred Stock ("Series B Preferred Stock").
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<PAGE> 2
4. CONVERSION RIGHTS.
(a) Subject to the antidilution provisions, each share of
Series C Preferred Stock may be converted, (i) at the option of the holder, at
any time after the last day upon which subscriptions are accepted for the Series
C Preferred Stock ("Final Closing of the Offering") of the Series C Preferred
Stock, (ii) and at the option of the Company, at any time one year after the
Final Closing of the Offering, into such number of shares of the Company's
Common Stock as shall equal $12.25 divided by the lower of $3.50 or the closing
bid price for any five (5) consecutive trading days during the period commencing
11 months after the Final Closing of the Offering and ending one month
thereafter; provided, however, that in no event shall the Conversion Price be
reduced below $2.80; provided, that any unpaid dividends accumulated on the
Series C Preferred Stock, as set forth in Section 3, shall be paid to the
holders of the Series C Preferred Stock on the date of conversion, either in
cash, or at the option of the Company, in shares of Common Stock.
(b) Promptly after the receipt of certificates representing
Series C Preferred Stock and the surrender of Series C Preferred Stock, the
Company shall issue and deliver, or cause to be issued and delivered, to the
holder a certificate or certificates for the number of whole shares of Common
Stock issuable upon the conversion of such Series C Preferred Stock. The date of
the issuance of such Common Stock shall be the "Conversion Date." No fractional
shares shall be issued upon conversion of the Series C Preferred Stock into
shares of Common Stock. To the extent permitted by law, the conversion shall be
deemed to have been effected as of the close of business on the Conversion Date
(or on the next preceding business day if the Conversion Date is not a business
day) and at that time the rights of the holder of Series C Preferred Stock, as
such holder, shall cease, and the holder of the Series C Preferred Stock shall
become the holder of record of shares of Common Stock and shall solely be
entitled to the rights and preferences of the holders of shares of Common Stock.
(c) Notwithstanding anything herein to the contrary, on any
liquidation of the Company, the right of conversion of the Series C Preferred
Stock shall terminate at the close of business on the last full business day
before the date fixed for payment of the amount distributable on the Series C
Preferred Stock.
5. ANTIDILUTION RIGHTS. The Conversion Price and the number of
shares issuable upon conversion shall be subject to adjustment as follows:
(a) In case the Company shall (i) declare a dividend on its
Common Stock payable in shares of its Common Stock, (ii) subdivide its
outstanding shares of Common Stock, into a greater number of shares, (iii)
combine its outstanding shares of Common Stock into a smaller number of shares,
or (iv) issue any shares of its capital stock by reclassification of the Common
Stock (including any such reclassification in connection with a consolidation or
merger in which the Company is the continuing corporation), then, and in each
case, the Conversion Price in effect at the time of the record date for such
dividend or of the effective date of such subdivision, combination or
reclassification shall be proportionately adjusted so that the holder of any
shares of the Series C Preferred Stock surrendered for conversion after such
time shall be entitled to receive the kind and amount of shares such holder
would have owned or have been entitled to receive had such shares of the Series
C Preferred Stock been converted immediately
2
<PAGE> 3
prior to the time of such dividend, subdivision, combination, or
reclassification. Such adjustment shall be made successively whenever any event
listed above shall occur.
(b) In case of any capital reorganization or reclassification
of the capital stock of the Company, or a consolidation or merger of the Company
with or into any other corporation (other than a consolidation or merger in
which the Company is the surviving or continuing corporation), or in case of any
sale or transfer of all or substantially all of the assets of the Company, the
holder of each share of the Series C Preferred Stock, shall have after such
reorganization, reclassification, consolidation, merger, sale or transfer, the
right to convert such share of the Series B Preferred Stock solely into the kind
and amount of shares of stock and other securities and property which such
holder would have been entitled to receive had such share of Series B Preferred
Stock been converted immediately prior to such consolidation, merger, sale or
transfer.
(c) Whenever there is an adjustment in the Conversion Price
and/or the number or kind of securities issuable upon conversion of the Series C
Preferred Stock, as provided herein, the Company shall promptly file in the
custody of its Secretary, a certificate signed by an officer of the Company,
showing in detail the facts requiring such adjustment, the number and kind of
securities issuable upon conversion of Series C Preferred Stock upon such
adjustment, and the Conversion Price; and notice of such adjustment along with a
duplicate officer's certificate shall be sent by registered mail, postage paid,
to the holder at its address as it shall appear in the Company's Stock Register.
6. The Corporation shall at all times reserve and keep available
and free of preemptive rights out of its authorized but unissued Common Stock,
solely for the purpose of effecting the conversion of the Series C Preferred
Shares, such number of shares of Common Stock (or such other shares or
securities as may be required) as shall from time to time be sufficient to
effect the conversion of all outstanding Series C Preferred Shares, and if at
any time the number of authorized but unissued shares of Common Stock (or any
such other shares or other securities) shall not be sufficient to effect the
conversion of all then outstanding Series C preferred Stock, the Corporation
shall take such action as may be necessary to increase the authorized but
unissued shares of Common Stock (or other shares or other securities) to such
number of shares as shall be sufficient for such purposes.
7. NO VOTING RIGHTS.
(a) Except as otherwise required by law or as set forth in
this Section 7, the holders of Series C Preferred Stock shall not have any
voting rights.
(b) So long as any shares of Series C Preferred Stock are
outstanding, in addition to any other vote or consent of shareholders required
in the Articles of Incorporation or the Bylaws of the Company, the consent of
the holders of at least sixty-six and two-thirds percent (66 2/3%) of Series C
Preferred Stock at the time outstanding, such consent given in person or by
proxy, either in writing without a meeting, or by vote at any meeting called for
the purpose of obtaining such consent, shall be necessary for effecting or
validating:
(i) Any amendment, alteration or repeal of any of the
provisions of the Articles of Incorporation, or of
the By-Laws of the Corporation, which affects
adversely the voting powers, rights or preferences of
the holders of Series
3
<PAGE> 4
C Preferred Stock; provided, however that the
amendment of the provisions of the Articles of
Incorporation so as to authorize or create or to
increase the authorized amount of any junior stock or
parity stock shall not be deemed to affect adversely
the voting powers, rights or preferences of the
holders of Series C Preferred;
(ii) The authorization of or creation of any stock of any
class or any security convertible into stock of any
class, ranking prior to Series C Preferred Stock in
the distribution of assets on any liquidation,
dissolution, or winding up of the Company or in the
payment of dividends; provided, however, that the
Company may increase the authorized amount of Series
A or Series B Preferred Stock without such vote;
(iii) The merger or consolidation of the Company with or
into any other corporation, unless after such merger
or consolidation, if the Company should be the
surviving corporation, there shall be no class of
stock and no other securities either authorized or
outstanding, ranking prior to the Series B Preferred
Stock, except for the Series A Preferred Stock, in
the distribution of assets on any liquidation,
dissolution or winding up of the Company, or in the
payment of dividends; or if the Company should not be
the surviving corporation, the holders of Series B
Preferred Stock immediately preceding such merger or
consolidation shall receive the same number of shares
of stock in the surviving corporation, which shall
have the same rights and preferences in the surviving
corporation, as in the Company.
(iv) The purchase or redemption of any shares of any
series of parity stock or junior stock (whether
pursuant to mandatory redemption or sinking fund
provisions, optional redemption provisions or
otherwise) unless the full dividend on all shares of
Series C Preferred Stock then outstanding shall have
been paid or declared, and a sum sufficient, or
shares sufficient, for the payment of such dividends
shall have been set apart by the Company.
8. REGISTRATION RIGHTS.
(a) "Registrable Securities" shall mean: (i) any share of
Series C Preferred Stock; (ii) the Common Stock issued or issuable upon
conversion of any share of Series C Preferred Stock; and (iii) any Warrant or
Common Stock or other securities of the Company issued as (or issuable upon the
conversion or exercise of any warrant, right or other security which is issued
as) a dividend or other distribution with respect to, or in exchange for, any
share of Series C Preferred Stock, excluding in all cases, however, any
Registrable Securities sold to the public pursuant to a registration under the
Securities Act or an applicable exemption therefrom.
(b) If (but without any obligation to do so) the Company at
any time commencing on the date of issuance proposes to register (including for
this purpose a registration statement effected by the Company for
securityholders other than the Holder) any of its securities under the
Securities Act of 1933 (the "Act") in connection with the public offering of
such securities solely for cash (other than a registration on Form S-4, Form S-8
or any form which does
4
<PAGE> 5
not include substantially the same information as would be required to be
included in a registration statement covering the sale of the Registrable
Securities), the Company shall promptly give the Holder written notice of such
registration. Upon the written request of the Holder given within twenty (20)
days after receipt of such written notice from the Company, the Company shall,
subject to the provisions of this Section 6, cause to be registered under the
Securities Act all of the Registrable Securities that the Holder has requested
to be registered; provided, however, that the Registrable Securities shall be
subject to restrictions on transfer for such number of days after the effective
date of the subject registration statement as may be specified by the managing
underwriter.
(c) If any of the Holder of the Registrable Securities should
notify the Company within twenty (20) days after receipt of any such notice of
its or their desire to include any such securities in such proposed registration
statement, the Company shall afford each of the Holder of the Registrable
Securities the opportunity to have any such Registrable Securities registered
under such registration statement.
Notwithstanding the provisions of this Section 8(c), the
Company shall have the right at any time after it shall have given written
notice pursuant to this Section 8(c) (irrespective of whether a written request
for inclusion of any such securities shall have been made) to elect not to file
any such proposed registration statement, or to withdraw the same after the
filing but prior to the effective date thereof.
(d) Effective after the Final Closing until twelve months
thereafter, any holder shall have the one-time demand registration right to
provide notice to the Company on behalf of all holders, requiring the Company to
register the Common Stock. In such event, the Company will do any and all things
necessary to effect such registration and to have the registration statement
declared effective as soon as practicable following such demand.
(e) In the event that the Company should register the
Registrable Securities under either Section 8(c) or 8(d) hereof, the Company
shall bear the expense of any accounting and registration costs associated with
such registration under the Act.
9. RANKING. With respect to the payment of dividends and upon
liquidation, the shares of the Series C Preferred Stock shall rank senior to the
shares of Common Stock of the Company and junior to the shares of Series A
Preferred Stock and Series B Preferred Stock.
10. REDEMPTION RIGHTS. Neither the Company nor the holders of
Class C Preferred Stock shall have any redemption rights with respect to the
Class C Preferred Stock.
11. LIQUIDATION, DISSOLUTION AND WINDING UP. In the event of any
liquidation, dissolution or winding up of the Company, whether voluntary or
involuntary, each holder of Series C Preferred Stock shall have the right to a
ratable distribution of assets of the Company from any of the Company's assets
then available for distribution after the satisfaction of the liquidation,
dissolution and winding up preferences of the holders of Series A Preferred
Stock and Series B Preferred Stock, and before the satisfaction of the
liquidation, dissolution and winding up preferences of the holders of Common
Stock, all, in accordance with the Nevada Revised Statutes. Whenever the
distribution provided for in this Section 11 shall be payable in property other
than cash, the value of such distribution shall be the fair market value of such
property as
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<PAGE> 6
determined in good faith by not less than a majority of the directors then
serving on the Board of Directors of the Company. A reorganization of the
Company, or a consolidation or merger of the Company with or into another
corporation or entity or a sale of or other disposition of all or substantially
all of the assets of the Company, shall not be treated as a liquidation,
dissolution or winding up of the Company within the meaning of this Section 11.
The foregoing amendment was duly adopted by the Board of Directors
without the requirement of shareholder action by meeting held on March 15, 1999,
pursuant to the Articles of Incorporation and the provisions of the Nevada
Revised Statutes.
IN WITNESS WHEREOF, I-Storm, Inc. has caused this Certificate of
Designation, Preferences and Rights of Series C Preferred Stock to be executed
by its President and attested to by its Secretary this ______ day of
___________, 1999.
<TABLE>
<S> <C>
ATTEST: I-STORM, INC.
By: /s/ Stephen Venuti By: /s/ Calbert Lai
---------------------------- ------------------------------
Stephen Venuti, Secretary Calbert Lai, President
</TABLE>
6
<PAGE> 1
Exhibit 9.1
AMENDED
VOTING TRUST AGREEMENT IN RESPECT OF
COMMON STOCK OF DIGITAL POWER HOLDING COMPANY
This Voting Trust Agreement (the "Agreement") effective as of May 6,
1998, and as now amended between I-Storm Acquisition Corp., a Cayman Islands
company and an owner and holder of shares of the Common Stock (the "Holder") of
Digital Power Holding Company (the "Corporation"), a corporation organized and
existing under the laws of the State of Nevada; and the Secretary of the
Corporation (the "Trustee").
WHEREAS, the Holder entered into a Stock Purchase Agreement on May 6,
1998 herewith pursuant to which the Holder acquired sixty (60) percent of the
issued and outstanding Common Stock of the Corporation;
WHEREAS, as condition of the Stock Purchase Agreement, the Holder must
vest its voting power of its Common Stock of the Corporation, including any
Common Stock acquired through the exercise of options granted to it by the Stock
Purchase Agreement, in the Trustee as hereinafter provided;
WHEREAS, with a view to the safe and competent management of the
Corporation in the interests of all the shareholders thereof, and in the
interest of preventing the Holders from exercising direct or indirect control
over the management and fundamental decisionmaking of the Corporation, the
subscribers are desirous of creating a trust in the manner following;
NOW, THEREFORE, for and in consideration of the mutual promises and
covenants set forth herein, the receipt and sufficiency of which is hereby
acknowledged, it is mutually agreed as follows:
1. TRANSFER OF STOCK TO TRUSTEE. The Stockholder shall deposit
with the Trustee the certificate or certificates representing its Common Stock
of the Corporation, together with a proper and sufficient instrument, duly
executed, for the transfer to the Trustee, and with all necessary transfer tax
stamps affixed. Shares of Common Stock of the Corporation received by the
Stockholder through the exercise of options granted to it pursuant to the Stock
Purchase Agreement shall immediately be deposited with the Trustee at the time
of exercise and such shares and options shall be governed by and subject to this
Voting Trust Agreement.
2. VOTING TRUST CERTIFICATES.
(a) Upon deposit of a certificate or certificates representing
Common Stock of the Corporation by the Stockholder, the Trustee shall deliver or
cause to be delivered to the Holder, a voting trust certificate or certificates
for the same number of shares of Common Stock of the Corporation as is
represented by the certificate or certificates so deposited, which voting trust
certificate or certificates so to be delivered shall be substantially in the
form attached hereto as Exhibit A with such amendments and modifications as
shall be approved by the Trustee. A copy of this Agreement shall be filed by the
Trustee in the principal office of the Corporation.
<PAGE> 2
(b) The voting trust certificates issued by the Trustee may
only be transferred on the books of the Trustee upon the surrender of any and
all voting trust certificates, properly endorsed by the Holder. Any transfer of
the voting trust certificates shall be subject to the same restrictions
governing the transfer of the underlying Common Stock of the Corporation imposed
by the Corporation, including those imposed by the provisions of any shareholder
agreement, or any federal or state law or regulation. Until such transfer, the
Trustee may treat the Holder as owner of the voting trust certificate for all
purposes whatsoever. In connection with any transfer of such voting trust
certificates under any provision of this Agreement, the Trustee may require the
payment of a sum sufficient to pay or reimburse him for any resulting stamp tax
or other governmental charge. Except in the case of a transfer made in a bona
fide sale for value to an unrelated third party, every transferee of a voting
trust certificate or certificates issued shall, by the acceptance of the voting
trust certificate or certificates, become a party to this Agreement with like
effect as though an original party, and shall be considered a Holder.
(c) Shares of Common Stock of the Corporation, certificates
for which shall be deposited with the Trustee, shall be vested in the Trustee
and shall be transferred into the name of the Trustee upon the books of the
Corporation. The Trustee shall, as to all Common Stock so held by him, possess
and be entitled to exercise all shareholders' rights of every kind, including
the right to vote and take part in, or consent to, any corporate or
shareholders' action, in accordance with the terms of this Agreement.
3. HOLDERS SHALL NOT VOTE. Each Holder shall not have any right,
with respect to any such Common Stock held by the Trustee, to vote, or take part
in or consent to, any corporate or shareholders' action of the Corporation.
Holder acknowledges it has acquired the shares and options of the Corporation as
a passive investment and not to control the management of the Corporation. Each
Holder assumes no responsibility for the acts of the Trustee, or of any director
elected in the exercise of the voting power of the Common Stock.
4. TRUSTEE TO VOTE STOCK. The Voting Trustee shall vote on
matters which may come before him at any shareholders' meeting and agrees to
vote the Common Stock held by it pursuant hereto in the same manner as the
majority of the shares of Common Stock which are not subject to this Voting
Trust are voted; and further, in the event that a majority of the shares of
Common Stock which are not subject to this Voting Trust should take action by
written consent in lieu of a meeting or stockholder vote, the Trustee shall
immediately thereafter take action by written consent in the same manner as the
majority of the shares of Common Stock which are not subject to the Voting Trust
have taken such action. The Trustee shall have no obligation to give advance
notice to any Holder of any pending vote or corporate action. The Trustee shall,
however give notice to the Holders of any shareholder action, including his
exercise of voting power, within ten (10) days after the occurrence of such
action.
5. APPOINTMENT OF TRUSTEE TO FILL VACANCIES.
(a) In the event of a vacancy, by resignation or otherwise, in
the role of Trustee, the Holders shall, at a special meeting, appoint by a vote
of the Holders of a majority of the shares of Common Stock held in the Voting
Trust at that time, appoint a successor to the vacancy. Any such successor shall
sign an agreement to be bound by this Agreement, and to perform the terms
thereof, as if such successor had originally signed this Agreement. The
selection of a Trustee shall be limited to such entities or individuals which
are unrelated third parties to any
2
<PAGE> 3
Holder. No Holder, or any individual or entity directly or indirectly controlled
by a Holder, or in which a Holder has any financial, contractual, beneficial, or
voting relationship or interest, shall serve as a Trustee under this Voting
Trust Agreement.
(b) The Holders of a majority of the shares of Common Stock of the
Corporation at the time held in the Trust may, at any time, determine to remove
a Voting Trustee, by signing a resolution to such effect and filing it with the
Secretary of the Corporation. The successor to such Trustee shall be appointed
in accordance with Section 5(a) hereof.
6. DIVIDENDS. Each Holder shall be entitled, until distribution
of Common Stock in the Corporation, as provided for herein, to receive, from
time to time, payments equal to the dividends, if any, other than such as shall
be in the form of shares of Common Stock of the Corporation, collected by the
Trustee upon the like number of shares of Common Stock of the Corporation as is
specified in the voting trust certificate. Payments are to be mailed to the
Holders of the voting trust certificates entitled to receive the dividends, at
their addresses as filed with the Trustee. In the event that any dividends paid
in Common Stock of the company shall be received by the Trustee, the respective
holders of voting trust certificates issued under this Agreement shall be
entitled to the delivery of new or additional voting trust certificates to the
amount of the Common Stock received by the Trustee as such dividend upon the
number of such shares of the company represented by their respective voting
trust certificates previously outstanding. The record date for determining the
Holders entitled to any payment or distribution of dividends shall be the same
record date fixed pursuant to the Bylaws of the Corporation for the
determination of the Common Stockholders entitled to receive such payment or
distribution, and only the Holders of record on that date shall be entitled to
participate in such payment and distributions.
7. SUBSCRIPTION OF ADDITIONAL COMMON STOCK. If any Common Stock
or other securities of the Corporation are offered for subscription to the
holders of the Common Stock deposited hereunder, the Trustee, promptly upon
receipt of notice of such offer, shall deliver a copy of such notice to each
holder of a voting trust certificate. Upon receipt by the Trustee of a request
from any Holder of a voting trust certificate to subscribe in his behalf,
accompanied with the sum of money or other consideration required to pay for
such Common Stock or securities (not in excess of the amount subject to
subscription in respect of the shares represented by the voting trust
certificate held by such holder), the Trustee shall make such subscription and
payment. Upon receiving from the Corporation the certificate for shares or
securities so subscribed for, the Trustee shall issue to such Holder a voting
trust certificate in respect if the shares or securities received have general
voting powers. If, however, the shares or securities do not have voting powers,
the Trustee shall mail or deliver such securities to the Holder in whose behalf
the subscription was made, or may instruct the Corporation to make delivery
directly to the certificate holder entitled thereto.
8. MERGER OR CONSOLIDATION. If the Corporation is merged into or
consolidated with another corporation, or all or substantially all of the assets
of the Corporation are transferred to another corporation, then in connection
with any of the foregoing, the term "Corporation" for all purposes of this
Agreement shall be deemed to include such successor corporation, and the Trustee
shall receive and hold under this Agreement any Common Stock of such successor
corporation received on account of the ownership, as the Trustee hereunder, of
the Common Stock held hereunder prior to such merger, consolidation and
transfer. Voting trust certificates issued and outstanding under this Agreement
at the time of such merger, consolidation or transfer may remain outstanding or
the Trustee may, in his discretion, substitute for the voting trust certificates
new
3
<PAGE> 4
voting trust certificates in appropriate form, and the term "Common Stock"
shall include any capital Common Stock which may be received by the Trustee in
lieu of all or any part of the Common Stock of the Corporation.
9. ACTION WITHOUT MEETING. Any action required or permitted to be
taken at any meeting of the Holders may be taken without a meeting if a written
consent or consents to such action is signed by all Holders and delivered to the
Trustee. Notice of any meeting to be held pursuant hereto shall be given in the
manner provided in the Bylaws of the Corporation relative to notice and purpose
of Common Stockholders' meetings and shall be held and conducted in accordance
with the Bylaws of the Corporation relative to Common Stockholder's meetings.
10. AMENDMENT OF VOTING TRUST. If at any time the Trustee shall
deem it advisable to amend this Agreement, the Trustee shall submit such
amendment to the Holders for a majority approval at a meeting called for that
purpose. If at any time any of the Holders shall deem it advisable to amend the
Agreement, such Holder shall submit such amendment to the Holders for a majority
approval at a meeting called for that purpose.
11. TRUSTEE ACCEPTANCE. The Trustee accepts the trusts under this
Agreement subject to all the terms, conditions and reservations herein
contained, and agrees that he will exercise the powers and perform the duties of
Trustee as set forth; provided, however, that nothing herein contained shall be
construed to prevent any or all Trustees from resigning and discharging
themselves from the trust.
12. TERMINATION.
(a) This Agreement and the Trust hereby created shall be
continued until May 6, 2003, and then automatically shall terminate; provided,
that the duration of this Agreement and the Trust may be extended upon consent
of the Holder for a period not to exceed an additional fifteen years, as set
forth in Section 78.365 of the Nevada Revised Statutes, except that such
Agreement shall be terminated with respect to the shares of Common Stock which
are represented by the Voting Trust Certificate of any Holder upon a transfer of
such Common Stock for value in a bona fide sale for value to an unrelated third
party; or in the event that the aggregate number of such shares of Common Stock
which are represented by the Voting Trust Certificates held collectively by the
Holders hereunder at any time shall represent less than ten (10) percent of the
total number of shares of outstanding and issued voting Common Stock of the
Corporation, this Agreement and the Trust shall be automatically terminated.
(b) At any time after the termination of this Agreement, the
Holders shall, upon surrender for cancellation of their voting trust
certificates and upon payment of any transfer tax required by law, be entitled
to receive certificates for the number of shares of Common Stock represented by
their respective voting trust certificates.
13. NOTICE. Any notices to be provided to the Holder or to the
Trustee pursuant to this Agreement shall be provided to each, respectively, as
set forth in Attachment B hereto. The Trustee, further, shall advise the Holders
in writing within three days receipt of notice of any shareholder vote, and
further, shall provide prompt notice to the Holder of any action taken by the
Trustee pursuant to this Agreement.
4
<PAGE> 5
14. GOVERNING LAW. This Agreement and the voting trust created
hereby shall be governed for all purposes by the laws of the State of Nevada.
All voting trust certificates issued by the Trustee hereunder shall
have enclosed thereon a statement that they are held in accordance with and
subject to the terms of this Voting Trust Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Voting Trust
Agreement.
VOTING TRUSTEE:
-------------------------------------------
By:
----------------------
Date:
-------------------------------------
HOLDER:
I-STORM ACQUISITION CORP.
By:
--------------------------------------
Name:
Title:
5
<PAGE> 6
EXHIBIT A
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER APPLICABLE STATE LAW, AND MAY
NOT BE SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF IN THE
ABSENCE OF (i) AN EFFECTIVE REGISTRATION STATEMENT FOR SUCH SECURITIES UNDER
SAID LAWS OR (ii) AN EXEMPTION THEREFROM UNDER SAID LAWS.
VOTING TRUST CERTIFICATE
FOR SHARES OF STOCK OF DIGITAL POWER HOLDING COMPANY
Certificate No. 001 600,000 Shares of Common Stock
This is to certify that I-Storm Acquisition Corp. has deposited under
the Voting Trust Agreement dated as of May 6, 1998 (the "Voting Trust
Agreement"), between the owners and holders of certain shares of the Common
Stock of Digital Power Holding Company, a Nevada corporation (the
"Corporation"), and _____________ (the "Trustee"), a certificate or certificates
for 600,000 shares of Common Stock of the Corporation.
Until the termination of the Voting Trust Agreement, the holder of this
voting trust certificate (the "Holder") is entitled to receive payments equal to
the amount of dividends, if any, other than such as shall be in the form of
shares of Common Stock of the Corporation, received by the Trustee on the shares
of Common Stock represented by this certificate, less any taxes imposed which
the Trustee may be required to pay, and also less a proportionate share of the
expenses of the Trustee. In the event that any dividends paid in Common Stock of
the Corporation shall be received by the Trustee, the respective holders of
voting trust certificates issued under this Agreement shall be entitled to the
delivery of new or additional voting trust certificates representing the amount
of the Common Stock received by the Trustee as such dividend.
Upon the termination of the Voting Trust Agreement, the Holder shall be
entitled to receive a Common Stock certificate or certificates for the number of
shares of Common Stock represented by this certificate. Until actual delivery to
the Holder of such Common Stock certificate or certificates, the Trustee shall
be entitled to exercise all rights and powers of absolute owners of record of
the Common Stock deposited, including the right to vote and to consent to or
waive any act of the Corporation of any kind.
A duplicate original of the Voting Trust Agreement has been filed in
the principal place of business of the Corporation and shall be open to
inspection, during business hours, by any shareholder of the Corporation or his
attorney.
At any time after the termination, the Holders will be entitled, upon
surrender for cancellation of their respective voting trust certificate(s) and
upon payment of the transfer tax required by law, to receive certificates for
the number of shares of Common Stock represented by
6
<PAGE> 7
their respective voting trust certificates. Stock certificates shall be
delivered by the Trustee to the Holder.
In the event of the dissolution or total or partial liquidation of the
Corporation, any proceeds received by the Trustee for the Common Stock
represented by this certificate shall be delivered to the Holder of record, but
only upon surrender of this certificate in the case of a dissolution, or the
presentation of this certificate for a notation in the case of a distribution in
a partial liquidation.
This voting trust certificate and the right, title and interest in and
to the shares of Common Stock for which this voting trust certificate is issued,
are transferable on the books of the Trustee by the registered Holder. And,
until transferred, the Trustee may treat the registered Holder as the owner for
all purposes whatsoever except that no delivery of Common Stock certificates
shall be made without the surrender of this voting trust certificate.
As a condition of permitting any transfer or delivery of Common Stock
certificates or voting trust certificates, the Trustee may require the payment
of a sufficient sum to reimburse it for any stamp tax or other governmental
charge in connection with such transfer and for a proportionate part of its
expenses as Trustee.
IN WITNESS WHEREOF, the Trustee has caused this voting trust
certificate to be signed effective as of the 6th day of May, 1998.
VOTING TRUSTEE:
-----------------------------------------
By:
--------------------------------------
Name:
-----------------------------------
Secretary
7
<PAGE> 8
To Be Completed Upon Transfer:
FOR VALUE RECEIVED, __________________________________ hereby sells,
assigns and transfers to ____________________________, the within certificate
and all rights and interests represented, and does hereby irrevocably appoint
________________________________ Attorney to transfer the same on the books of
the Trustee, with full power of substitution in the premises.
Dated:
--------------------
-----------------------------------------
In the presence of:
- ---------------------------
8
<PAGE> 1
Exhibit 10.1
CALBERT LAI
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (the "Agreement") dated as of August 5, 1998, between
I-Storm, Inc., a Nevada corporation, and its wholly owned subsidiary, LVL
Communications Corporation, a California corporation, (collectively, the
"Company"), each with its principal place of business in the United States at
480 Cowper Street, Palo Alto, California, 94301 (herein called the "Company")
and CALBERT LAI (herein called the "Employee") residing at 26063 Todd Lane, Los
Altos Hills, California, 94022.
1. EMPLOYMENT. The Company hereby employs Employee as the President of I-Storm,
Inc. and as the President of LVL Communications Corporation reporting to the
Company's Board of Directors. Employee will be responsible for management and
supervision of all Company activities for the term of this Agreement, and the
Employee hereby accepts such employment upon the terms and conditions
hereinafter set forth.
2. TERM. The term of this Agreement shall have commenced as of July 15, 1998
(the "Employment Date") and shall continue in effect for a term of 36 months,
unless earlier terminated in accordance with the provisions of Section 6 of this
Agreement. Thereafter, this Agreement shall be automatically renewed on a
year-to-year basis unless either party shall provide the other with notice in
writing of the termination of this Agreement at least 60 days' prior to the
expiration of this Agreement at the end of its original term or any renewal
thereof. For purposes of this Agreement, the "term of this Agreement" shall
refer to the initial term and all renewal terms hereof. In the event of
termination by the Company prior to the expiration of this Agreement at the end
of its original term or any renewal thereof, the Company shall pay the Employee
severance pay and benefits required by Section 6(e) of this Agreement unless
Page 1 of 11
<PAGE> 2
termination by the Company is for a reason specified in Sections 6(a), 6(b) or
6(c) hereunder
3. COMPENSATION. For all services rendered by the Employee under this Agreement,
the Company shall pay the Employee a salary and fringe benefits as follows:
(a) Cash Compensation: The Company shall pay the Employee a base salary
during the term of this Agreement, payable semi-monthly, at the rate of
$150,000 per year. Employee will be eligible to receive an fiscal annual
performance bonus of up to 50% of base salary based upon achievement of
reasonable and achievable Company goals as determined and approved in
good faith by the Board of Directors to be paid no later than 30 days
from the end of such year. Employee shall be eligible for annual
performance appraisal and merit increase. Company may, but is not
obligated to, increase Employee's salary as Company deems appropriate.
(b) Stock Options: The Company shall grant the Employee stock options to
purchase 600,000 common shares of the Company at $0.50 per share, of
which 300,000 shares shall vest ratably over a period of 36 months from
the Employment Date; and of which 300,000 shares will only vest upon the
Company's sales revenue meeting or exceeding twelve million dollars
($12,000,000) for any twelve month period from the Employment Date and
upon the Company's quarterly revenue exceeding operating expenses for the
same twelve month period, as determined by the Board of Directors at its
sole discretion.
(c) Medical, Insurance, and Other Benefits: The Employee shall at his
option be entitled to participate with other employees of the Company in
all group fringe benefit plans or other group arrangements authorized and
adopted from time to time. Employee shall also receive such other
benefits including
Page 2 of 11
<PAGE> 3
vacation, holidays, and sick leave, as Company generally provides to its
employees holding similar positions as that of Employee.
(d) Expenses: The Company shall either pay directly or reimburse Employee
for reasonable travel, entertainment and other business expenses incurred
by Employee in the performance of his duties hereunder; provided that the
incurring of such expenses shall be subject to such policies as shall be
established by the Board of Directors of the Company from time to time,
and Employee shall submit to the Company such documentation to
substantiate such expenses as the Company shall reasonably request.
Nothing herein shall be deemed to preclude the Company from awarding additional
compensation or benefits to Employee during the term of this Agreement, upon
approval of Company's Board of Directors, whether in the form of raises,
bonuses, additional fringe benefits, or otherwise.
4. DUTIES. During the term of this Agreement, the Employee hereby promises to
perform and discharge faithfully the duties which may be assigned to him from
time to time by the Board of Directors in connection with the conduct of its
business so long as such duties are reasonably related to the Employee's duties
as President of the Company. Employee will be responsible for all activities of
the Company as determined by the Board of Directors and as required of officers
of the Company under applicable state and federal law, and will have all
relevant executives and their respective subordinates report to him. Employee is
employed to actively serve on a full-time basis as an executive officer of the
Company.
5. EXTENT OF SERVICES; OTHER INTERESTS. During the term of this Agreement, the
Employee shall devote all of his working time, attention and energies which are
reasonably required for the performance of his duties and the business of the
Company
Page 3 of 11
<PAGE> 4
and shall travel as reasonably required to discharge the duties of his position
with the Company as assigned by its Board of Directors. The Employee shall not
during the term of this Agreement be engaged in any other business activities
that are, or could potentially be, in competition with the business activities
of the Company whether or not such business activities are pursued for gain,
profit or other pecuniary advantage. Subject to the foregoing, the Employee may
engage in investment, business, professional and continuing education activities
so long as such activities do not substantially interfere with the performance
of his duties as the President of the Company.
6. TERMINATION. Payment of severance described in this Section 6 shall be paid
no later than ten (10) days after becoming due.
(a) Death: In the event of Employee's death during the term hereof, this
Agreement shall terminate immediately and, except as expressly set forth
in this paragraph, the Company shall have no further liability hereunder
to Employee or his estate. The Company shall continue to pay to
Employee's estate his salary and continued stock option vesting for a
period of three (3) months from and after the date of death during the
term of this Agreement.
(b) Permanent Disability. In the event that Employee becomes totally
disabled during the term hereof and such total disability continues for a
period in excess of ninety (90) days, whether consecutive or in the
aggregate during any 12 month period, at the end of such period of
disability the Employee shall be considered as permanently disabled and
this Agreement shall terminate immediately and, except as expressly set
forth in this paragraph, the Company shall have no further liability
hereunder to Employee. The Company shall continue to pay to Employee his
salary and continue stock option vesting for the period of disability and
a period of two (2) months from and after the date of total disability
commencing with the expiration of the first 90 day period of such
disability as severance pay hereunder.
Page 4 of 11
<PAGE> 5
Employee shall be considered as totally disabled if, and when because of
injury, illness or physical or mental disability, he is prevented from
effectively performing the duties of his employment. The determination of
total disability shall be made by the Board of Directors of the Company,
but said decision shall not be unreasonable or arbitrary and shall be
supported by the opinion (at the Company's expense) of at least one
licensed physician, unless Employee shall without justification fail to
submit to the necessary physical or mental examinations. It is understood
that Employee's occasional sickness of short duration shall not result in
Employee being considered totally disabled, and Employee shall continue
to be compensated hereunder during such periods of occasional sickness so
long as they shall not exceed the greater of twelve (12) days in a
calendar year or the amount of sick leave available to any other employee
of the Company.
(c) Involuntary Termination for Cause. The Company may terminate this
Agreement for cause. For the purposes of this Agreement, a termination
for "cause" shall mean a termination resulting from a good faith and
reasonable determination by the Company's Board of Directors that
Employee (i) has committed a felony or act of moral turpitude which would
materially injure the Company or its reputation or, (ii) has
intentionally or willfully and repeatedly breached his duties hereunder
in a material respect and, if curable, has failed to cure the same within
thirty (30) days after receiving written notice of such breach from the
Board of the Company. Such notice must be given to Employee following
each claimed breach, whether or not curable. In the event of termination
for cause, the Company shall have no further liability hereunder to
Employee from and after the date of such termination.
(d) Termination Without Cause. Termination of Employee by the Company for
any reason other than in paragraphs 6(a), 6(b), and 6(c) hereof shall be
considered Termination Without Cause.
Page 5 of 11
<PAGE> 6
(e) Salary and Benefit Continuation Upon Termination Without Cause. Upon
the Company's termination of Employee's employment for any reason
whatsoever prior to the expiration of the original term or any annual
renewal of the term of this Agreement, except for (i) termination upon
death as set forth in paragraph 6(a) hereof; (ii) termination upon
permanent disability as set forth in paragraph 6(b) hereof; or (iii)
termination for cause pursuant to paragraph 6(c) hereof ("Termination
without Cause"); or (iv) Employee's voluntarily electing not to continue
in the employment of the Company under conditions other than Constructive
Discharge; then the Company within thirty (30) days after such
termination, and in lieu of all other obligations, the Company hereunder,
shall: 1) pay to Employee a lump-sum payment equal to his then base
salary for a period equal to twelve (12) months; 2) provide Employee, at
Company's cost, with employment benefits consisting of life, health,
dental and long-term disability insurance for a period of 12 months after
termination; and 3) enter into a Post-termination Consulting Agreement as
defined below in paragraph 6(f) hereof. Thereafter, any continuation of
benefits under the Consolidated Omnibus Budget Reconciliation Act (COBRA)
will be at Employee's cost.
(f) Post-termination Consulting Agreement. Upon Termination Without
Cause, the Employee will hold himself available to provide consulting
services to the Company for a period terminating one year after the
Termination Date (the "Consulting Period"). Employee will provide the
consulting services only upon the request of the Company's Board of
Directors and for no more than ten hours per week at such times and
places as are mutually convenient to Employee and the Company. However,
Employee will perform those services at times and places that do not
reasonably conflict with his responsibilities to his then current
employer. Employee will perform services as an independent contractor
with the customary and usual independence associated therewith, and he
will not be deemed an employee or agent of the Company or have the
authority to bind, or to enter into any contract on behalf of, the
Company, unless expressly authorized in writing to do so. The Company
will pay Employee a consulting fee of $150.00 per hour for each hour
actually worked
Page 6 of 11
<PAGE> 7
at the Company's request. The Company's Board of Directors has determined
that Employee will be providing "substantial services" to the Company
during the Consulting Period such that any option held by Employee on the
Termination Date, if not fully vested at the time, will continue to vest
at the rate of 1/36 of the option grant per month during the Consulting
Period provided that total vesting shall not exceed the original total
shares granted under each stock option. Any option held by Employee at
the Termination Date will remain exercisable for 36 months from the
Termination Date even though the employment of Employee will terminate on
the Termination Date.
7. NONDISCLOSURE OF CONFIDENTIAL INFORMATION. The Employee recognizes and
acknowledges that the Company's trade secrets and proprietary processes as they
may exist from time to time are valuable, special and unique assets of the
Company's business, access to and knowledge of which are essential to the
performance of the Employee's duties hereunder. The Employee will not during or
after the term of his employment, disclose such secrets or processes to any
person, firm, corporation, association or other entity for any reason or purpose
whatsoever, nor shall the Employee make use of any such secrets or processes for
his own purposes or for the benefit of any person, firm, corporation, or other
entity (except the Company) under any circumstances during or after the term of
his employment; provided that, after the expiration of the term of his
employment these, restrictions shall not apply to such secrets and processes
which are then, or from time to time thereafter, in the public domain (provided
that he was not responsible, directly or indirectly, for permitting such secrets
or processes to enter the public domain without the Company's consent).
8. COVENANT NOT TO COMPETE OR INTERFERE. With the exception of activities
associated with the purchase and subsequent operation of the Company., Employee
agrees that during the term of this Agreement and for a period of one (1) year
after the date of Termination under this Agreement, whichever occurs first; (a)
Employee shall not intentionally interfere with, disrupt or attempt to disrupt
the relationship, contractual or otherwise between the Company and any customer,
supplier, lessor or employee of
Page 7 of 11
<PAGE> 8
the Company or any of its subsidiaries and (b) Employee shall not as a sole
proprietor or otherwise for his own account or as a partner, employee, officer,
director, manager, agent, distributor, consultant, marketing representative,
associate, investor or otherwise (except as to a less than 5% interest in a
public company listed on the Nasdaq, a national, or a regional exchange),
directly or indirectly, own, purchase, organize or take preparatory steps for
the organization of, finance, work for, provide services to, advise, acquire,
lease, operate, manage or invest in or permit his name to be used or employed in
connection with any business which engages directly in competition with the
Company. Employee further agrees that the covenants and other provisions of this
paragraph shall cover his activities in the whole of North America, Europe and
Asia (the "Territory"). The parties hereto agree that the covenants contained in
this paragraph (b) shall be construed as if the covenants are divided into
separate and distinct covenants in respect of each of the products and services
of the Company, each capacity in which the party is prohibited from competing,
and each part of the world in which such competition is prohibited from taking
place. The territorial restrictions contained in this Section 8 are properly
required for the adequate protection of the Company and in the event any
covenant or other provision contained this Section 8 shall be deemed to be
illegal, unenforceable, or unreasonable by a court or other tribunal of
competent jurisdiction. With respect to any part of the Territory or otherwise,
such covenant or provision shall not be affected with respect to any other part
of the Territory or otherwise, and each of the parties hereto agrees and submits
to the reduction of said territorial restriction or other provisions to such an
area or otherwise, as said court shall deem reasonable. The parties further
agree that if any provision of this Agreement is found to be unenforceable, it
shall not affect the enforceability of the remaining provisions and the court
shall enforce all remaining provisions to the extent permitted by law.
9. INVENTIONS. The Employee hereby sells, transfers, and assigns to the Company,
or to any person or entity designated by the Company, at of the entire right,
title and interest of the Employee in and to all inventions, ideas, disclosures,
and improvements, whether patented or unpatented, and copyrightable material
made or conceived by the Employee, solely or jointly during the term hereof
which relate to
Page 8 of 11
<PAGE> 9
methods, apparatus, formulae, designs, products, processes or devices, sold,
leased, used, or under consideration or development by the Company, or which
otherwise relate to or pertain to the business, functions, or operations of the
Company. The Employee agrees to communicate promptly and to disclose to the
Company, in such form as the Employee may be required to do so, all information,
details, and data pertaining to the aforementioned inventions, ideas,
disclosures, and improvements and to execute and deliver to the Company such
formal transfers and assignments and such other papers and documents as may be
required of the Employee to permit the Company or any person or entity
designated by the Company to file and prosecute the patent applications and, as
to copyrightable material, to obtain copyright thereof.
For the purposes of this Agreement, an invention shall be deemed to have been
made during the term of Employee's employment if, during such period, the
invention was conceived or first actually reduced to practice by the Company,
and Employee agrees that any patent application filed within one (1) year after
termination of this employment shall be presumed to relate to an invention which
was made during the term of Employee's employment unless Employee can provide
satisfactory evidence to the contrary.
10. INJUNCTIVE RELIEF. The parties hereto acknowledge that (a) the covenants and
restrictions set forth in Sections 8, 9 and 10 of this Agreement are necessary,
fundamental and required for the protection of the business of the Company, (b)
such covenants and restrictions are material inducements to investors to enter
into agreements to invest in the Company, and (c) a breach of any of such
covenants and restrictions by Employee will result in irreparable harm and
damages to the Company which cannot be adequately compensated by a monetary
award. Accordingly, in the event of breach or threatened breach of such
provisions by Employee, Employee expressly agrees that the Company shall be
entitled to the immediate remedy of a temporary restraining order, preliminary
injunction or such other form of injunctive or equitable relief as may be used
by any court of competent jurisdiction to restrain or enjoin the Employee from
breaching any such covenant or provision or to specifically
Page 9 of 11
<PAGE> 10
enforce the provisions hereof. Nothing herein shall be construed as prohibiting
the Company from pursuing any other remedies for such breach or threatened
breach.
11. INSURANCE. The Company, at its election and for its benefit, may insure the
Employee against accidental loss or death and the Employee shall submit to such
physical examination and supply such information as may be required in
connection therewith.
12. NOTICES. Any notice required or permitted to be given under this Agreement
shall be sufficient if in writing and if sent by registered or certified mail to
his last known residence in the case of the Employee or to its last known
principal office in the case of the Company.
13. WAIVER OF BREACH. The waiver by either party of a breach of any provision of
this Agreement shall not operate or be construed by a waiver of any subsequent
breach.
14. GOVERNING LAW. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of California.
15. ASSIGNMENT. The rights and obligations of the parities under this Agreement
shall inure to the benefit of and shall be binding upon the successors of such
parties.
16. ENTIRE AGREEMENT. This instrument contains the entire agreement of the
parties and supersedes all existing agreements between them. It may not be
changed orally but only by an agreement in writing signed by the party against
whom enforcement of any waiver, modification, extension or discharge is sought.
Page 10 of 11
<PAGE> 11
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day first
written above.
CALBERT LAI
EMPLOYEE: /s/ CALBERT LAI
-----------------------------------------
Calbert Lai
COMPANY I-STORM, INC
By: /s/ FRANK DELAPE
--------------------------------------
Frank DeLape
Chairman of the Board
Page 11 of 11
<PAGE> 1
Exhibit 10.2
STEPHEN VENUTI
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (the "Agreement') dated as of August 5, 1998, between
I-Storm, Inc., a Nevada corporation, and its wholly owned subsidiary, LVL
Communications Corporation, a California corporation, (collectively, the
"Company"), each with its principal place of business in the United States at
480 Cowper Street, Palo Alto, California, 94301 (herein called the "Company")
and STEPHEN VENUTI (herein called the "Employee") residing at 24130 Big Basin
Way, Saratoga, CA, 95070.
1. EMPLOYMENT. The Company hereby employs Employee as the Executive Vice
President and General Manger of I-Storm Inc. and as the Executive Vice President
and General Manger of LVL Communications Corporation reporting to the Company's
President. Employee will be responsible for management and supervision of all
Company activities for the term of this Agreement, and the Employee hereby
accepts such employment upon the terms and conditions hereinafter set forth.
2. TERM. The term of this Agreement shall have commenced as of July 15, 1998
(the "Employment Date") and shall continue in effect for a term of 36 months,
unless earlier terminated in accordance with the provisions of Section 6 of this
Agreement. Thereafter, this Agreement shall be automatically renewed on a
year-to-year basis unless either party shall provide the other with notice in
writing of the termination of this Agreement at least 60 days' prior to the
expiration of this Agreement at the end of its original term or any renewal
thereof. For purposes of this Agreement, the "term of this Agreement" shall
refer to the initial term and all renewal terms hereof. In the event of
termination by the Company prior to the expiration of this Agreement at the end
of its original term or any renewal thereof, the Company shall pay the Employee
severance pay and benefits required by Section 6(e) of this Agreement unless
Page 1 of 11
<PAGE> 2
termination by the Company is for a reason specified in Sections 6(a), 6(b) or
6(c) hereunder
3. COMPENSATION. For all services rendered by the Employee under this Agreement,
the Company shall pay the Employee a salary and fringe benefits as follows:
(a) Cash Compensation: The Company shall pay the Employee a base salary
during the term of this Agreement, payable semi-monthly, at the rate of
$150,000 per year. Employee will be eligible to receive an fiscal annual
performance bonus of up to 50% of base salary based upon achievement of
reasonable and achievable Company goals as determined and approved in good
faith by the Board of Directors to be paid no later than 30 days from the
end of such year. Employee shall be eligible for annual performance
appraisal and merit increase. Company may, but is not obligated to,
increase Employee's salary as Company deems appropriate.
(b) Stock Options: The Company shall grant the Employee stock options to
purchase 300,000 common shares of the Company at $0.50 per share, of which
150,000 shares shall vest ratably over a period of 36 months from the
Employment Date; and of which 150,000 shares will only vest upon the
Company's sales revenue meeting or exceeding twelve million dollars
($12,000,000) for any twelve month period from the Employment Date and
upon the Company's quarterly revenue exceeding operating expenses for the
same twelve month period, as determined by the Board of Directors at its
sole discretion.
(c) Medical, Insurance, and Other Benefits: The Employee shall at his
option be entitled to participate with other employees of the Company in
all group fringe benefit plans or other group arrangements authorized and
adopted from time to time. Employee shall also receive such other benefits
including
Page 2 of 11
<PAGE> 3
vacation, holidays, and sick leave, as Company generally provides to its
employees holding similar positions as that of Employee.
(d) Expenses: The Company shall either pay directly or reimburse Employee
for reasonable travel, entertainment and other business expenses incurred
by Employee in the performance of his duties hereunder; provided that the
incurring of such expenses shall be subject to such policies as shall be
established by the Board of Directors of the Company from time to time, and
Employee shall submit to the Company such documentation to substantiate
such expenses as the Company shall reasonably request.
Nothing herein shall be deemed to preclude the Company from awarding additional
compensation or benefits to Employee during the term of this Agreement, upon
approval of Company's Board of Directors, whether in the form of raises,
bonuses, additional fringe benefits, or otherwise.
4. DUTIES. During the term of this Agreement, the Employee hereby promises to
perform and discharge faithfully the duties which may be assigned to him from
time to time by the Board of Directors in connection with the conduct of its
business so long as such duties are reasonably related to the Employee's duties
as an Executive Officer of the Company. Employee will be responsible for all
activities of the Company as determined by the President and as required of
officers of the Company under applicable state and federal law, and will have
all relevant executives and their respective subordinates report to him.
Employee is employed to actively serve on a full-time basis as an executive
officer of the Company.
5. EXTENT OF SERVICES; OTHER INTERESTS. During the term of this Agreement, the
Employee shall devote all of his working time, attention and energies which are
reasonably required for the performance of his duties and the business of the
Company
Page 3 of 11
<PAGE> 4
and shall travel as reasonably required to discharge the duties of his position
with the Company as assigned by its President. The Employee shall not during the
term of this Agreement be engaged in any other business activities that are, or
could potentially be, in competition with the business activities of the Company
whether or not such business activities are pursued for gain, profit or other
pecuniary advantage. Subject to the foregoing, the Employee may engage in
investment, business, professional and continuing education activities so long
as such activities do not substantially interfere with the performance of his
duties as an Officer of the Company.
6. TERMINATION. Payment of severance described in this Section 6 shall be paid
no later than ten (10) days after becoming due.
(a) Death: In the event of Employee's death during the term hereof, this
Agreement shall terminate immediately and, except as expressly set forth in
this paragraph, the Company shall have no further liability hereunder to
Employee or his estate. The Company shall continue to pay to Employee's
estate his salary and continued stock option vesting for a period of three
(3) months from and after the date of death during the term of this
Agreement.
(b Permanent Disability. In the event that Employee becomes totally
disabled during the term hereof and such total disability continues for a
period in excess of ninety (90) days, whether consecutive or in the
aggregate during any 12 month period, at the end of such period of
disability the Employee shall be considered as permanently disabled and
this Agreement shall terminate immediately and, except as expressly set
forth in this paragraph, the Company shall have no further liability
hereunder to Employee. The Company shall continue to pay to Employee his
salary and continue stock option vesting for the period of disability and a
period of two (2) months from and after the date of total disability
commencing with the expiration of the first 90 day period of such
disability as severance pay hereunder.
Page 4 of 11
<PAGE> 5
Employee shall be considered as totally disabled if, and when because of
injury, illness or physical or mental disability, he is prevented from
effectively performing the duties of his employment. The determination of
total disability shall be made by the Board of Directors of the Company,
but said decision shall not be unreasonable or arbitrary and shall be
supported by the opinion (at the Company's expense) of at least one
licensed physician, unless Employee shall without justification fail to
submit to the necessary physical or mental examinations. It is understood
that Employee's occasional sickness of short duration shall not result in
Employee being considered totally disabled, and Employee shall continue to
be compensated hereunder during such periods of occasional sickness so long
as they shall not exceed the greater of twelve (12) days in a calendar year
or the amount of sick leave available to any other employee of the Company.
(c) Involuntary Termination for Cause. The Company may terminate this
Agreement for cause. For the purposes of this Agreement, a termination for
"cause" shall mean a termination resulting from a good faith and reasonable
determination by the Company's Board of Directors that Employee (i) has
committed a felony or act of moral turpitude which would materially injure
the Company or its reputation or, (ii) has intentionally or willfully and
repeatedly breached his duties hereunder in a material respect and, if
curable, has failed to cure the same within thirty (30) days after
receiving written notice of such breach from the Board of the Company. Such
notice must be given to Employee following each claimed breach, whether or
not curable. In the event of termination for cause, the Company shall have
no further liability hereunder to Employee from and after the date of such
termination.
(d) Termination Without Cause. Termination of Employee by the Company for
any reason other than in paragraphs 6(a), 6(b), and 6(c) hereof shall be
considered Termination Without Cause.
Page 5 of 11
<PAGE> 6
(e) Salary and Benefit Continuation Upon Termination Without Cause. Upon
the Company's termination of Employee's employment for any reason
whatsoever prior to the expiration of the original term or any annual
renewal of the term of this Agreement, except for (i) termination upon
death as set forth in paragraph 6(a) hereof; (ii) termination upon
permanent disability as set forth in paragraph 6(b) hereof; or (iii)
termination for cause pursuant to paragraph 6(c) hereof ("Termination
without Cause"); or (iv) Employee's voluntarily electing not to continue in
the employment of the Company under conditions other than Constructive
Discharge; then the Company within thirty (30) days after such termination,
and in lieu of all other obligations, the Company hereunder, shall:
1) pay to Employee a lump-sum payment equal to his then base salary for a
period equal to twelve (12) months; 2) provide Employee, at Company's cost,
with employment benefits consisting of life, health, dental and long-term
disability insurance for a period of 12 months after termination; and 3)
enter into a Post-termination Consulting Agreement as defined below in
paragraph 6(f) hereof. Thereafter, any continuation of benefits under the
Consolidated Omnibus Budget Reconciliation Act (COBRA) will be at
Employee's cost.
(f) Post-termination Consulting Agreement. Upon the Termination Without
Cause, the Employee will hold himself available to provide consulting
services to the Company for a period terminating one year after the
Termination Date (the "Consulting Period"). Employee will provide the
consulting services only upon the request of the Company's President and
for no more than ten hours per week at such times and places as are
mutually convenient to Employee and the Company. However, Employee will
perform those services at times and places that do not reasonably conflict
with his responsibilities to his then current employer. Employee will
perform services as an independent contractor with the customary and usual
independence associated therewith, and he will not be deemed an employee or
agent of the Company or have the authority to bind, or to enter into any
contract on behalf of, the Company, unless expressly authorized in writing
to do so. The Company will pay Employee a consulting fee of $150.00 per
hour for each hour actually worked
Page 6 of 11
<PAGE> 7
at the Company's request. The Company's Board of Directors has determined
that Employee will be providing "substantial services" to the Company
during the Consulting Period such that any option held by Employee on the
Termination Date, if not fully vested at the time, will continue to vest at
the rate of 1/36 of the option grant per month during the Consulting Period
provided that total vesting shall not exceed the original total shares
granted under each stock option. Any option held by Employee at the
Termination Date will remain exercisable for 36 months from the Termination
Date even though the employment of Employee will terminate on the
Termination Date.
7. NONDISCLOSURE OF CONFIDENTIAL INFORMATION. The Employee recognizes and
acknowledges that the Company's trade secrets and proprietary processes as they
may exist from time to time are valuable, special and unique assets of the
Company's business, access to and knowledge of which are essential to the
performance of the Employee's duties hereunder. The Employee will not during or
after the term of his employment, disclose such secrets or processes to any
person, firm, corporation, association or other entity for any reason or purpose
whatsoever, nor shall the Employee make use of any such secrets or processes for
his own purposes or for the benefit of any person, firm, corporation, or other
entity (except the Company) under any circumstances during or after the term of
his employment; provided that, after the expiration of the term of his
employment these, restrictions shall not apply to such secrets and processes
which are, then, or from time to time thereafter, in the public domain (provided
that he was not responsible, directly or indirectly, for permitting such secrets
or processes to enter the public domain without the Company's consent).
8. COVENANT NOT TO COMPETE OR INTERFERE. With the exception of activities
associated with the purchase and subsequent operation of the Company, Employee
agrees that during the term of this Agreement and for a period of one (1) year
after the date of Termination under this Agreement, whichever occurs first; (a)
Employee shall not intentionally interfere with, disrupt or attempt to disrupt
the relationship, contractual
Page 7 of 11
<PAGE> 8
or otherwise between the Company and any customer, supplier, lessor or employee
of the Company or any of its subsidiaries and (b) Employee shall not as a sole
proprietor or otherwise for his own account or as a partner, employee, officer,
director, manager, agent, distributor, consultant, marketing representative,
associate, investor or otherwise (except as to a less than 5% interest in a
public company listed on the Nasdaq, a national, or a regional exchange),
directly or indirectly, own, purchase, organize or take preparatory steps for
the organization of, finance, work for, provide services to, advise, acquire,
lease, operate, manage or invest in or permit his name to be used or employed in
connection with any business which engages directly in competition with the
Company. Employee further agrees that the covenants and other provisions of this
paragraph shall cover his activities in the whole of North America, Europe and
Asia (the "Territory"). The parties hereto agree that the covenants contained in
this paragraph (b) shall be construed as if the covenants are divided into
separate and distinct covenants in respect of each of the products and services
of the Company, each capacity in which the party is prohibited from competing,
and each part of the world in which such competition is prohibited from taking
place. The territorial restrictions contained in this Section 8 are properly
required for the adequate protection of the Company and in the event any
covenant or other provision contained this Section 8 shall be deemed to be
illegal, unenforceable, or unreasonable by a court or other tribunal of
competent jurisdiction. With respect to any part of the Territory or otherwise,
such covenant or provision shall not be affected with respect to any other part
of the Territory or otherwise, and each of the parties hereto agrees and submits
to the reduction of said territorial restriction or other provisions to such an
area or otherwise, as said court shall deem reasonable. The parties further
agree that if any provision of this Agreement is found to be unenforceable, it
shall not affect the enforceability of the remaining provisions and the court
shall enforce all remaining provisions to the extent permitted by law.
9. INVENTIONS. The Employee hereby sells, transfers, and assigns to the Company,
or to any person or entity designated by the Company, at of the entire right,
title and interest of the Employee in and to all inventions, ideas, disclosures,
and improvements, whether patented or unpatented, and copyrightable material
made or
Page 8 of 11
<PAGE> 9
conceived by the Employee, solely or jointly during the term hereof which relate
to methods, apparatus, formulae, designs, products, processes or devices, sold,
leased, used, or under consideration or development by the Company, or which
otherwise relate to or pertain to the business, functions, or operations of the
Company. The Employee agrees to communicate promptly and to disclose to the
Company, in such form as the Employee may be required to do so, all information,
details, and data pertaining to the aforementioned inventions, ideas,
disclosures, and improvements and to execute and deliver to the Company such
formal transfers and assignments and such other papers and documents as may be
required of the Employee to permit the Company or any person or entity
designated by the Company to file and prosecute the patent applications and, as
to copyrightable material, to obtain copyright thereof.
For the purposes of this Agreement, an invention shall be deemed to have been
made during the term of Employee's employment if, during such period, the
invention was conceived or first actually reduced to practice by the Company,
and Employee agrees that any patent application filed within one (1) year after
termination of this employment shall be presumed to relate to an invention which
was made during the term of Employee's employment unless Employee can provide
satisfactory evidence to the contrary.
10. INJUNCTIVE RELIEF. The parties hereto acknowledge that (a) the covenants and
restrictions set forth in Sections 8, 9 and 10 of this Agreement are necessary,
fundamental and required for the protection of the business of the Company, (b)
such covenants and restrictions are material inducements to investors to enter
into agreements to invest in the Company, and (c) a breach of any of such
covenants and restrictions by Employee will result in irreparable harm and
damages to the Company which cannot be adequately compensated by a monetary
award. Accordingly, in the event of breach or threatened breach of such
provisions by Employee, Employee expressly agrees that the Company shall be
entitled to the immediate remedy of a temporary restraining order, preliminary
injunction or such other form of injunctive or equitable relief as may be used
by any court of competent jurisdiction to restrain or enjoin the Employee from
breaching any such covenant or provision or to specifically
Page 9 of 11
<PAGE> 10
enforce the provisions hereof. Nothing herein shall be construed as prohibiting
the Company from pursuing any other remedies for such breach or threatened
breach.
11. INSURANCE. The Company, at its election and for its benefit, may insure the
Employee against accidental loss or death and the Employee shall submit to such
physical examination and supply such information as may be required in
connection therewith.
12. NOTICES. Any notice required or permitted to be given under this Agreement
shall be sufficient if in writing and if sent by registered or certified mail to
his last known residence in the case of the Employee or to its last known
principal office in the case of the Company.
13. WAIVER OF BREACH. The waiver by either party of a breach of any provision of
this Agreement shall not operate or be construed by a waiver of any subsequent
breach.
14. GOVERNING LAW. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of California.
15. ASSIGNMENT. The rights and obligations of the parties under this Agreement
shall inure to the benefit of and shall be binding upon the successors of such
parties.
16. ENTIRE AGREEMENT. This instrument contains the entire agreement of the
parties and supersedes all existing agreements between them. It may not be
changed orally but only by an agreement in writing signed by the party against
whom enforcement of any waiver, modification, extension or discharge is sought.
Page 10 of 11
<PAGE> 11
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day first
written above.
STEPHEN VENUTI
EMPLOYEE: /s/ CALBERT LAI ATTORNEY IN FACT FOR
STEPHEN VENUTI
--------------------------
Stephen Venuti
COMPANY I-STORM, INC
By: /s/ FRANK DELAPE
-----------------------
Frank DeLape
Chairman of the Board
Page 11 of 11
<PAGE> 12
SPECIAL POWER OF ATTORNEY
I, STEVEN VENUTI, 24130 Big Basin Way, Saratoga, CA 95070, appoint CALBERT
LAI, 480 Cowper Street, Palo Alto, CA 94301, as my agent (attorney in fact) to
act for me in the following specific manner: Calbert Lai is authorized to
execute an employment agreement on my behalf with I-Storm, Inc., a Nevada
corporation, or LVL Communications Corporation, a California corporation, upon
telephonic authorization from me.
This Special Power of Attorney is valid and effective for the period July
28, 1998 through August 10, 1998, only.
Executed this 29 day of July, 1998 at Palo Alto, California.
/s/ STEVEN VENUTI
---------------
STEVEN VENUTI
State of California )
) ss.
County of Santa Clara )
On July 29, 1998, before me, Sally A. Morello, Notary Public,
personally appeared STEVEN VENUTI, personally known to me or proved to me on the
basis of satisfactory evidence to be the person whose name is subscribed to the
within instrument and acknowledged to me that he executed the same in his
authorized capacity, and that by his signature on the instrument the person, or
the entity upon behalf of which the person acted, executed the instrument.
WITNESS my hand and official seal,
/s/ SALLY A. MORELLO
----------------------------------
Notary Public, State of California
VSI1
[SEAL]
SALLY A. MORELLO
Comm. #1153741
NOTARY PUBLIC - CALIFORNIA
Santa Clara County
My Comm. Expires Sept. 26, 2001
VSI1
<PAGE> 1
Exhibit 10.3
TIMOTHY COHRS
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (the "Agreement') dated as of August 5, 1998, between
I-Storm, Inc., a Nevada corporation, and its wholly owned subsidiary, LVL
Communications Corporation, a California corporation, (collectively, the
"Company"), each with its principal place of business in the United States at
480 Cowper Street, Palo Alto, California, 94301 (herein called the "Company")
and TIMOTHY COHRS (herein called the "Employee") residing at 724 Ninth Avenue,
San Francisco, CA 94118.
1. EMPLOYMENT. The Company hereby employs Employee as the Vice President and
Executive Creative Director of I-Storm Inc. and as the Vice President and
Executive Creative Director of LVL Communications Corporation reporting to the
Company's President. Employee will be responsible for management and
supervision of all Company activities for the term of this Agreement, and the
Employee hereby accepts such employment upon the terms and conditions
hereinafter set forth.
2. TERM. The term of this Agreement shall have commenced as of July 15, 1998
(the "Employment Date") and shall continue in effect for a term of 36 months,
unless earlier terminated in accordance with the provisions of Section 6 of
this Agreement. Thereafter, this Agreement shall be automatically renewed on a
year-to-year basis unless either party shall provide the other with notice in
writing of the termination of this Agreement at least 60 days' prior to the
expiration of this Agreement at the end of its original term or any renewal
thereof. For purposes of this Agreement, the "term of this Agreement" shall
refer to the initial term and all renewal terms hereof. In the event of
termination by the Company prior to the expiration of this Agreement at the end
of its original term or any renewal thereof, the Company shall pay the Employee
severance pay and benefits required by Section 6(e) of this Agreement unless
Page 1 of 11
<PAGE> 2
termination by the Company is for a reason specified in Sections 6(a), 6(b) or
6(c) hereunder
3. COMPENSATION. For all services rendered by the Employee under this
Agreement, the Company shall pay the Employee a salary and fringe
benefits as follows:
(a) Cash Compensation: The Company shall pay the Employee a base salary
during the term of this Agreement, payable semi-monthly, at the rate of
$240,000 per year. Employee will be eligible to receive an fiscal annual
performance bonus of up to 50% of base salary based upon achievement of
reasonable and achievable Company goals as determined and approved in
good faith by the Board of Directors to be paid no later than 30 days
from the end of such year. Employee shall be eligible for annual
performance appraisal and merit increase. Company may, but is not
obligated to, increase Employee's salary as Company deems appropriate.
(b) Stock Options: The Company shall grant the Employee stock options to
purchase 75,000 common shares of the Company at $0.50 per share, of
which 37,500 shares shall vest ratably over a period of 36 months from
the Employment Date; and of which 37,500 shares will only vest upon the
Company's sales revenue meeting or exceeding twelve million dollars
($12,000,000) for any twelve month period from the Employment Date and
upon the Company's quarterly revenue exceeding operating expenses for
the same twelve month period, as determined by the Board of Directors at
its sole discretion.
(c) Medical, Insurance, and Other Benefits: The Employee shall at his
option be entitled to participate with other employees of the Company in
all group fringe benefit plans or other group arrangements authorized
and adopted from time to time. Employee shall also receive such other
benefits including
Page 2 of 11
<PAGE> 3
vacation, holidays, and sick leave, as Company generally provides to its
employees holding similar positions as that of Employee.
(d) Expenses: The Company shall either pay directly or reimburse
Employee for reasonable travel, entertainment and other business
expenses incurred by Employee in the performance of his duties
hereunder; provided that the incurring of such expenses shall be subject
to such policies as shall be established by the Board of Directors of
the Company from time to time, and Employee shall submit to the Company
such documentation to substantiate such expenses as the Company shall
reasonably request.
Nothing herein shall be deemed to preclude the Company from awarding additional
compensation or benefits to Employee during the term of this Agreement, upon
approval of Company's Board of Directors, whether in the form of raises,
bonuses, additional fringe benefits, or otherwise.
4. DUTIES. During the term of this Agreement, the Employee hereby promises to
perform and discharge faithfully the duties which may be assigned to him from
time to time by the Board of Directors in connection with the conduct of its
business so long as such duties are reasonably related to the Employee's duties
as an Executive Officer of the Company. Employee will be responsible for all
activities of the Company as determined by the President and as required of
officers of the Company under applicable state and federal law, and will have
all relevant executives and their respective subordinates report to him.
Employee is employed to actively serve on a full-time basis as an executive
officer of the Company.
5. EXTENT OF SERVICES; OTHER INTERESTS. During the term of this Agreement, the
Employee shall devote all of his working time, attention and energies which are
reasonably required for the performance of his duties and the business of the
Company
Page 3 of 11
<PAGE> 4
and shall travel as reasonably required to discharge the duties of his position
with the Company as assigned by its President. The Employee shall not during
the term of this Agreement be engaged in any other business activities that
are, or could potentially be, in competition with the business activities of
the Company whether or not such business activities are pursued for gain,
profit or other pecuniary advantage. Subject to the foregoing, the Employee may
engage in investment, business, professional and continuing education
activities so long as such activities do not substantially interfere with the
performance of his duties as an Officer of the Company.
6. TERMINATION. Payment of severance described in this Section 6 shall be paid
no later than ten (10) days after becoming due.
(a) Death: In the event of Employee's death during the term hereof, this
Agreement shall terminate immediately and, except as expressly set forth
in this paragraph, the Company shall have no further liability hereunder
to Employee or his estate. The Company shall continue to pay to
Employee's estate his salary and continued stock option vesting for a
period of three (3) months from and after the date of death during the
term of this Agreement.
(b) Permanent Disability. In the event that Employee becomes totally
disabled during the term hereof and such total disability continues for
a period in excess of ninety (90) days, whether consecutive or in the
aggregate during any 12 month period, at the end of such period of
disability the Employee shall be considered as permanently disabled and
this Agreement shall terminate immediately and, except as expressly set
forth in this paragraph, the Company shall have no further liability
hereunder to Employee. The Company shall continue to pay to Employee his
salary and continue stock option vesting for the period of disability
and a period of two (2) months from and after the date of total
disability commencing with the expiration of the first 90 day period of
such disability as severance pay hereunder.
Page 4 of 11
<PAGE> 5
Employee shall be considered as totally disabled if, and when because of
injury, illness or physical or mental disability, he is prevented from
effectively performing the duties of his employment. The determination
of total disability shall be made by the Board of Directors of the
Company, but said decision shall not be unreasonable or arbitrary and
shall be supported by the opinion (at the Company's expense) of at least
one licensed physician, unless Employee shall without justification fail
to submit to the necessary physical or mental examinations. It is
understood that Employee's occasional sickness of short duration shall
not result in Employee being considered totally disabled, and Employee
shall continue to be compensated hereunder during such periods of
occasional sickness so long as they shall not exceed the greater of
twelve (12) days in a calendar year or the amount of sick leave
available to any other employee of the Company.
(c) Involuntary Termination for Cause. The Company may terminate this
Agreement for cause. For the purposes of this Agreement, a termination
for "cause" shall mean a termination resulting from a good faith and
reasonable determination by the Company's Board of Directors that
Employee (i) has committed a felony or act of moral turpitude which
would materially injure the Company or its reputation or, (ii) has
intentionally or willfully and repeatedly breached his duties hereunder
in a material respect and, if curable, has failed to cure the same
within thirty (30) days after receiving written notice of such breach
from the Board of the Company. Such notice must be given to Employee
following each claimed breach, whether or not curable. In the event of
termination for cause, the Company shall have no further liability
hereunder to Employee from and after the date of such termination.
(d) Termination Without Cause. Termination of Employee by the Company
for any reason other than in paragraphs 6(a), 6(b), and 6(c) hereof
shall be considered Termination Without Cause.
Page 5 of 11
<PAGE> 6
(e) Salary and Benefit Continuation Upon Termination Without
Cause. Upon the Company's termination of Employee's employment
for any reason whatsoever prior to the expiration of the original
term or any annual renewal of the term of this Agreement, except
for (i) termination upon death as set forth in paragraph 6(a)
hereof; (ii) termination upon permanent disability as set forth
in paragraph 6(b) hereof; or (iii) termination for cause pursuant
to paragraph 6(c) hereof ("Termination without Cause"); or (iv)
Employee's voluntarily electing not to continue in the employment
of the Company under conditions other than Constructive
Discharge; then the Company within thirty (30) days after such
termination, and in lieu of all other obligations, the Company
hereunder, shall: 1) pay to Employee a lump-sum payment equal to
his then base salary for a period equal to twelve (12) months;
2) provide Employee, at Company's cost, with employment benefits
consisting of life, health, dental and long-term disability
insurance for a period of 12 months after termination; and
3) enter into a Post-termination Consulting Agreement as defined
below in paragraph 6(f) hereof. Thereafter, any continuation of
benefits under the Consolidated Omnibus Budget Reconciliation Act
(COBRA) will be at Employee's cost.
(f) Post-termination Consulting Agreement. Upon the Termination
Without Cause, the Employee will hold himself available to
provide consulting services to the Company for a period
terminating one year after the Termination Date (the "Consulting
Period"). Employee will provide the consulting services only upon
the request of the Company's President and for no more than ten
hours per week at such times and places as are mutually
convenient to Employee and the Company. However, Employee will
perform those services at times and places that do not reasonably
conflict with his responsibilities to his then current employer.
Employee will perform services as an independent contractor with
the customary and usual independence associated therewith, and he
will not be deemed an employee or agent of the Company or have
the authority to bind, or to enter into any contract on behalf
of, the Company, unless expressly authorized in writing to do so.
The Company will pay Employee a consulting fee of $150.00 per
hour for each hour actually worked
Page 6 of 11
<PAGE> 7
at the Company's request. The Company's Board of Directors has
determined that Employee will be providing "substantial services"
to the Company during the Consulting Period such that any option
held by Employee on the Termination Date, if not fully vested at
the time, will continue to vest at the rate of 1/36 of the option
grant per month during the Consulting Period provided that total
vesting shall not exceed the original total shares granted under
each stock option. Any option held by Employee at the Termination
Date will remain exercisable for 36 months from the Termination
Date even though the employment of Employee will terminate on the
Termination Date.
7. NONDISCLOSURE OF CONFIDENTIAL INFORMATION. The Employee recognizes
and acknowledges that the Company's trade secrets and proprietary
processes as they may exist from time to time are valuable, special and
unique assets of the Company's business, access to and knowledge of
which are essential to the performance of the Employee's duties
hereunder. The Employee will not during or after the term of his
employment, disclose such secrets or processes to any person, firm,
corporation, association or other entity for any reason or purpose
whatsoever, nor shall the Employee make use of any such secrets or
processes for his own purposes or for the benefit of any person, firm,
corporation, or other entity (except the Company) under any
circumstances during or after the term of his employment; provided that,
after the expiration of the term of his employment these, restrictions
shall not apply to such secrets and processes which are then, or from
time to time thereafter, in the public domain (provided that he was not
responsible, directly or indirectly, for permitting such secrets or
processes to enter the public domain without the Company's consent).
8. COVENANT NOT TO COMPETE OR INTERFERE. With the exception of
activities associated with the purchase and subsequent operation of the
Company., Employee agrees that during the term of this Agreement and for
a period of one (1) year after the date of Termination under this
Agreement, whichever occurs first; (a) Employee shall not intentionally
interfere with, disrupt or attempt to disrupt the relationship,
contractual
Page 7 of 11
<PAGE> 8
or otherwise between the Company and any customer, supplier, lessor or
employee of the Company or any of its subsidiaries and (b) Employee
shall not as a sole proprietor or otherwise for his own account or as a
partner, employee, officer, director, manager, agent, distributor,
consultant, marketing representative, associate, investor or otherwise
(except as to a less than 5% interest in a public company listed on the
Nasdaq, a national, or a regional exchange), directly or indirectly,
own, purchase, organize or take preparatory steps for the organization
of, finance, work for, provide services to, advise, acquire, lease,
operate, manage or invest in or permit his name to be used or employed
in connection with any business which engages directly in competition
with the Company. Employee further agrees that the covenants and other
provisions of this paragraph shall cover his activities in the whole of
North America, Europe and Asia (the "Territory"). The parties hereto
agree that the covenants contained in this paragraph (b) shall be
construed as if the covenants are divided into separate and distinct
covenants in respect of each of the products and services of the
Company, each capacity in which the party is prohibited from competing,
and each part of the world in which such competition is prohibited from
taking place. The territorial restrictions contained in this Section 8
are properly required for the adequate protection of the Company and in
the event any covenant or other provision contained this Section 8 shall
be deemed to be illegal, unenforceable, or unreasonable by a court or
other tribunal of competent jurisdiction. With respect to any part of
the Territory or otherwise, such covenant or provision shall not be
affected with respect to any other part of the Territory or otherwise,
and each of the parties hereto agrees and submits to the reduction of
said territorial restriction or other provisions to such an area or
otherwise, as said court shall deem reasonable. The parties further
agree that if any provision of this Agreement is found to be
unenforceable, it shall not affect the enforceability of the remaining
provisions and the court shall enforce all remaining provisions to the
extent permitted by law.
9. INVENTIONS. The Employee hereby sells, transfers, and assigns to the
Company, or to any person or entity designated by the Company, at of the
entire right, title and interest of the Employee in and to all
inventions, ideas, disclosures, and improvements, whether patented or
unpatented, and copyrightable material made or
Page 8 of 11
<PAGE> 9
conceived by the Employee, solely or jointly during the term hereof
which relate to methods, apparatus, formulae, designs, products,
processes or devices, sold, leased, used, or under consideration or
development by the Company, or which otherwise relate to or pertain to
the business, functions, or operations of the Company. The Employee
agrees to communicate promptly and to disclose to the Company, in such
form as the Employee may be required to do so, all information, details,
and data pertaining to the aforementioned inventions, ideas,
disclosures, and improvements and to execute and deliver to the Company
such formal transfers and assignments and such other papers and
documents as may be required of the Employee to permit the Company or
any person or entity designated by the Company to file and prosecute the
patent applications and, as to copyrightable material, to obtain
copyright thereof.
For the purposes of this Agreement, an invention shall be deemed to have
been made during the term of Employee's employment if, during such
period, the invention was conceived or first actually reduced to
practice by the Company, and Employee agrees that any patent application
filed within one (1) year after termination of this employment shall be
presumed to relate to an invention which was made during the term of
Employee's employment unless Employee can provide satisfactory evidence
to the contrary.
10. INJUNCTIVE RELIEF. The parties hereto acknowledge that (a) the
covenants and restrictions set forth in Sections 8, 9 and 10 of this
Agreement are necessary, fundamental and required for the protection of
the business of the Company, (b) such covenants and restrictions are
material inducements to investors to enter into agreements to invest in
the Company, and (c) a breach of any of such covenants and restrictions
by Employee will result in irreparable harm and damages to the Company
which cannot be adequately compensated by a monetary award. Accordingly,
in the event of breach or threatened breach of such provisions by
Employee, Employee expressly agrees that the Company shall be entitled
to the immediate remedy of a temporary restraining order, preliminary
injunction or such other form of injunctive or equitable relief as may
be used by any court of competent jurisdiction to restrain or enjoin the
Employee from breaching any such covenant or provision or to
specifically
Page 9 of 11
<PAGE> 10
enforce the provisions hereof. Nothing herein shall be construed as
prohibiting the Company from pursuing any other remedies for such breach
or threatened breach.
11. INSURANCE. The Company, at its election and for its benefit, may
insure the Employee against accidental loss or death and the Employee
shall submit to such physical examination and supply such information as
may be required in connection therewith.
12. NOTICES. Any notice required or permitted to be given under this
Agreement shall be sufficient if in writing and if sent by registered or
certified mail to his last known residence in the case of the Employee
or to its last known principal office in the case of the Company.
13. WAIVER OF BREACH. The waiver by either party of a breach of any
provision of this Agreement shall not operate or be construed by a
waiver of any subsequent breach.
14. GOVERNING LAW. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of California.
15. ASSIGNMENT. The rights and obligations of the parities under this
Agreement shall inure to the benefit of and shall be binding upon the
successors of such parties.
16. ENTIRE AGREEMENT. This instrument contains the entire agreement of the
parties and supersedes all existing agreements between them. It may not be
changed orally but only by an agreement in writing signed by the party against
whom enforcement of any waiver, modification, extension or discharge is sought.
Page 10 of 11
<PAGE> 11
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day first written above.
TIMOTHY COHRS
EMPLOYEE: /s/ TIMOTHY COHRS
-------------------------------
TIMOTHY COHRS
COMPANY I-STORM, INC
BY: /s/ FRANK DeLAPE
----------------------------
Frank DeLape
Chairman of the Board
Page 11 of 11
<PAGE> 1
Exhibit 10.4
STOCK PURCHASE AGREEMENT
BY AND AMONG
I-STORM ACQUISITION CORP.
AND
DIGITAL POWER HOLDING COMPANY
AND
CHIRICAHUA COMPANY
AND
MELINDA JOHNSON
AND
DAVID C. MERRELL
MAY 6, 1998
<PAGE> 2
TABLE OF CONTENTS
TO
STOCK PURCHASE AGREEMENT
<TABLE>
<CAPTION>
ARTICLE/SECTION/SUBJECT PAGE
- ----------------------- ----
<S> <C>
INTRODUCTION AND RECITALS.........................................................................................1
ARTICLE I PURCHASE AND SALE OF STOCK
1.1 Purchase and Sale of Shares of Company Stock.............................................................2
1.2 Purchase Price for Shares of Company Stock...............................................................2
1.3 Cancellation of Certain Shares of Common Stock...........................................................2
1.4 Option to Purchase Shares................................................................................3
1.5 Voting Trust.............................................................................................3
1.6 Lock-up Agreements.......................................................................................3
1.7 Resignation of Directorship and Officership of the Company at Closing....................................5
ARTICLE II CLOSING
2.1 Date and Time of Closing.................................................................................5
ARTICLE III REPRESENTATIONS AND WARRANTIES
3.1 Representations and Warranties of the Company and the Stockholders.......................................5
(a) Authorization...................................................................................5
(b) Organization; Subsidiaries......................................................................6
(c) Capitalization..................................................................................6
(d) Financial Statements............................................................................6
(e) Owned Real Property.............................................................................7
(f) Leased Real Property; Tenancies.................................................................7
(g) Title...........................................................................................7
(h) Fixed Assets; Condition of Assets...............................................................7
(i) Intellectual Property...........................................................................8
(j) Inventory.......................................................................................8
(k) Accounts Receivable.............................................................................8
(l) Absence of Undisclosed Liabilities..............................................................8
(m) Absence of Certain Changes or Events............................................................8
(n) Agreements.....................................................................................10
(o) Non-Contravention; Consents....................................................................12
(p) Employee Benefit Plans/Labor Relations.........................................................12
(q) Insurance......................................................................................12
(r) Tax Matters....................................................................................13
(s) Compliance with Applicable Law.................................................................14
(t) Litigation.....................................................................................14
(u) Permits........................................................................................15
(v) Restrictive Covenants..........................................................................15
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C>
(w) Unlawful Payments..............................................................................15
(x) Warranties.....................................................................................15
(y) Officers, Directors and Employees..............................................................15
(z) Loans to or from Affiliates....................................................................16
(aa) Books and Records..............................................................................16
(bb) Bank Accounts..................................................................................16
(cc) Agreements with Affiliates.....................................................................16
(dd) Accuracy of Information Furnished..............................................................16
3.2 Representations and Warranties of Purchaser.............................................................17
(a) Authorization..................................................................................17
(b) Organization; Subsidiaries.....................................................................17
(c) Non-Contravention; Consents....................................................................17
(d) Accuracy of Information Furnished..............................................................18
(e) Compliance with Applicable Law.................................................................18
(f) Restricted Stock...............................................................................18
3.3 Survival of Representations and Warranties..............................................................19
ARTICLE IV COVENANTS
4.1 Covenants of the Company and the Stockholders and David C. Merrell......................................20
(a) Notification...................................................................................20
(b) [Intentionally Deleted]........................................................................20
(c) [Intentionally Deleted]........................................................................20
(d) Conduct of Business; Certain Covenants.........................................................20
(e) Proposals; Other Offers........................................................................23
(f) Best Efforts and Cooperation; Further Assurances...............................................23
(g) Access to Additional Agreements and Information................................................23
4.2 Covenants of Purchaser..................................................................................23
(a) Notice of Defaults.............................................................................23
(b) Third Party Consents...........................................................................24
(c) Best Efforts and Cooperation; Further Assurances...............................................24
(d) Tax Audits.....................................................................................24
4.3 Governmental Filings and Consents.......................................................................24
4.4 Publicity...............................................................................................24
4.5 Purchaser's Right to Investigate........................................................................25
(a) Obligation of the Company and the Stockholders and David C. Merrell...........................25
(b) Effectiveness of Representations Notwithstanding Investigation.................................25
ARTICLE V CONDITIONS
5.1 Conditions to Obligations of Purchaser..................................................................26
(a) No Material Adverse Change.....................................................................26
(b) Copies of Resolutions..........................................................................26
(c) Opinion of Company's and Stockholders' Counsel.................................................26
(d) Accuracy of Representations and Warranties; Performance of Covenants...........................26
(e) Delivery of Officers' Certificates.............................................................26
(f) Consents and Waivers...........................................................................27
</TABLE>
ii
<PAGE> 4
<TABLE>
<S> <C>
(g) Litigation.....................................................................................27
(h) Delivery of Documents and Other Information....................................................27
5.2 Conditions to Obligations of the Company and the Stockholders...........................................27
(a) Copies of Resolutions..........................................................................27
(b) Opinion of Purchasers' Counsel.................................................................27
(c) Accuracy of Representations and Warranties; Performance of Covenants...........................27
(d) Delivery of Officers' Certificates.............................................................28
(e) Consents and Waivers...........................................................................28
ARTICLE VI INDEMNIFICATION AND CLAIMS
6.1 Indemnification by the Company, the Stockholders and David C. Merrell...................................28
6.2 Claims Against Indemnified Party........................................................................29
6.3 Right of Offset.........................................................................................29
6.4 Indemnification by Purchaser............................................................................29
6.5 Claims Against the Company or the Stockholders..........................................................30
6.6 Disclosure Generally....................................................................................30
ARTICLE VII TERMINATION AND REMEDIES FOR BREACH OF THIS AGREEMENT
7.1 Termination by Mutual Agreement.........................................................................31
7.2 Termination for Failure to Close........................................................................31
7.3 Termination by Operation of Law.........................................................................31
7.4 Termination for Failure to Perform Covenants or Conditions..............................................31
7.5 Effect of Termination or Default; Remedies..............................................................31
7.6 Remedies; Specific Performance..........................................................................32
ARTICLE VIII MISCELLANEOUS
8.1 Fees and Expenses.......................................................................................32
8.2 Modification, Amendments and Waiver.....................................................................32
8.3 Assignment..............................................................................................32
8.4 Burden and Benefit......................................................................................32
8.5 Brokers.................................................................................................33
8.6 Entire Agreement........................................................................................33
8.7 Governing Law...........................................................................................33
8.8 Notices.................................................................................................33
8.9 Counterparts............................................................................................34
8.10 Rights Cumulative.......................................................................................34
8.11 Severability of Provisions..............................................................................34
8.12 Headings................................................................................................35
8.13 Joint and Several Representations of Stockholders and David C. Merrell..................................35
</TABLE>
iii
<PAGE> 5
LIST OF EXHIBITS AND SCHEDULE
TO
STOCK PURCHASE AGREEMENT
<TABLE>
EXHIBITS:
- ---------
<S> <C>
Exhibit 1.4: Form of Option Agreement
Exhibit 1.3: Form of Voting Trust
Exhibit 3.1(d): Financial Statements
Exhibit 5.1(c): Form of Opinion of Counsel to Company and Stockholders
Exhibit 5.2(b): Form of Opinion of Counsel to Purchaser
SCHEDULES:
- ----------
Schedule 3.1(b): Jurisdictions in which Company is Qualified to do Business
Schedule 3.1(m): Certain Changes or Events
Schedule 3.1(n): Agreements
Schedule 3.1(o): Non-Contravention; Consents
Schedule 3.1(q): Insurance
Schedule 3.1(y): Officers, Directors and Employees
Schedule 3.1(z): Loans to or from Affiliates
Schedule 3.1(bb): Bank Accounts
</TABLE>
iv
<PAGE> 6
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT (the "Agreement") is entered into as of
this 30th day of April, 1998, by and among I-Storm Acquisition Corp., a Cayman
Islands corporation (the "Purchaser"), Digital Power Holding Company, a Nevada
corporation (the "Company"), and Chiricahua Company and Melinda Johnson
(individually referred to hereinafter as a "Stockholder" and collectively
referred to hereinafter as the "Stockholders") and David C. Merrell, the sole
stockholder of Chiricahua Company.
WITNESSETH:
WHEREAS, the authorized capital stock of the Company consists of
2,000,000 shares of preferred stock, $.01 par value (the "Preferred Stock"),
with no shares of Preferred Stock issued and outstanding; and 25,000,000 shares
of common stock, having $.01 par value per share (the "Common Stock"), of which
1,076,134 shares of Common Stock have been issued and are outstanding as of the
date hereof;
WHEREAS, Chiricahua Company owns 410,436 shares of Common Stock,
representing 38% of the issued and outstanding capital stock of the Company; and
WHEREAS, Melinda Johnson owns 410,436 shares of Common Stock,
representing 38% of the issued and outstanding capital stock of the Company; and
WHEREAS, David C. Merrell is the sole shareholder of Chiricahua Company
and joins in this Agreement in consideration of the rights and benefits to be
conferred hereunder upon Chiricahua Company; and
WHEREAS, each Stockholder desires to sell, assign, transfer and convey
to the Purchaser a portion of each of such Stockholder's right, title and
interest in and to the issued and outstanding shares of capital stock of the
Company, pursuant to the terms and subject to the conditions set forth in this
Agreement;
WHEREAS, it is the desire of the Purchaser to purchase, obtain and
acquire from the Stockholders sixty percent (60%) of the issued and outstanding
shares of Common Stock of the Company pursuant to the terms and subject to the
conditions set forth in this Agreement.
NOW THEREFORE, in consideration of the premises and mutual covenants,
conditions and agreements contained herein and for such other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto, each intending to be legally bound hereby, agree as follows:
1
<PAGE> 7
ARTICLE 1
PURCHASE AND SALE OF STOCK
1.1 Purchase and Sale of Shares of Company Stock. Upon the terms
and subject to the conditions set forth in this Agreement, the Company and the
Stockholders hereby agree that on the Closing Date (as hereinafter defined in
Section 2.1), the Stockholders shall sell, assign, transfer and convey to the
Purchaser, and the Purchaser hereby agrees to purchase, obtain and acquire from
the Stockholders, an aggregate of six hundred thousand (600,000) shares of
Common Stock, which number of shares shall be equal to sixty percent (60%) of
the issued and outstanding shares of capital stock of the Company (the "Company
Stock"), as of the Closing Date and after taking into account the cancellation
of certain outstanding shares of Common Stock pursuant to Section 1.3 of this
Agreement. The number of shares sold and transferred by each Stockholder is as
follows:
<TABLE>
<CAPTION>
STOCKHOLDER NUMBER OF SHARES TO BE SOLD
----------- ---------------------------
<S> <C>
Chiricahua Company 300,000
Melinda Johnson 300,000
</TABLE>
The Stockholders hereby further agree, upon the terms and subject to the
conditions set forth herein, to transfer and deliver to the Purchaser at the
Closing (as hereinafter defined in Section 2.1) certificates, properly endorsed
in blank or accompanied by a properly executed stock power, representing six
hundred thousand (600,000) shares, and being equal to sixty percent (60%) of the
issued and outstanding shares of Company Stock after taking into account the
cancellation of certain outstanding shares of Common Stock pursuant to Section
1.3 of this Agreement.
1.2 Purchase Price for Shares of Company Stock. In consideration of
and in exchange for the Stockholders' sale, assignment, transfer and conveyance
of six hundred thousand (600,000) shares of Company Stock (equal to sixty
percent (60%) of the issued and outstanding shares of Company Stock to the
Purchaser), the Purchaser hereby agrees to pay the Stockholders an aggregate of
One Hundred Fifty Thousand Dollars ($150,000) in cash, which amount (hereinafter
referred to as the "Purchase Price") shall be payable in cash at Closing, by
certified or cashier's check or regular wire transfer of legal currency of the
United States in immediately available funds.
1.3 Cancellation of Certain Shares of Common Stock. On the Closing
Date, simultaneously with the consummation of the transactions contemplated
hereby, each of Chiricahua Company and Melinda Johnson shall transfer to the
Company 38,067 shares of Common Stock (an aggregate of 76,134 shares), and the
Company shall immediately thereafter cancel and retire such shares. After the
cancellation of said shares, there will be 1,000,000 shares of Common Stock
issued and outstanding.
2
<PAGE> 8
1.4 Option to Purchase Shares. At Closing, for no additional
monetary consideration, each of the Stockholders and Leonard Burningham, a
stockholder of the Company, shall grant to the Purchaser the right to purchase
an additional aggregate of 100,000 shares of Common Stock an exercise price of
$2.00 per share, and each shall execute an Option Agreement in substantially the
same form as that attached hereto as Exhibit 1.4.
1.5 Voting Trust. Simultaneous with the purchase of the shares of
common stock as provided in Section 1.1, the Purchaser shall deposit such shares
into a voting trust to be governed by the terms and conditions of the Voting
Trust attached hereto as Exhibit 1.5 (the "Voting Trust"). Additionally, if and
when the options granted to Purchaser pursuant to Section 1.4, or any part
thereof, are exercised, then immediately after such exercise, the Purchaser
shall deposit the shares received upon such exercise into the Voting Trust, in
accordance with the terms thereof.
1.6 Lock-Up Agreements. As further inducement for the Purchaser to
purchase sixty percent (60%) of the outstanding Common Stock of the Company, the
Stockholders agree to restrict the sale and transferability of the shares of
Common Stock held by them after Closing (the "Lock-Up") as follows:
(a) Except as provided in subsection (f) of this Section 1.6,
for a period of 210 days after the Closing Date, the Stockholders will not sell,
contract to sell, or otherwise dispose of an aggregate of 150,000 shares of
Common Stock owned by them, without the prior written consent of the Purchaser,
which consent shall not be unreasonably withheld, and except as otherwise
provided in Section 1.6(b). The specific number of shares subject to the Lock-Up
for each of the Stockholders are:
<TABLE>
<CAPTION>
NUMBER OF SHARES SUBJECT TO LOCK-UP
-----------------------------------
NAME ("LOCK-UP" SHARES)
---- ------------------
<S> <C>
Chiricahua Company 75,000
Melinda Johnson 75,000
</TABLE>
(b) Commencing on the one hundred twenty-first (121st) day
after Closing and continuing thereafter until the two hundred tenth (210th) day
after Closing, the Stockholders may collectively sell, contract to sell, or
otherwise dispose of up to an aggregate of 20,000 shares of Common Stock owned
by them per month (which amount may not be carried forward to future months).
The remaining shares of Common Stock owned by the Stockholders and subject to
the Lock-Up as set forth in Section 1.6(a) shall continue to be subject to the
restrictions of subsection (a).
(c) Commencing on the two hundred eleventh (211th) day after
Closing, all shares of Common Stock owned by the Stockholders shall be released
from the restrictions set forth in subsections (a) and (b) of this Section 1.6,
above.
(d) On or before Closing, the Stockholders shall submit their
share certificates to the Company's stock transfer agent for the purpose of
placing a legend on certificates for the
3
<PAGE> 9
Lock-Up Shares regarding the foregoing transfer restrictions on the reverse side
of such certificates. Such legend shall be in substantially the following form:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
THAT CERTAIN AGREEMENT DATED MAY 6, 1998 BY AND AMONG I-STORM
ACQUISITION CORP., DIGITAL POWER HOLDING COMPANY, CHIRICAHUA
COMPANY, MELINDA JOHNSON AND DAVID C. MERRELL, AND MAY NOT BE
DIRECTLY OR INDIRECTLY, OFFERED, TRANSFERRED, SOLD, ASSIGNED,
PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF EXCEPT IN
COMPLIANCE WITH THE TERMS THEREOF.
(e) The provisions of this Section 1.6 shall survive the
Closing of the transactions contemplated by this Agreement.
(f) Notwithstanding anything else to the contrary in this
Section 1.6, the Purchaser agrees that each of the Stockholders shall be
permitted to transfer their shares of Common Stock, which shares will continue
to be subject to the Lock-Up, to any third party, except that: (i) such shares
must be sold in a private transaction and not through the public market; and
(ii) no shares may be transferred to any market maker or to any party that:
(1) Has filed a registration statement which is subject
of a currently effective registration stop order entered pursuant to any
state's securities law within five years prior to Closing.
(2) Has been convicted within five years prior to
Closing of any felony or misdemeanor in connection with the offer, purchase or
sale of any security or any felony involving fraud or deceit, including, but not
limited to, forgery, embezzlement, obtaining money under false pretenses,
larceny or conspiracy to defraud.
(3) Is currently subject to any state administrative
enforcement order or judgment entered by that state's securities administrator
within five years prior to Closing or is subject to any state's administrative
enforcement order or judgment in which fraud or deceit, including, but not
limited to, making untrue statements of material facts and omitting to state
material facts, was found and the order or judgment was entered within five
years prior to Closing.
(4) Is subject to any state's administrative
enforcement order or judgment which prohibits, denies or revokes the use of any
exemption from registration in connection with the offer, purchase or sale of
securities.
(5) Is currently subject to any order, judgment, or
decree of any court of competent jurisdiction temporarily or preliminarily
restraining or enjoining, or is subject to any
4
<PAGE> 10
order, judgment or decree of any court of competent jurisdiction, permanently
restraining or enjoining, such party from engaging in or continuing any conduct
or practice in connection with the purchase or sale of any security or involving
the making of any false filing with the state entered within five years prior to
Closing.
1.7 Resignation of Directorship and Officership of the Company at
Closing. Melinda Johnson, David C. Merrell and Charles Johnson agree that at the
time of Closing, each of them will resign their respective officerships and
directorships with the Company, effective as of the Closing Date.
ARTICLE 2
CLOSING
2.1 Date and Time of Closing. Subject to satisfaction of the
conditions set forth in this Agreement and compliance with the other provisions
hereof, the closing of the transactions contemplated by this Agreement (the
"Closing") shall take place on May 6, 1998 at 10:00 a.m. (Eastern Daylight
Savings Time) at the law offices of De Martino Finkelstein Rosen & Virga, 1818 N
Street, N.W., Suite 400, Washington, D.C. 20036, or at such other place and time
thereafter as shall be mutually agreeable to the parties hereto (the "Closing
Date").
ARTICLE 3
REPRESENTATIONS AND WARRANTIES
3.1 Representations and Warranties of the Company and the
Stockholders. The Company, the Stockholders and David C. Merrell jointly and
severally, except as otherwise specifically provided herein, represent and
warrant to the Purchaser as follows:
(a) Authorization. The execution, delivery and performance of
this Agreement and consummation of the transactions contemplated hereby have
been duly authorized, adopted and approved by the Board of Directors of the
Company and by each of the Stockholders. The Company has taken all necessary
corporate action and has all the necessary corporate power to enter into this
Agreement and to consummate the transactions contemplated hereby. This Agreement
has been duly and validly executed and delivered by the officers of the Company
on its behalf and is the valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms, except as such
enforcement may be limited by applicable bankruptcy, insolvency, reorganization,
moratorium or other similar laws now or hereafter in effect, or by legal or
equitable principles, relating to or limiting creditors' rights generally and
except that the remedy of specific performance and injunctive and other forms of
equitable relief are subject to certain equitable defenses and to the discretion
of the court before which any proceeding therefor may be brought. Each
Stockholder severally represents and warrants that he has the ability to
consummate the transactions contemplated hereby, that this Agreement has been
5
<PAGE> 11
duly executed and validly delivered by him and that this Agreement is the valid
and binding obligation of such Stockholder, enforceable against each such
Stockholder in accordance with its terms, except as such enforcement may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other similar laws now or hereafter in effect, or by legal or equitable
principles, relating to or limiting creditors' rights generally and except that
the remedy of specific performance and injunctive and other forms of equitable
relief are subject to certain equitable defenses and to the discretion of the
court before which any proceeding therefor may be brought.
(b) Organization; Subsidiaries. The Company is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Nevada. The Company has the corporate power and authority to own and
lease its properties and assets and to carry on its business as it is now being
conducted and is duly qualified to do business as a foreign corporation in each
jurisdiction where it owns or leases real property or conducts business, except
where the failure to be so qualified would not have a material adverse effect on
the business, operations, earnings, prospects, assets or condition (financial or
otherwise) of the Company. Set forth on Schedule 3.1(b) hereto is a true and
correct list of each jurisdiction in which the Company is qualified to do
business. The Company does not own any shares of capital stock or other interest
in any corporation, partnership, association or other entity.
(c) Capitalization. The number of authorized, issued and
outstanding shares of capital stock of the Company as of the date hereof is as
set forth above in the recitals to this Agreement. The outstanding shares of
Company Stock have been duly authorized, validly issued and are fully paid and
non-assessable. Each Stockholder hereby severally and not jointly represents and
warrants that he is the sole legal and beneficial owner of the number of shares
of Company Stock as set forth in the recitals to this Agreement, which shares,
in the aggregate, represent all of the issued and outstanding shares of capital
stock of the Company. Each Stockholder hereby severally and not jointly
represents and warrants that the issued and outstanding shares of Company Stock
owned by such Stockholder are owned, in each case, free of preemptive rights and
free and clear of all adverse claims, liens, mortgages, charges, security
interests, encumbrances and other restrictions or limitations of any kind
whatsoever. The Company has not issued any shares of capital stock which could
give rise to claims for violation of any federal or state securities laws
(including any rules or regulations promulgated thereunder) or the securities
laws of any other jurisdiction (including any rules or regulations promulgated
thereunder). As of the date hereof, there are no options, warrants, calls,
convertible securities or commitments of any kind whatsoever relating to the
shares of the Company Stock to be acquired by the Purchaser pursuant hereto or
any of the unissued shares of capital stock of the Company, and there are no
voting trusts, voting agreements, stockholder agreements or other agreements or
understandings of any kind whatsoever which relate to the voting of the capital
stock of the Company.
(d) Financial Statements. The Company has heretofore delivered
to the Purchaser audited year-end balance sheets of the Company as of March 31,
1997 and 1998 (the "Balance Sheets"), and the related unqualified audited
statements of operations and retained earnings and cash flows for the years then
ended (all of the foregoing, including the notes thereto,
6
<PAGE> 12
may collectively be referred to hereinafter as the "Financial Statements")
accompanied by the corresponding relevant opinions and reports of the Company's
independent auditors as of the same dates and for the same periods, all of which
are attached hereto as Exhibit 3.1(d). The Financial Statements present fairly,
in all material respects, the financial position of the Company as of the
respective dates indicated and the results of operations and cash flows of the
Company for the respective periods indicated in conformity with generally
accepted accounting principles applied on a consistent basis.
(e) Owned Real Property. The Company does not own (of record
or beneficially), nor does it have any interest in, any real property.
(f) Leased Real Property; Tenancies. The Company does not
lease or sublease any real property, nor does it have any interest in using
leases or subleases used in the conduct of its business or otherwise.
(g) Title. The Company does not own any assets or properties,
as reflected on the March 31, 1997 and March 31, 1998 Balance Sheets, nor have
any assets or properties been purchased by the Company after the date thereof.
(h) Fixed Assets; Condition of Assets. All other documents and
agreements pursuant to which the Company has obtained the right to use or occupy
any real property, personal property or assets, are valid and enforceable in all
respects in accordance with their respective terms, except as such enforcement
may be limited by applicable bankruptcy, insolvency, reorganization, moratorium
or other similar laws now or hereafter in effect, or by legal or equitable
principles, relating to or limiting creditors' rights generally and except that
the remedy of specific performance and injunctive and other forms of equitable
relief are subject to certain equitable defenses and to the discretion of the
court before which any proceeding therefor may be brought. All rights-of-way,
easements, licenses, permits and authorizations related to the location or
operation of the business of the Company are in good standing and are valid and
enforceable in all respects in accordance with their respective terms. There is
not, under any of the foregoing instruments, documents or agreements, any
existing default, nor is there any event which, with notice or lapse of time or
both, would constitute a default, which could have a material adverse effect on
the business, assets, operations, earnings, prospects or condition (financial or
otherwise) of the Company or materially adversely affect the title to its
assets. The Company is not in violation of and has complied with all applicable
zoning, building or other codes, statutes, regulations, ordinances, notices and
orders of any governmental authority with respect to the occupancy, use,
maintenance, condition, operation and improvement of the assets, except where
the failure to comply would not have a material adverse effect on the business,
operations, earnings, prospects, assets or condition (financial or otherwise) of
the Company. The Company possesses all licenses, certificates of occupancy,
permits and authorizations required to be obtained by the Company with respect
to the Company's operation and maintenance of the assets for all uses for which
such property is or assets are operated or used by the Company as of the date
hereof, except where the failure to do so would not have a material adverse
effect on the business, operations, earnings, prospects, assets or condition
(financial or otherwise) of the Company.
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<PAGE> 13
(i) Intellectual Property.
(1) There are no registered and unregistered trademarks,
service marks and trade names (including any applications for the same), trade
secrets, registered and unregistered copyrights, and computer programs and
software (whether or not protected by patent, copyright or otherwise) which are
owned by, licensed by, used in or are material to the business of the Company
(the "Intellectual Property").
(2) The Company has not committed any acts of unfair
competition or directly, indirectly, contributory or by inducement, infringed
upon any patent, trademark, service mark, trade name, copyright, computer
program or software, or any other intellectual property, nor has the Company
misappropriated any of the foregoing from any other person or entity or received
from any other person or entity any notice, charge, claim or other assertion
with respect thereto.
(3) The Company has not sent or otherwise communicated
to any other person or entity any notice, charge, claim or other assertion of,
nor has the Company any knowledge of, any present, impending or threatened
infringement upon any patent, trademark, service mark, trade name, copyright,
computer program or software, or any other intellectual property by any other
person or entity, or misappropriation of any of the foregoing by any other
person or entity, or any commission of acts of unfair competition by any other
person or entity.
(j) Inventory. The Company has no inventory.
(k) Accounts Receivable. The Company has no accounts
receivable.
(l) Absence of Undisclosed Liabilities. Neither the Company
nor the Stockholders had or has any indebtedness, loss or liability of any
nature whatsoever (other than those incurred in the ordinary course of
business), whether accrued, absolute, contingent or otherwise and whether due or
become due, which is material to the business or operations of the Company.
(m) Absence of Certain Changes or Events. Except as set forth
on Schedule 3.1(m) and except as expressly set forth in this Agreement, the
Company has not, since December 31, 1997:
(1) issued, sold, granted or contracted to issue, sell
or grant any of its stock, notes, bonds, other securities or any option to
purchase any of the same;
(2) amended its Certificate of Incorporation or By-Laws;
(3) made any capital expenditures or commitments for the
acquisition or construction of any property, plant or equipment other than in
the ordinary course of business of the Company;
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<PAGE> 14
(4) entered into any material transaction in any way
inconsistent with the past practices of its business or conducted its business
in any manner inconsistent with its past practices;
(5) incurred any damage, destruction or any other loss
to any of its property or assets whether or not covered by insurance;
(6) suffered any loss and, neither the Company nor the
Stockholders has become aware of any intention on the part of any customer,
dealer or supplier to discontinue its current relationship with the Company, the
loss or discontinuance of which, alone or in the aggregate, could have a
material adverse effect on the Company's business, assets, operations, earnings,
prospects or condition (financial or otherwise);
(7) modified, amended or altered any contractual
arrangement with any customer, dealer or supplier, the modification, amendment
or alteration of which, alone or in the aggregate, could have a material adverse
effect on the Company's business, assets, operations, earnings, prospects or
conditions (financial or otherwise);
(8) incurred any material liability or obligation
(absolute or contingent) or made any material expenditure other than in the
ordinary course of business of the Company;
(9) experienced any material adverse change in the
business, assets, operations, earnings, prospects or condition (financial or
otherwise) of the Company, or experienced or have knowledge of any event which
could have a material adverse effect on the business, assets, operations,
earnings, or condition (financial or otherwise) of the Company;
(10) declared, set aside or paid any dividend or other
distribution in respect of the capital stock of the Company;
(11) redeemed, repurchased, or otherwise acquired any of
its capital stock or securities convertible into or exchangeable for its capital
stock or entered into any agreement with respect to any of the foregoing;
(12) granted, conveyed, transferred, assigned or made
any sale of Accounts Receivable or any accrual of liabilities outside of the
ordinary course of its business;
(13) granted, conveyed, transferred, assigned or made
any sale of any interest in Intellectual Property;
(14) purchased, disposed of or contracted to purchase or
dispose of, or granted or received an option or any other right to purchase or
sell, any of its property or assets, except in the ordinary course of business;
(15) increased the rate of compensation payable or to
become payable to the officers or employees of the Company, or increased the
amounts paid or payable to such
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<PAGE> 15
officers or employees under any bonus, insurance, pension or other benefit plan,
or made any arrangements therefor with or for any of said officers or employees
except for increases consistent with the Company's ordinary course of business
or increases resulting from the application of existing formulas under existing
plans, agreements or policies relating to employee compensation;
(16) adopted or amended any collective bargaining, bonus,
profit-sharing, compensation, stock option, pension, retirement, deferred
compensation or other plan, agreement, trust, fund or arrangement for the
benefit of any employees, except as otherwise required or permitted herein; or
(17) changed any accounting principle, procedure or
practice followed by the Company or changed the method of applying such
principle, procedure or practice.
(n) Agreements. There are no contracts, agreements or other
instruments material to the business or operation of the Company, including
without limitation, those to which the Company is a party and those by which any
of its property or assets are bound. There is no contract or agreement to which
the Company or a Stockholder or David C. Merrell is a party or which affects the
assets, liabilities or outstanding securities of the Company. Except as
otherwise set forth on Schedule 3.1(n), the Company is not a party to or bound
by, nor are any of its properties or assets subject to, any material written or
oral agreement, including without limitation, the following:
(1) any agreement which has not been entered into or
received by the Company in the ordinary course of business or which is not
consistent with the prior practice of the Company;
(2) any agreement which involves the purchase or sale of
goods or payment by or to the Company for services rendered;
(3) any agreement for the employment of any officer or
employee or former officer or employee (other than, with respect to any
employee, agreements which are terminable without liability upon notice of
thirty (30) days or less and do not provide for any further payments following
such termination) pursuant to which payments may be required to be made at any
time following the Closing Date;
(4) any stock option or stock appreciation rights plan
or arrangement;
(5) any mortgage, deed of trust or other form of
secured indebtedness for borrowed money;
(6) any debentures, indentures, notes or installment
obligations, or other instruments for or relating to any unsecured borrowing of
money by the Company;
(7) any guaranty of any obligation of any person or
party for borrowings or otherwise, excluding endorsements made for collection in
the ordinary course of business;
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<PAGE> 16
(8) any agreement or arrangement for the sale or lease
of any of its property or assets;
(9) any agreement or agreements pursuant to which the
Company is or may be obligated to make any payments, contingent or otherwise,
resulting from or arising out of the prior acquisition of any business, or of
all or substantially all of the assets or capital stock of any company or any
division thereof;
(10) any agreement with any labor union;
(11) any agreement, including but not limited to
assignments, licenses, transfers of exclusive rights, "work for hire"
agreements, special commissions, employment agreements, purchase orders, sales
orders, mortgages and security agreements, to which the Company is a party.
(12) any dealership, franchise or distribution agreement,
territory or license agreement or other similar agreement;
(13) any agreement with any officer, director or
stockholder of the Company, the immediate family of any officer, director or
stockholder of the Company, or any affiliate of any of the foregoing;
(14) any unexpired and enforceable agreements for the
disposition of the Company, whether by grant or option, sale of stock, sale of
assets, merger or otherwise; or
(15) any other agreement, contract, document or
instrument not entered into in the ordinary course of business which is material
to the Company's business and not excluded by reason of operation of this or any
other provision of this Agreement.
Neither the Company, the Stockholders (each severally and not
jointly), David C. Merrell, nor any third party is in default and no event has
occurred which, with notice or lapse of time or both, could cause or become a
default by the Company or the Stockholders or David C. Merrell or, to the best
knowledge of the Company or the Stockholders or David C. Merrell, by any third
party, under any contract, agreement, document or instrument to which the
Company or either Stockholder is a party which is material to the business or
operations of the Company. Each contract, agreement, document or instrument to
which the Company or the Stockholders (each severally and not jointly) or David
C. Merrell is a party which is material to the business or operations of the
Company is enforceable, in accordance with its terms, against all other parties
thereto, except as such enforcement may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other similar laws now or hereafter in
effect, or by legal or equitable principles, relating to or limiting creditors'
rights generally and except that the remedy of specific performance and
injunctive and other forms of equitable relief are subject to certain equitable
defenses and to the discretion of the court before which any proceeding therefor
may be brought.
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<PAGE> 17
(o) Non-Contravention; Consents. Neither the execution and
delivery of this Agreement or the Non-Compete and Confidentiality Agreement by
the Company and the Stockholders, as the case may be, nor consummation of the
transactions contemplated thereby, does or will: (a) violate or conflict with
any provision of the Certificate of Incorporation or By-Laws of the Company as
of the Closing Date; (b) violate or, with the passage of time, result in the
violation of any provision of, or result in the acceleration of or entitle any
party to accelerate any obligation under, or result in the creation or
imposition of any lien, charge, pledge, security interest or other encumbrance
upon any of the property or assets, which are material to the business or
operation of the Company, pursuant to any provision of any mortgage, lien,
lease, agreement, permit, indenture, license, instrument, law, order,
arbitration award, judgment or decree to which the Company is a party or by
which it or any of such property or assets are bound, the effect of which
violation, acceleration, creation or imposition could result, in the aggregate,
in liability of the Company; (c) violate or conflict with any other restriction
of any kind whatsoever to which the Company or the Stockholders or David C.
Merrell (each representing as to the same severally and not jointly) are
subject, or by which any of their material properties or assets may be bound,
the effect of any of which violation or conflict would result, in the aggregate,
in liability of the Company; or (d) constitute an event permitting termination
by a third party of any agreement to which the Company is a party or is subject,
which termination could have a materially adverse effect on the business,
assets, operations, earnings, prospects or condition (financial or otherwise) of
the Company. Except as set forth on Schedule 3.1(o) hereto, no consent,
authorization, order or approval of, or filing or registration with, any
governmental commission, board or other regulatory body is required in
connection with the execution, delivery and performance of the terms of this
Agreement and consummation of the transactions contemplated hereby by the
Company or the Stockholders or David C. Merrell.
(p) Employee Benefit Plans/Labor Relations. The Company has no
employees and no "employee benefit plans" as such term is defined in Section
3(3) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA") (the "Benefit Plans") covering the employees of the Company. There are
no agreements with or pending petitions for recognition of any labor union or
association as the exclusive bargaining agent for any employees of the Company
and no such petition has been pending at any time during the two years prior to
the date hereof. There has not been any organizing effort by any union or other
group seeking to represent any employees of the Company as its exclusive
bargaining agent at any time during the two years prior to the date hereof.
(q) Insurance. Set forth on Schedule 3.1(q) hereto is a true,
correct and complete list of all insurance policies or binders of insurance or
programs of self-insurance which relate to the business of the Company, copies
of which have been previously provided or made available to the Purchaser. The
coverage under each such policy and binder is in full force and effect. The
Stockholders or David C. Merrell have no knowledge of nor have they or the
Company received any notice of cancellation, termination, nonrenewal or
disallowance of any claim thereunder or with respect thereto. The Stockholders
or David C. Merrell have no knowledge of any facts or the occurrence of any
events which could form the basis of any claim against the Company relating to
its business, assets, properties or operations which could increase
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<PAGE> 18
the insurance premiums payable by the Company under such policy or binder in
excess of normal increases consistent with industry practices.
(r) Tax Matters. The Company is not a member of an affiliated
group, within the meaning of Section 1504 of the Code, (an "Affiliated Group").
The Company has filed when due and will file if and when due prior to the
Closing Date (after giving effect to any extensions granted by the requisite
legal or regulatory authority) all returns, reports, elections, estimates,
declarations, schedules, forms and other documents ("Tax Returns") relating to
taxes required to be filed by the Code or by any applicable federal, state,
county, municipal, local, foreign or other laws, including, without limitation,
consolidated, combined or unitary returns, for any taxable period ending prior
to or on the Closing Date (the "Pre-Closing Tax Period"). The taxable year of
the Company for federal and state income and business tax purposes ends on
December 31 of each year. All taxes shown on any Tax Return required to be filed
with respect to the Company for any Pre-Closing Tax Period have been, or will
have been, paid or accrued prior to the Closing. The Company has heretofore
delivered to the Purchaser all Tax Returns filed on its behalf for the fiscal
years ended March 31, 1997, March 31, 1996, March 31, 1995, March 31, 1994 and
March 31, 1993. The Company has fully accrued on its books all taxes for any
periods which are not yet due. No tax liens have been filed, and no material
claims have been or are being asserted or proposed, against the Company with
respect to any taxes. No Tax Returns of the Company have been audited in the
past five years by any taxing authority, no deficiencies or claims have been
proposed, assessed or claimed (including interest and penalties) against the
Company which have not been paid or accrued, and the Company has not waived or
extended any statute of limitations with respect to the assessment of any taxes,
which waiver or extension has not yet expired by its terms. There are no suits,
actions, proceedings, claims or investigations now pending against the Company
with respect to any taxes. The Company has withheld or collected from each
payment made to each of its employees, consultants, contractors and other payees
the amount of all taxes (including, but not limited to, federal income taxes,
state and local income and wage taxes, payroll taxes, workers' compensation and
unemployment taxes) required to be withheld or collected therefrom for all
Pre-Closing Tax Periods and the Company has timely paid or accrued and reported
the same in respect of its employees, consultants, contractors and other payees
to the proper tax receiving offices. The Company does not have any liability for
any taxes of any nature whatsoever other than as shown on the March 31, 1998
Balance Sheet (except for liabilities for taxes accruing after the date of such
balance sheet in the ordinary course of business) and there is no basis for any
additional liabilities for taxes for any Pre-Closing Tax Period. The reserve for
accrued but unpaid taxes for the period ending March 31, 1998 and March 31, 1999
includes adequate provision for all taxes which have been assessed or which will
be due and payable by the Company for all Pre-Closing Tax Periods. The Company
has not been, and will not on the Closing Date be, liable for any taxes for
which it has not made adequate provision. The Company does not file any state or
local tax returns on a unitary or combined basis with any other member of an
Affiliated Group. The Company will incur no tax liability in connection with the
payment of the Purchase Price described in Section 1.2 above. To the extent that
the Stockholders or David C. Merrell may incur tax liability in connection with
the payment of the Purchase Price, each of the Stockholders or David C. Merrell,
and not the Company, will be responsible for fulfilling any obligations or
liabilities with respect thereto.
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<PAGE> 19
The term "taxes" or "tax" as used in this section or referred
to elsewhere in this Agreement shall mean all taxes, charges, fees, levies,
penalties, or other assessments, including without limitation, income, capital
gain, profit, gross receipts, ad valorem, excise, property, payroll,
withholding, employment, severance, social security, workers' compensation,
occupation, premium, customs duties, windfall profits, sales, use, and franchise
taxes, imposed by the United States, or any state, county, local or foreign
government or any subdivision or agency thereof, and including any interest,
penalties, or additions attributable thereto.
(s) Compliance with Applicable Law. The Company has been and
is in compliance with all foreign, federal, state and local laws, statutes,
ordinances, rules and regulations, except where the failure to comply with which
would not materially adversely affect the business, assets, operations,
earnings, prospects or condition (financial or otherwise) of the Company or
which would subject any officer or director of the Company to civil or criminal
penalties or imprisonment. To the best knowledge of the Company and the
Stockholders, the Company has complied with the rules and regulations of all
governmental agencies having authority over its business or its operations,
including without limitation, agencies concerned with intra-state and interstate
commerce, occupational safety, environmental protection and employment
practices, except where the failure to comply would not have a material adverse
effect on the business, operations, earnings, prospects, assets or condition
(financial or otherwise) of the Company. Neither the Company nor the
Stockholders nor David C. Merrell have any knowledge of or received any notice
of violation of any such rule or regulation during the two years prior to the
date hereof which could result in any liability of the Company for penalties or
damages or which could subject the Company to any injunction or government writ,
order or decree. To the best knowledge of the Company and the Stockholders and
David C. Merrell, there are no facts, events or conditions that could interfere
with, prevent continued compliance with or give rise to any liability under any
foreign, federal, state or local governmental laws, statutes, ordinances or
regulations applicable to the business, assets, operations, earnings, prospects
or condition (financial or otherwise) of the Company, except where the failure
to do so would not have a material adverse effect on the business, operations,
earnings, prospects, assets or condition (financial or otherwise) of the
Company.
(t) Litigation. There is no action, suit, proceeding or
investigation pending or, to the best knowledge of the Company and the
Stockholders and David C. Merrell, threatened, which could restrict the Company
or the Stockholders' or David C. Merrell's ability to perform their respective
obligations hereunder or could have a material adverse effect on the business,
assets, operations, earnings, prospects or condition (financial or otherwise) of
the Company. To the best knowledge of the Company and the Stockholders and David
C. Merrell, there are no grounds for or facts, events or circumstances which
could form the basis of any such action that could cause or result in any such
action, suit, proceeding or investigation or which is possible of assertion.
Neither the Company nor the Stockholders nor David C. Merrell are in default in
respect of any judgment, order, writ, injunction or decree of any court or any
federal, state, local or other governmental agency, authority, body, board,
bureau, commission, department or instrumentality which could have a material
adverse effect on the business, assets, operations, earnings, prospects or
condition (financial or otherwise) of the Company.
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<PAGE> 20
(u) Permits. The Company holds all permits, licenses, orders
and approvals of all federal, state or local governmental or regulatory
authorities, agencies or bodies required for the conduct and operation of the
Company's business as currently conducted, except where the failure to do so
would not have a material adverse effect on the business, operations, earnings,
prospects, assets or condition (financial or otherwise) of the Company. All such
permits, licenses, orders, and approvals are in full force and effect and no
suspension, termination or revocation of any of the foregoing is, to the best
knowledge of the Company and the Stockholders and David C. Merrell, threatened.
None of such permits, licenses, orders or approvals will be adversely affected
by consummation of the transactions contemplated by this Agreement. The Company
has complied with the rules and regulations of all governmental or other
regulatory agencies, authorities, bodies, boards, bureaus, commissions,
departments or instrumentalities which regulate, supervise or are in any manner
concerned with import and export licenses, occupational safety, environmental
protection and employment practices relating to the Company's business, except
where the failure to do so would not have a material adverse effect on the
business, operations, earnings, prospects, assets or condition (financial or
otherwise) of the Company. The Company has no knowledge of nor has it received
any notice of violation of any of such rules or regulations during the two years
prior to the date hereof which would result in any liability of the Company for
penalties or damages or which would subject the Company to any injunction or
governmental writ, order or decree.
(v) Restrictive Covenants. The Company is not a party to any
agreement, contract or covenant limiting the freedom of the Company to compete
in any line of business or with any person or other entity in any geographic
region within or outside of the United States of America.
(w) Unlawful Payments. Neither the Company, the Stockholders
David C. Merrell, any officer or director, nor any agent or representative of
the Company has made, directly or indirectly, any bribe or kickback, illegal
political contribution, payment from corporate funds which was incorrectly
recorded on the books and records of the Company, unlawful payment from
corporate funds to governmental or municipal officials in their individual
capacities for the purpose of affecting their action or the actions of the
jurisdiction which they represent to obtain favorable treatment in securing
business or licenses or to obtain special concessions of any kind whatsoever, or
illegal payment from corporate funds to obtain or retain any business.
(x) Warranties. The Company has not made, extended or
otherwise represented that it would provide any express warranty with respect to
the products or services sold, distributed or leased to its clients or
customers.
(y) Officers, Directors and Employees. Set forth on Schedule
3.1(y) hereto is a true, correct and complete list of all of the officers and
directors of the Company as of the date hereof, including their respective
names, titles and salaries. Also set forth on Schedule 3.1(y) is a true, correct
and complete list of any employment agreements between the Company and any of
the foregoing officers, directors and employees of the Company in effect as of
the date hereof, including summaries of the material terms of each such
agreement.
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<PAGE> 21
(z) Loans to or from Affiliates. Set forth on Schedule 3.1(z)
hereto is a true, correct and complete list of all of the outstanding loans
extended by the Company to any current or former officer, director, employee,
consultant or stockholder of the Company or any affiliate of any of the
foregoing. Also set forth on Schedule 3.1(z) is a true, correct and complete
list of all of the outstanding loans extended to the Company by any current or
former officer, director, employee, consultant or stockholder of the Company.
Such schedule reflects the original principal amount of each loan, the
outstanding principal balance thereunder as of the date hereof, the interest
rate applicable thereto and the maturity date thereof. Except as set forth on
Schedule 3.1(z), there are no other loans pursuant to which the Company is owed
or owes money which involve any officer, director, employee, consultant or
stockholder of the Company.
(aa) Books and Records.
(i) The books of account and other financial records of
the Company are complete and correct and have been maintained in accordance with
good business practices.
(ii) The minute books of the Company, as previously
made available to the Purchaser and its counsel, contain accurate records of all
meetings of the Company's Board of Directors (including any committees) and its
stockholders since the date of the Company's incorporation, and accurately
reflect all other material corporate action of the Company's Board of Directors
(including any committees) and stockholders of the Company since the date of the
Company's incorporation.
(iii) The Company will provide the Purchaser prior to
the Closing Date access to all books and records referred to in clauses (i) and
(ii) above and copies of all such books and records shall be delivered to the
Purchaser at the Closing. The originals of all such books and records are
located at the Company's principal place of business and shall remain at such
principal place of business at the time of Closing.
(bb) Bank Accounts. Set forth on Schedule 3.1(bb) is a true,
correct and complete list of the names of each bank, savings and loan, or other
financial institution at which the Company maintains any account (including any
cash contribution or similar accounts) and the names of all persons authorized
to draw thereon or who have access thereto. Schedule 3.1(bb) includes a true,
correct and complete list of each credit or loan facility established and/or
maintained by or on behalf of the Company and includes the amounts available to
the Company under each such facility, the outstanding principal balance
thereunder as of the date hereof, the interest rate applicable thereto and the
maturity date thereof.
(cc) Agreements with Affiliates. Except as otherwise set forth
herein or in the Schedules hereto, the Company is not a party to any instrument,
license, lease or other agreement, written or oral, with any officer, director
or stockholder of the Company.
(dd) Accuracy of Information Furnished. The Company and the
Stockholders (severally and not jointly with respect to those statements,
representations or warranties made severally and not jointly by such
Stockholders) represent that no statement by the Company or the
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<PAGE> 22
Stockholders set forth herein or in the exhibits or the schedules hereto, and no
statement set forth in any certificate or other instrument or document required
to be delivered by or on behalf of the Company or the Stockholders pursuant
hereto or in connection with the consummation of the transactions contemplated
hereby, contained, contains or will contain any untrue statement of a material
fact, or omits, omitted or will omit to state any material fact which is
necessary to make the statements contained herein or therein, in light of the
circumstances under which they were made, not misleading.
3.2 Representations and Warranties of Purchaser. The Purchaser
represents and warrants to the Company and the Stockholders as follows:
(a) Authorization. The execution, delivery and performance of
this Agreement and consummation of the transactions contemplated hereby have
been duly authorized, adopted and approved by the Board of Directors of the
Purchaser. The Purchaser has taken all necessary corporate action and has all
the necessary corporate power to enter into this Agreement and to consummate the
transactions contemplated hereby. This Agreement has been duly and validly
executed and delivered by the officers of the Purchaser on its behalf, and
assuming that this Agreement is the valid and binding obligation of the Company
and each Stockholder, is the valid and binding obligation of the Purchaser,
enforceable against the Purchaser in accordance with its terms, except as such
enforcement may be limited by applicable bankruptcy, insolvency, reorganization,
moratorium or other similar laws now or hereafter in effect, or by legal or
equitable principles, relating to or limiting creditors' rights generally and
except that the remedy of specific performance and injunctive and other forms of
equitable relief are subject to certain equitable defenses and to the discretion
of the court before which any proceeding therefor may be brought.
(b) Organization; Subsidiaries. The Purchaser is a corporation
duly organized, validly existing and in good standing under the laws of the
Cayman Islands. The Purchaser has the corporate power and authority to own and
lease its properties and assets and to carry on its business as it is now being
conducted and is duly qualified to do business as a foreign corporation in each
jurisdiction where it owns or leases real property or conducts business, except
where the failure to be so qualified would not have a material adverse effect on
the business, operations, earnings, prospects, assets or condition (financial or
otherwise) of the Purchaser.
(c) Non-Contravention; Consents. Neither the execution and
delivery of this Agreement, nor consummation of the transactions contemplated
hereby, does or will: (i) violate or conflict with any provision of the
Certificate of Incorporation or By-Laws of the Purchaser; (ii) violate or
conflict with any material provision of any mortgage, lien, lease, agreement,
permit, indenture, license, instrument, law, order, arbitration award, judgment
or decree to which the Purchaser is a party or by which it or the property or
assets which are material to its business or operation are bound, the effect of
any of which violation result, in the aggregate, in liability of the Purchaser
in excess of Ten Thousand Dollars ($10,000); (iii) violate or conflict with any
other restriction to which the Purchaser is subject or by which any of the
property or assets which are material to its business or operation may be bound,
the effect of any of which violation or conflict would result, in the aggregate,
in liability of the Purchaser in excess of Ten Thousand Dollars
17
<PAGE> 23
($10,000); or (iv) constitute an event permitting termination of any agreement
to which the Purchaser is subject by any other party thereto, if in any such
circumstance such termination could have a materially adverse on the Purchaser's
ability to fulfill its obligations hereunder. No consent, authorization, order
or approval of, or filing or registration with, any governmental commission,
board or other regulatory body is required in connection with the execution,
delivery and performance of the terms of this Agreement by the Purchaser and
consummation by the Purchaser of any of the transactions contemplated hereby.
(d) Accuracy of Information Furnished. No statement by the
Purchaser set forth herein or in the exhibits or the schedules hereto, and no
statement set forth in any certificate or other instrument or document required
to be delivered by or on behalf of the Purchaser pursuant hereto or in
connection with consummation of the transactions contemplated hereby, contained,
contains or will contain any untrue statement of a material fact, or omitted,
omits or will omit to state any material fact which is necessary to make the
statements contained herein or therein, in light of the circumstances under
which they were made, not misleading.
(e) Compliance with Applicable Law. The Purchaser has been and
is in compliance with all foreign, federal, state and local laws, statutes,
ordinances, rules and regulations (including without limitation the Securities
Act and the Securities Exchange Act of 1934, as amended) as of the date hereof,
the failure to comply with which could materially adversely affect the business,
assets, operations, earnings, prospects or condition (financial or otherwise) of
the Purchaser or which would subject any officer or director of the Company to
civil or criminal penalties or imprisonment. The Purchaser has complied with the
rules and regulations of all governmental agencies having authority over its
business or its operations, including without limitation, agencies concerned
with intra-state and interstate commerce, occupational safety, environmental
protection and employment practices, except where the failure to comply would
not have a material adverse effect on the business, operations, earnings,
prospects, assets or condition (financial or otherwise) of the Purchaser. The
Purchaser has no knowledge of and has not received any notice of violation of
any such rule or regulation during the two years prior to the date hereof which
could result in any liability of the Purchaser for penalties or damages or which
could subject the Purchaser to any injunction or government writ, order or
decree. To the best knowledge of the Purchaser, there are no facts, events or
conditions that could interfere with, prevent continued compliance with or give
rise to any liability under any foreign, federal, state or local governmental
laws, statutes, ordinances or regulations applicable to the business, assets,
operations, earnings, prospects or condition (financial or otherwise) of the
Purchaser, except where the failure to do so would not have a material adverse
effect on the business, operations, earnings, prospects, assets or condition
(financial or otherwise) of the Purchaser.
(f) Restricted Stock. The Purchaser hereby represents that it
is acquiring the Common Stock for investment purposes only and not with a view
to or for transfer in connection with any distribution. The Purchaser
understands that the Company will not permit the transfer of the Common Stock
except upon the issuance to the Company of a favorable opinion of its counsel,
or the submission to the Company of such other evidence as may be satisfactory
to counsel for the Company, in either case to the effect that any such transfer
shall not be in violation of the federal Securities Act of 1933, as amended, and
any applicable state securities laws. The
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Purchaser agrees that a conspicuous legend shall be placed on the shares
delivered to it in connection with this Agreement in substantially the following
form:
THE SHARES REPRESENTED HEREBY HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT"), OR ANY STATE SECURITIES LAWS,
AND HAS BEEN ACQUIRED PURSUANT TO AN INVESTMENT
REPRESENTATION ON THE PART OF THE PURCHASER HEREOF
AND SHALL NOT BE SOLD, PLEDGED, HYPOTHECATED,
DONATED, OR OTHERWISE TRANSFERRED, WHETHER OR NOT FOR
CONSIDERATION, BY THE PURCHASER EXCEPT UPON THE
ISSUANCE TO THE COMPANY OF A FAVORABLE OPINION OF ITS
COUNSEL, OR THE SUBMISSION TO THE COMPANY OF SUCH
OTHER EVIDENCE AS MAY BE SATISFACTORY TO COUNSEL FOR
THE COMPANY, IN EITHER CASE TO THE EFFECT THAT ANY
SUCH TRANSFER SHALL NOT BE IN VIOLATION OF THE ACT
AND APPLICABLE STATE SECURITIES LAWS.
The Purchaser agrees that the shares will not be sold without
registration under the Securities Act of 1933, as amended, or exemption
therefrom, and all pertinent corporate records will reflect this restriction.
3.3 Survival of Representations and Warranties. The representations
and warranties set forth in Sections 3.1 and 3.2 hereof shall survive until the
close of business on the third anniversary of the Closing Date, provided that,
notice or demand with respect to any alleged breach thereof which has occurred
prior to the third anniversary of the Closing Date shall be given in writing by
the nonbreaching party or parties to the breaching party or parties not later
than the close of business on the sixtieth day following the third anniversary
of the Closing Date; and further provided that, with respect to claims for
damages arising out of any misrepresentation or breach of warranty made by the
Company and the Stockholders and David C. Merrell relating to taxes, notice
shall have been given on or before the close of business on the sixtieth day
following the later to occur of: (a) the expiration date of the statute of
limitations applicable to any indemnified federal, state or local tax liability,
and (b) the final determination of any such tax liability, including the final
administrative and/or judicial determination thereof.
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ARTICLE 4
COVENANTS
4.1 Covenants of the Company and the Stockholders and David C.
Merrell.
(a) Notification. Each of the Company and the Stockholders and
David C. Merrell shall give prompt notice to the Purchaser of: (i) any notice or
other communication received by the Company or the Stockholders and David C.
Merrell prior to the Closing Date, relating to a default or an event which, with
notice or lapse of time or both would become a default under this Agreement or
under any other material contract, agreement or instrument to which the Company
is a party, by which it or any of its properties or assets are bound or to which
it or any of its properties or assets are subject; (ii) any event which, with
notice or lapse of time or both, would cause any warranty or representation of
the Company or of any Stockholder or David C. Merrell under this Agreement to be
inaccurate, untrue, incomplete or misleading in any respect; (iii) any notice or
other communication from any third party alleging that the consent of such third
party was, is or may be required in connection with the transactions
contemplated by this Agreement; and (iv) any material adverse change in the
business, assets, operations, earnings, prospects or condition (financial or
otherwise) of the Company.
(b) [Intentionally deleted.]
(c) [Intentionally deleted.]
(d) Conduct of Business; Certain Covenants. Prior to and
through the Closing Date, the Company shall conduct and operate its business and
will not, without prior written consent of the Purchaser, which consent shall
not be unreasonably withheld, take any action other than in accordance with the
ordinary and usual course of business. The Company will use commercially
reasonable efforts to preserve intact its business, operation, organization and
relationships with its employees, independent contractors, agents, suppliers,
customers and others having business dealings with it. Prior to and through the
Closing Date, without the prior written consent of the Purchaser, which consent
shall not be unreasonably withheld, the Company shall not, and the Stockholders
or David C. Merrell, shall not permit the Company to:
(1) amend its Certificate of Incorporation or
By-Laws;
(2) issue or otherwise grant or enter into any agreement
relating to the issuance or grant of any stock options, warrants or other rights
calling for or permitting the issue, transfer, sale or delivery of its capital
stock;
(3) pay or declare any cash dividend or other dividend
or distribution with respect to its capital stock;
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(4) issue, transfer, sell or deliver any shares of its
capital stock or any securities convertible into or exchangeable for, with or
without additional consideration, such capital stock;
(5) redeem, purchase or otherwise acquire for any
consideration any outstanding shares of its capital stock or any securities
convertible into or exchangeable for, with or without additional consideration,
such capital stock;
(6) incur any indebtedness for borrowed money, except
in the ordinary course of business or pursuant to existing agreements which the
Company or the Stockholders or David C. Merrell have previously disclosed or
made available to the Purchaser;
(7) permit the occurrence or continuance of any material
default under any agreement to which the Company is a party;
(8) make any acquisition of the capital stock or all or
substantially all of the assets of any entity;
(9) merge or consolidate with any corporation or
enter into any joint venture arrangement with any third party;
(10) enter into any employment or similar contract with
or increase the compensation payable to any officer or employee of the Company;
(11) alter, amend or otherwise modify any material term
or provision of any contract or agreement with any of its clients, customers,
suppliers or vendors;
(12) adopt any Benefit Plan, severance plan or collective
bargaining agreement;
(13) sell, enter into any contract to sell or grant any
option to purchase, any of its assets other than in the ordinary course of
business;
(14) create, assume or permit to exist any lien, pledge,
security interest, encumbrance or mortgage of any kind whatsoever on any of its
properties or assets other than:
(A) liens existing on the date hereof which the
Company which are otherwise permitted hereby;
(B) any mortgage, pledge, lien or other security
interest in or upon any property or asset hereafter acquired by the Company in
the ordinary course of business, which mortgage, pledge, lien or other security
interest is entered into contemporaneously with such acquisition to secure or
provide for the payment of any part of the purchase price therefor, or the
assumption by the Company of any mortgage, pledge, lien or other security
interest in or upon any property or asset hereafter acquired by the Company
which mortgage, pledge, lien or
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other security interest existed at the time of such acquisition; provided that,
each such mortgage, pledge, lien or other security interest shall not extend to
or cover any property or asset of the Company other than such property or asset
hereafter acquired;
(C) any mortgage, pledge, lien or other security
interest created for the sole purpose of renewing or refunding any mortgage,
pledge, lien or other security interest allowed under clause (B) above; provided
that, the principal amount of indebtedness secured thereby shall not exceed the
principal amount of indebtedness so secured at the time of such renewal or
refunding and that such renewed or refunded mortgage, pledge, lien or other
security interest shall not extend the mortgage, pledge, lien or other security
interest renewed or refunded to any additional property or asset;
(D) the pledge by the Company of any property or
asset as security required by law or governmental regulation as a condition to
the transaction of any business or the exercise of any privilege, license or
right;
(E) a banker's lien or right of offset on funds of
the Company deposited with a lender or holder in the ordinary course of business
in favor of any lender of funds or holder of the Company's commercial paper in
the ordinary course of business;
(F) liens for taxes, assessments and governmental
charges or levies imposed upon the Company or upon its income or profit, or upon
any of its property or assets if the same shall not at the time be due or are
being contested in good faith in appropriate proceedings; and
(G) liens imposed by law, such as those of
carriers, warehousemen and mechanics, for sums not yet due or which are being
contested in good faith in appropriate proceedings.
(15) enter into any contract, including but not limited
to assignments, licenses, transfers of exclusive rights, "work for hire"
agreements, special commissions, employment contracts, purchase orders, sales
orders, mortgages and security agreements, which:
(A) contain a grant or other transfer, whether
present, retroactive, prospective or contingent, by the Company of any rights in
any intellectual property; or
(B) contain a promise made by or to the Company to
pay any consideration, lump sum, royalty or other payment with respect to the
acquisition, practice or use of any rights in any intellectual property;
(16) except in the ordinary course of business or arising
out of or relating to this Agreement, initiate any legal proceedings involving
the Company, including suits and administrative proceedings in the United States
or any foreign country;
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(17) file with any federal, state or local governmental
agency or regulatory body, any cancellation, reduction, modification, change or
amendment of or addition to any schedule of tariffs currently on file with such
agency or regulatory body, or file with such governmental agency or regulatory
body any schedule of tariffs for services which are not covered by the tariff
schedules on file therewith as of the date hereof; or
(18) take any action that would cause any representation
or warranty contained herein to be materially inaccurate, untrue, incomplete or
misleading.
(e) Proposals; Other Offers. Prior to the Closing Date,
neither the Company nor the Stockholders nor David C. Merrell shall, directly or
indirectly (whether through an employee, a representative, an agent or
otherwise) solicit or encourage any inquiries or proposals, engage in
negotiations for or consent to or enter into any agreement providing for the
acquisition of the capital stock or all or any part of the assets or the
business of the Company. The Company shall promptly notify the Purchaser upon
its receipt or other knowledge of any such request, inquiry or proposal. Neither
the Company nor the Stockholders nor David C. Merrell shall, directly or
indirectly (whether through an employee, a representative, an agent or
otherwise) disclose any nonpublic information relating to the Company or afford
access to any of the books, records or other properties of the Company to any
person or entity that is considering, has considered or is making any such
acquisition inquiry or proposal.
(f) Best Efforts and Cooperation; Further Assurances. Prior to
the Closing Date, with the cooperation of Purchaser where appropriate, the
Company shall:
(1) promptly comply with all filing requirements which
federal, state or local law may impose on the Company with respect to the
transactions contemplated by this Agreement; and
(2) use its diligent efforts to take all actions
necessary to be taken, make any filing and obtain any consent, authorization or
approval of or exemption by any governmental authority, regulatory agency or any
other third party (including, without limitation, any landlord or lessor of the
Company and any party to whom notification is required to be delivered or from
whom any form of consent is required) which is required to be filed or obtained
by the Company in connection with the transactions contemplated by this
Agreement.
(g) Access to Additional Agreements and Information. Prior to
the Closing Date, the Company shall make available or otherwise deliver to the
Purchaser any and all agreements, contracts, documents and other instruments
material to the business or operation of the Company.
4.2 Covenants of Purchaser.
(a) Notice of Defaults. The Purchaser shall give prompt notice
to the Company the Stockholders and David C. Merrell of: (i) any notice or other
communication relating to a default hereunder or event which, with notice or
lapse of time or both, would become a default
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hereunder, received by the Purchaser prior to the Closing Date, or under any
material contract, agreement or instrument to which the Purchaser is a party, by
which it or any of its properties or assets are bound or to which it or any of
its properties or assets are subject which would prevent the consummation of the
transactions contemplated hereby; (ii) any event which, with notice or lapse of
time or both, would cause any representation or warranty of the Purchaser under
this Agreement to be inaccurate or misleading in any respect; (iii) any notice
or other communication by any third party alleging that the consent of such
third party is or may be required in connection with the transactions
contemplated by this Agreement; and (iv) any adverse change in the business,
assets, operations, earnings, prospects or conditions (financial or otherwise)
of the Purchaser.
(b) Third Party Consents. The Purchaser shall use its best
efforts to obtain any consent, authorization or approval of, or exemption by,
any governmental authority or agency or other third party required to be
obtained or made by it in connection with this Agreement or the consummation of
the transactions contemplated hereby.
(c) Best Efforts and Cooperation; Further Assurances. Prior to
the Closing Date, with the cooperation of the Company and the Stockholders and
David C. Merrell, where appropriate, the Purchaser shall:
(1) promptly comply with all filing requirements which
federal, state or local law may impose on the Purchaser with respect to the
transactions contemplated by this Agreement; and
(2) use its diligent efforts to take all actions
necessary to be taken, make any filing and obtain any consent, authorization or
approval of or exemption by any governmental authority, regulatory agency or any
other third party which is required to be filed or obtained by the Purchaser in
connection with the transactions contemplated by this Agreement.
(d) Tax Audits. The Company or the Stockholders shall not
enter into any settlement agreement of any audit relating to any taxes due for
the Pre-Closing Period without the prior written consent of the Purchaser, which
consent shall not be unreasonably withheld; provided however, that nothing
contained herein shall vitiate the absolute duty of the boards of directors of
the Company to act under the circumstances in the best interests of the
stockholders of the Company.
4.3 Governmental Filings and Consents. The Company, the Stockholders
and the Purchaser shall cooperate with one another in filing any necessary
applications, reports or other documents with any federal or state agencies,
authorities or bodies having jurisdiction with respect to the business of the
Company or the transactions contemplated by this Agreement, and in seeking any
necessary approval, consultation or prompt favorable action of, with or by any
of such agencies, authorities or bodies.
4.4 Publicity. The Company, the Stockholders and the Purchaser will
consult with each party hereto prior to making, releasing or otherwise
disseminating any public announcements with respect to the transactions
contemplated by this Agreement. Any public announcements permitted
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hereunder shall be made only at such time and in such manner as the Company and
the Stockholders and David C. Merrell (collectively acting as one), and the
Purchaser shall mutually agree, except that any party hereto shall be free to
make such public announcements as it shall reasonably deem necessary to comply
with federal or state laws, provided that such announcement is simultaneously
delivered to the other parties hereto.
4.5 Purchaser's Right to Investigate.
(a) Obligation of the Company, the Stockholders and David C.
Merrell. The Company shall afford to the officers and authorized representatives
and agents of the Purchaser, during regular business hours and upon reasonable
prior notice, free and full access to any office, warehouse, plant, property,
inventory, accounts, books and records of the Company such as to afford the
Purchaser the full opportunity to make such investigations as it shall desire or
deem appropriate with respect to the affairs of the Company. The officers of the
Company shall furnish the Purchaser with such additional financial and operating
data and other information relating to the assets, property, business and
operation of the Company as the Purchaser shall from time to time reasonably
request. Prior to the Closing Date, or at all times hereafter in the event that
the transactions contemplated hereby are not consummated or this Agreement is
otherwise terminated, the Purchaser shall, except as may be otherwise required
by applicable law, hold confidential all information obtained pursuant to this
Subsection 4.5(a) or otherwise in connection with consummation of the
transactions contemplated by this Agreement with respect to the Company. In the
event that this Agreement is terminated, the Purchaser shall return to the
Company all of such information as shall be in documentary form.
(b) Effectiveness of Representations Notwithstanding
Investigation. Notwithstanding any party's undertaking or conduct of any
investigation pursuant hereto, or any party's failure to so investigate, the
representations, warranties and agreements of each of the parties hereto shall
be operative and effective and shall survive the Closing Date to the extent
previously set forth in Section 3.3. In the event that a party hereto becomes
aware or knows prior to the Closing that a representation or warranty made
herein by another party hereto is untrue, such party shall express such
knowledge by written notice thereof to the party rendering such representation
or warranty on or prior to the Closing Date. Knowledge on the part of the
Purchaser on or prior to the Closing that a representation or warranty of the
Company or the Stockholders is untrue or knowledge on the part of the Company or
the Stockholders on or prior to the Closing Date that a representation or
warranty of the Purchaser is untrue, shall render that specific representation
or warranty inoperative and ineffective and such other party shall not have any
liability in respect thereof pursuant to Article 6 hereof; provided that, such
knowledge is expressed by written notice thereof to the party rendering such
representation or warranty on or prior to the Closing Date.
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ARTICLE 5
CONDITIONS
5.1 Conditions to Obligations of Purchaser. The obligation of the
Purchaser to consummate the transactions contemplated by this Agreement is
subject to the fulfillment of each of the following conditions, which may be
waived in whole or in part by the Purchaser to the extent permitted by
applicable law:
(a) No Material Adverse Change. Since December 31, 1997, no
material adverse change in the business, assets, operations, earnings, prospects
or condition (financial or otherwise) of the Company, and no event which would
materially and adversely affect the business, assets, operations, earnings,
prospects or condition (financial or otherwise) of the Company shall have
occurred.
(b) Copies of Resolutions. At the Closing, the Company shall
have furnished the Purchaser with certified copies of resolutions duly adopted
by the Board of Directors of the Company and the Stockholders authorizing the
execution, delivery and performance of the terms of this Agreement and all other
necessary or proper corporate action to enable the Company to comply with the
terms of this Agreement.
(c) Opinion of Company's and Stockholders' Counsel. The
Company and the Stockholders shall have furnished the Purchaser, at the Closing,
with an opinion of counsel to the Company and the Stockholders, dated as of the
Closing Date, substantially in the form attached hereto as Exhibit 5.1(c).
(d) Accuracy of Representations and Warranties; Performance of
Covenants. Each of the representations and warranties of the Company and each of
the Stockholders and David C. Merrell set forth in this Agreement was true,
correct and complete in all respects when made and shall also be true, correct
and complete in all respects at and as of the Closing Date, with the same force
and effect as if made at and as of the Closing Date. The Company and the
Stockholders and David C. Merrell shall have performed and complied in all
respects with all agreements and covenants required by this Agreement to be
performed by the Company and each of the Stockholders and David C. Merrell at or
prior to the Closing Date.
(e) Delivery of Officers' Certificates. The Company and each
of the Stockholders and David C. Merrell shall have delivered to the Purchaser
certificates, dated the Closing Date, and signed by the President of the Company
(with respect to the Company), and by each of the Stockholders and David C.
Merrell, representing and affirming that the representations and warranties made
by each of the Company and the Stockholders and David C. Merrell jointly and/or
severally as set forth in Section 3.1 of this Agreement and referred to in
Subsection 5.1(d) above were and are true, correct and complete as required by
Subsection 5.1(d) above and the conditions set forth in this Section 5.1 have
been satisfied. The Company shall also have delivered a certificate signed by
the Secretary of the Company with respect to the authority
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and incumbency of the officers of the Company executing this Agreement and any
documents required to be executed or delivered in connection therewith.
(f) Consents and Waivers. At the Closing, any and all
necessary consents, authorizations, orders or approvals described in Subsection
3.1(o) above shall have been obtained, except as the same shall have been waived
by the Purchaser.
(g) Litigation. On the Closing Date, there shall be no
effective injunction, writ or preliminary restraining order or any order of any
kind whatsoever with respect to the Company or the Stockholders or David C.
Merrell issued by a court or governmental agency (or other governmental or
regulatory authority) of competent jurisdiction restraining or prohibiting the
consummation of the transactions contemplated hereby or making consummation
thereof unduly burdensome to the Company or the Stockholders or David C.
Merrell. On the Closing Date and immediately prior to consummation of the
transactions contemplated by this Agreement, no proceeding or lawsuit shall have
been commenced, be pending or have been threatened by any governmental or
regulatory agency or authority or any other person with respect to the
transactions contemplated by this Agreement.
(h) Delivery of Documents and Other Information. Prior to the
Closing Date, the Company shall have made available or delivered to the
Purchaser all of the agreements, contracts, documents and other instruments
required to be delivered pursuant to the provisions of this Agreement, including
the stock certificates referenced in Section 1.6(d).
5.2 Conditions to Obligations of the Company and the Stockholders.
The obligations of the Company and the Stockholders to consummate the
transactions contemplated by this Agreement are subject to the fulfillment of
each of the following conditions, which may be waived in whole or in part by the
Company and/or the Stockholders to the extent permitted by law:
(a) Copies of Resolutions. At the Closing, the Purchaser shall
have furnished the Company with certified copies of resolutions duly adopted by
the Board of Directors of the Purchaser authorizing the execution, delivery and
performance of the terms of this Agreement and all other necessary or proper
corporate action to enable the Purchaser to comply with the terms of this
Agreement.
(b) Opinion of Purchasers' Counsel. The Purchaser shall have
furnished the Company and the Stockholders and David C. Merrell, at the Closing,
with an opinion of De Martino Finkelstein Rosen & Virga, counsel to the
Purchaser, dated as of the Closing Date, substantially in the form attached
hereto as Exhibit 5.2(b).
(c) Accuracy of Representations and Warranties; Performance of
Covenants. Each of the representations and warranties of the Purchaser was true,
correct and complete in all respects when made and shall also be true, correct
and complete in all respects at and as of the Closing Date, with the same force
and effect as if made at and as of the Closing Date. The Purchaser shall have
performed and complied with in all respects all agreements and covenants
required by this Agreement to be performed by the Purchaser at or prior to the
Closing Date.
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(d) Delivery of Officers' Certificates. The Purchaser shall
have delivered to the Company and the Stockholders and David C. Merrell
certificates, dated the Closing Date and signed by the President of the
Purchaser, affirming that the representations and warranties of the Purchaser as
set forth in Section 3.2 of this Agreement and referred to in Subsection 5.2(c)
above were and are true, correct and complete as required by Subsection 5.2(c)
above; and (ii) the conditions set forth in this Section 5.2 have been
satisfied. The Purchaser shall also have delivered a certificate signed by the
Secretary of the Purchaser with respect to the authority and incumbency of the
officers of the Purchaser executing this Agreement and any documents required to
be executed or delivered in connection therewith.
(e) Consents and Waivers. On or prior to the Closing Date, any
and all necessary consents, authorizations, orders or approvals described in
Subsection 3.2(d) shall have been obtained, except as the same shall have been
waived by the Company and the Stockholders.
ARTICLE 6
INDEMNIFICATION AND CLAIMS
6.1 Indemnification by the Company, the Stockholders and David C.
Merrell.
(a) Subject to Section 3.3 hereof, the Company and the
Stockholders and David C. Merrell hereby agree, jointly and severally, except as
otherwise specifically provided throughout this Agreement with respect to
representations and warranties made severally and not jointly by each
Stockholder as to which each such Stockholder hereby severally and not jointly
agrees to indemnify and hold harmless the Purchaser (the "Indemnified Party")
against and in respect of all damages, claims, losses and expenses (including,
without limitation, attorneys' fees and disbursements) reasonably incurred by
the Purchaser (all such amounts may hereinafter be referred to as the "Damages")
arising out of (i) any misrepresentation or breach of any warranty made by the
Company or the Stockholders and David C. Merrell pursuant to the provisions of
this Agreement or in any statement, certificate or other document furnished by
the Company or the Stockholders or David C. Merrell pursuant to this Agreement;
and (ii) the nonperformance or breach of any covenant, agreement or obligation
of the Company or the Stockholders or David C. Merrell contained in this
Agreement which has not been waived by the Purchaser.
(b) Subject to Section 3.3 hereof, the Company and the
Stockholders and David C. Merrell shall be obligated to indemnify the
Indemnified Party pursuant to this Section 6.1 with respect to claims for
Damages as to which the Indemnified Party shall have given written notice to the
Company and the Stockholders on or before the close of business on the sixtieth
day following the second anniversary of the Closing Date. The Company and the
Stockholders shall be obligated to indemnify the Indemnified Party with respect
to claims for Damages arising out of any misrepresentation or breach of warranty
made by the Company or the Stockholders or David C. Merrell relating to taxes as
to which the Indemnified Party shall have given notice on or before the close of
business on the sixtieth day following the later of: (i) the expiration date of
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the statute of limitations applicable to any indemnified federal, state, foreign
or local tax liability, or (ii) the final determination of any such tax
liability, including the final administrative and/or judicial determination
thereof.
(c) In any case where the Company or the Stockholders or David
C. Merrell have indemnified an Indemnified Party for any Damages and such
Indemnified Party recovers from third parties all or any part of the amount so
indemnified by the Company or the Stockholders or David C. Merrell, such
Indemnified Party shall promptly pay over to the Company or the Stockholders or
David C. Merrell, as the case may be, the amount so recovered.
6.2 Claims Against Indemnified Party. With respect to claims or
demands by third parties, whenever the Indemnified Party shall have received
notice that such a claim or demand has been asserted or threatened which, if
valid, would be subject to indemnification under Section 6.1 hereof, the
Indemnified Party shall as soon as reasonably possible and in any event within
thirty (30) days of receipt of such notice, notify the Company and the
Stockholders or David C. Merrell of such claim or demand and of all relevant
facts within its knowledge which relate thereto. The Company and/or the
Stockholders or David C. Merrell shall then have the right at their own expense
to undertake the defense of any such claims or demands utilizing counsel
selected by the Company or the Stockholders or David C. Merrell, as the case may
be, and approved by the Purchaser, which approval shall not be unreasonably
withheld. In the event that the Company or the Stockholders or David C. Merrell
should fail to give notice of the intention to undertake the defense of any such
claim or demand within sixty (60) days after receiving notice that it has been
asserted or threatened, the Indemnified Party shall have the right to satisfy
and discharge the same by payment, compromise or otherwise and shall give
written notice of any such payment, compromise or settlement to the Company and
the Stockholders and David C. Merrell.
6.3 Right of Offset. In the event that the Company or any
Stockholder or David C. Merrell may be required to pay monies in indemnification
to any Indemnified Party pursuant to any indemnification provision of this
Agreement, such Indemnified Party shall have the right to offset any amounts
which are owed to it in indemnification by the Company or such Stockholder or
David C. Merrell against any amounts which are payable by such Indemnified Party
to the Company or the Stockholder or David C. Merrell, as the case may be;
provided however, that nothing set forth in this Section 6.3 shall relieve the
Indemnified Party of its obligations to make payments (subject to reduction for
offsets as provided herein) under this Agreement when due.
6.4 Indemnification by Purchaser.
(a) Subject to Section 3.3 hereof, the Purchaser hereby agrees
to indemnify and hold harmless the Company and the Stockholders and David C.
Merrell against and in respect of all damages, claims, losses and expenses
(including without limitation, attorneys' fees and disbursements) reasonably
incurred by the Company or the Stockholders and David C. Merrell with respect
thereto (all such amounts may hereinafter be referred to as "Seller Damages")
arising out of: (i) any misrepresentation or breach of any warranty made by the
Purchaser pursuant to the provisions of this Agreement or in any statement,
certificate or other document furnished by
29
<PAGE> 35
the Purchaser pursuant to this Agreement; and (ii) the nonperformance or breach
of any covenant, agreement or obligation of the Purchaser which has not been
waived by the Company and the Stockholders and David C. Merrell collectively.
(b) Subject to Section 3.3 hereof, the Purchaser shall be
obligated to indemnify the Company and/or the Stockholders and David C. Merrell,
as the case may be, pursuant to this Section 6.4 only with respect to claims for
Seller Damages as to which the Company or the Stockholders shall have given
written notice to the Purchaser on or before the close of business on the
sixtieth day following the second anniversary of the Closing Date.
(c) In any case where the Purchaser has indemnified the
Company or the Stockholders for any Seller Damages and the Company or the
Stockholders and David C. Merrell recovers from third parties all or any part of
the amount so indemnified by the Purchaser, the Company or the Stockholders and
David C. Merrell, as the case may be, shall promptly reimburse to the Purchaser
the amount paid by the Purchaser to the Company or the Stockholders and David C.
Merrell, as the case may be, up to the amount so recovered.
6.5 Claims Against the Company or the Stockholders. With respect to
claims or demands by third parties, whenever the Company or the Stockholders and
David C. Merrell shall have received notice that such a claim or demand has been
asserted or threatened, which, if valid, would be subject to indemnification
under Section 6.4 hereof, the Company or the Stockholders and David C. Merrell,
as the case may be, shall as soon as reasonably possible and in any event within
thirty (30) days of receipt of such notice, notify the Purchaser (and the
Stockholders and David C. Merrell in the event that the Company receives such
notice) of such claim or demand and of all relevant facts within its knowledge
which relate thereto. The Purchaser shall have the right at its expense to
undertake the defense of any such claim or demand utilizing counsel selected by
the Purchaser. In the event that the Purchaser should fail to give notice of its
intention to undertake the defense of any such claim or demand within sixty (60)
days after receiving notice that it has been asserted or threatened, the Company
or the Stockholders and David C. Merrell, as the case may be, shall have the
right to satisfy and discharge the same by payment, compromise or otherwise and
shall give written notice of any such payment, compromise or settlement to the
Purchaser.
6.6 Disclosure Generally. If and to the extent any information
required to be furnished in any Schedule is contained in this Agreement or in
any schedule attached hereto, such information shall be deemed to be included in
all schedules in which the information is required to be included. The inclusion
of any information in any schedule attached hereto shall not be deemed to be an
admission or acknowledgement by the Company or the Stockholders or David C.
Merrell, in and of itself, that such information is material to or outside the
ordinary course of the business of the Company.
30
<PAGE> 36
ARTICLE 7
TERMINATION AND REMEDIES FOR BREACH OF THIS AGREEMENT
7.1 Termination by Mutual Agreement. This Agreement may be
terminated at any time by mutual consent of the parties hereto, provided that
such consent to terminate is manifested in writing and is signed by each of the
parties hereto.
7.2 Termination for Failure to Close. This Agreement may be
terminated by the Purchaser, the Company or the Stockholders if the Closing
shall not have occurred by April 25, 1998, provided that, the right to terminate
this Agreement pursuant to this section shall not be available to any party
whose failure to fulfill any of its obligations hereunder has been the cause of
or resulted in the failure to consummate the transactions contemplated hereby by
the foregoing date.
7.3 Termination by Operation of Law. This Agreement may be
terminated by the Purchaser, the Company or the Stockholders if there shall be
any statute, rule or regulation that renders consummation of the transactions
contemplated hereby illegal or otherwise prohibited, or a court of competent
jurisdiction or any government (or governmental authority) shall have issued an
order, decree or ruling, or has taken any other action restraining, enjoining or
otherwise prohibiting the consummation of such transactions and such order,
decree, ruling or other action shall have become final and nonappealable.
7.4 Termination for Failure to Perform Covenants or Conditions.
This Agreement may be terminated prior to the Closing Date:
(a) by the Purchaser if: (i) any of the representations and
warranties made in this Agreement by the Company or the Stockholders or David C.
Merrell shall not be true and correct, when made or at any time prior to
consummation of the transactions contemplated hereby as if made at and as of
such time; (ii) any of the conditions set forth in Section 5.1 hereof have not
been fulfilled by the Closing Date; (iii) the Company or the Stockholders or
David C. Merrell shall have failed to observe or perform any of their respective
obligations under this Agreement; or (iv) as otherwise set forth herein; or
(b) by the Company or the Stockholders if: (i) any of the
representations and warranties of the Purchaser shall not be true and correct
when made or at any time prior to consummation of the transactions contemplated
hereby as if made at and as of such time; (ii) any of the conditions set forth
in Section 5.2 hereof have not been fulfilled by the Closing Date; (iii) the
Purchaser shall have failed to observe or perform any of its obligations under
this Agreement; or (iv) as otherwise set forth herein.
7.5 Effect of Termination or Default; Remedies. In the event of
termination of this Agreement as set forth above, this Agreement shall forthwith
become void and there shall be no liability on the part of any party hereto,
provided that, such party is a Non-Defaulting Party (as
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<PAGE> 37
defined below). The foregoing shall not relieve any party from liability for
damages actually incurred as a result of such party's breach of any term or
provision of this Agreement.
7.6 Remedies; Specific Performance. In the event that any party
shall fail or refuse to consummate the transactions contemplated by this
Agreement or if any default under or breach of any representation, warranty,
covenant or condition of this Agreement on the part of any party (the
"Defaulting Party") shall have occurred that results in the failure to
consummate the transactions contemplated hereby, then in addition to the other
remedies provided herein, the non-defaulting party (the "Non-Defaulting Party")
shall be entitled to seek and obtain money damages from the Defaulting Party, or
may seek to obtain an order of specific performance thereof against the
Defaulting Party from a court of competent jurisdiction, provided that, the
Non-Defaulting party seeking such protection must file its request with such
court within forty-five (45) days after it becomes aware of the Defaulting
Party's failure, refusal, default or breach. In addition, the Non-Defaulting
Party shall be entitled to obtain from the Defaulting Party court costs and
attorneys' fees incurred in connection with or in pursuit of enforcing the
rights and remedies provided hereunder.
ARTICLE 8
MISCELLANEOUS
8.1 Fees and Expenses. The Company and the Stockholders shall pay
the Company's and their own expenses and the Purchaser shall pay its own
expenses incident to execution, delivery and performance of the terms of this
Agreement and the consummation of the transactions contemplated hereby.
8.2 Modification, Amendments and Waiver. The parties hereto may
amend, modify or otherwise waive any provision of this Agreement by mutual
consent, provided that such consent and any amendment, modification or waiver is
in writing and is signed by each of the parties hereto.
8.3 Assignment. None of the Company, the Stockholders, David C.
Merrell nor the Purchaser shall have the authority to assign its respective
rights or obligations under this Agreement without the prior written consent of
the other parties hereto, except that the Purchaser may assign all or any
portion of its respective rights hereunder as security without the prior written
consent of the Company or the Stockholders or David C. Merrell to any affiliate
of the Purchaser (including any wholly-owned subsidiary) or to any lender, bank
or other financial institution providing financing to the Purchaser in
connection with consummation of the transactions contemplated hereby and the
Company and the Stockholders and David C. Merrell shall execute such documents
as are necessary in order to effectuate such assignments.
8.4 Burden and Benefit. This Agreement shall be binding upon and,
to the extent permitted in this Agreement, shall inure to the benefit of the
parties and their respective successors and assigns. In the event of a default
by the Purchaser of any of its obligations hereunder, the
32
<PAGE> 38
sole and exclusive recourse and remedy of the Stockholders and the Company and
David C. Merrell shall be against the Purchaser and its assets; under no
circumstances shall any officer, director, stockholder or affiliate of the
Purchaser be liable in law or equity for any obligations of the Purchaser
hereunder.
8.5 Brokers. The Company and the Stockholders represent and warrant
to the Purchaser that there are no brokers or finders entitled to any brokerage
or finder's fee or other commission or fee based upon arrangements made by or on
behalf of the Company or the Stockholders or David C. Merrell or any other
person in connection with this Agreement or any of the transactions contemplated
hereby. The Purchaser represents and warrants to the Company and the
Stockholders or David C. Merrell that there are no brokers or finders entitled
to any brokerage or finder's fee or other commission or fee based upon
arrangements made by or on behalf of the Purchaser in connection with this
Agreement or any of the transactions contemplated hereby.
8.6 Entire Agreement. This Agreement and the exhibits, lists and
other documents referred to herein contain the entire agreement among the
parties hereto with respect to the transactions contemplated hereby and
supersede all prior agreements with respect thereto, whether written or oral.
8.7 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Utah, without regard,
however, to such jurisdiction's principles of conflicts of laws.
8.8 Notices. Any notice, request, instruction or other document to
be given hereunder by any party hereto shall be in writing and delivered
personally, by facsimile transmission or telex, or sent by registered or
certified mail (return receipt requested), postage prepaid, addressed as
follows:
If to the Company
or the Stockholders
or David C. Merrell: Digital Power Holding Company
9005 Cobble Canyon Lane
Sandy, Utah 84093
Attn: David C. Merrell
Chiricahua Company
9005 Cobble Canyon Lane
Sandy, Utah 84093
Attn: David C. Merrell
Melinda Johnson
8989 Scofield Circle
Sandy, Utah 84093
33
<PAGE> 39
David C. Merrell
9005 Cobble Canyon Lane
Sandy, Utah 84093
Attn: David C. Merrell
with a copy to: Leonard W. Burningham, Esq.
455 East 500 South, Suite 205
Salt Lake City, Utah 84111
and
If to the Purchaser: I-Storm Acquisition Corp.
c/o Mees Pierson
British American Centre
Phase 3, Roy's Drive
George Town, Grand Cayman BWI
Attn: Frank M. DeLape
with a copy to: De Martino Finkelstein Rosen & Virga
1818 N Street, N.W., Suite 400
Washington, D.C. 20036
Attn: Ralph V. De Martino, Esq.
Facsimile: (202) 659-1290
or to such other persons or addresses as may be designated in writing by the
party to receive such notice. If mailed as aforesaid, the day of mailing or
transmission shall be the date any such notice shall be deemed to have been
delivered.
8.9 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be an original, but all of which shall
constitute but one agreement.
8.10 Rights Cumulative. All rights, powers and privileges conferred
hereunder upon the parties, unless otherwise provided, shall be cumulative and
shall not be restricted to those given by law. Failure to exercise any power
given any party hereunder or to insist upon strict compliance by any other party
shall not constitute a waiver of any party's right to demand exact compliance
with any of the terms or provisions hereof.
8.11 Severability of Provisions. The provisions of this Agreement shall
be considered severable in the event that any of such provisions are held by a
court of competent jurisdiction to be invalid, void or otherwise unenforceable.
Such invalid, void or otherwise unenforceable provisions shall be automatically
replaced by other provisions which are valid and enforceable and which are as
similar as possible in term and intent to those provisions deemed to be invalid,
void or otherwise unenforceable. Notwithstanding the foregoing, the remaining
provisions hereof shall remain enforceable to the fullest extent permitted by
law.
34
<PAGE> 40
8.12 Headings. The headings set forth in the articles and sections of
this Agreement and in the exhibits and the schedules to this Agreement are
inserted for convenience of reference only and shall not be deemed to constitute
a part hereof.
8.13 Joint and Several Representations of Stockholders and David C.
Merrell. In the event that: (i) a Stockholder or David C. Merrell has knowledge
prior to the Closing Date that any fact, representation or warranty made herein
by the other Stockholder or David C. Merrell, as the case may be, is inaccurate,
untrue, incomplete or misleading; and (ii) reference herein to the obligation or
liability of the Stockholders hereunder with respect to such fact,
representation or warranty has been restricted or limited to the standard of
several and not joint obligation or liability, such restriction or limitation
shall be null and void and of no effect and the obligation or liability of the
Stockholders or David C. Merrell hereunder with respect to such fact,
representation or warranty shall be joint and not several.
[THE REST OF THIS PAGE IS INTENTIONALLY BLANK.]
35
<PAGE> 41
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed and delivered on the date and year first above written.
<TABLE>
<CAPTION>
<S> <C>
ATTEST: DIGITAL POWER HOLDING COMPANY
By:
- --------------------------------- --------------------------------
Name:
--------------------------------
Title:
-------------------------------
STOCKHOLDERS:
WITNESS: CHIRICAHUA COMPANY
By:
- --------------------------------- --------------------------------
Name:
-------------------------------
Title:
-------------------------------
WITNESS:
By:
- --------------------------------- --------------------------------
Melinda Johnson
WITNESS:
By:
- --------------------------------- --------------------------------
David C. Merrell
I-STORM ACQUISITION CORP.
ATTEST:
By:
- --------------------------------- --------------------------------
Name:
-------------------------------
Title:
-------------------------------
</TABLE>
Charles Johnson hereby joins in and executes this Agreement for the purpose of
evidencing his agreement to the provisions contained in Section 1.7 of this
Agreement.
<TABLE>
<S> <C>
WITNESS:
By:
- --------------------------------- --------------------------------
Charles Johnson
</TABLE>
36
<PAGE> 42
EXHIBIT 1.4
FORM OF OPTION AGREEMENT
37
<PAGE> 43
EXHIBIT 3.1(d)
FINANCIAL STATEMENTS
38
<PAGE> 44
EXHIBIT 5.1(c)
FORM OF OPINION OF COUNSEL TO COMPANY AND STOCKHOLDERS
39
<PAGE> 45
EXHIBIT 5.2(b)
FORM OF OPINION OF COUNSEL TO PURCHASER
40
<PAGE> 46
SCHEDULE 3.1(b)
JURISDICTIONS IN WHICH COMPANY IS QUALIFIED TO DO BUSINESS
41
<PAGE> 47
SCHEDULE 3.1(m)
CERTAIN CHANGES OR EVENTS
42
<PAGE> 48
SCHEDULE 3.1(n)
AGREEMENTS
43
<PAGE> 49
SCHEDULE 3.1(o)
NON-CONTRAVENTION; CONSENTS
44
<PAGE> 50
SCHEDULE 3.1(q)
INSURANCE
45
<PAGE> 51
SCHEDULE 3.1(y)
OFFICERS, DIRECTORS AND EMPLOYEES
46
<PAGE> 52
SCHEDULE 3.1(z)
LOANS TO OR FROM AFFILIATES
47
<PAGE> 53
SCHEDULE 3.1(bb)
BANK ACCOUNTS
48
<PAGE> 1
Exhibit 10.5
August 31, 1998
Mr. Calbert Lai
President
I-Storm, Inc.
480 Cowper Street
Palo Alto, California 94301
Dear Mr. Lai:
You have communicated the desire of I-Storm, Inc. and its wholly-owned
subsidiary, LVL Communications Corporation (the "Company") to engage the
management and financial consulting services of Benchmark Equity Group, Inc.
("Benchmark") management consulting services, including, but not limited to,
financial and strategic planning, and corporate and investment planning for the
period of twelve months commencing as of April 1, 1998. The purpose of this
letter agreement is to consummate and memorialize an agreement between Benchmark
and the Company for that purpose. In consideration of providing the foregoing
services, Benchmark will receive the following:
- The Company shall pay Benchmark and/or its designees an annual
fee of $175,000 in twelve equal monthly payments, commencing
thirty days following March 1, 1998; provided, however, that the
Company may defer any such monthly payment until the earlier of
the time as the Company has received $2,000,000 in debt or equity
financing, or January 1, 1999 (First Payment Date). Upon the First
Payment Date, the Company shall pay the sum of all outstanding
monthly payments that have accrued to such First Payment Date.
- The Company shall reimburse Benchmark for all reasonable
out-of-pocket expenses, which shall include, but are not limited
to, the fees and disbursements of Benchmark's counsel, fees and
disbursements of accountants or auditors employed by Benchmark,
and due diligence costs, within five (5) business days following
receipt of statements from Benchmark.
- The Company will execute an indemnity agreement, satisfactory in
form and substance to Benchmark, which will indemnify and hold
harmless Benchmark, its affiliates, officers, shareholders,
employees, counsel, and any experts retained in connection with
this transaction.
The terms hereof shall be construed and enforced in accordance with the
laws of the State of Texas without regard to the principles of conflicts of laws
thereof and shall inure to the
<PAGE> 2
Mr. Calbert Lai
August 31, 1998
Page 2
benefit of and be binding upon Benchmark and the Company and the respective
legal successors and assigns of each.
The Company represents, warrants, covenants and agrees that any
controversy or claim brought in any capacity by the Company against Benchmark or
any members, officers, directors, agents, affiliates, associates, employees or
controlling persons of Benchmark shall be settled by expedited arbitration under
the Federal Arbitration Act in accordance with the commercial arbitration rules
of the American Arbitration Association ("AAA") and judgment upon the award
rendered by the arbitrators may be entered in any court having jurisdiction
thereof. In arbitration proceedings under this section, the parties shall be
entitled to any and all remedies that would be available in the absence of this
section and the arbitrators, in rendering their decision, shall follow the
substantive laws of the State of Texas. The arbitration of any dispute pursuant
to this paragraph shall be held in the State of Texas.
Notwithstanding the foregoing, in order to preserve the status quo
pending the resolution by arbitration of a claim seeking relief of an injunctive
or equitable nature, any party, upon submitting a matter to arbitration as
required by this section, may simultaneously or thereafter seek a temporary
restraining order or preliminary injunction from a court of competent
jurisdiction pending the outcome of the arbitration. This section is intended to
benefit the members, managers, agents, affiliates, associates and employees of
Benchmark, each of whom may enforce this section to the full extent that
Benchmark could do so if a controversy or claim were brought against it.
The waiver by any party of any provision or breach hereof shall not
operate as or be construed to be a waiver of any other provision here or of any
other breach of any provision hereof.
Any and all notices from either party to the other which may be
specified by, or otherwise deemed necessary or incident hereto shall, in the
absence of hand delivery with return receipt requested, be deemed duly given
when mailed if the same shall be sent to the address of the party set out on the
first page hereof by registered or certified mail, return receipt requested, or
express delivery (e.g., Federal Express).
The provisions hereof shall be considered severable in the event that
any of such provisions are held by a court of competent jurisdiction to be
invalid, void or otherwise unenforceable. Such invalid, void or otherwise
unenforceable provisions shall be automatically replaced by other provisions
which are valid and enforceable and which are similar as possible in term and
intent to those provisions deemed to be invalid, void or otherwise
unenforceable. Notwithstanding the foregoing, the remaining provisions hereof
shall remain enforceable to the fullest extent permitted by the law.
<PAGE> 3
Mr. Calbert Lai
August 31, 1998
Page 3
Except for the Indemnification Agreement to be executed pursuant to
this agreement, this letter agreement contains the entire agreement between the
parties with respect to the subject matter hereof. This letter agreement may not
be amended, changed, modified or discharged, nor may any provision hereof be
waived, except by an instrument in writing executed by or on behalf of the party
against whom enforcement of any amendment, waiver, change, modification of
discharge is sought. No course of conduct or dealing shall be construed to
modify, amend or otherwise affect any of the provisions hereof. Any and all
prior agreements between or among Benchmark and the Company are hereby
terminated.
Please confirm that the foregoing is in accordance with your
understanding by signing and returning the duplicate(s) of this letter.
Very truly yours,
BENCHMARK EQUITY GROUP, INC.
By:
---------------------------
Agreed to and accepted as of this
31st day of August, 1998.
I-STORM, INC.
By:
------------------------------
Name: Calbert Lai
Title: President
<PAGE> 1
EXHIBIT 10.6
------------
ROBERT L. TOMZ
CONSULTING AGREEMENT
This CONSULTING AGREEMENT (the "Agreement') dated as of December 7,
1998, between I-Storm, Inc., a Nevada corporation, and its wholly owned
subsidiary, LVL Communications Corporation, a California corporation,
(collectively, the "Company"), each with its principal place of
business in the United States at 480 Cowper Street, Palo Alto,
California, 94301 (herein called the "Company") and ROBERT L. TOMZ
(herein called the "Consultant") residing at 4527 Silver Bell Circle,
Castle Rock, CO 80104.
1. RETENTION AND DESCRIPTION OF SERVICE. The Company hereby retains
Consultant as the Vice President Finance and Chief Financial Officer of
I-Storm Inc. reporting to the Company's President. Consultant will be
responsible for management and supervision of all Company financial and
administrative activities for the term of this Agreement, and the
Consultant hereby accepts such assignment upon the terms and conditions
hereinafter set forth. Consultant will perform services as an
independent contractor with the customary and usual independence
associated therewith, and the Consultant will not be deemed an employee
of the Company.
2. TERM. The term of this Agreement shall commence as of January 11,
1999 (the "Assignment Date") and shall continue in effect for a term of
12 months, unless earlier terminated in accordance with the provisions
of Section 6 of this Agreement. Thereafter, this Agreement shall be
automatically renewed on a year-to-year basis unless either party shall
provide the other with notice in writing of the termination of this
Agreement at least 60 days' prior to the expiration of this Agreement
at the end of its original term or any renewal thereof For purposes of
this Agreement, the "term of this Agreement" shall refer to the initial
term and all renewal terms hereof In the event of tennination by the
Company prior to the expiration of this Agreement at the end of
Page 1 of 11
<PAGE> 2
its original term or any renewal thereof, the Company shall pay the
Consultant severance pay and benefits required by Section 6(e) of this
Agreement unless termination by the Company is for a reason specified
in Sections 6(a), 6(b) or 6(c) hereunder.
3. COMPENSATION. For all services rendered by the Consultant under this
Agreement, the Company shall pay the Consultant a base retainer and
fringe benefits as follows:
(a) Cash Compensation: The Company shall pay the Consultant a
base retainer during the term of this Agreement, payable
semi-monthly, at the rate of $8,000 per month. Consultant will
be eligible to receive a fiscal annual performance bonus of up
to 50% of base retainer based upon achievement of reasonable
and achievable Company goals as determined and approved in
good faith by the Board of Directors of the Company to be paid
no later than 30 days from the end of such year. Consultant
shall be eligible for annual performance appraisal and merit
increase. Company may, but is not obligated to, increase
Consultant's retainer as Company deems appropriate.
(b) Stock Warrants: The Company shall grant the Consultant
five-year exercisable warrants to purchase 168,000 (14,000 *
12) common shares of the Company at $2.00 per share, of which
168,000 shares shall vest ratably over a period of 12 months
from the Assignment Date.
(c) Medical, Insurance, and Other Benefits: The Consultant
shall at his option be entitled to participate in all
Company's group fringe benefit plans or other group
arrangements authorized and adopted from time to time.
Consultant shall also receive such other benefits including
vacation, holidays, and sick leave, as Company generally
provides to its Consultants holding similar positions as that
of Consultant.
Page 2 of 11
<PAGE> 3
(d) Expenses: The Company shall either pay directly or
reimburse Consultant for reasonable travel, entertainment and
other business expenses incurred by Consultant in the
performance of his duties hereunder; provided that the
incurring of such expenses shall be subject to such policies
as shall be established by the Board of Directors of the
Company from time to time, and Consultant shall submit to the
Company such documentation to substantiate such expenses as
the Company shall reasonably request.
Nothing herein shall be deemed to preclude the Company from awarding
additional compensation or benefits to Consultant during the term of
this Agreement, upon approval of Company's Board of Directors, whether
in the form of retainers, bonuses, additional fringe benefits, or
otherwise.
4. DUTIES. During the term of this Agreement, the Consultant hereby
promises to perform and discharge faithfully the duties which may be
assigned to him from time to time by the Board of Directors in
connection with the conduct of its business so long as such duties are
reasonably related to the Consultant's duties as an Executive Officer
of the Company. Consultant will be responsible for all activities of
the Company as determined by the President and as required of officers
of the Company under applicable state and federal law, and will have
all relevant executives and their respective subordinates report to
him. Consultant is retained to actively serve on a three to four day a
week basis as an executive officer of the Company.
5. EXTENT OF SERVICES; OTHER INTERESTS. During the term of this
Agreement, the Consultant shall devote his working time, attention and
energies which are reasonably required for the performance of his
duties and the business of the Company and shall travel as reasonably
required to discharge the duties of his position with the Company as
assigned by its President. The Consultant shall not during the term of
this Agreement be engaged in any other business activities that are, or
could potentially be, in competition with the business activities of
the Company whether or not such business activities are pursued for
gain, profit or other pecuniary advantage. Subject to the
Page 3 of 11
<PAGE> 4
foregoing, the Consultant may engage in investment, business,
professional and continuing education activities so long as such
activities do not substantially interfere with the performance of his
duties as an Officer of the Company.
6. TERMINATION. Payment of severance described in this Section 6 shall
be paid no later than ten (10) days after becoming due.
(a) Death: In the event of Consultant's death during the term
hereof, this Agreement shall terminate immediately and, except
as expressly set forth in this paragraph, the Company shall
have no further liability hereunder to Consultant or his
estate. The Company shall continue to pay to Consultant's
estate his retainer and continued stock option vesting for a
period of three (3) months from and after the date of death
during the term of this Agreement.
(b) Permanent Disability. In the event that Consultant becomes
totally disabled during the term hereof and such total
disability continues for a period in excess of ninety (90)
days, whether consecutive or in the aggregate during any 12
month period, at the end of such period of disability the
Consultant shall be considered as permanently disabled and
this Agreement shall terminate immediately and, except as
expressly set forth in this paragraph, the Company shall have
no further liability hereunder to Consultant. The Company
shall continue to pay to Consultant his retainer and continue
stock option vesting for the period of disability and a period
of two (2) months from and after the date of total disability
commencing with the expiration of the first 90 day period of
such disability as severance pay hereunder.
Consultant shall be considered as totally disabled if, and
when because of injury, illness or physical or mental
disability, he is prevented from effectively performing the
duties of this Agreement. The determination of total
disability shall be made by the Board of Directors of the
Company, but said decision shall not be unreasonable or
arbitrary and shall be supported by the opinion (at the
Page 4 of 11
<PAGE> 5
Company's expense) of at least one licensed physician, unless
Consultant shall without justification fail to submit to the
necessary physical or mental examinations. It is understood
that Consultant's occasional sickness of short duration shall
not result in Consultant being considered totally disabled,
and Consultant shall continue to be compensated hereunder
during such periods of occasional sickness so long as they
shall not exceed the greater of twelve (12) days in a calendar
year or the amount of sick leave available to an employee of
the Company.
(c) Involuntary Termination for Cause. The Company may
terminate this Agreement for cause. For the purposes of this
Agreement, a termination for "cause" shall mean a termination
resulting from a good faith and reasonable determination by
the Company's Board of Directors that Consultant (i) has
committed a felony or act of moral turpitude which would
materially injure the Company or its reputation or, (ii) has
intentionally or willfully and repeatedly breached his duties
hereunder in a material respect and, if curable, has failed to
cure the same within thirty (30) days after receiving written
notice of such breach from the Board of the Company. Such
notice must be given to Consultant following each claimed
breach, whether or not curable. In the event of termination
for cause, the Company shall have no further liability
hereunder to Consultant from and after the date of such
termination.
(d) Termination Without Cause. Termination of Consultant by
the Company for any reason other than in paragraphs 6(a),
6(b), and 6(c) hereof shall be considered Termination Without
Cause.
(e) Salary and Benefit Continuation Upon Termination Without
Cause. Upon the Company's termination of Consultant for any
reason whatsoever prior to the expiration of the original term
or any annual renewal of the term of this Agreement, except
for (i) termination upon death as set forth in paragraph 6(a)
hereof; (ii) termination upon permanent disability as set
forth in paragraph 6(b)
Page 5 of 11
<PAGE> 6
hereof; or (iii) termination for cause pursuant to paragraph
6(c) hereof ("Termination for Cause"); or (iv) Consultant's
voluntarily electing not to continue in the employment of the
Company under conditions other than Constructive Discharge;
then the Company within thirty (30) days after such
termination, and in lieu of all other obligations, the Company
hereunder, shall: 1) pay to Consultant a lump-sum payment
equal to his then base salary and continue warrant vesting for
a period equal to one (1) month; 2) provide Consultant, at
Company's cost, with employment benefits consisting of life,
health, dental and long-term disability insurance for a period
of 12 months after termination; and 3) enter into a
Post-termination Consulting Agreement as defined below in
paragraph 6(f) hereof. Thereafter, any continuation of
benefits under the Consolidated Omnibus Budget Reconciliation
Act (COBRA) will be at Consultant's cost.
(f) Post-termination Consulting Agreement. Upon the
Termination Without Cause, the Consultant will hold himself
available to provide consulting services to the Company for a
period terminating one year after the Termination Date (the
"Consulting Period"). Consultant will provide the consulting
services only upon the request of the Company's President and
for no more than ten hours per week at such times and places
as are mutually convenient to Consultant and the Company.
However, Consultant will perform those services at times and
places that do not reasonably conflict with his
responsibilities to his then current employer or as a self
employed individual. Consultant will perform services as an
independent contractor with the customary and usual
independence associated therewith, and he will not be deemed
an Consultant or agent of the Company or have the authority to
bind, or to enter into any contract on behalf of, the Company,
unless expressly authorized in writing to do so. The Company
will pay Consultant a consulting fee of $150.00 per hour for
each hour actually worked at the Company's request. If the
Company's Board of Directors determines that Consultant will
be providing "substantial services" to the Company during the
Consulting Period, any warrant held by Consultant on
Page 6 of 11
<PAGE> 7
the Termination Date, if not fully vested at the time, will
continue to vest at the rate of 1/12 of the warrant grant per
month during the Consulting Period provided that total vesting
shall not exceed the original total shares granted under each
stock warrant. Any warrant held by Consultant at the
Termination Date will remain exercisable for the duration of
the original five year exercisable period.
7. NONDISCLOSURE OF CONFIDENTIAL INFORMATION. The Consultant recognizes
and acknowledges that the Company's trade secrets and proprietary
processes as they may exist from time to time are valuable, special and
unique assets of the Company's business, access to and knowledge of
which are essential to the performance of the Consultant's duties
hereunder. The Consultant will not during or after the term of his
employment, disclose such secrets or processes to any person, firm,
corporation, association or other entity for any reason or purpose
whatsoever, nor shall the Consultant make use of any such secrets or
processes for his own purposes or for the benefit of any person, firm,
corporation, or other entity (except the Company) under any
circumstances during or after the term of his employment; provided
that, after the expiration of the term of his Agreement these,
restrictions shall not apply to such secrets and processes which are
then, or from time to time thereafter, in the public domain (provided
that he was not responsible, directly or indirectly, for permitting
such secrets or processes to enter the public domain without the
Company's consent).
8. COVENANT NOT TO COMPETE OR INTERFERE. With the exception of
activities associated with the purchase and subsequent operation of the
Company. Consultant agrees that during the term of this Agreement and
for a period of one (1) year after the date of Termination under this
Agreement, whichever occurs first; (a) Consultant shall not
intentionally interfere with, disrupt or attempt to disrupt the
relationship, contractual or otherwise between the Company and any
customer, supplier, lessor or Consultant of the Company or any of its
subsidiaries and (b) Consultant shall not as a sole proprietor or
otherwise for his own account or as a partner, Consultant, officer,
director, manager, agent, distributor, consultant, marketing
representative, associate, investor or
Page 7 of 11
<PAGE> 8
otherwise (except as to a less than 5% interest in a public company
listed on the Nasdaq, a national, or a regional exchange), directly or
indirectly, own, purchase, organize or take preparatory steps for the
organization of, finance, work for, provide services to, advise,
acquire, lease, operate, manage or invest in or permit his name to be
used or employed in connection with any business which engages directly
in competition with the Company. Consultant further agrees that the
covenants and other provisions of this paragraph shall cover his
activities in the whole of North America, Europe and Asia (the
"Territory"). The parties hereto agree that the covenants contained in
this paragraph (b) shall be construed as if the covenants are divided
into separate and distinct covenants in respect of each of the products
and services of the Company, each capacity in which the party is
prohibited from competing, and each part of the world in which such
competition is prohibited from taking place. The territorial
restrictions contained in this Section 8 are properly required for the
adequate protection of the Company and in the event any covenant or
other provision contained this Section 8 shall be deemed to be illegal,
unenforceable, or unreasonable by a court or other tribunal of
competent jurisdiction. With respect to any part of the Territory or
otherwise, such covenant or provision shall not be affected with
respect to any other part of the Territory or otherwise, and each of
the parties hereto agrees and submits to the reduction of said
territorial restriction or other provisions to such an area or
otherwise, as said court shall deem reasonable. The parties further
agree that if any provision of this Agreement is found to be
unenforceable, it shall not affect the enforceability of the remaining
provisions and the court shall enforce all remaining provisions to the
extent permitted by law.
9. INVENTIONS. The Consultant hereby sells, transfers, and assigns to
the Company, or to any person or entity designated by the Company, at
of the entire right, title and interest of the Consultant in and to all
inventions, ideas, disclosures, and improvements, whether patented or
unpatented, and copyrightable material made or conceived by the
Consultant, solely or jointly during the term hereof which relate to
methods, apparatus, formulae, designs, products, processes or devices,
sold, leased, used, or under consideration or development by the
Company, or which otherwise relate to or pertain
Page 8 of 11
<PAGE> 9
to the business, functions, or operations of the Company. The
Consultant agrees to communicate promptly and to disclose to the
Company, in such form as the Consultant may be required to do so, all
information, details, and data pertaining to the aforementioned
inventions, ideas, disclosures, and improvements and to execute and
deliver to the Company such formal transfers and assignments and such
other papers and documents as may be required of the Consultant to
permit the Company or any person or entity designated by the Company to
file and prosecute the patent applications and, as to copyrightable
material, to obtain copyright thereof.
For the purposes of this Agreement, an invention shall be deemed to
have been made during the term of Consultant's retainer if, during such
period, the invention was conceived or first actually reduced to
practice by the Company, and Consultant agrees that any patent
application filed within one (1) year after termination of this
employment shall be presumed to relate to an invention which was made
during the term of Consultant's employment unless Consultant can
provide satisfactory evidence to the contrary.
10. INJUNCTIVE RELIEF. The parties hereto acknowledge that (a) the
covenants and restrictions set forth in Sections 7, 8 and 9 of this
Agreement are necessary, fundamental and required for the protection of
the business of the Company, (b) such covenants and restrictions are
material inducements to investors to enter into agreements to invest in
the Company, and (c) a breach of any of such covenants and restrictions
by Consultant will result in irreparable harm and damages to the
Company which cannot be adequately compensated by a monetary award.
Accordingly, in the event of breach or threatened breach of such
provisions by Consultant, Consultant expressly agrees that the Company
shall be entitled to the immediate remedy of a temporary restraining
order, preliminary injunction or such other form of injunctive or
equitable relief as may be used by any court of competent jurisdiction
to restrain or enjoin the Consultant from breaching any such covenant
or provision or to specifically enforce the provisions hereof. Nothing
herein shall be construed as prohibiting the Company from pursuing any
other remedies for such breach or threatened breach.
Page 9 of 11
<PAGE> 10
11. INSURANCE. The Company, at its election and for its benefit, may
insure the Consultant against accidental loss or death and the
Consultant shall submit to such physical examination and supply such
information as may be required in connection therewith.
12. NOTICES. Any notice required or permitted to be given under this
Agreement shall be sufficient if in writing and if sent by registered
or certified mail to his last known residence in the case of the
Consultant or to its last known principal office in the case of the
Company.
13. WAIVER OF BREACH. The waiver by either party of a breach of any
provision of this Agreement shall not operate or be construed by a
waiver of any subsequent breach.
14. GOVERNING LAW. This Agreement shall be governed by and construed
and enforced in accordance with the laws of the State of California.
15. ASSIGNMENT. The rights and obligations of the parities under this
Agreement shall inure to the benefit of and shall be binding upon the
successors of such parties.
16. ENTIRE AGREEMENT. This instrument contains the entire agreement of
the parties and supersedes all existing agreements between them. It may
not be changed orally but only by an agreement in writing signed by the
party against whom enforcement of any waiver, modification, extension
or discharge is sought.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day first written above.
CONSULTANT:
---------------------------
Robert L. Tomz
Page 10 of 11
<PAGE> 11
COMPANY I-STORM, INC
By:
--------------------------
Calbert Lai
President
Page 11 of 11
<PAGE> 12
EXHIBIT 10.6
------------
ROBERT L. TOMZ
CONSULTING AGREEMENT
AMENDMENT NUMBER #1
DATED MARCH 19, 1999
This Amendment Number #1 ("Amendment") dated as of March 19, 1999
refers to the Consulting Agreement ("Agreement") dated as of December 7, 1998
between I-Storm, Inc. and Robert L. Tomz and which is hereby attached. The
primary substance of this Amendment is that Robert L. Tomz will no longer be an
officer or acting officer of the Company effective March 19, 1999, which date is
prior to any take-downs or actual closing of the Company's private placement of
its Series C Preferred Stock. Accordingly, the paragraphs in the Agreement are
hereby amended as follows:
PARAGRAPH 1 - RETENTION AND DESCRIPTION OF SERVICES. Effective March 19, 1999,
the first two sentences of the paragraph no longer apply and are replaced with:
"The Company hereby retains Consultant as a Financial Advisor of I-Storm, Inc.
reporting to the Company's President. Consultant will be responsible for
advising the Company on certain financial and administrative activities of the
Company for the term of this Agreement, and the Consultant hereby accepts such
assignment upon the terms and conditions hereinafter set forth."
PARAGRAPH 3(a) - CASH COMPENSATION. Effective January 11, 1999, the first
sentence is deleted in entirety and is replaced with: "The Company shall pay
the Consultant a base retainer during the term of this Agreement, payable
semi-monthly, at the rate of $15,000 per month."
PARAGRAPH 4-- DUTIES. Effective March 19, 1999, the first two sentences of the
paragraph no longer apply and are replaced with: "During the term of this
Agreement, the Consultant hereby promises to perform and discharge faithfully
the duties which may be assigned to him from time to time by the President."
PARAGRAPH 5 -- EXTENT OF SERVICES; OTHER INTERESTS. Effective March 19, 1999,
the words "an Officer" in the last sentence shall be amended to read "a
Financial Advisor".
IN WITNESS WHEREOF, the parties have executed this Amendment to the Agreement as
of the day first written above.
/s/ ROBERT L. TOMZ
CONSULTANT: --------------------------
Robert L. Tomz
COMPANY: I-Storm, Inc.
By /s/ CALBERT LAI
-----------------------
Calbert Lai, President
<PAGE> 1
EXHIBIT 10.7
PROMISSORY NOTE
$50,000.00 MARCH 31, 1998 PALO ALTO, CALIFORNIA
- ------------------------------------------------------------------------------
FOR VALUE RECEIVED, the receipt and adequacy of which is hereby
acknowledged, LVL Communications Corporation, a California corporation, LVL
Advertising, Inc., a California corporation and LVL Interactive, Inc., a
California corporation, each a debtor-in-possession (collectively "Debtors"),
jointly and severally promise to pay to PacRim Access Group, Inc.,
("Lender"), at such place in the State of California as may be designated in
writing by the holder ("Holder") of this Promissory Note (this "Note") the
principal sum of Fifty Thousand ($50,000.00), plus interest accruing at the rate
of ten percent (10%) per annum. The outstanding principal balance of this Note
plus all unpaid interest an other charges hereunder shall be due and payable on
the earlier of:(i) the equity or debt financing of Debtors in which Debtors
receive an aggregate of $3,000,000 from the date hereof; (ii) the payoff or
termination of the Factoring Agreement (the "Factoring Agreement") between
Debtors and Pacific Business Funding Corp ("PBF"); (iii) one year from the date
hereof; or (iv) upon acceleration of this Note as set forth below.
1. PRIORITY. This Note is provided to evidence post-petition financing
provided to Debtors and shall be senior to all pre-petition unsecured
debt of Debtors and of equal priority to administrative claims against Debtor.
2. COLLATERALIZATION. Within the earlier of: (i) thirty (30) days after
the confirmation of Debtors' Plan of Reorganization; or (ii) one hundred eighty
(180) days after the date of this Note, Debtors shall secure this Note and the
underlying obligation, with a security interest in all of Debtors' assets,
subject to the security interest of PBF and other liens and encumbrances of
record as of the dated hereof. Lender acknowledges that Debtors have agreed to
sell Debtors' leasehold interest in their principal place of business and hereby
consent to such transfer.
3. WARRANTS. As an incentive for Lender to work with Debtors and delay
the requirement of collateral concurrent with the date of this Note, Debtors
hereby issue to Lender the right to purchase 40,000 shares of LVL
Communications, Inc., or any successor or parent of Debtors surviving after the
confirmation of the Plan of Reorganization, for $.50 per share (the "Warrant").
The Warrant will be issued pursuant to and as part of, the Warrants described in
the Plan of Reorganization. The Warrant shall be for a term of five (5) years
from the date hereof and shall be evidenced by a Warrant Certificate in a form
consistent with other warrants or options issued by Debtors or any of them,
pursuant to the authority and capitalization set forth in the Plan of
Reorganization, which shall have such terms, antidilution provisions and
standard protections as are reasonably acceptable to Lender and not inconsistent
with the Plan of Reorganization. The shares issued pursuant to the Warrant
shall have piggyback registration rights. In the event of a default by Debtors
under the terms of this Note, including, without limitation, default under
Section 2 hereof, the exercise price of the Warrants shall be reduced to $.01
per share. Debtors shall use their best efforts to cause the Bankruptcy Court
having jurisdiction over Debtors to issue unrestricted and free trading shares
of common stock upon exercise of the Warrant. If the Bankruptcy Court does not
issue free trading stock, the stock shall be transferable in accordance with
Rule 144.
1
<PAGE> 2
4. SECURITY AGREEMENT. Concurrently with Debtors' provision of
collateral for this Note pursuant to Section 2 hereof, Debtors shall enter into
a security agreement with Lender and execute a UCC-1 Financing Statement, and
provide such other documentation reasonably required by Lender to evidence
Lender's security interest, each in a form acceptable to Lender.
5. ACKNOWLEDGMENT OF MULTIPLE LENDERS. Lender acknowledges and consents
to the issuance of multiple notes by Debtors to other lenders contemporaneous
with the delivery of this Note. The other notes and loans made pursuant thereto
will be of equal priority with this Note.
6. RELEASE OF FUNDS. Lender has delivered the face amount of this Note
to an escrow account for release for the benefit of Debtors upon the execution
of this Note by Debtors and Lender, without further documentation.
7. NO COURT APPROVAL. Debtors represent and warrant to Lender that
Debtors have the authority to enter into the Note without Bankruptcy Court
approval. Debtors will use their best efforts to obtain the approval of the
Bankruptcy Court to the collateralization of this Note pursuant to Section 2
hereof.
8. ALLOCATION OF PAYMENT. Payments of principal and interest will be
made in legal tender of the United States of America. All payments made
pursuant to this Note will be first applied to accrued and unpaid interest, if
any, then to other proper charges under this Note and the balance, if any, to
principal. All or any portion of the principal amount of this Note may be
prepaid at any time without penalty of any kind.
9. DEFAULT. Notwithstanding anything in this Note to the contrary, the
entire unpaid principal amount of this Note, together with all accrued but
unpaid interest thereon and other unpaid charges hereunder, will become
immediately all due and payable without further notice at the option of Holder
upon any of the following (the "Acceleration Date"); (i) Debtors fail to timely
make any payment hereunder when such payment becomes first due and such failure
continues for a period of five days after written notice from Holder to
Debtors; (ii) Debtors fail to obtain Bankruptcy Court approval to the
requirements of Section 2 hereof or fails to comply with Section 2 hereof; or
(iii) Debtors default under this Note, the Security Agreement, or the Financing
Statement, or make any assignment for the benefit of Debtors' creditors, make
any election to wind up or dissolve or after approval of the Plan of
Reorganization become unable to pay Debtors' debt as they mature, insolvent or
the subject of any proceeding under any subsequent bankruptcy, insolvency or
debtors' relief law. Thereafter, this Note will bear interest at an annual
rate of interest equal to the greater of (i) fifteen percent (15%), (ii) the
advance rate to member banks on the Acceleration Date as established by the
Federal Reserve Bank of San Francisco, California, pursuant to Section 13 of
the Federal Reserve Act, plus five percentage points, or (iii) the maximum rate
then permitted by law (the "Default Rate").
10. OPTION TO PURCHASE COLLATERALIZATION. If Debtors fail to secure this
Note pursuant to Section 2 hereof, in addition to Lender's right to accelerate
the repayment of this Note pursuant to Section 9 hereof, Debtors shall jointly
and severally pay to Lender the sum of $10,000 as a repurchase of Lender's right
to receive a security interest in Debtors' assets (the "Collateral
2
<PAGE> 3
Repurchase Price"). Debtors may, however, prepay this Note in full at any time
prior to the deadlines set forth in Section 2 hereof, without premium, penalty
or the requirement to pay the Collateral Repurchase Price. If Debtors fail to
pay the Collateral Repurchase Price within five (5) days of Lender's demand,
the Collateral Repurchase Price shall be added to the outstanding balance of
this Note and accrue interest as set forth herein.
11. WAIVERS. Debtors for themselves and their legal representatives,
successors and assigns, expressly waive presentment, protest, demand, notice of
dishonor, notice of nonpayment, notice of maturity, notice of protest,
presentment for purpose of accelerating maturity, and diligence in collection,
and consent that Holder may extend the time for payment or otherwise modify the
terms of payment or any part or the whole of the debt evidenced hereby. To the
fullest extent permitted by law, Debtors waive the statute of limitations in any
action brought by Holder in connection with this Note. Holder may proceed
directly against Debtors to recover any amounts due under this Note and shall
not be required to first proceed against any collateral. Debtors hereby waiver
any right Debtors may have to require Holder to proceed against the collateral.
Debtors represent and warrant that Debtors have no claim, offset or defense to
the principal amount due under this Note.
12. DELINQUENT AMOUNTS. If any installment or other amount payable to
Holder under this Note is not received by Holder on the date that such
installment or other amount becomes first due (the "Due Date"), then such
installment or other amount ("the Delinquent Amount") will bear interest from
and after the Due Date until paid at the Default Rate or the highest rate then
permitted by law, whichever is greater. In addition, Debtors will also pay to
Holder each month a late payment processing fee ("Late Fee") in an amount each
month equal to six percent (6%) of each Delinquent Amount to defray the expense
incident to the administration, processing and collection of each Delinquent
Amount. Debtors agree that it would be impractical to ascertain the exact
amount of damage Holder would incur to collect Delinquent Amounts and that the
Late Fee is a reasonable estimate by Debtors and Creditor of the actual amount
of damage which will be incurred by Holder to collect Delinquent Amounts. As
the option of Holder from time to time, the Late Fee will be immediately payable
or will be added to the unpaid principal balance, accrue interest as set forth
above and be payable on the Payment Dates.
13. TRANSFER. Creditor and Holder have the right to sell, assign,
transfer, negotiate, or grant participation in, all or any of its interest
hereunder. In connection therewith, Holder may disclose all documents and
information which Holder now or hereafter may have relating to Debtors.
14. INTEREST. In the event that this Note shall require the payment of
interest in excess of the maximum amount permissible under the applicable law,
Debtors' obligations hereunder shall automatically and retroactively be deemed
reduced to the highest maximum amount permissible under applicable law. In the
event Holder receives as interest an amount that would exceed such maximum
applicable rate, the amount of any excess interest shall not be applied to the
payment of interest hereunder, but shall automatically and retroactively be
applied to the reduction of the unpaid principal balance due hereunder. In the
event and to the extent such excess amount of interest exceeds the outstanding
unpaid principal balance hereunder, any such excess amount shall be immediately
returned to Debtors by Holder. Debtors hereby waive any provisions of any
state or
3
<PAGE> 4
federal law concerning usury or the limitation on the maximum rate of interest
chargeable by a creditor or lender.
15. DISPUTES. This Note will be interpreted in accordance with California
law, including all matters of construction, validity, performance and
enforcement, without giving effect to any principles of conflict of laws. Any
dispute, action or proceeding concerning this Note will be initiated,
maintained, heard and decided exclusively in San Francisco County, California.
Debtors irrevocably waive their right to a jury trial in all such disputes,
actions and proceedings. The prevailing party in any action, litigation or
proceeding including any appeal or the collection of any judgment concerning
this Note will be awarded, in addition to any damages, injunctions or other
relief, and without regard to whether or not such matter be prosecuted to final
judgment, such party's costs and expenses, including reasonable attorneys' fees,
including from in house attorneys and paralegals and Holder shall be entitled
to recover all of its attorneys fees and costs should Holder place this Note in
the hands of an attorney for collection. This Note may not be changed,
modified, amended or terminated orally.
"DEBTORS"
LVL COMMUNICATIONS CORP.
By: /s/ [SIG]
-------------------------------------
Its: CHAIRMAN & CEO
---------------------------------
LVL ADVERTISING, INC.
By: /s/ [SIG]
-------------------------------------
Its: PRESIDENT & CEO
---------------------------------
LVL INTERACTIVE, INC.
By: /s/ [SIG]
-------------------------------------
Its:
---------------------------------
Acknowledged and Agreed to
as of April 12, 1998 by:
PACRIM ACCESS GROUP, INC.
By: /s/ KEIJI MIYAGAMA
----------------------
Its: KEIJI MIYAGAMA
------------------
CEO & PRESIDENT
4
<PAGE> 5
Exhibit 10.7
THIS NOTE HAS NOT BEEN THE SUBJECT OF REGISTRATION UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR UNDER THE SECURITIES LAWS OF ANY STATE AND THE SAME HAS
BEEN ISSUED IN RELIANCE ON EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF SAID
ACT AND SUCH LAWS. THIS NOTE MAY NOT BE SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED
OR OTHERWISE DISPOSED OF EXCEPT AS PERMITTED UNDER SUCH SECURITIES LAWS,
PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM.
10% PROMISSORY NOTE
$150,000 Palo Alto, California
July __, 1998
FOR VALUE RECEIVED, LVL Communications Corporation, a California
corporation (herein referred to as the "Borrower"), promises to pay to the order
of Four M International, a Texas corporation ("Lender"), on the Termination
Date, as defined below, at 1980 Post Oak Boulevard, Suite 1850, Houston, TX
77056, in lawful currency of the United States of America, the principal amount
of One Hundred Fifty Thousand Dollars ($150,000). Borrower further promises to
pay interest to the Lender at the above address, in like currency, from the date
hereof on the entire unpaid principal amount owing hereunder from time to time
until the entire unpaid principal amount hereof is paid in full, at a rate per
annum equal to ten percent (10%). Interest shall be computed on the basis of a
365-day year and shall be calculated for the actual number of days elapsed.
Payment of principal and interest hereunder shall be due and payable on
the earliest of the following (the "Termination Date"): (a) July 31, 1999; (b)
the date of Borrower's receipt of Three Million Dollars ($3,000,000) from one or
more debt or equity financings; (c) execution of any agreement, letter,
memorandum of understanding or similar document relating to the transfer,
disposition or sale of any or all of the capital stock or assets of the Borrower
to anyone other than Digital Power Holding Company; or (d) if sooner terminated
pursuant to any other provisions hereof.
1. Prepayment. This Note may be prepaid in whole or in part without
penalty. Any payments made pursuant to this Note shall be applied first toward
any fees and costs due, then toward interest and then toward principal.
2. Presentment. Except as set forth herein, Borrower waives
presentment, demand and presentation for payment, notice of nonpayment and
dishonor, protest and notice of protest and expressly agrees that this Note or
any payment hereunder may be extended from time to time by the Lender without in
any way affecting the liability of Borrower.
<PAGE> 6
3. Default. Upon the failure to pay when due any principal or interest
hereunder and the continuance of such failure for a period of thirty (30) days
thereafter, all amounts then remaining unpaid under this Note shall be
immediately due and payable. In such event, this Note shall bear interest at the
maximum rate permitted by law. In the event that all monies owed hereunder are
not paid when due, Borrower agrees that it shall be liable for all of Lender's
reasonable costs and expenses incurred in connection with enforcing Lender's
rights under this Note to the extent not prohibited by law, including but not
limited to reasonable attorneys' fees and disbursements.
4. Notice. Any notice regarding this Note to the Borrower shall be made
at 480 Cowper Street, Palo Alto, California 94301. Notice to the Lender shall be
made at 1980 Post Oak Boulevard, Suite 1850, Houston, TX 77056.
5. Assignability and Governing Law. This Note may only be assigned by
the Borrower with the prior written consent of the Lender. This Note is
negotiable and shall be governed by the laws of the State of California.
<TABLE>
<S> <C>
ATTEST: LVL COMMUNICATIONS CORPORATION
By: By:
------------------------------- -----------------------------------
Stephen Venuti, Secretary Calbert Lai, President
</TABLE>
Date: July __, 1998
2
<PAGE> 1
Exhibit 10.8
I-STORM, INC.
LOCK-UP AGREEMENT
I-Storm, Inc.
480 Cowper Street
Palo Alto, California 94301
Ladies and Gentlemen:
This Lock-up Agreement shall apply to an additional 24,000 shares of
non-redeemable Common Stock, $.01 par value per share ("Common Stock"), of
I-Storm, Inc., a Nevada corporation (the "Company") (collectively, the
"Shares"), that have been issued to the undersigned.
The undersigned understands that Weatherly Securities Corp. ("Weatherly"
or the "Placement Agent") has entered into an Agreement with the Company
providing for the private offering ("Private Offering") of up to 735,000 shares
of Cumulative Convertible Series B Preferred Stock by the Company. The
undersigned further acknowledges that the Common Stock has been issued pursuant
to the April 16, 1998 Order of the United States Bankruptcy Court for the
Northern District of California confirming a Plan of Reorganization ("Order and
Plan of Reorganization") for LVL Communications Corporation, a wholly-owned
subsidiary of the Company, and is subject to restrictions and requirements set
forth therein. Pursuant to this Order and Plan of Reorganization, 216,000 shares
of Common Stock were issued to the undersigned pursuant to an eighteen (18)
month lock-up agreement ("Initial Lock-up Agreement) between Fordham Financial
Management, Inc., the Company's former placement agent and the Company; and this
Initial Lock-up Agreement has been accepted by Weatherly and is presently in
force.
In consideration of the agreement by the Placement Agent, or its
designees, to publicly offer and sell the Company's shares of Preferred Stock,
and as an inducement for Weatherly to enter into the Agreement, and for other
good and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, and further, to effectuate compliance with the Order and Plan of
Reorganization, the undersigned agrees that, without the prior written consent
of each of Weatherly, or its designee, and Thomas Schultz, or any successor to
Mr. Schultz as appointed by the Board of Directors of the Company, and as
approved by the Class A Creditors, which are set forth in the Order and Plan of
Reorganization ("Successor"), the undersigned will not, for a period beginning
on August 1, 1998 and continuing for eighteen (18) months thereafter, directly
or indirectly: offer, sell, contract to sell, transfer, assign, contract to
assign, gift, grant any option, warrant to purchase, or right to acquire;
announce the intention to sell, pledge, exchange, contract to exchange, or
otherwise dispose or contract to dispose of any of the Shares, except that
during such eighteen (18) month period the undersigned may make (1) transfers in
private non-public transactions; and (2) gifts to the undersigned's children, or
trusts established for children, provided that any such person or organization
agrees to be bound by the foregoing restrictions on the disposition of such
securities.
<PAGE> 2
The undersigned further understands and agrees that the Company will
place stop transfer instructions against the Shares in accordance with the
restrictions set forth in this Lock-up Agreement. The granting of any consent
under this Lock-up Agreement is within the mutual and absolute discretion of
both Weatherly, or its designee, and Thomas Schultz, or his Successor, and may
be withheld for any reason; and both Weatherly and Thomas Schultz must agree to
grant such consent.
The undersigned understands that the Company and the Placement Agent will
proceed with the proposed Private Offering in reliance upon this executed
Lock-up Agreement, and further, that the Company has relied on the
representations made herein in its issuance of shares of Common Stock to the
undersigned and in its compliance efforts with the Order and Plan of
Reorganization.
Very truly yours,
SOMA 2000, L.L.C.
Date: December , 1998 By:
--- ------------------------------------
<PAGE> 1
Exhibit 10.9
NEITHER THIS NOTE NOR THE SECURITIES ISSUABLE UPON CONVERSION HEREOF HAVE BEEN
THE SUBJECT OF REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
UNDER THE SECURITIES LAWS OF ANY STATE AND THE SAME HAVE BEEN (OR WILL BE, WITH
RESPECT TO THE SECURITIES ISSUABLE UPON CONVERSION HEREOF) ISSUED IN RELIANCE ON
EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF SAID ACT AND SUCH LAWS. NEITHER
THIS NOTE NOR THE SECURITIES ISSUABLE UPON CONVERSION HEREOF MAY BE SOLD,
TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF EXCEPT AS PERMITTED
UNDER SUCH SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM.
CONVERTIBLE LINE OF CREDIT NOTE
$1,000,000 February 5, 1998
FOR VALUE RECEIVED, the undersigned, LVL Communications Corporation, a
California corporation (hereinafter referred to as the "Borrower"), hereby
promises to pay to Trident III, L.L.C., a Cayman Islands exempted company with
limited life, its successors and assigns (the "Lender") at 700 Gemini, Houston,
Texas 77058 or at such other place as the holder hereof may from time to time
designate in writing, the principal sum of up to One Million Dollars
($1,000,000) on the Termination Date, as defined in a certain loan agreement of
even date herewith between the Borrower and the Lender, as the same may be from
time to time amended or supplemented (the "Loan Agreement"), together with
interest from and after the date hereof at the rate of ten percent (10%) per
annum computed on the unpaid principal balance. By acceptance of this
Convertible Line of Credit Note (the "Note"), the Lender represents, warrants,
covenants and agrees that he, she or it will abide by and be bound by its terms
and the terms of the Loan Agreement which are incorporated herein by reference.
Capitalized terms not defined herein shall have the meaning set forth in the
Loan Agreement.
1. Committed Amount. This Note has been issued pursuant to the Loan
Agreement and the Borrower may borrow such principal amount hereunder up to the
Committed Amount (as defined in the Loan Agreement), subject to the provisions
of the Loan Agreement, and the Borrower shall be liable for payment to the
Lender only for such principal amount of the Committed Amount as may be
outstanding, together with interest as aforesaid on such outstanding principal
amount from the date of advance thereof.
2. Security. Repayment of amounts outstanding and/or owing hereunder is
collateralized by the grant of a leasehold deed of trust, security agreement and
assignment of subleases and rents and fixture filing in and to that certain
leasehold interest arising out of that certain Commercial Office Lease dated
February 15, 1996, as amended February 15, 1997, between the Borrower as tenant
and RRC Partners, a California Limited Liability Company as landlord relating to
those certain premises at 499 University Avenue, Palo Alto, California (the
"Leasehold Deed of Trust").
<PAGE> 2
3. Conversion Right. Amounts outstanding from time to time hereunder
will be converted into shares of common stock of the Borrower (the "Common
Stock") as follows:
(a) On the effective date (the "Effective Date") of the Debtors'
Joint Plan of Reorganization (the "Plan") of the Borrower the first one hundred
fifty thousand dollars ($150,000) of the principal owing hereunder shall be
converted into (i) 150,000 shares of a new class of redeemable common stock
("New Common"); and (ii) 110,000 shares of Common Stock, subject to adjustment
pursuant to Section 5 hereof. Furthermore, on the Effective Date, each dollar of
principal owing hereunder in excess of one hundred fifty thousand dollars
($150,000) shall be automatically converted into 1.0 share of New Common and
0.733 shares of Common Stock of the Borrower, subject to adjustment as provided
in Section 5 hereof. (The conversion ratios established in the prior two
sentences of this section shall be referred to as the "Conversion Price.") Any
amount converted shall be deemed to reduce the principal amount outstanding
herewith by the amount so converted and shall proportionately reduce the amount
available to be borrowed by the Borrower pursuant to this Note and the Loan
Agreement. The New Common will have the following rights, entitlements and
privileges: it will have dividend rights on par with those of Common Stock
holders; except as otherwise required by law, each share will vote share for
share as a single class with the Common Stock; the shares will be automatically
redeemed at $1.00 per share upon the earlier of the closing of a subsequent debt
or equity offering in excess of three million dollars ($3,000,000) by the
Borrower (or its successor) or the receipt of proceeds from the Leasehold Deed
of Trust in the event of foreclosure; except as set forth hereinabove the class
shall have liquidation rights that are subordinate to those of the Class 5
Preferred Stock referenced in the Plan. The numbers of shares of Common Stock
and New Common, respectively, issuable upon conversion shall be referred to as
the "Conversion Price."
(b) Notwithstanding any other provision hereof, the Conversion
Right may not be exercised at any time during which a registration statement
under the Securities Act of 1933 is filed but not effective, if such a
conversion would constitute a violation of the registration provisions of such
Act.
4. Conversion Procedure. Conversion will be deemed to have taken place
on the Effective Date of the Plan (the "Conversion Date"). As promptly as
practicable thereafter, the Borrower shall issue and deliver to the Lender
certificates representing the securities to which the Lender, or its successors
or assignees are entitled The person or entity in whose name the certificates
representing the shares of Common Stock issuable upon conversion hereof shall be
deemed to have become a holder of record on the next succeeding day on which the
transfer books are open, but the Conversion Price shall be that in effect on the
Conversion Date. The Borrower covenants that all securities which may be issued
upon exercise of the Conversion Right referenced in Section 3 above will, upon
issuance, be fully paid and nonassessable and free of all taxes, liens and
charges caused or created by the Borrower with respect to the issuance thereof.
2
<PAGE> 3
5. Adjustments. The Conversion Price and the number and kind of
securities which may be received upon the exercise of the Conversion Right
referenced in Section 3 above shall be subject to adjustment from time to time
upon the happening of certain events, as follows:
(a) Stock Splits and Combinations. If the Borrower shall at any
time or from time to time after the date hereof effect a subdivision of its
outstanding shares of Common Stock, the Conversion Price then in effect
immediately before such subdivision shall be proportionately decreased, and
conversely, if the Borrower shall at any time or from time to time after the
date hereof combine its outstanding shares of Common Stock, the Conversion Price
then in effect immediately before such combination shall be proportionately
increased. Any adjustment under this section shall become effective upon the
close of business on the date the subdivision or combination becomes effective.
(b) Certain Dividends and Distributions. In the event that the
Borrower shall at any time or from time to time after the date hereof make or
issue, or fix a record date for the determination of holders of shares of Common
Stock entitled to receive, a dividend or other distribution payable in
additional shares of Common Stock, then and in each such event, the Conversion
Price then in effect shall be decreased as of the time of such issuance or, in
the event that such a record date shall have been fixed, as of the close of
business on such record date, by multiplying the Conversion Price then in effect
by a fraction:
(i) the numerator of which shall be the total number of
shares of Common Stock issued and outstanding immediately prior to the time of
such issuance or the close of business on such record date; and
(ii) the denominator of which shall be the sum of the total
number of shares of Common Stock issued and outstanding immediately prior to the
time of such issuance or the close of business on such record date and the
number of shares of Common Stock issuable in payment of such dividend or
distribution; provided, however, that if such record date shall have been fixed
and such dividend is not fully paid or if such distribution is not fully made on
the date fixed therefor, the Conversion Price shall be recomputed accordingly as
of the close of business on such record date and thereafter such Conversion
Price shall be adjusted pursuant to this subsection as of the time of actual
payment of such dividends or distributions.
(c) Other Dividends and Distributions. In the event that the
Borrower at any time or from time to time after the date hereof shall make or
issue, or fix a record date for the determination of holders of shares of Common
Stock entitled to receive, a dividend or other distribution payable in
securities of the Borrower other than shares of Common Stock, then and in each
such event provisions shall be made so that the holder of this Note shall
receive, upon conversion of this Note, in addition to the number of shares of
Common Stock receivable thereupon, the amount of securities of the Borrower
which such holder would have received had its Note been converted into shares of
Common Stock on the date of such event and had thereafter, during the period
from the date of such event to and including the Conversion Date,
3
<PAGE> 4
retained such securities (together with any distributions payable thereon during
such period) receivable by the holder 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 holder of the Note.
(d) Reclassification, Exchange or Substitution. If the shares of
Common Stock issuable upon exercise of the Conversion Right shall be changed
into the same or different number of shares of any class or classes of capital
stock, whether by capital reorganization, reclassification or otherwise (other
than a subdivision or combination of shares or stock dividend provided for
above, or a reorganization, merger, consolidation or sale of assets provided for
in subsection (e) below), then and in each such event, the holder of this Note
shall have the right thereafter upon exercise of the Conversion Right to receive
the kind and amount of shares of capital stock and other securities and property
receivable upon such reorganization, reclassification or other change, as the
holder of the number of shares of Common Stock issuable upon exercise of the
Conversion Right immediately prior to such reorganization, reclassification or
change, all subject to further adjustment as provided herein.
(e) Reorganization, Merger, Consolidation or Sale of Assets. If,
at any time or from time to time, there shall be a capital reorganization of the
shares of Common Stock (other than a subdivision, combination, reclassification
or exchange of shares provided for elsewhere in this section) or a merger or
consolidation of the Borrower with or into another corporation, or the sale of
all or substantially all of the Borrower's properties and assets to any other
person or entity, then as a part of such reorganization, merger, consolidation
or sale, provision shall be made so that the holder of this Note shall
thereafter be entitled to receive upon exercise of the Conversion Right, the
number of shares of capital stock or other securities or property of the
Borrower, or of the successor corporation resulting from such merger or
consolidation or sale, to which the holder of shares of Common Stock deliverable
upon conversion would have been entitled on such reorganization, merger,
consolidation, or sale. 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 holder of this Note after the reorganization, merger, consolidation or
sale to the end that the provisions of this section (including adjustment of the
Conversion Price then in effect and the number of shares of Common Stock
issuable upon exercise of the Conversion Right) shall be applicable after that
event as nearly equivalent hereto as may be practicable.
(f) Minimum Adjustment. Notwithstanding anything to the contrary
set forth herein, no adjustment of the Conversion Price shall be made in an
amount equal to less than one cent ($.01), but any such lesser adjustment shall
be carried forward and shall be made at the time and together with the next
subsequent adjustment which together with any adjustments so carried forward
shall amount to one cent ($.01) or more.
(g) Certificate of Adjustment. Upon the occurrence of each
adjustment or readjustment of the applicable Conversion Price pursuant to this
section, the Borrower shall promptly compute such adjustment or readjustment in
accordance with the terms hereof and prepare and furnish to the holder of this
Note a certificate, signed by the Chairman of the Board,
4
<PAGE> 5
the President or the Chief Financial Officer, setting forth such adjustment or
readjustment and showing in detail the facts upon which such adjustment or
readjustment is based.
(h) Notices of Record Date. If and in the event that:
(i) the Borrower shall set a record date for the purpose of
entitling the holders of shares of Common Stock to receive a dividend, or any
other distribution, payable otherwise than in cash;
(ii) the Borrower shall set a record date for the purpose of
entitling the holders of shares of Common Stock to subscribe for or purchase any
shares of any class or to receive any other rights;
(iii) there shall occur any capital reorganization of the
Borrower, reclassification of the shares of capital stock of the Borrower (other
than a subdivision or combination of its outstanding shares of Common Stock),
consolidation or merger of the Borrower with or into another corporation, or
sale of all or substantially all of the assets of the Borrower; or
(iv) there shall occur a voluntary or involuntary
dissolution, liquidation, or winding up of the Borrower;
then, and in any such case, the Borrower shall cause to be mailed to the holder
of record of this Note, at least thirty (30) days prior to the dates hereinafter
specified, a notice stating the date: (A) which has been set as the record date
for the purpose of such dividend, distribution, or rights; or (B) on which such
reclassification, reorganization, consolidation, merger, sale, dissolution,
liquidation or winding up is to take place and the record date as of which the
holder of record shall be entitled to exercise the Conversion Right for
securities or other property deliverable upon such reclassification,
reorganization, consolidation, merger, sale, dissolution, liquidation or winding
up.
6. Reservation. The Borrower covenants that prior to the Conversion
Date, the Borrower will at all times have authorized and reserved for the
purpose of issuance upon exercise of the Conversion Right, a sufficient number
of shares of Common Stock and New Common (or other securities subject to the
Conversion Right) to provide for the exercise of the Conversion Right in full.
7. Fractional Shares. No fractional shares of Common Stock shall be
issued upon exercise of the Conversion Right. In lieu of any fractional shares
of Common Stock to which the Lender would otherwise be entitled, the Borrower
shall pay an amount equal to the product of such fraction multiplied by the fair
value of one share of Common Stock on the Conversion Date, as determined in good
faith by the Board of Directors of the Borrower.
5
<PAGE> 6
8. Registration Rights. The Borrower hereby covenants and agrees as
follows:
(a) Definitions. For purposes of this section:
(i) The terms "register," "registered" and "registration"
refer to a registration effected by preparing and filing a registration
statement or similar document in compliance with the Securities Act, and the
declaration of effectiveness of such registration statement or other document by
the Securities and Exchange Commission (the "SEC").
(ii) The term "Registrable Securities" means: (A) the shares
of Common Stock issued or issuable upon conversion of this Note; or (B) any
other securities of the Borrower issued as (or issuable upon the conversion or
exercise of any warrant, right or other security which is issued as) a dividend
or other distribution with respect to, in exchange for or in replacement of the
shares of Common Stock referenced in subsection (ii)(A) immediately above,
excluding in all cases, however, any Registrable Securities sold to the public
pursuant to a registration or an exemption from registration.
(iii) The number of shares of "Registrable Securities then
outstanding" shall be the number of securities outstanding which are Registrable
Securities.
(iv) The term "Holder" as used hereinafter in this Section 8
means any person or entity owning of record Registrable Securities.
(b) Demand Registration Rights.
(i) If the Borrower shall receive, at any time after the
Borrower registers and becomes subject to the reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), a written
request (the "Demand Request") from the Holder, if only one Holder, or in the
event of more than one Holder, the Holders of at least fifty percent (50%) of
the Registrable Securities, requesting that the Borrower file a registration
statement under the Securities Act relating to the Registrable Securities then
outstanding, then the Borrower shall promptly provide notice of such request to
any other Holders (together with a list of the jurisdictions in which the
Borrower intends to attempt to qualify the offer and sale of the Registrable
Securities under applicable state securities laws) and, as soon as is
practicable thereafter, file a registration statement under the Securities Act
relating to or otherwise including all of the Registrable Securities which the
Holder or Holders have requested to be registered, subject to Subsection
8(b)(iii)below.
(ii) If the Holder or Holders intend to distribute the
Registrable Securities covered by the Demand Request by means of an
underwriting, they shall so advise the Borrower as a part of the Demand Request
made pursuant hereto.
6
<PAGE> 7
(iii) All Holders proposing to distribute their securities
through an underwriting (together with the Borrower as set forth in Subsection
8(d) below) shall enter into an underwriting agreement in customary form with
the managing underwriter selected for such underwriting by the Holder (or, if
more than one Holder, the Holders of more than fifty percent (50%) of the
Registrable Securities) and reasonably acceptable to the Borrower.
Notwithstanding any other provision hereof, if the managing underwriter advises
such Holder or Holders in writing that marketing factors require a limitation of
the number of securities to be underwritten, the number of shares of Registrable
Securities that may be included in the registration shall be so limited. Any
Registrable Securities excluded from the underwriting by reason of the managing
underwriter's marketing limitation may, at the discretion of the managing
underwriter, be included in such registration statement but the sale thereof may
be deferred up to ninety (90) days after the effective date thereof at the
request of the managing underwriter. If the managing underwriter has not limited
or otherwise objected to the number of Registrable Securities to be
underwritten, the Borrower may include securities for its own account in such
registration and the number of Registrable Securities which would otherwise have
been included in such registration and underwriting will not thereby be limited.
The Borrower shall be obligated to effect only one (1) demand registration
pursuant hereto. To the extent that the Holder or Holders demand registration
pursuant hereto and any of their Registrable Securities are included for
registration hereunder, the demand registration right provided hereby shall be
deemed to have been exercised.
(c) Piggy-Back Registration Rights. If, at any time after the
Borrower registers and becomes subject to the reporting requirements of the
Exchange Act, the Borrower proposes to file a registration statement relating to
any of its securities under the Securities Act in connection with the public
offering of such securities solely for cash (other than a registration on Form
S-4, Form S-8 or any form which does not include substantially the same
information as would be required to be included in a registration statement
covering the sale of the Registrable Securities), the Borrower shall promptly
give each Holder written notice of such registration (the "Piggy-Back Notice");
provided, however, that the Borrower shall have no obligation to so notify
Holders with respect to any registration subsequent to the first of such
registrations to occur after the issuance of this Note and shall have no
obligation if such registration statement relates to an underwritten offering by
the Borrower and the managing underwriter of the subject proposed offering
expresses its objection thereto to the Borrower. Upon the written request of a
Holder given within twenty (20) days after receipt of such Piggy-Back Notice
from the Borrower, the Borrower shall, subject to the provisions of Subsections
8(h) and 8(m) below, cause to be included in the registration statement filed by
the Borrower under the Securities Act all of the Registrable Securities that
such Holder has requested to be registered; provided, however, that the Borrower
shall have no such obligation if such registration statement relates to an
underwritten offering by the Borrower and the managing underwriter of the
subject offering has expressed its objection to the same to the Borrower. To the
extent that a Holder is offered the opportunity hereunder to include its
Registrable Securities in a registration statement and includes any of its
Registrable Securities therein, the piggy-back registration right provided
hereby shall be deemed to have been exercised.
7
<PAGE> 8
(d) Obligations of the Borrower. Whenever required under this
section to file a registration statement to effect the registration of any
Registrable Securities, the Borrower shall, as expeditiously as reasonably
possible:
(i) Prepare and file with the SEC a registration statement
with respect to such Registrable Securities and use its best efforts to cause
such registration statement to become effective, and, upon the request of the
Holder or, in the case of more than one Holder, the Holders of at least fifty
percent (50%) of the Registrable Securities, keep such registration statement
effective for at least six (6) months.
(ii) Prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus included therein
as may be necessary to comply with the provisions of the Securities Act with
respect to the disposition of all securities covered by such registration
statement.
(iii) Furnish to the Holders such numbers of copies of a
prospectus, including a preliminary prospectus, in conformity with the
requirements of the Securities Act, and such other documents as it may
reasonably request in order to facilitate the disposition of Registrable
Securities owned by such Holders.
(iv) Use its best efforts to register and qualify the
securities covered by such registration statement under the securities laws of
such jurisdictions as shall be reasonably requested by the Holders for the
distribution of the securities covered by the registration statement, provided
that the Borrower shall not be required in connection therewith or as a
condition thereto to qualify to do business or to file a general consent to
service of process in any such jurisdiction.
(v) In the event of any underwritten public offering, enter
into and perform its obligations under an underwriting agreement with terms
generally satisfactory to the managing underwriter of such offering.
(vi) Notify the Holders promptly after the Borrower shall
have received notice thereof, of the time when the registration statement
becomes effective or any supplement to any prospectus forming a part of the
registration statement has been filed.
(vii) Notify the Holders of any stop order suspending the
effectiveness of the registration statement and use its reasonable best efforts
to remove such stop order.
(e) Furnish Information. It shall be a condition precedent to the
obligations of the Borrower to take any action pursuant hereto that any Holder
seeking to include any of its Registrable Securities in a registration statement
filed by the Borrower pursuant hereto shall furnish to the Borrower such
information regarding itself, the Registrable Securities held by it, and the
intended method of disposition of such securities as shall be required to effect
the registration of its Registrable Securities. In that connection, each such
Holder shall be required
8
<PAGE> 9
to represent to the Borrower that all such information which is given is both
complete and accurate in all material respects.
(f) Definition of Expenses.
(i) "Registration Expenses" shall mean all expenses incurred
by the Borrower in complying with Sections 8(b) and 8(c) hereof, including
without limitation, all registration and filing fees, printing expenses, fees
and disbursements of counsel for the Borrower, blue sky fees and expenses, and
the expense of any special audits incident to or required by any such
registration (but excluding the compensation of regular employees of the
Borrower which shall be paid in any event by the Borrower).
(ii) "Selling Expenses" shall mean all underwriting
discounts, selling commissions and underwriters' expense allowance applicable to
the sale and all fees and disbursements of any special counsel (other than the
Borrower's regular counsel) for any Holder.
(g) Expenses of Registration. All Registration Expenses incurred
in connection with any registration, qualification or compliance herewith, shall
be borne by the Borrower, and all Selling Expenses shall be borne by the Holders
of the securities so registered pro rata on the basis of the number of
Registrable Securities so registered; provided, however, that the Borrower shall
not be required to pay any Registration Expenses if, as a result of the
withdrawal of a request for registration by a Holder, the registration statement
does not become effective. In the case of such withdrawal and the failure of
such Holder to agree so to forfeit, such Holder shall bear such Registration
Expenses on a pro rata basis based on the number of Registrable Securities so
included in the registration request.
(h) Underwriting Requirements. All Holders proposing to distribute
Registrable Securities through an underwriting pursuant hereto shall (together
with the Borrower and any other securityholders distributing their securities
through such underwriting) enter into an underwriting agreement in customary
form with the underwriter or underwriters selected for underwriting by the
Borrower. Notwithstanding any other provision of this section, at the request of
the managing underwriter, each Holder shall delay the sale of Registrable
Securities which such Holder has requested be registered under this section for
a period of up to ninety (90) days commencing with the effective date of the
registration statement. Notwithstanding anything to the contrary herein, no such
delay shall be required with respect to securities offered by holders of
securities who have requested the Borrower to register such securities pursuant
to a mandatory registration obligation of the Borrower if other securityholders
of the Borrower who have not made requests pursuant to such an obligation are
not subject to a similar delay. If a Holder disapproves of the terms of any such
underwriting, he may elect to withdraw therefrom by written notice to the
Borrower and the underwriter. Any Registrable Securities excluded or withdrawn
from such underwriting shall not be withdrawn from such registration except at
the election of such Holder.
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<PAGE> 10
(i) Delay of Registration. No Holder shall have any right to
obtain or seek an injunction restraining or otherwise delaying any such
registration as the result of any controversy that might arise with respect to
the interpretation or implementation of this section.
(j) Indemnification. In the event that any Registrable Securities
are included in a registration statement pursuant hereto:
(i) To the extent permitted by law, the Borrower will
indemnify and hold harmless each Holder, the officers, directors and partners of
each Holder, any underwriter (as defined in the Securities Act) for such Holder
and each person or entity, if any, that controls such Holder or underwriter
within the meaning of the Securities Act or the Exchange Act, against any
losses, claims, damages or liabilities (joint or several) to which they may
become subject under the Securities Act, the Exchange Act or other federal or
state law, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any of the following statements,
omissions or violations (collectively a "Violation"): (A) any untrue statement
or alleged untrue statement of a material fact contained in such registration
statement, including any preliminary prospectus or final prospectus contained
therein or any amendments or supplements thereto; (B) the omission or alleged
omission to state therein a material fact required to be stated therein, or
necessary to make the statements therein not misleading; or (C) any violation or
alleged violation by the Borrower of the Securities Act, the Exchange Act, any
state securities law or any rule or regulation promulgated under the Securities
Act, the Exchange Act or any state securities law; and the Borrower will
reimburse each such Holder, officer, director or partner, underwriter or
controlling person for any legal or other expenses reasonably incurred by them
in connection with investigating or defending any such loss, claim, damage,
liability or action; provided, however, that the indemnity agreement contained
in this subsection shall not apply to amounts paid in settlement of any such
loss, claim, damage, liability or action if such settlement is effected without
the consent of the Borrower (which consent shall not be unreasonably withheld),
nor shall the Borrower be liable in any such case for any such loss, claim,
damage, liability or action to the extent that it arises out of or is based upon
a Violation which occurs in reliance upon and in conformity with written
information furnished expressly for use in connection with such registration by
a Holder, underwriter or controlling person; and further provided, however, that
the foregoing indemnity agreement is subject to the condition that, insofar as
it relates to any untrue statement, alleged untrue statement, omission or
alleged omission made in any preliminary prospectus but eliminated or remedied
in the definitive prospectus, such indemnity agreement shall not inure to the
benefit of the underwriter (or the benefit of any person or entity that controls
such underwriter), if a copy of the definitive prospectus was not sent or given
to such person or entity with or prior to the confirmation of the sale of such
securities to such person or entity.
(ii) To the extent permitted by law, each selling Holder will
indemnify and hold harmless the Borrower, each of its directors, each of its
officers who have signed the registration statement, each person, if any, who
controls the Borrower within the meaning of the Securities Act or the Exchange
Act, any underwriter (within the meaning of the Securities Act)
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<PAGE> 11
for the Borrower, any person who (or entity that) controls such underwriter, and
any other securityholder selling securities in such registration statement or
any of its directors or officers or any person who controls such securityholder,
against any losses, claims, damages or liabilities (joint or several) to which
the Borrower or any such director, officer, controlling person (or entity), or
underwriter or controlling person, or other such securityholder or director,
officer or controlling person may become subject, under the Securities Act, the
Exchange Act or other federal or state law, insofar as such losses, claims,
damages or liabilities (or actions in respect thereto) arise out of or are based
upon any Violation, in each case to the extent (and only to the extent) that
such Violation occurs in reliance upon and in conformity with written
information furnished by the securityholder expressly for use in connection with
such registration; and each such Holder will reimburse any legal or other
expenses reasonably incurred by the Borrower or any such director, officer,
controlling person (or entity), underwriter or controlling person (or entity),
other Holder, officer, director or controlling person in connection with
investigating or defending any such loss, claim, damage, liability or action;
provided, however, that the indemnity agreement contained in this subsection
shall not apply to amounts paid in settlement of any such loss, claim, damage,
liability or action if such settlement is effected without the consent of such
Holder, which consent shall not be unreasonably withheld.
(iii) Promptly after receipt by an indemnified party under
this Section 8(j) of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in respect thereof
is to be made against any indemnifying party under this Section 8(j), notify the
indemnifying party in writing of the commencement thereof and the indemnifying
party shall have the right to participate in, and, to the extent the
indemnifying party so desires, jointly with any other indemnifying party
similarly notified, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party shall
have the right to retain its own counsel, with the fees and expenses to be paid
by the indemnifying party, if representation of such indemnified party by the
counsel retained by the indemnifying party would be inappropriate due to actual
or potential differing interests between such indemnified party and any other
party represented by such counsel in such proceeding. The failure to notify an
indemnifying party within a reasonable time of the commencement of any such
action, to the extent prejudicial to its ability to defend such action, shall
relieve such indemnifying party of any liability to the indemnified party under
this Section 8(j), but the omission so to notify the indemnifying party will not
relieve it of any liability that it may have to any indemnified party otherwise
than under this Section 8(j).
(k) Reports Under Securities Exchange Act of 1934. With a view
toward making available to the Holder the benefits of Rule 144 promulgated under
the Securities Act and any other rule or regulation of the SEC that may at any
time permit a Holder to sell securities of the Borrower to the public without
registration, the Borrower agrees to:
(i) use its best efforts to make and keep public information
available, as those terms are understood and defined in Rule 144, at all times;
11
<PAGE> 12
(ii) use its best efforts to file with the SEC in a timely
manner all reports and other documents required of the Borrower under the
Securities Act and the Exchange Act; and
(iii) furnish to each Holder, so long as such Holder owns any
Registrable Securities, promptly upon request such information as may be
reasonably requested in order to allow such Holder to avail itself of any rule
or regulation of the SEC which permits the selling of any such securities
without registration.
(l) Termination of the Borrower's Obligations.
(i) The Borrower shall have no obligation pursuant to
Section 8 with respect to any request made by a Holder after the second
anniversary of the Termination Date.
(ii) Notwithstanding any provision hereof to the contrary,
the Borrower shall not be required to effect any registration under the
Securities Act or under any state securities laws on behalf of any Holder if, in
the opinion of counsel for the Borrower, the offering or transfer by such Holder
in the manner proposed (including, without limitation, the number of shares
proposed to be offered or transferred and the method of offering or transfer) is
exempt from the registration requirements of the Securities Act and the
securities laws of applicable states.
(m) Lock Ups; Limitation on Rights. The Lender (and any subsequent
Holder) by acceptance hereof hereby agrees that, in the event that subsequent to
the date hereof, the Borrower conducts an underwritten public offering of its
securities: (i) the right to demand or otherwise request registration pursuant
to the provisions hereof shall be subject to the approval of the underwriter of
such public offering; and (ii) the Lender (and any subsequent Holder) shall
agree to refrain from exercising such rights or selling, transferring or
otherwise disposing of any of the Registrable Securities for a period of up to
nine (9) months should the underwriter so request in writing.
(n) Restricted Securities. By acceptance hereof, the Lender (and
any subsequent Holder) understands and agrees that this Note and the shares of
Common Stock and New Common issuable upon conversion hereof are "restricted
securities" under the federal securities laws inasmuch as they are being
acquired from the Borrower in a transaction not involving a public offering and
have not been the subject of registration under the Securities Act and that
under such laws and applicable regulations such securities may be resold in the
absence of registration under the Securities Act only in certain limited
circumstances. The Lender (and any subsequent Holder by acceptance hereof)
represents that it is familiar with Rule 144 promulgated under the Securities
Act, as presently in effect, and understands the resale limitations imposed
thereby and by the Securities Act.
9. Legends. It is understood that this Note and each certificate
evidencing shares of Common Stock issuable upon conversion hereof (or evidencing
any other securities issued with
12
<PAGE> 13
respect thereto pursuant to any stock split, stock dividend, merger or other
form of reorganization or recapitalization) shall bear the legends (in addition
to any legends which may be required in the opinion of the Borrower's counsel by
the securities laws of the state where the Lender is located) substantially as
set forth on the first page of this Note.
10. Presentment. Except as set forth herein, Borrower waives
presentment, demand and presentation for payment, notice of nonpayment and
dishonor, protest and notice of protest and expressly agrees that this Note or
any payment hereunder may be extended from time to time by the Lender without in
any way affecting the liability of Borrower.
11. Notices.
(a) Notices to the Lender. Any notice required by the provisions
of this Note to be given to the Lender (or a subsequent Holder) shall be in
writing and may be delivered by personal service, facsimile transmission or by
registered or certified mail, return receipt requested, with postage thereon
fully prepaid or overnight delivery courier. All such communications shall be
addressed to the Lender or Holder of record at its address appearing on the
books of the Borrower. Service of any such communication made only by mail shall
be deemed complete on the date of actual delivery as shown by the addressee's
registry or certification receipt or at the expiration of the third (3rd)
business day after the date of mailing, whichever is earlier in time.
b. Notices to the Borrower. Whenever any provision of this Note
requires a notice to be given or a request to be made to the Borrower by the
Lender (or a subsequent Holder), then and in each such case, any such notice or
request shall be in writing and shall be sent by registered or certified mail,
return receipt requested with postage thereon fully prepaid to the Borrower at
its principal place of business. No notice given or request made hereunder shall
be valid unless signed by the Lender (or subsequent Holder) giving such notice
or request.
12. Events of Default.
(a) Upon the occurrence of an Event of Default (as defined in the
Loan Agreement), this Note shall be considered to be in default and the entire
unpaid principal sum hereof, together with accrued interest, shall at the option
of the holder hereof become immediately due and payable in full. Upon the
occurrence of an Event of Default and the placement of this Note in the hands of
an attorney for collection, the Borrower agrees to pay reasonable collection
costs and expenses, including reasonable attorneys' fees and interest from the
date of the default at the maximum rate permitted by law computed on the unpaid
principal balance.
(b) The Lender may waive any Event of Default hereunder. Such
waiver shall be evidenced by written notice or other document specifying the
Event or Events of Default being waived and shall be binding on all existing or
subsequent Lenders under this Note.
13
<PAGE> 14
13. Survival. In the event that all or a portion of the principal
hereunder is converted pursuant to Section 3 above, Section 8 hereof relating to
registration rights shall survive the termination of this Note upon cancellation
hereof resulting from repayment of the balance of amounts outstanding hereunder
or the issuance of a new note pursuant to Section 4 above.
14. Construction; Governing Law. The validity and construction of this
Note and all matters pertaining hereto are to be determined in accordance with
the laws of the State of Texas without regard to the conflicts of law principles
thereof.
IN WITNESS WHEREOF, Borrower, by its appropriate officers thereunto duly
authorized, has executed this Note and affixed its corporate seal as of this 4th
day of February 1998.
ATTEST: LVL COMMUNICATIONS CORPORATION
By: By:
-------------------------- -----------------------------
Secretary Name
-----------------------
Its:
-----------------------
14
<PAGE> 15
Exhibit 10.9
AMENDMENT TO THE
CONVERTIBLE LINE OF CREDIT NOTE
THIS AMENDMENT (the "Amendment") to the Convertible Line of Credit Note,
dated February 5th, 1998, by and between LVL Communications Corporation, a
California corporation (the "Borrower") and Trident III, L.L.C., a Cayman
Islands exempted company with a limited life (the "Lender).
WHEREAS, the Borrower entered into a Loan Agreement dated February 5,
1998 with the Lender, and pursuant to such Loan Agreement, the Borrower
executed, in favor of the Lender, a Convertible Line of Credit Note ("Note")
dated February 5th, 1998, providing the Lender, at Section 3, with the option of
converting all or a portion of the Note into certain redeemable and
non-redeemable Common Stock of the Borrower, or into a successor entity of the
Borrower;
WHEREAS, the Borrower subsequently submitted an Amended Plan of
Reorganization (the "Amended Plan") to the United States Bankruptcy Court for
the Northern District of California on March 24, 1998, and such Amended Plan was
approved by the Bankruptcy Court on April 16, 1998, without creditor objection;
and
WHEREAS, prior to the submission of the Amended Plan, the Borrower and
the Lender had agreed that the conversion ratios set forth below as amended
Section 3(a) were the true and correct conversion ratios for the Note, and the
terms of the certain redeemable Common Stock and non-redeemable Common Stock and
these conversion ratios and terms had been contemplated and approved by the
confirmed Amended Plan;
NOW, THEREFORE, with the consent of the Lender, the Borrower hereby
amends Section 3(a) of the Note to reflect the "Amended Conversion Price" and
terms of the redeemable and non-redeemable Common Stock as follows:
(a) Immediately following the effective date (the "Effective Date") of
the Debtors' Joint Plan of Reorganization (the "Plan") of the Borrower, (i) the
first one hundred fifty thousand dollars ($150,000) of the principal owing
hereunder shall, at the option of the Lender, be converted into 150,000 shares
of a new class of redeemable Common Stock ("New Common"); and 120,000 shares of
Common Stock shall be issued to the Lender, subject to adjustment pursuant to
Section 5 hereof; (ii) furthermore, immediately following the Effective Date,
each dollar of principal owing hereunder up to the next three hundred fifty
thousand dollars ($350,000) shall be converted at the option of the Lender into
1.0 shares of New Common; and 0.80 shares of Common Stock shall be issued to the
Lender for each dollar of principal owing up to such additional $350,000; (iii)
furthermore, immediately following the Effective Date each dollar of principal
owing hereunder in excess of five hundred thousand dollars ($500,000) (A) shall
be converted at the option of the Lender into 1.0 share of New
<PAGE> 16
Common; and (B) 0.40 shares of Common Stock of the Borrower shall be issued to
the Lender for each dollar of principal owing up to such additional $500,000,
subject to adjustment as provided in Section 5 hereof. (The conversion ratios
established in the prior two sentences of this section shall be referred to as
the "Conversion Price.") Any amount converted shall be deemed to reduce the
principal amount outstanding herewith by the amount so converted and shall
proportionately reduce the amount available to be borrowed by the Borrower
pursuant to this Note and the Loan Agreement. The New Common will have the
following rights, entitlements and privileges: it will have dividend rights on
par with those of Common Stock holders; except as otherwise required by law,
each share will vote share for share as a single class with the Common Stock;
the shares will be redeemed at the option of the Lender at $1.00 per share upon
the earlier of the closing of a subsequent debt or equity offering in excess of
three million dollars ($3,000,000) by the Borrower (or its successor) or the
receipt of proceeds from the Leasehold Deed of Trust in the event of
foreclosure.
IN WITNESS WHEREOF, Borrower, by its appropriate officers thereto, duly
authorized, has executed this Amendment to the Convertible Line of Credit Note
as of this 28th day of July, 1998.
ATTEST: LVL COMMUNICATIONS CORPORATION
By: By:
------------------------------ -------------------------------
Secretary Calbert Lai, President
CONSENT:
TRIDENT III, L.L.C.
By:
------------------------------
2
<PAGE> 1
Exhibit 10.10
EL CAMINO LEASE
OVERVIEW OF MAJOR CONTRACT POINTS
<TABLE>
<CAPTION>
PARTIES TO AGREEMENT
- --------------------
<S> <C>
Master lessor: Sobrato Development Companies #850
Sublessor: Dialog Corporation
Sublessee: I-Storm, Inc.
</TABLE>
PARAGRAPH 1(c) -- CONFERENCE ROOM NOTICE
- ----------------------------------------
Need to provide prior written notice requesting use of any of the conference
rooms. There are 7 conference rooms with size capacity of approximately: one
each of 30, 25, 10 plus four rooms of about 3 to 4 in size. Request should be
made of Tom Bodenlos, the facilities manager, who works for the management firm
of CB Richard Ellis and who offices on the first floor across from the guard
station. Suggest that Becky Schulz handle all requests. Tom can be reached at:
<TABLE>
<S> <C>
Tom Bodenloss
Telephone 650-254-8080
Fax 650-254-7070
E-mail [email protected]
</TABLE>
<TABLE>
<CAPTION>
PARAGRAPH 2 -- TERM OF LEASE
- ----------------------------
<S> <C>
Commencement date March 23, 1999
Expiration date February 18, 2001
</TABLE>
<TABLE>
<CAPTION>
PARAGRAPH 3 -- RENT
- ------------------
<S> <C>
Basic rent: Starts April 1, 1999, payable in advance. Monthly
payment, $2.45 per rentable SF, $28,140.70 based on
11,486 SF.
Adjusts on March 23, 2000, one yr anniversary of
Commencement Date. Monthly payment, $2.55 per rentable
SF, $29,289.30 based on 11,486 SF.
Additional rent: Starts April 1, 1999, payable in advance. Will be
calculated by Dialog. FYI, amount was 61 cents per RSF in
1997; 66 cents in 1998 and may be as high as 89 cents in
1999. However, see cap below.
Cap: For period of April 1, 1999 thru January 31, 2000, if
additional rent calculation is greater than 70 cents per
RSF, I-Storm will receive credit against basic rent in
February 2000 and following months if needed.
For period of February 1, 2000 thru Expiration Date, if
additional rent calculation is greater than 74 cents per
RSF, I-Storm will receive refund on the Expiration Date.
Workstations: See workstation verbal agreement below; rent of $1,000
per month.
</TABLE>
1
<PAGE> 2
PARAGRAPH 4 -- SECURITY DEPOSIT
- -------------------------------
Security deposit of $28,140.70, which is equivalent to one month's basis rent,
was paid when lease was signed. Deposit to be returned within 30 days after
Sublessee vacates.
PARAGRAPH 5 -- IMPROVEMENTS
- ---------------------------
Dialog, Sublessor, is responsible for installing double door entry at their
cost. I-Storm is responsible for all other improvements, but will be provided a
tenant improvement allowance of $22,972.00 which is $2.00 per rentable SF. See
comments below in regard Exhibit D -- Work Letter.
PARAGRAPH 7 -- INCORPORATION OF MASTER LEASE
- --------------------------------------------
For the most part, our sublease is subject to the master lease.
Points noteworthy of mention:
- ML paragraph #4: Sublessee's right to erect any satellite/microwave
transmission devices on the roof shall be subject to Sublessee's obtaining
the prior written consent of Sublessor (whose consent shall not be
unreasonably withheld or delayed) and of Master Lessor.
- ML paragraph 11A: We are responsible for repair and maintenance of the
interior of subleased Premises.
- ML paragraph 12C: We are responsible for maintaining $2.0 million of
general liability insurance and in naming the Master Lessor and Sublessor
as additional insureds on any and all insurance policies that are required
under the Master Lease.
EXHIBIT D -- WORK LETTER
- ------------------------
Paragraph 1(a). We are supposed to deliver space plans to Dialog. Suggest we
talk to Bodenlos immediately since our improvements are minimal and do not
include any hard walls, etc.
Paragraph 1(b). If we had hard wall improvements, we need to have permission of
Sublessor and Master Lessor. Would also need permits, licenses, etc.
Paragraph 1(e). For mechanical work, need to use Newcomb Mechanical; for
electric: Access Electric.
Paragraph 3. Indicates that the tenant improvement allowance may be applied to
"payments in respect of architectural and engineering fees, consultants, legal
fees, moving expenses, equipment or communication requirements and hard costs
of construction in connection with the Improvement Work. Improvement Work is
defined as the construction, furnishing and installation of Sublessee's Initial
Improvements which is defined as all improvements, equipment or fixtures that
are necessary for the Sublessee's use and occupancy of the Premises. Thus, it
appears that I-Storm has some latitude on what to include in such costs (e.g.
telephone work, repositioning of cubicals, possibly the set-up of our own
workstations, etc.) It would not include the cost to move from Cowper to El
Camino.
2
<PAGE> 3
WORKSTATION VERBAL AGREEMENT
- ----------------------------
Per Bob Tomz telephone conversation with Victor Cohen (Dialog CFO), work
stations will be rented to I-Storm at rate of $1,000 per month for 30 stations
($900 if 20 stations). I-Storm would be responsible for relocating any
workstations from one area to another. Dialog would be responsible for taking
out any stations not wanted and for repairing those stations which were
canalbalized.
3
<PAGE> 4
[LOGO]
EXHIBIT A
LEASE BETWEEN
DIALOG INFORMATION SERVICES, INC., AND
SOBRATO DEVELOPMENT COMPANIES #850
<TABLE>
<CAPTION>
Section Page #
- ------- ------
<S> <C>
Parties 1
Definitions 1
Parcel Map 1
Land 1
Building 1
Common Area 1
Tenancy-In-Common Agreement 1
Premises 1
Premises 1
Use 1
Term and Rental 2
Rental Adjustment 2
Early Occupancy 2
Late Charges 2
Possession 3
Acceptance of Possession and Covenants to Surrender 3
Uses Prohibited 4
Alterations and Additions 4
Maintenance of Premises 4
Tenant's Obligations 4
Landlord's Obligations 5
Amortization of Certain Capital Replacements 5
Hazard Insurance 5
Tenant's Use 5
Landlord's Insurance 6
Tenant's Insurance 6
Waiver 6
Taxes 6
Utilities 7
Abandonment 7
Free From Liens 7
Compliance With Governmental Regulations 7
Toxic Waste and Environmental Damage 7
Tenant's Responsibility 7
Tenant's Indemnity Regarding Hazardous Materials 8
Actual Release by Tenant 8
Landlord's Indemnity Regarding Hazardous Materials 9
Environmental Monitoring 9
Indemnity 9
Advertisements and Signs 10
Attorney's Fees 10
Tenant's Default 10
Remedies 10
Right to Re-enter 11
Abandonment 11
No Termination 11
Surrender of Lease 11
This paragraph intentionally left blank 12
Landlord's Default 12
Notices 12
</TABLE>
<PAGE> 5
<TABLE>
<S> <C>
Entry by Landlord 12
Destruction of Premises
Destruction by an Insured Casualty 12
Destruction by an Uninsured Casualty 13
Destruction during the Last Year of the Lease Term 13
Assignment or Sublease 13
Consent by Landlord 13
Assignment or Subletting Consideration 14
No Release 14
Effect of Default 14
Permitted Transfers 14
Condemnation 14
Effects of Conveyance 15
Subordination 15
Waiver 15
Holding Over 16
Successors and Assigns 16
Estoppel Certificates 16
Option to Extend the Lease Term 16
Grant and Exercise of Option 16
Determination of Fair Market Rental 17
Resolution of a Disagreement over the Fair Market Rental 17
Options 18
Quiet Enjoyment 18
Brokers 18
Landlord's Liability 18
Authority of Parties 18
Transportation Demand Management programs 18
Right Of First Offering To Purchase 18
Dispute Resolution 19
Miscellaneous Provisions 19
Rent 19
This paragraph intentionally left blank 19
Performance by Landlord 19
Interest 20
Rights and Remedies 20
Survival of Indemnities 20
Severability 20
Choice of Law 20
Time 20
Entire Agreement 20
Representations 20
Headings 20
Exhibits 20
Exhibit "A" - Parcel Map 21
Exhibit "B" - Tenancy In Common and Maintenance Agreement 22
</TABLE>
Page ii
<PAGE> 6
[GRAPHIC]
1. PARTIES: THIS LEASE, is entered into on this 10th day of MARCH, 1994,
between SOBRATO DEVELOPMENT COMPANIES #850, a California Limited Partnership,
whose address is 10600 North De Anza Boulevard, Suite 200, Cupertino, CA 95014
and DIALOG INFORMATION SERVICES, INC., a California Corporation, whose address
is 3460 Hillview Avenue, Palo Alto, CA 94304, hereinafter called respectively
Landlord and Tenant.
2. DEFINITIONS:
A. PARCEL MAP. The term "Parcel Map" shall mean that certain
subdivision map entitled "Tract No. 7813 - Skyview" which map was filed for
record in the Office of the Recorder of Santa Clara County, California on the
10th day of June, 1986, Book 561, pages 1,2,3, and 4. Page 2 of the Parcel Map
is attached hereto as Exhibit "A"
B. LAND. The term "Land" shall mean that certain real property more
particularly described as Lot 1 on the Parcel Map.
C. BUILDING. The term "Building" shall mean that seven (7) story
concrete and steel building situated on the Land containing 133,500 square feet
and all interior improvements existing therein.
D. COMMON AREA. The term "Common Area" shall mean (i) the site area
surrounding the Building on Lot 1 and (ii) that certain real property beneath
Lot 1 described as Lot 2 on the Parcel Map consisting of a three (3) level
underground garage shared by Landlord as the owner of Lot 1 and the owners of
lots 3 through 7 inclusive.
E. TENANCY-IN-COMMON AGREEMENT. The term "Tenancy-In Common Agreement"
shall mean that certain Tenancy-In-Common and Maintenance Agreement,
Declaration of Covenants, Conditions and Restrictions and Grant of Easements
recorded June 10, 1986 as amended September 8, 1986, attached hereto as Exhibit
"B".
F. PREMISES. The term "Premises" shall mean (i) the Land; (ii) the
Building; and (iii) all of Landlord's rights with respect to the Common Area as
more particularly described in the Tenancy-In-Common Agreement.
3. PREMISES: Landlord hereby leases the Premises to Tenant, and Tenant
hires the Premises from Landlord. Landlord also hereby assigns to Tenant
for the term of this Lease all of Landlord's rights in and to the Common
Area as the owner of Lot 1 under the Tenancy in Common Agreement. Tenant
shall perform the duties of Landlord as the Managing Owner under such
agreement until Lots 3 through 7 (the "Adjacent Properties") are developed
at which time Landlord shall resume the duties of the Managing Owner.
Notwithstanding the terms of the Tenancy in Common Agreement, Tenant
shall be responsible for 100% of the variable costs of maintaining the
garage (e.g. sweeping, security, etc.) until the Adjacent Properties are
developed and the garage is shared with the other lot owners. The fixed
costs associated with the garage (e.g. taxes and insurance) shall be
prorated pursuant to section 1.9 of the Tenancy in Common Agreement at all
times during the Lease Term.
Landlord reserves the right to make changes to the Common Area and
construct additional buildings on the Adjacent Properties provided such changes
to do materially affect Tenant's access to the Premises or reduce the parking
available to Tenant.
4. USE: Tenant shall use the Premises only for the following purposes
and
Page 1
<PAGE> 7
shall not change the use of the Premises without the prior written consent of
Landlord: Office, research and development, marketing, customer training, data
center, light manufacturing, storage and other lawful office related uses.
Tenant shall have the right to erect satellite/microwave transmission devices
on the roof of the Building provided such devices are installed in compliance
with the provisions of paragraph 10 of the Lease. Landlord makes no
representation or warranty that any specific use of the Premises desired by
Tenant is permitted pursuant to any Laws.
5. TERM AND RENTAL: The term ("Lease Term") shall be for one hundred
twenty (120) months, commencing on the 23rd day of January, 1995 ("Commencement
Date"), and ending on the 22nd day of January, 2005, ("Expiration Date"). In
addition to all other sums payable by Tenant under this Lease, Tenant shall pay
as base monthly rent ("Base Monthly Rent") for the Premises, as increased
pursuant to paragraph 4(A) below, the sum of One Hundred Sixty Thousand Two
Hundred and No/100 Dollars ($160,200.00). Base Monthly Rent shall be due on or
before the first day of each calendar month during Lease Term. All sums payable
by Tenant under this Lease shall be paid in lawful money of the United States
of America, without offset or deduction, and shall be paid to Landlord at the
address specified in paragraph 1 of this Lease or at such place or places as
may be designated from time to time by Landlord. Base Monthly Rent for any
period less than a calendar month shall be a pro rata portion of the monthly
installment.
A. RENTAL ADJUSTMENT: Beginning thirty (30) months after the
Commencement Date, and every thirty (30) months thereafter, the then payable
Base Monthly Rent shall be subject to adjustment based on the increase, if any,
in the Consumer Price Index ("Adjustment Date"). The basis for computing the
adjustment shall be the U.S. Department of Labor, Bureau of Labor Statistic's
Consumer Price Index for All Urban Consumers, All Items, 1982-84=100, for the
San Francisco-Oakland-San Jose area ("Index"). The Index most recently
published preceding the commencement of the Lease (or previous Adjustment Date,
as applicable), shall be considered the "Base Index". If the Index most
recently published preceding the Adjustment Date ("Comparison Index") is
greater than the Base Index, the then payable Base Monthly Rent shall be
increased by multiplying the then payable Base Monthly Rent by a fraction, the
numerator of which is the Comparison Index and the denominator of which is the
Base Index. Notwithstanding any subsequent decrease in the Index, the increase
in the CPI for any calendar year shall never be less than three percent (3%)
per year nor more than six percent (6%) per year. On adjustment of the Base
Monthly Rent Landlord shall notify Tenant by letter stating the new Base
Monthly Rent. Landlord's calculation of the Base Monthly Rent escalation shall
be conclusive and binding unless Tenant objects to said calculation within a
thirty (30) day period following receipt of such determination from Landlord.
If the Index base year is changed so that it differs from 1982-84=100, the
Index shall be converted in accordance with the conversion factor published by
the United States Department of Labor, Bureau of Labor Statistics. If the Index
is discontinued or revised during the Lease Term, such other government index
or computation with which it is replaced shall be used in order to obtain
substantially the same result as would be obtained if the index had not been
discontinued or revised.
B. EARLY OCCUPANCY: Tenant shall be allowed to occupy the Premises prior
to Commencement Date from and after November 15, 1994, but not earlier that
November 15, 1994. In the event Tenant elects to occupy the Premises prior to
the Commencement Date ("Early Occupancy Period"), such occupancy shall be
subject to all the terms and conditions of the Lease, except that no monthly
rent, property taxes, property insurance or exterior maintenance shall be due or
payable by Tenant during the Early Occupancy Period. Tenant shall, however, be
responsible for the payment of any utilities, janitorial or security services
during the Early Occupancy Period unless Tenant is occupying the building
solely for the purposes of completing Alterations to the Building in which
event no utility payments shall be due during this period.
6. LATE CHARGES: Tenant hereby acknowledges that late payment by Tenant to
Landlord of Base Monthly Rent and other sums due hereunder will cause Landlord
to incur costs not contemplated by this Lease, the exact amount of which will
Page 2
<PAGE> 8
be extremely difficult to ascertain. Such costs include, but are not limited
to, administrative, processing, accounting charges, and late charges, which may
be imposed on Landlord by the terms of any contract, revolving credit, mortgage
or trust deed covering the Premises. Accordingly, if any installment of Base
Monthly Rent or any other sum due from Tenant shall not be received by Landlord
or Landlord's designee when due, Tenant shall pay to Landlord a late charge
equal to five (5%) percent of such overdue amount which late charge shall be
due and payable on the same date that the overdue amount in question was due.
Landlord agrees to waive said late charge in the event all amounts set forth in
any notice served upon Tenant by Landlord to pay rent or quit in connection
with the overdue amount are paid in full by cashier's check within five (5)
days after Landlord's service upon Tenant of such notice to quit or pay rent.
The parties hereby agree that such late charge represents a fair and reasonable
estimate of the costs Landlord will incur by reason of late payment by Tenant.
Acceptance of such late charge by Landlord shall in no event constitute a
waiver of Tenant's default with respect to such overdue amount, nor prevent
Landlord from exercising any of the other rights and remedies granted
hereunder.
IT IS FURTHER MUTUALLY AGREED BETWEEN THE PARTIES AS FOLLOWS:
7. POSSESSION: If Landlord, for any reason whatsoever, cannot deliver
possession of the said Premises to Tenant by the Commencement Date, this Lease
shall not be void or voidable, and, except as provided in this paragraph 7,
Landlord shall not be liable to Tenant for any loss or damage resulting
therefrom. In such event the Commencement Date and Expiration Date of the Lease
and all other dates affected thereby shall be revised to conform to the date of
Landlord's delivery of possession. Notwithstanding the foregoing, (i) if
Landlord has not delivered possession of the Premises to Tenant within thirty
(30) days of the date Tenant requests possession, Tenant shall be entitled to
rental abatement hereunder of one (1) day's rent for each day for which
possession is not delivered; and (ii) if Landlord has not delivered possession
of the Premises to Tenant within ninety (90) days of the date Tenant requests
possession, Tenant, upon written notice to Landlord, shall be entitled to
terminate this Lease without further liability to Landlord. Pursuant to the
provisions of paragraph 5(B), in no event shall Tenant be entitled to request
possession earlier that November 15, 1994.
8. ACCEPTANCE OF POSSESSION AND COVENANTS TO SURRENDER: Prior to September
1, 1994, Tenant shall complete an inspection of the building mechanical and
operating systems by contractors selected by Landlord and Tenant. Landlord
shall, at Landlord's sole cost and expense, perform any repair work identified
in such inspection reports to ensure that the Premises are in good operating
condition and repair prior to the Commencement Date. At the conclusion of such
work, Tenant shall accept the Premises as being in good and sanitary order,
condition and repair and accepts the Premises and the other improvements in
their present condition. Tenant further agrees on Expiration Date, or on the
sooner termination of this Lease, to surrender the Premises to Landlord in good
condition and repair, reasonable wear and tear excepted. "Good condition"
shall mean that the interior walls, floors, suspended ceilings, and carpeting
within the Premises will be cleaned to the same condition as existed at the
commencement of the Lease, reasonable wear and tear excepted. "Reasonable wear
and tear" shall mean normal wear of the Premises expected over the duration of
the Lease Term on, including but not limited to, the carpeting, walls, ceiling
tiles, fixtures and operating systems and equipment. Tenant shall ascertain from
Landlord within thirty (30) days before the Expiration Date whether Landlord
desires to have the Premises or any part or parts thereof restored to their
condition as of the Commencement Date or to cause Tenant to surrender all
Alterations in place to Landlord. If Landlord shall so desire, then Tenant
shall remove such Alterations as Landlord may require and shall repair and
restore said Premises or such part or parts thereof before the Expiration Date
at Tenant's sole cost and expense. Tenant on or before the Expiration Date or
sooner termination of this Lease, shall remove all its personal property and
trade fixtures from the Premises, and all property and fixtures not so removed
shall be deemed to be abandoned by Tenant. If the Premises are not surrendered
at the Expiration Date or sooner termination of this Lease in the condition
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required by this paragraph, Tenant shall indemnify, defend, and hold harmless
Landlord against loss or liability resulting from delay by Tenant in so
surrendering the Premises including, without limitation, any claims made by any
succeeding tenant founded on such delay.
9. USES PROHIBITED: Tenant shall not commit, or suffer to be committed,
any waste upon the said Premises, or any nuisance, or other act or thing which
may disturb the quiet enjoyment of any other tenant in or around the Premises
or allow any sale by auction upon the Premises, or allow the Premises to be
used for any unlawful or objectionable purpose, or place any loads upon the
floor, walls, or ceiling which endanger the structure, or use any machinery or
apparatus which will in any manner vibrate or shake the Premises, or place any
harmful liquids, waste materials, or hazardous materials in the drainage system
of, or upon or in the soils surrounding the Building. No materials, supplies,
equipment, finished products or semi-finished products, raw materials or
articles of any nature or any waste materials, refuse, scrap or debris shall be
stored upon or permitted to remain on any portion of the Premises outside of
the Building proper without Landlord's prior approval, which approval may be
withheld in its sole discretion.
10. ALTERATIONS AND ADDITIONS: Tenant intends to make certain alterations
and additions to the existing interior improvements prior to the Commencement
Date. Landlord agrees to pay Tenant on the Commencement Date the sum of Thirty
Thousand and No/100 Dollars ($30,000.00) towards Tenant's planning and design
fees related to this work.
Tenant shall be entitled without obtaining Landlord's consent after
initial occupancy, to make any alteration or addition to the Premises
("Alterations") which (i) does not affect the structure of the Building, (ii)
cost does not exceed $50,000 per alteration nor an aggregate of $100,000 in any
twelve (12) month period. All other Alterations shall require Landlord's
consent. Tenant shall, at its sole cost and expense, prepare and deliver to
Landlord the proposed architectural and structural plans for all such
Alterations. In the event the Alterations require Landlord's approval as
provided above, Landlord agrees to either (i) approve such Alterations or (ii)
or provide the basis for disapproval within fifteen (15) days of receipt of the
plans. Landlord agrees not to unreasonably withhold approval of any
Alterations. Landlord's failure to respond within such fifteen (15) day period
shall be deemed approval of the Alterations. At the time of consent, Landlord
agrees to advise Tenant whether Landlord will require remove of such
Alterations at the expiration of the Lease Term. In the event Landlord requires
removal, any salvage value of such Alterations shall belong to Tenant.
After having obtained Landlord's consent, Tenant agrees that it shall
not proceed to make such Alterations until (i) Tenant has obtained all required
governmental approvals and permits, and (ii) Tenant has provided Landlord
reasonable security, in form reasonably approved by Landlord, to protect
Landlord against mechanics' lien claims. Tenant further agrees to provide
Landlord (i) written notice of the anticipated start date and actual start date
of the work, and (ii) a complete set of as-built drawings. All Alterations
shall be constructed in compliance with applicable buildings codes and laws.
Any Alterations, except movable furniture and trade fixtures, shall become at
once a part of the realty and belong to Landlord. Alterations which are not to
be deemed as trade fixtures shall include heating, lighting, electrical
systems, air conditioning, partitioning, carpeting, or any other installation
which has become an integral part of the Premises. All Alterations shall be
maintained, replaced or repaired by Tenant at Tenant's sole cost and expense.
11. MAINTENANCE OF PREMISES:
A. TENANT'S OBLIGATIONS: Tenant shall, at its sole cost, keep and
maintain, repair and replace, said Premises and appurtenances and every part
hereof, including but not limited to, exterior walls, roof, glazing, sidewalks,
parking areas, elevator, plumbing, electrical and HVAC systems, and all the
Tenant Improvements in good and sanitary order, and repair. Tenant shall
provide Landlord with a copy of a
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service contract between Tenant and (i) a licensed air-conditioning and heating
contractor which contract shall provide for bi-monthly maintenance of all air
conditioning and heating equipment at the Premises; and (ii) a licensed
elevator maintenance contractor which contract shall provide for monthly
maintenance of all elevator related systems. Tenant shall pay the cost of all
air-conditioning heating, and elevator equipment repairs or replacements which
are either excluded from such service contract or any existing equipment
warranties. All wall surfaces and floor tile are to be maintained in an as good
a condition as when Tenant took possession free of holes, gouges, or
defacements.
Tenant shall also be responsible, at its sole cost and expense for the
preventive maintenance of the membrane of the roof, which responsibility shall
be deemed properly discharged if (i) Tenant contracts with a licensed roof
contractor who is reasonably satisfactory to both Tenant and Landlord, at
Tenant's sole cost, to inspect the roof membrane at least every six (6) months,
with the first inspection due the sixth (6th) month after the Commencement
Date, and (ii) Tenant performs, at Tenant's sole cost, all preventive
maintenance recommendations made by such contractor within a reasonable time
after such recommendations are made. Such preventive maintenance might include
acts such as clearing storm gutters and drains, removing debris from the roof
membrane, trimming trees overhanging the roof membrane, applying coating
materials to seal roof penetrations, repairing blisters, and other routine
measures. Tenant shall provide to Landlord a copy of such preventive
maintenance contract and paid invoices for the recommended work. Tenant agrees,
at its expense, to water, maintain and replace, when necessary, any shrubbery
and landscaping.
B. LANDLORD'S OBLIGATIONS: Landlord shall, at its sole cost and
expense, maintain in good condition, order, and repair, and replace as and when
necessary, the foundation, floor slabs, columns, exterior load bearing walls
and roof structure of the Building. Landlord shall also keep the Common Area
and any part thereof, in good and sanitary order, condition and repair. Tenant
shall reimburse Landlord for the amount payable by the owner of Lot 1 (as set
forth in the Tenancy-In-Common Agreement) for maintenance and repair of the
Common Area under the terms of the Tenancy-In-Common Agreement; provided,
however, that if Tenant is required to reimburse to Landlord in excess of Fifty
Thousand Dollars ($50,000) for any particular capital improvement or
replacement in the Common Area, then Tenant may pay its share of such costs
pursuant to the provisions of paragraph 11(C) below.
C. AMORTIZATION OF CERTAIN CAPITAL REPLACEMENTS: Notwithstanding the
foregoing, in the event a capital replacement is required during the Lease Term
of the equipment related to building systems or to the roof membrane and such
replacement costs in excess of (i) Fifty Thousand and No/100 Dollars
($50,000.00) per occurrence, or (ii) One Hundred Thousand and No/100 Dollars
($100,000.00) in the aggregate over any twelve (12) calendar month period,
Tenant shall be required to pay (x) the first Fifty Thousand and No/100 Dollars
($50,000.00) of the cost and (y) that portion of the cost equal to the product
of such remaining cost multiplied by a fraction, the numerator of which is the
number of years remaining in the Lease Term, the denominator of which is the
useful life (in years) of the replacement, which cost shall be amortized over
the remaining Lease Term with interest at eight percent (8%). Landlord shall
pay the balance of such cost.
12. HAZARD INSURANCE:
A. TENANT'S USE: Tenant shall not use, or permit said Premises, or
any part thereof, to be used, for any purpose other than that for which the
said Premises are hereby leased; and no use shall be made or permitted to be
made of the said Premises, nor acts done, which will cause an increase in
premiums or a cancellation of any insurance policy covering said Premises, or
any part thereof, nor shall Tenant sell or permit to be kept, used or sold, in
or about said Premises, any article which may be prohibited by the standard
form of fire insurance policies. Subject to the provisions of paragraph 17,
Tenant shall, at its sole cost and expense, comply with any and all
requirements, pertaining to said Premises, of any insurance organization or
company,
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necessary for the maintenance of reasonable fire and public liability
insurance, covering said Premises and appurtenances.
B. LANDLORD'S INSURANCE: Landlord agrees to purchase and keep in
force fire, extended coverage, owner's liability, and 12 month rental loss
insurance. The amount of the said insurance shall not exceed the replacement
cost of the Building (not including any Tenant Improvements or Alterations paid
for by Tenant) as determined by Landlord's insurance company's appraisers. The
Tenant agrees to pay to the Landlord as additional rent, on demand, the full
cost of said insurance as evidenced by insurance billings to the Landlord, and
in the event of damage covered by said insurance, the amount of any deductible
under such policy. Payment shall be due to Landlord within ten (10) days after
written invoice to Tenant. Landlord agrees to competitively bid such insurance
not less than once every two (2) years. It is understood and agreed that
Tenant's obligation under this paragraph will be prorated to reflect the
commencement and termination dates of this Lease. The parties reserve the right
to carry earthquake insurance in the future if such cost becomes reasonable as
determined by mutual agreement of Landlord and Tenant.
C. TENANT'S INSURANCE: Tenant, at its sole cost, agrees to insure its
personal property, Tenant Improvements paid for by Tenant, and Alterations for
their full replacement value (without depreciation) and to obtain worker's
compensation and public liability and property damage insurance for occurrences
within the Premises with combined limits for bodily injury and property damage
of not less than $1,000,000.00 per occurrence and a general aggregate limit of
not less than $5,000,000.00. Tenant shall name Landlord and Landlord's lender
as an additional insured, shall deliver a copy of the policies and renewal
certificates to Landlord. All such policies shall provide for thirty (30) days'
prior written notice to Landlord of any cancellation, termination, or reduction
in coverage. Notwithstanding the above, Landlord retains the right to have
Tenant provide other forms of insurance which may be reasonably required to
cover future risks.
D. WAIVER: Landlord and Tenant hereby waive any and all rights each
may have against the other on account of any loss or damage occasioned to the
Landlord or the Tenant as the case may be, or to the Premises or its contents,
and which may arise from any risk covered by their respective insurance
policies (or which would have been covered had such insurance policies been
maintained in accordance with this Lease), as set forth above. The parties
shall use their reasonable efforts to obtain from their respective insurance
companies a waiver of any right of subrogation which said insurance company may
have against the Landlord or the Tenant, as the case may be.
13. TAXES: Tenant shall be liable for, and shall pay prior to delinquency,
all taxes and assessments levied against personal property and trade or
business fixtures, and agrees to pay, as additional rental, all real estate
taxes and assessment installments (special or general) or other impositions or
charges which may be levied on the Premises, upon the occupancy of the Premises
and including any substitute or additional charges which may be imposed during,
or applicable to the Lease Term including real estate tax increases due to a
sale or other transfer of the Premises, as they appear on the City and County
tax bills during the Lease Term, and as they become due. It is understood and
agreed that Tenant's obligation under this paragraph will be prorated to
reflect the Commencement and Expiration Dates. If, at any time during the Lease
Term a tax, excise on rents, business license tax, or any other tax, however
described, is levied or assessed against Landlord, as a substitute or addition
in whole or in part for taxes assessed or imposed on land or Buildings, Tenant
shall pay and discharge his pro rata share of such tax or excise on rents or
other tax before it becomes delinquent, except that this provision is not
intended to cover net income taxes, inheritance, gift or estate tax imposed
upon the Landlord. In the event that a tax is placed, levied, or assessed
against Landlord and the taxing authority takes the position that the Tenant
cannot pay and discharge his pro rata share of such tax on behalf of the
Landlord, then at the sole election of the Landlord, the Landlord may increase
the rental charged hereunder by the exact amount of such tax and Tenant shall
pay such increase as additional rent hereunder. If by virtue of any application
or proceeding brought by
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or on behalf of Landlord, there results a reduction in the assessed value of
the Building during the Lease Term, Tenant agrees to reimburse Landlord
its out of pocket costs incurred by Landlord in connection with such
application or proceeding.
Notwithstanding the foregoing, if property taxes increase during the
Lease Term as a result of a reassessment due to a voluntary change of
ownership, Tenants shall be responsible for payment of the resulting property
tax increase as follows: during the first twelve month period following the
transfer, Tenant shall be responsible for payment of twenty five percent (25%)
of the tax increase; during the second twelve month period following the
transfer, Tenant shall be responsible for payment of fifty percent (50%) of the
tax increase, during third twelve month period following the transfer, Tenant
shall be responsible for payment of seventy five percent (75%) of the tax
increase, thereafter Tenant shall be responsible for payment of the entire tax
increase.
14. UTILITIES: Tenant shall pay directly to the providing utility all
water, gas, heat, light, power, telephone and other utilities supplied to the
Premises. Landlord shall not be liable for a loss of or injury to property,
however occurring, through or in connection with or incidental to furnishing or
failure to furnish any utilities to the Premises and Tenant shall not be
entitled to abatement or reduction of any portion of the Base Monthly Rent so
long as any failure to provide and furnish the utilities to the Premises
is due to a cause beyond the Landlord's reasonable control.
15. ABANDONMENT: Tenant shall not abandon the Premises at any time during
the Lease Term; and if Tenant shall abandon, surrender said Premises, or be
dispossessed by process of law, or otherwise, any personal property belonging
to Tenant and left on the Premises shall be deemed to be abandoned, at the
option of Landlord, except such property as may be mortgaged to Landlord.
Tenant shall have the right to vacate all of the Premises for up to thirty (30)
days in any given year without being in default under the Lease. Further Tenant
shall have the right to vacate any portion of the Building during the Lease
Term, regardless of duration, without being in default under the Lease, so long
as Tenant continues to occupy a portion of the Building and pays the rent and
fulfills its other obligations under the Lease.
16. FREE FROM LIENS: Tenant shall keep the Premises free from any liens
arising out of any work performed, materials furnished, or obligations incurred
by Tenant or claimed to have been performed for Tenant. In the event Tenant
fails to discharge any such lien within ten (10) days after receiving notice of
the filing, Landlord shall be entitled to discharge such lien at Tenant's
expense and all resulting costs incurred by Landlord, including attorney's fees
shall be due from Tenant as additional rent.
17. COMPLIANCE WITH GOVERNMENTAL REGULATIONS: Tenant shall, at its sole
cost and expense, comply with all of the requirements of all Municipal, State
and Federal authorities now in force, or which may hereafter be in force,
pertaining to the said Premises, and shall faithfully observe in the use of the
Premises all Municipal ordinances and State and Federal statutes now in force
or which may hereafter be in force. The judgment of any court of competent
jurisdiction, or the admission of Tenant in any action or proceeding against
Tenant, whether Landlord be a party thereto or not, that Tenant has violated
any such ordinance or statute in the use of the Premises, shall be conclusive
of that fact as between Landlord and Tenant. Notwithstanding the foregoing, if
any improvement to the Premises is required as a result of any future laws or
regulations affecting the Premises not related to Tenant's specific use of the
Premises, and provided further said improvement is not required because of
Alterations made by Tenant, the cost of such improvements shall be allocated
between Landlord and Tenant such that Tenant shall pay to Landlord upon
completion of such improvement, the portion of the cost thereof equal to the
remaining number of years in the lease term divided by the anticipated useful
life of such improvement.
18. TOXIC WASTE AND ENVIRONMENTAL DAMAGE:
A. TENANT'S RESPONSIBILITY: Without the prior written consent of
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Landlord, Tenant shall not bring, use, or permit upon the Premises, or
generate, create, release, emit, or dispose (nor permit any of the same) from
the Premises any chemicals, toxic or hazardous gaseous, liquid or solid
materials or waste, including without limitation, material or substance having
characteristics of ignitability, corrosivity, reactivity, or toxicity (other
than small quantities of toxic substances such as photocopy toner, photography
chemicals and the like typically used by office users) or substances or
materials which are listed on any of the Environmental Protection Agency's lists
of hazardous wastes or which are identified in Sections 66680 through 66685 of
Title 22 of the California Administrative Code as the same may be amended from
time to time ("Hazardous Materials"). In order to obtain consent, Tenant shall
deliver to Landlord its written proposal describing the toxic material to be
brought onto the Premises, measures to be taken for storage and disposal
thereof, safety measures to be employed to prevent pollution of the air, ground,
surface and ground water. Landlord's approval may be withheld in its reasonable
judgment. In the event Landlord consents to Tenant's use of Hazardous Materials
on the Premises, Tenant represents and warrants that Tenant will (i) adhere to
all reporting and inspection requirements imposed by Federal, State, County or
Municipal laws, ordinances or regulations and will provide Landlord a copy of
any such reports or agency inspections, (ii) obtain and provide Landlord copies
of all necessary permits required for the use and handling Hazardous
Materials on the Premises, (iii) enforce Hazardous Materials handling and
disposal practices consistent with industry standards, (iv) surrender the
Premises free from any Hazardous Materials arising from Tenant's bringing,
using, permitting, generating, emitting or disposing of Hazardous Materials, and
(v) properly close the facility with regard to Hazardous Materials including the
removal or decontamination of any process piping, mechanical ducting, storage
tanks, containers, or trenches which have come into contact with Hazardous
Materials and obtain a closure certificate from the local administering agency
prior to the Expiration Date.
B. TENANT'S INDEMNITY REGARDING HAZARDOUS MATERIALS: Tenant shall
comply, at its sole cost, with all laws pertaining to, and shall indemnify and
hold Landlord harmless from any claims, liabilities, costs or expenses incurred
or suffered by Landlord arising from such bringing, using, permitting,
generating, emitting or disposing of Hazardous Materials by Tenant. Tenant's
indemnification and hold harmless obligations include, without limitation, (i)
claims, liability, costs or expenses resulting from or based upon
administrative, judicial (civil or criminal) or other action, legal or
equitable, brought by any private or public person under common law or under
the Comprehensive Environmental Response, Compensation and Liability Act of
1980 ("CERCLA"), the Resource Conservation and Recovery Act of 1980 ("RCRA") or
any other Federal, State, County or Municipal law, ordinance or regulation,
(ii) claims, liabilities, costs or expenses pertaining to the identification,
monitoring, cleanup, containment, or removal of Hazardous Materials from soils,
riverbeds or aquifers including the provision of an alternative public drinking
water source, and (iii) all costs of defending such claims.
C. ACTUAL RELEASE BY TENANT: Tenant agrees to notify Landlord of any
lawsuits which relate to, or orders which relate to the remedying of, the
actual release of Hazardous Materials on or into the soils or groundwater at or
under the Premises. Tenant shall also provide to Landlord all notices required
by Section 25359.7(b) of the Health and Safety Code and all other notices
required by law to be given to Landlord in connection with Hazardous Materials.
Without limiting the foregoing, Tenant shall also deliver to Landlord, within
twenty (20) days after receipt thereof, any written notices from any
governmental agency alleging a material violation of, or material failure to
comply with, any federal, state or local laws, regulations, ordinances or
orders, the violation of which of failure to comply with, poses a foreseeable
and material risk of contamination of the groundwater or injury to humans
(other than injury solely to Tenant, its agents and employees within the
Improvements on the Property).
In the event of any release on or into the Premises or into the soil
or groundwater under the Premises of any Hazardous Materials used, treated,
stored or disposed of by Tenant, Tenant agrees to comply, at its sole cost and
expense, with all laws, regulations, ordinances and orders of any federal,
state or local agency relating to
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the monitoring or remediation of such Hazardous Materials. In the event of any
such release of Hazardous Materials, Tenant agrees to meet and confer with
Landlord and its Lender to attempt to eliminate and mitigate any financial
exposure to such Lender and resultant exposure to Landlord under California
Code of Civil Procedure section 736(b) as a result of such release and promptly
to take reasonable monitoring, cleanup and remedial steps given, inter alia,
the historical uses to which the Property has and continues to be used, the
risks to public health posed by the release, the then available technology and
the costs of remediation, cleanup and monitoring, consistent with acceptable
customary practices for the type and severity of such contamination and all
applicable laws. Nothing in the preceding sentence shall eliminate, modify or
reduce the obligation of Tenant under paragraph 20(B) of this Lease to
indemnify and hold Landlord harmless from any claims liabilities, costs or
expenses incurred or suffered by Landlord as provided in paragraph 20(B) of
this Lease. Tenant shall provide Landlord prompt written notice of Tenant's
monitoring, cleanup and remedial steps.
In the absence of an order of any federal, state or local governmental
or quasi-governmental agency relating to the cleanup, remediation or other
response action required by applicable law, any dispute arising between
Landlord and Tenant concerning Tenant's obligation to Landlord under this
Paragraph C concerning the Level, method, and manner of cleanup, remediation or
response action required in connection with such a release of Hazardous
Materials shall be resolved by mediation and/or arbitration pursuant to the
provisions of paragraph 44 of this Lease.
D. LANDLORDS INDEMNITY REGARDING HAZARDOUS MATERIALS: Landlord shall
indemnify and hold Tenant harmless from any claims, liabilities, costs or
expenses incurred or suffered by Tenant related to the removal,
investigation, monitoring or remediation of Hazardous Materials which are
present on the Premises as of the Commencement Date. Landlord's indemnification
and hold harmless obligations include, without limitation, (i) claims,
liability, costs or expenses resulting from or based upon administrative,
judicial (civil or criminal) or other action, legal or equitable, brought by
any private or public person under common law or under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"), the
Resource Conservation and Recovery Act of 1980 ("RCRA") or any other Federal,
State, County or Municipal law, ordinance or regulation, (ii) claims,
liabilities, costs or expenses pertaining to the identification, monitoring,
cleanup, containment, or removal of Hazardous Materials from soils, riverbeds
or aquifers including the provision of an alternative public drinking water
source, and (iii) all costs of defending such claims. In no event shall
Landlord be liable for any consequential damages suffered or incurred by Tenant
as a result of any such contamination.
E. ENVIRONMENTAL MONITORING: Landlord and its agents shall have the
right, at Landlord's sole cost and expense, to inspect, investigate, sample
and/or monitor the Premises, including any air, soil, water, groundwater or
other sampling or any other testing, digging, drilling or analysis to determine
whether Tenant is complying with the terms of this paragraph 18. If Landlord
discovers that Tenant is not in compliance with the terms of this paragraph 18,
any such costs incurred by Landlord, including attorneys' and consultants' fees
shall be due and payable by Tenant to Landlord within five days following
Landlord's written demand therefore.
19. INDEMNITY: As a material part of the consideration to be rendered to
Landlord, Tenant hereby waives all claims against Landlord for damages to
goods, wares and merchandise, and all other personal property in, upon or about
said Premises and for injuries to persons in or about said Premises, from any
cause arising at any time to the fullest extent permitted by law, and Tenant
shall indemnify and hold Landlord exempt and harmless from any damage or injury
to any person, or to the goods, wares and merchandise and all other personal
property of any person, arising from the use of the Premises, Building, and/or
Project by Tenant, its employees, contractors, agents and invitees or from the
failure of Tenant to keep the Premises in good condition and repair, as herein
provided, except to the extent due to the active negligence or willful
misconduct of Landlord. Further, in the event Landlord is made party to any
litigation due to the acts or omission of Tenant, its employees, contractors,
agents and invitees,
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Tenant will indemnify and hold Landlord harmless from any such claim or
liability including Landlord's costs and expenses and reasonable attorney's
fees incurred in defending such claims.
20. ADVERTISEMENTS AND SIGNS: Tenant will not place or permit to be
placed, in, upon or about the said Premises any signs not approved by the city
or other governing authority. Any sign so placed on the Premises shall be
removed by Tenant, at its expense, prior to the Expiration Date or promptly
following the earlier termination of the lease and Tenant shall repair, at its
sole cost and expense, any damage or injury to the Premises caused thereby, and
if not so removed by Tenant then Landlord may have same so removed at Tenant's
expense.
21. ATTORNEY'S FEES: In case a suit or alternative form of dispute
resolution should be brought for the possession of the Premises, for the
recovery of any sum due hereunder, or because of the breach of any other
covenant herein, the losing party shall pay to the prevailing party a
reasonable attorney's fee as part of its costs which shall be deemed to have
accrued on the commencement of such action. In addition, the prevailing party
shall be entitled to recover all costs and expenses including reasonable
attorney's fees incurred by the prevailing party in enforcing any judgment or
award against the other party. The foregoing provision relating to
post-judgment costs is intended to be severable from all other provisions of
this Lease.
22. TENANT'S DEFAULT: The occurrence of any of the following shall
constitute a material default and breach of this Lease by Tenant: a) Any
failure by Tenant to pay any rent under this Lease ten (10) days following
Tenant's receipt of written notice from Landlord that such rent is due under
this Lease and has not been received; b) The abandonment of the Premises by
Tenant; c) A failure by Tenant to observe and perform any other provision of
this Lease to be observed or performed by Tenant, where such failure continues
for thirty (30) days after written notice thereof by Landlord to Tenant;
provided, however, that if the nature of such default is such that the same
cannot reasonably be cured within such thirty (30) day period Tenant shall not
be deemed to be in default if Tenant shall within such period commence such
cure and thereafter diligently prosecute the same to completion; d) The making
by Tenant of any general assignment for the benefit of creditors; the filing
by or against Tenant of a petition to have Tenant adjudged a bankrupt or of a
petition for reorganization or arrangement under any law relating to bankruptcy
(unless, in the case of a petition filed against Tenant, the same is dismissed
after the filing); the appointment of a trustee or receiver to take possession
of substantially all of Tenant's assets located at the Premises or of Tenant's
interest in this Lease, where possession is not restored to Tenant within
thirty (30) days; or the attachment, execution or other judicial seizure of
substantially all of Tenant's assets located at the Premises or of Tenant's
interest in this Lease, where such seizure is not discharged within thirty (30)
days. The notice requirements set forth herein are in lieu of and not in
addition to the notices required by California Code of Civil Procedure Section
1161. Any notice given by Landlord to Tenant pursuant to California Civil Code
1161 with respect to any failure by Tenant to pay rent under this Lease on or
before the date the rent is due shall provide Tenant with a period of no less
than ten (10) days to pay such rent or quit.
A. REMEDIES: In the event of any such default by Tenant, then in
addition to any other remedies available to Landlord at law or in equity,
Landlord shall have the immediate option to terminate this Lease and all rights
of Tenant hereunder by giving written notice of such intention to terminate. In
the event that Landlord shall elect to so terminate this Lease then Landlord
may recover from Tenant: a) the worth at the time of award of any unpaid rent
which had been earned at the time of such termination; plus b) the worth at the
time of award of the amount by which the unpaid rent which would have been
earned after termination until the time of award exceeds the amount of such
rental loss for the same period that Tenant proves could have been reasonably
avoided; plus c) the worth at the time of award of the amount by which the
unpaid rent for the balance of the Lease Term after the time of award exceeds
the amount of such rental loss that Tenant proves could be reasonably avoided;
plus d) any other amount necessary to compensate Landlord for all the detriment
proximately caused by Tenant's
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failure to perform its obligations under this Lease or which in the ordinary
course of things would be likely to result therefrom, and e) at Landlord's
election, such other amounts in addition to or in lieu of the foregoing as may
be permitted from time to time by applicable California law. The term "rent", as
used herein, shall be deemed to be and to mean the minimum monthly installments
of Base Monthly Rent and all other sums required to be paid by Tenant pursuant
to the terms of this Lease, all other such sums being deemed to be additional
rent due hereunder. As used in (a) and (b) above, the "worth at the time of
award" is to be computed by allowing interest at the rate of the discount rate
of the Federal Reserve Bank of San Francisco plus five (5%) percent per annum.
As used in (c) above, the "worth at the time of award" is to be computed by
discounting such amount at the discount rate of the Federal Reserve Bank of San
Francisco at the time of award plus one (1%) percent.
B. RIGHT TO RE-ENTER: In the event of any such default by Tenant,
Landlord shall also have the right, with or without terminating this Lease, to
re-enter the Premises and remove all persons and property from the Premises;
such property may be removed and stored in a public warehouse or elsewhere at
the cost of and for the account of Tenant and disposed of by Landlord in any
manner permitted by law.
C. ABANDONMENT: In the event of the abandonment of the Premises by
Tenant or in the event that Landlord shall elect to re-enter as provided in
paragraph 22(B) above or shall take possession of the Premises pursuant to legal
proceeding or pursuant to any notice provided by law, then if Landlord does not
elect to terminate this Lease as provided in paragraph 22(A) above, then the
provisions of California Civil Code Section 1951.4, (Landlord may continue the
lease in effect after Tenant's breach and abandonment and recover rent as it
becomes due, if Tenant has a right to sublet and assign, subject only to
reasonable limitations) as amended from time to time, shall apply and Landlord
may from time to time, without terminating this Lease, either recover all rental
as it becomes due or relet the Premises or any part thereof for such term or
terms and at such rental or rentals and upon such other terms and conditions as
Landlord in its sole discretion may deem advisable with the right to make
alterations and repairs to the Premises. In the event that Landlord shall elect
to so relet, then rentals received by Landlord from such reletting shall be
applied: first, to the payment of any indebtedness other than Base Monthly Rent
due hereunder from Tenant to Landlord; second, to the payment of any cost of
such reletting; third, to the payment of the cost of any alterations and repairs
to the Premises; fourth, to the payment of Base Monthly Rent due and unpaid
hereunder; and the residue, if any, shall be held by Landlord and applied in
payment of future Base Monthly Rent as the same may become due and payable
hereunder. Landlord shall have no obligation to relet the Premises following a
default if Landlord has other available space within the Building or Project.
Should that portion of such rentals received from such reletting during any
month, which is applied by the payment of rent hereunder, be less than the rent
payable during that month by Tenant hereunder, then Tenant shall pay such
deficiency to Landlord immediately upon demand therefor by Landlord. Such
deficiency shall be calculated and paid monthly. Tenant shall also pay to
Landlord, as soon as ascertained, any costs and expenses incurred by Landlord in
such reletting or in making such alterations and repairs not covered by the
rentals received from such reletting.
D. NO TERMINATION: No re-entry or taking possession of the Premises
by Landlord pursuant to 22(B) or 22(C) of this Article 22 shall be construed as
an election to terminate this Lease unless a written notice of such intention be
given to Tenant or unless the termination thereof be decreed by a court of
competent jurisdiction. Notwithstanding any reletting without termination by
Landlord because of any default by Tenant, Landlord may at any time after such
reletting elect to terminate this Lease for any such default.
23. SURRENDER OF LEASE: The voluntary or other surrender of this Lease
by Tenant, or a mutual cancellation thereof, shall not automatically effect a
merger of the Lease with Landlord's ownership of the Premises. Instead, at the
option of Landlord, Tenant's surrender may terminate all or any existing
sublease or subtenancies, or may operate as an assignment to Landlord of any or
all such subleases
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or subtenancies, thereby creating a direct Landlord-Tenant relationship between
Landlord and any subtenants.
24. THIS PARAGRAPH INTENTIONALLY LEFT BLANK:
25. LANDLORD'S DEFAULT: In the event of Landlord's failure to perform any
of its covenants or agreements under this Lease, Tenant shall give Landlord
written notice of such failure and shall give Landlord thirty (30) days or such
other reasonable opportunity to cure or to commence to cure such failure prior
to any claim for breach or for damages resulting from such failure. In addition,
upon any such failure by Landlord, Tenant shall give notice by registered or
certified mail to any person or entity with a security interest in the Premises
("Mortgagee") that has provided Tenant with notice of its interest in the
Premises, and shall provide such Mortgagee a reasonable opportunity to cure such
failure, including such time to obtain possession of the Premises by power of
sale or judicial foreclosure, if such should prove necessary to effectuate a
cure. In no event, however, shall the period of time for Mortgagee to obtain
possession exceed one hundred twenty (120) days. Tenant agrees that each of the
Mortgagees to whom this Lease has been assigned is an expressed third party
beneficiary hereof. Tenant shall not make any prepayment of rent more than one
(1) month in advance without the prior written consent of such Mortgagee. Tenant
waives any right under California Civil Code Section 1950.7 or any other present
or future law to the collection of any payment or deposit from such Mortgagee or
any purchaser at a foreclosure sale of such Mortgagee's interest unless such
Mortgagee or such purchaser shall have actually received and not refunded the
applicable payment or deposit.
26. NOTICES: All notices, demands, requests, or consents required to be
given under this Lease shall be sent in writing by U.S. certified mail, return
receipt requested, or by personal delivery addressed to the party to be notified
at the address for such party specified in paragraph 1 of this Lease, or to such
other place as the party to be notified may from time to time designate by at
least fifteen (15) days prior notice to the notifying party.
27. ENTRY BY LANDLORD: Tenant shall permit Landlord and his agents, upon
prior notice except in the case of emergency, to enter into and upon said
Premises at all reasonable times subject to any security regulations of Tenant
for the purpose of inspecting the same or for the purpose of maintaining the
Premises or for the purpose of making repairs, alterations or additions to any
other portion of said Premises or for the purpose of erecting additional
building(s) and improvements on the land where the Premises are situated, or on
adjacent land owned by Landlord, including the erection and maintenance of such
scaffolding, canopies, fences and props as may be required without any abatement
or reduction of rent or without any liability to Tenant for any loss of
occupation or quiet enjoyment of the Premises thereby occasioned. Tenant shall
permit Landlord and his agents, at any time within one hundred eighty (180) days
prior to the Expiration Date (or at any time during the Lease if Tenant is in
default hereunder), to place upon the Premises "For Lease" signs and exhibit
the Premises to real estate brokers and prospective tenants at reasonable hours.
28. DESTRUCTION OF PREMISES:
A. DESTRUCTION BY AN INSURED CASUALTY: In the event of a partial
destruction of the Premises by a casualty for which Landlord has received
insurance proceeds sufficient to repair the damage or destruction during the
Lease Term from any cause, Landlord shall forthwith repair the same to the
extent of such proceeds, provided such repairs can be made within one hundred
twenty (120) days from the date of receipt of all governmental approvals
necessary under the laws and regulations of State, Federal, County or Municipal
authorities (as reasonably determined by Landlord), and such partial destruction
shall in no way annul or void this Lease, except that Tenant shall be entitled
to a proportionate reduction of Base Monthly Rent and additional rent from the
date of destruction until completion of the repairs, such proportionate
reduction to be based upon the extent to which the making of such repairs shall
interfere with the business carried on by Tenant in the Premises, in the
reasonable
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judgment of Landlord. For purposes of this paragraph "partial destruction"
shall mean destruction of no greater than one-third (1/3) of the replacement
cost of the Premises, including the replacement cost of the Tenant Improvements
paid for by Landlord. In the event the Premises are more than partially
destroyed, or in the event the repairs cannot be made in one hundred twenty
(120) days or the Premises are only partially destroyed but Landlord does not
actually receive insurance proceeds sufficient to repair the damage, Landlord or
Tenant may elect to terminate this Lease within fifteen (15) days of
determination by Landlord of the foregoing. Landlord shall not be required to
restore Alterations or replace Tenant's fixtures or personal property. In
respect to any partial destruction which Landlord is obligated to repair or may
elect to repair under the terms of this paragraph, the provision of Section
1932, Subdivision 2, and of Section 1933, Subdivision 4, of the Civil Code of
the State of California and any other similarly enacted statute are waived by
Tenant and the provisions of this paragraph 28 shall govern in the case of such
destruction.
B. DESTRUCTION BY AN UNINSURED CASUALTY: In the event of a total or
partial destruction of the Premises by an uninsured casualty, the Lease shall
automatically terminate, unless (i) Landlord elects to rebuild, and (ii) the
damage can be repaired within one hundred twenty (120) days.
C. DESTRUCTION DURING THE LAST YEAR OF THE LEASE TERM: In the event
of an insured or uninsured casualty during the last year of the Lease Term which
would take more than sixty (60) days to repair, either Landlord or Tenant shall
have the right to terminate the Lease.
29. ASSIGNMENT OR SUBLEASE:
A. CONSENT BY LANDLORD: In the event Tenant desires to assign this
Lease or any interest therein including, without limitation, a pledge, mortgage
or other hypothecation, or sublet the Premises or any part thereof, Tenant
shall deliver to Landlord executed counterparts of any such agreement and of all
ancillary agreements with the proposed assignee or subtenant, financial
statements, and any additional information as reasonably required by Landlord to
determine whether it will consent to the proposed assignment or sublease. The
notice shall give the name and current address of the proposed
assignee/subtenant, proposed use of the Premises, rental rate and current
financial statement; and upon request to Tenant, Landlord shall be given
additional information as reasonably required by Landlord to determine whether
it will consent to the proposed assignment or sublease. Landlord shall then have
a period of fifteen (15) days following receipt of the foregoing agreement,
statements and additional information within which to notify Tenant in writing
that Landlord elects (i) to permit Tenant to assign or sublet such space to the
named assignee/subtenant on the terms and conditions set forth in the notice, or
(ii) to refuse consent. If Landlord should fail to notify Tenant in writing of
such election within said fifteen (15) day period, Landlord shall be deemed to
have elected option (i) above. Landlord's consent (which must be in writing and
in a form reasonably satisfactory to Landlord) to the proposed assignment or
sublease shall not be unreasonably withheld, provided and upon condition that:
(i) The proposed assignee or subtenant is engaged in a business that is limited
to the use expressly permitted under this Lease; (ii) The proposed assignee or
subtenant is a company with sufficient financial worth and management ability to
undertake the financial obligation of this Lease, and Landlord has been
furnished with reasonable proof thereof; (iii) The proposed assignment or
sublease shall be in form reasonably satisfactory to Landlord; (iv) Tenant shall
reimburse Landlord on demand for any costs that may be incurred by Landlord in
connection with said assignment or sublease, including the costs of making
investigations as to the acceptability of the proposed assignee or subtenant and
legal costs incurred in connection with the granting of any requested consent up
to a maximum amount of $5,000; and (v) Tenant shall not have advertised or
publicized in any way the availability of the Premises without prior notice to
Landlord. In the event all or any one of the foregoing conditions are not
satisfied, Landlord may, in its sole discretion, withhold its consent to the
proposed assignment or sublease.
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B. ASSIGNMENT OR SUBLETTING CONSIDERATION: Any rent or other
economic consideration received by Tenant under any such sublease and assignment
in excess of the rent payable hereunder, after the net unamortized cost of the
Tenant Improvements for which Tenant has itself paid, and reasonable subletting
and assignment costs including lease commissions, shall be divided and paid
fifty percent (50%) to Landlord and fifty percent (50%) to Tenant. Tenant's
obligation to pay over Landlord's portion of the consideration shall constitute
an obligation for additional rent hereunder. The above provisions relating to
Landlord's right to terminate the Lease and relating to the allocation of bonus
rent are independently negotiated terms of the Lease, constitute a material
inducement for the Landlord to enter into the Lease, and are agreed as between
the parties to be commercially reasonable. No assignment or subletting by Tenant
shall relieve Tenant of any obligation under this Lease. Any assignment or
subletting which conflicts with the provisions hereof shall be void.
C. NO RELEASE: Any assignment or sublease shall be made only if and
shall not be effective until the assignee or subtenant shall execute,
acknowledge and deliver to Landlord an agreement, in form and substance
satisfactory to Landlord, whereby the assignee or subtenant shall assume all of
the obligations of this Lease on the part of Tenant to be performed or observed
and shall be subject to all of the covenants, agreements, terms, provisions and
conditions contained in this Lease. Notwithstanding any such sublease or
assignment and the acceptance of rent by Landlord from any subtenant or
assignee, Tenant and any guarantor shall and will remain fully liable for the
payment of the rent and additional rent due, and to become due hereunder, for
the performance of all of the covenants, agreements, terms, provisions and
conditions contained in this Lease on the part of Tenant to be performed and for
all acts and omissions of any licensee, subtenant, assignee or any other person
claiming under or through any subtenant or assignee that shall be in violation
of any of the terms and conditions of this Lease, and any such violation shall
be deemed to be a violation by Tenant. Tenant shall further indemnify, defend
and hold Landlord harmless from and against any and all losses, liabilities,
damages, costs and expenses (including reasonable attorney fees) resulting from
any claims that may be made against Landlord by the proposed assignee or
subtenant or by any real estate brokers or other persons claiming a commission
or similar compensation in connection with the proposed assignment or sublease.
D. EFFECT OF DEFAULT: In the event of Tenant's default, Tenant
hereby assigns all rents due from any assignment or subletting to Landlord as
security for performance of its obligations under this Lease and Landlord may
collect such rents as Tenant's Attorney-in-Fact, except that Tenant may collect
such rents unless a default occurs as described in paragraph 22 and 24 above.
The termination of this Lease due to Tenant's default shall not automatically
terminate any assignment or sublease then in existence; at the election of
Landlord, such assignment or sublease shall survive the termination of this
Lease and, upon such election, the assignee or subtenant shall attorn to
Landlord and Landlord shall undertake the obligations of the Tenant under the
sublease or assignment; provided the Landlord shall not be liable for prepaid
rent, security deposits or other defaults of the Tenant to the subtenant or
assignee, or any acts or omissions of Tenant, its agents, employees, contractors
or invitees.
E. PERMITTED TRANSFERS: Tenant may, without Landlord's prior written
consent, sublet the Premises or assign the Lease to: (i) a subsidiary,
affiliate, division or corporation controlled or under common control with
Tenant; (ii) a successor corporation related to Tenant by merger, consolidation,
non-bankruptcy reorganization, or government action; or (iii) a purchaser of
substantially all of Tenant's assets, provided, however, that the subtenant or
assignee has a net worth not less than the net worth of Tenant as of the date of
such transfer. For the purpose of this Lease, sale of Tenant's capital stock
through any public exchange shall not be deemed an assignment, subletting, or
any other transfer of the Lease or the Premises.
30. CONDEMNATION: If any part of the Premises shall be taken for any
public or quasi-public use, under any statute or by right of eminent domain or
private purchase in lieu thereof, and only a part thereof remains which is
susceptible of
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occupation hereunder, this Lease shall as to the part so taken, terminate as of
the day before title shall vest in the condemnor or purchaser ("Vesting Date"),
and the Base Monthly Rent payable hereunder shall be adjusted so that the Tenant
shall be required to pay for the remainder of the Lease Term only such portion
of such Base Monthly Rent as the value of the part remaining after such taking
bears to the value of the entire Premises prior to such taking. If all of the
Premises, or such part thereof be taken so that there does not remain a portion
susceptible for occupation hereunder, this Lease shall thereupon terminate on
the Vesting Date. If a part or all of the Premises be taken, all compensation
awarded upon such taking shall go to the Landlord and the Tenant shall have no
claim thereto but Landlord shall cooperate with Tenant, without cost to
Landlord, to recover compensation for damage to or taking of any Alterations or
for Tenant's moving costs. Tenant hereby waives the provisions of California
Code of Civil Procedures Section 1265.130 and any other similarly enacted statue
are waived by Tenant and the provisions of this paragraph 30 shall govern in the
case of such destruction.
31. EFFECTS OF CONVEYANCE: The term "Landlord" as used in this Lease,
means only the owner for the time being of the Premises so that, in the event
of any sale or other conveyance of the Premises, or in the event of a master
lease of the Premises, the Landlord shall be and hereby is entirely freed and
relieved of all covenants and obligations of the "Landlord" hereunder arising
from and after the conveyance, and it shall be deemed and construed, without
further agreement between the parties and the purchaser at any such sale, or the
master tenant of the Premises, that the purchaser or master tenant of the
Premises has assumed and agreed to carry out any and all covenants and
obligations of the Landlord hereunder. Such transferor shall transfer and
deliver Tenant's security deposit to the purchaser at any such sale or the
master tenant of the Premises, and thereupon the such transferor shall be
discharged from any further liability in reference thereto.
32. SUBORDINATION: In the event Landlord notifies Tenant in writing,
this Lease shall be subordinate to any ground Lease, deed of trust, or other
hypothecation for security now or hereafter placed upon the real property of
which the Premises are a part and to any and all advances made on the security
thereof and to renewals, modifications, replacements and extensions thereof
provided that Tenant receives from the lender or other lien holder requesting
such subordination an agreement in writing providing that if the lien holder
acquires title to the real property on which the Premises are located, such
party shall not terminate this Lease so long as Tenant is not in default
hereunder, and such party shall recognize all of the rights of Tenant under this
Lease. Tenant agrees to promptly execute and deliver any documents which may be
required to effectuate such subordination. At the request of any lender, Tenant
agrees to execute and deliver any reasonable modifications of this Lease which
do not materially adversely affect Tenant's rights hereunder.
Landlord shall attempt to deliver to Tenant a non-disturbance
agreement from the existing lender on the Building in a form reasonably
acceptable to the parties within sixty (60) days from the date of execution of
this Lease. In the event Landlord is unable to deliver the non-disturbance,
Tenant shall have the right to terminate the Lease by providing Landlord
written notice of such election within five (5) days following the expiration of
such sixty (60) day period.
33. WAIVER: The waiver by Landlord of any breach of any term, covenant or
condition, herein contained shall not be deemed to be a waiver of such term,
covenant or condition or any subsequent breach of the same or any other term,
covenant or condition herein contained. The subsequent acceptance of rent
hereunder by Landlord shall not be deemed to be a waiver of any preceding breach
by Tenant of any term, covenant or condition of this Lease, other than the
failure of Tenant to pay the particular rental so accepted, regardless of
Landlord's knowledge of such preceding breach at the time of acceptance of such
rent. No payment by Tenant or receipt by Landlord of a lesser amount than any
installment of rent due shall be deemed to be other than payment on account of
the amount due. No delay or omission in the exercise of any right or remedy by
Landlord shall impair such right or remedy or be construed as a
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waiver thereof by Landlord. No act or conduct of Landlord, including, without
limitation, the acceptance of keys to the Premises, shall constitute acceptance
of the surrender of the Premises by Tenant before the Expiration Date (only
written notice from Landlord to Tenant of acceptance shall constitute such
acceptance of surrender of the Premises). Landlord's consent to or approval of
any act by Tenant which require Landlord's consent or approvals shall not be
deemed to waive or render unnecessary Landlord's consent to or approval of any
subsequent act by Tenant.
34. HOLDING OVER: Any holding over after the termination or Expiration
Date, shall be construed to be a tenancy from month to month, terminable on
thirty (30) days written notice from either party, and Tenant shall pay Base
Monthly Rent to Landlord at a rate equal to one hundred fifty percent (150%) of
the Base Monthly Rent due in the month preceding the termination or Expiration
Date plus all other amounts payable by Tenant under this Lease. Any holding over
shall otherwise be on the terms and conditions herein specified, except those
provisions relating to the Lease Term and any options to extend or renew, which
provisions shall be of no further force and effect following the expiration of
the applicable exercise period. Tenant shall indemnify, defend, and hold
Landlord harmless from all loss or liability (including, without limitation, any
loss or liability resulted from any claim against Landlord made by any
succeeding tenant) founded on or resulting from Tenant's failure to timely
surrender the Premises to Landlord and losses to Landlord due to lost
opportunities to lease the Premises to succeeding tenants.
35. SUCCESSORS AND ASSIGNS: The covenants and conditions herein contained
shall, subject to the provisions of paragraph 29, apply to and bind the heirs,
successors, executors, administrators and assigns of all the parties hereto; and
all of the parties hereto shall be jointly and severally liable hereunder.
36. ESTOPPEL CERTIFICATES: Either party shall at any time during the Lease
Term, within ten (10) days following written notice from the other party, be
obligated to execute and deliver a statement in writing certifying (i) that this
Lease is unmodified and in full force and effect (or, if modified, stating the
nature of such modification); (ii) the date to which the rent and other charges
are paid in advance, if any; (iii) acknowledging that there are not, to their
knowledge, any uncured defaults hereunder or specifying such defaults if they
are claimed; and (iv) such other information as either party may reasonably
request. Any such statement may be conclusively relied upon by any prospective
purchaser or encumbrancer of the Premises. Tenant also agrees to provide the
most current three (3) years of audited financial statements within five (5)
days of a request by Landlord for Landlord's use in financing the Premises with
commercial lenders.
37. OPTION TO EXTEND THE LEASE TERM:
A. GRANT AND EXERCISE OF OPTION: Landlord hereby grants to Tenant,
upon and subject to the terms and conditions set forth in this paragraph, two
(2) options (the "Options") to extend the Lease Term for an additional term (the
"Option Term"), each Option Term shall be for a period of sixty (60) months.
Each such Option shall be exercised, if at all, by written notice to Landlord no
earlier than the date that is thirty (36) months prior to the Expiration Date
but no later than the date that is thirty (30) months prior to the Expiration
Date. If Tenant exercises the Option, each of the terms, covenants and
conditions of this Lease except this paragraph shall apply during the Option
Term as though the expiration date of the Option Term was the date originally
set forth herein as the Expiration Date, provided that the Base Monthly Rent to
be paid by Tenant during the Option Term shall be the greater of (i) the Base
Monthly Rent applicable to the period immediately prior to the commencement of
the Option Term, or (ii) ninety five percent (95%) of the Fair Market Rental, as
hereinafter defined, for the Premises for the Option Term. Anything contained
herein to the contrary notwithstanding, if Tenant is in monetary or material
non-monetary default under any of the terms, covenants or conditions of this
Lease (after expiration of the applicable cure period) either at the time Tenant
exercises the Option or at any time thereafter prior to the commencement date of
the Option Term, Landlord shall have, in addition to
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all of Landlord's other rights and remedies provided in this Lease, the right to
terminate the Option upon notice to Tenant, in which event the expiration date
of this Lease shall be and remain the Expiration Date. As used herein, the term
"Fair Market Rental" for the Premises shall mean the rental and all other
monetary payments including any escalations and adjustments thereto (including
without limitation Consumer Price Indexing) then being obtained for new leases
of space comparable in age and quality to the Premises in the locality of the
Building that Landlord could obtain during the Option Term from a third party
desiring to lease the Premises for the Option Term based upon the current use
and other potential uses of the Premises. The appraisers shall be instructed
that the foregoing five percent (5%) discount off the Fair Market Rental is
intended to reduce comparable rents which include (i) brokerage commissions,
(ii) tenant improvement allowances, and (iii) vacancy costs, to account for the
fact that Landlord will not suffer such costs in the event Tenant exercises its
Option. The appraisers shall also be instructed to first attempt to utilize
comparables based on multistory buildings, and if no such comparables are
available, to then utilize low-rise steel frame buildings in the Palo Alto,
Menlo Park and Mountain View marketplace.
B. DETERMINATION OF FAIR MARKET RENTAL: If Tenant exercises the
Option, Landlord shall send to Tenant a notice setting forth the Fair Market
Rental for the Premises for the Option Term, on or before the date that is
twelve (12) months prior to the Expiration Date. If Tenant disputes Landlord's
determination of the Fair Market Rental for the Option Term, Tenant shall,
within thirty (30) days after the date of Landlord's notice setting forth the
Fair Market Rental for the Option Term, send to Landlord a notice stating that
Tenant either (i) elects to terminate its exercise of the Option, in which event
the Option shall lapse and this Lease shall terminate on the Expiration Date, or
(ii) disagrees with Landlord's determination of Fair Market Rental for the
Option Term and elects to resolve the disagreement as provided in paragraph
37(C) below. If Tenant does not send to Landlord a notice as provided in the
previous sentence, Landlord's determination of the Fair Market Rental shall be
the basis for determining the Base Monthly Rent to be paid by Tenant hereunder
during the Option Term. If Tenant elects to resolve the disagreement as provided
in paragraph 37(C) below and such procedures shall not have been concluded prior
to the commencement date of the Option Term, Tenant shall pay as Base Monthly
Rent to Landlord the Fair Market Rental as determined by Landlord in the manner
provided above. If the amount of Fair Market Rental as finally determined
pursuant to paragraph 37(C) below is greater than Landlord's determination,
Tenant shall pay to Landlord the difference between the amount paid by Tenant
and the Fair Market Rental as so determined in paragraph 37(C) below within
thirty (30) days after the determination. If the Fair Market Rental as finally
determined in paragraph 37(C) below is less than Landlord's determination, the
difference between the amount paid by Tenant and the Fair Market Rental as so
determined in paragraph 37(C) below shall be credited against the next
installments of rent due from Tenant to Landlord hereunder.
C. RESOLUTION OF A DISAGREEMENT OVER THE FAIR MARKET RENTAL: Any
disagreement regarding the Fair Market Rental shall be resolved as follows:
1. Within thirty (30) days after Tenant's response to
Landlord's notice to Tenant of the Fair Market Rental, Landlord and Tenant shall
meet no less than two (2) times, at a mutually agreeable time and place, to
attempt to resolve any such disagreement.
2. If within the thirty (30) day period referred to in (i)
above, Landlord and Tenant can not reach agreement as to the Fair Market Rental,
they shall each select one appraiser to determine the Fair Market Rental. Each
such appraiser shall arrive at a determination of the Fair Market Rental and
submit their conclusions to Landlord and Tenant within thirty (30) days after
the expiration of the thirty (30) day consultation period described in (i)
above.
3. If only one appraisal is submitted within the requisite time
period, it shall be deemed to be the Fair Market Rental. If both appraisals are
submitted within such time period, and if the two appraisals so submitted differ
by less than ten percent
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(10%) of the higher of the two, the average of the two shall be the Fair Market
Rental. If the two appraisals differ by more than ten percent (10%) of the
higher of the two, then the two appraisers shall immediately select a third
appraiser who shall within thirty (30) days after his or her selection make a
determination of the Fair Market Rental and submit such determination to
Landlord and Tenant. This third appraisal will then be averaged with the closer
of the two previous appraisals and the result shall be the Fair Market Rental.
4. All appraisers specified pursuant to this paragraph shall be
members of the American Institute of Real Estate Appraisers with not less than
ten (10) years experience appraising office and industrial properties in the
Santa Clara Valley. Each party shall pay the cost of the appraiser selected by
such party and one-half of the cost of the third appraiser.
38. OPTIONS: All Options provided Tenant in this Lease are personal and
granted to original Tenant and any permitted transferee pursuant to paragraph
29(E) of the Lease and are not exercisable by any other third party should
Tenant assign or sublet all or a portion of its rights under this Lease, unless
Landlord consents to permit exercise of any option by any assignee or subtenant,
in Landlord's sole discretion. In the event that Tenant hereunder has any
multiple options to extend this Lease, a later option to extend the Lease cannot
be exercised unless the prior option has been so exercised.
39. QUIET ENJOYMENT: Upon Tenant's faithful and timely performance of all
the terms and covenants of the Lease and except as otherwise provided in this
Lease, Tenant shall quietly have and hold the Premises for the Lease Term and
any extensions thereof.
40. BROKERS: Tenant represents it has not utilized or contacted a real
estate broker or finder with respect to this Lease other than CB Commercial and
Tenant agrees to indemnify and hold Landlord harmless against any claim, cost,
liability or cause of action asserted by any other broker or finder claiming
through Tenant. Landlord agrees to pay the commission to CB Commercial as
provided in a separate agreement between CB Commercial and Landlord.
41. LANDLORD'S LIABILITY: If Tenant should recover a money judgment
against Landlord arising in connection with this Lease, the judgment shall be
satisfied only out of Landlord's interest in the Premises including the
improvements and real property and neither Landlord or any of its partners,
officers, directors, agents, trustees, shareholders or employees shall be liable
personally for any deficiency. And furthermore, Tenant expressly waives any and
all rights to proceed against the individual partners or the officers, directors
or shareholders of any corporate partner, except to the extent of their interest
in said limited partnership.
42. AUTHORITY OF PARTIES: If Landlord or Tenant is a corporation, each
individual executing this Lease on behalf of said corporation represents and
warrants that he is duly authorized to execute and deliver this Lease on behalf
of said corporation, in accordance with a duly adopted resolution of the Board
of Directors of said corporation or in accordance with the by-laws of said
corporation, and that this Lease is binding upon said corporation in accordance
with its terms.
43. TRANSPORTATION DEMAND MANAGEMENT PROGRAMS: Should a government agency
or municipality require Landlord to institute TDM (Transportation Demand
Management) facilities and/or program, Landlord and Tenant hereby agree that the
cost of TDM imposed capital costs required on the Premises, including but not
limited to employee showers, lockers, cafeteria, or lunchroom facilities, shall
be shall be amortized pursuant to paragraph 17 and any ongoing operational
costs or expenses associated with a TDM program, such as an on-site TDM
coordinator, which are required for the Premises shall be paid for by Tenant.
44. RIGHT OF FIRST OFFERING TO PURCHASE: Landlord hereby grants
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Tenant a right of first offering to purchase the Premises. Prior to Landlord
offering to sell the Premises to a third party (other than the third parties
with existing rights), Landlord shall give Tenant written notice of such desire
and the terms and other information under which Landlord intends to sell the
Premises. Provided at the time of exercise, Tenant (i) is not in default and
(ii) fully occupies the Premises, Tenant shall have the option, which must be
exercised, if at all, by written notice to Landlord within ten (10) days after
Tenant's receipt of Landlord's notice, to purchase the Premises at the sales
price and terms of sale specified in the notice. In the event Tenant timely
exercises such option to purchase the Premises, Landlord shall sell the Premises
to Tenant, and Tenant shall purchase the Premises from Landlord in accordance
with the price and terms specified in Landlord's notice. Landlord and Tenant
shall, in good faith, attempt to reach agreement on the terms of a mutually
acceptable purchase agreement consistent with the terms set forth in Landlord's
notice within thirty (30) days of Landlord's notice. In the event (i) Landlord
and Tenant are unable to reach agreement on a mutually acceptable purchase
agreement within such thirty (30) day period or (ii) Tenant fails to exercise
Tenant's option within said ten (10) day period, Landlord shall have one hundred
eighty (180) days thereafter to sell the Building at no less than ninety percent
(90%) of the sales price and upon the same or substantially the same other terms
of sale as specified in the notice to Tenant. In the event Landlord fails to
sell the Premises within said one hundred eighty (180) day period or in the
event Landlord proposes to sell the Premises at less than ninety percent (90%)
of the sales price or on other material terms which are more favorable to the
prospective tenant than that proposed to Tenant, Landlord shall be required to
resubmit such offer to Tenant in accordance with this Right of First Offering.
This Right of First Offering shall automatically terminate, (i) upon
the expiration or sooner termination of the Lease, or (ii) in the event of a
foreclosure or other involuntary transfer of Landlord's interest in the
Premises. Notwithstanding the forgoing, this Right of First Offering shall not
apply to transfers of all or a portion of the Premises to (i) John A. Sobrato
and/or John M. Sobrato (individually and collectively "Sobrato"), and (ii) any
immediate family member of Sobrato, and (iii) any trust established, in whole or
in art, for the benefit of Sobrato and/or any immediate family member of
Sobrato, (iv) any partnership in which Sobrato or any immediate family member,
either directly or indirectly (e.g., through a partnership or corporate entity
or a trust) retains a general partner interest, and/or (v) any corporation under
the control, either directly or indirectly, by Sobrato or any immediate family
member of Sobrato.
45. DISPUTE RESOLUTION: Except for the failure by Tenant to timely pay the
Base Monthly Rent, any controversy, dispute, or claim of whatever nature arising
out of, in connection with, or in relation to the interpretation, performance or
breach of this agreement, including any claim based on contract, tort, or
statute, shall be resolved at the request of any party to this agreement through
a two-step dispute resolution process administered by JAMS or another judicial
and mediation service mutually acceptable to the parties involving first
mediation, followed, if necessary, by final and binding arbitration administered
by and in accordance with the then existing rules and practice of the judicial
and mediation service selected, and judgment upon any award rendered by the
arbitrator(s) may be entered by any State or Federal Court having jurisdiction
thereof.
46. MISCELLANEOUS PROVISIONS:
A. RENT: All monetary sums due from Tenant to Landlord under this
Lease, including, without limitation those referred to as "additional rent",
shall be deemed to be rent.
B. THIS PARAGRAPH INTENTIONALLY LEFT BLANK:
C. PERFORMANCE BY LANDLORD: If Tenant fails to perform any obligation
required under this Lease or by law or governmental regulation, Landlord in its
sole discretion may without notice and without releasing Tenant from its
obligations hereunder or waiving any rights or remedies, perform such
obligation, in which event
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Tenant shall pay Landlord as additional rent all sums paid by Landlord in
connection with such substitute performance including interest as provided in
paragraph 44(D) below within ten (10) days following Landlord's written notice
for such payment.
D. INTEREST: All rent due hereunder, if not paid when due, shall
bear interest at the maximum rate permitted under California law accruing from
the date due until the date paid to Landlord.
E. RIGHTS AND REMEDIES: All rights and remedies hereunder are
cumulative and not alternative to the extent permitted by law and are in
addition to all other rights and remedies in law and in equity.
F. SURVIVAL OF INDEMNITIES: All indemnification, defense, and hold
harmless obligations of Landlord and Tenant under this Lease shall survive the
expiration or sooner termination of the Lease.
G. SEVERABILITY: If any term or provision of this Lease is held
unenforceable or invalid by a court of competent jurisdiction, the remainder of
the Lease shall not be invalidated thereby but shall be enforceable in
accordance with its terms, omitting the invalid or unenforceable term.
H. CHOICE OF LAW: This Lease shall be governed by and construed in
accordance with California law. Venue shall be Santa Clara County.
I. TIME: Time is of the essence hereunder.
J. ENTIRE AGREEMENT: This instrument contains all of the agreements
and conditions made between the parties hereto and may not be modified orally or
in any other manner other than by an agreement in writing signed by all of the
parties hereto or their respective successors in interest.
K. REPRESENTATIONS: Tenant acknowledges that neither Landlord nor
any of its employees or agents have made any agreements, representations,
warranties or promises with respect to the demised Premises or with respect to
present or future rents, expenses, operations, tenancies or any other matter.
Except as herein expressly set forth herein, Tenant relied on no statement of
Landlord or its "employees or its agents" for that purpose.
L. HEADINGS: The headings or titles to the paragraphs of this Lease
are not a part of this Lease and shall have no effect upon the construction or
interpretation of any part thereof.
M. EXHIBITS: All exhibits referred to are attached to this Lease and
incorporated by reference.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease on the day and
year first above written.
<TABLE>
<S> <C>
LANDLORD: SOBRATO DEVELOPMENT TENANT: DIALOG INFORMATION
COMPANIES SERVICES, INC.
a California Limited Partnership a California Corporation
By: /s/ [SIG] By: /S/ [SIG]
- ------------------------------ ------------------------------
Its: Trustee of the General Partner Its: President
</TABLE>
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<PAGE> 26
Exhibit "A" -- Parcel Map
[MAP]
<PAGE> 27
Exhibit " -- Tenancy in Common & Maintenance Agmt
TICOR TITLE]
Order No. TS-
When Recorded Return To: FILED FOR RECORD
AT REQUEST OF
John Paul Hanna, Esq. /s/ SOBRATO DEV
525 University Avenue, Suite 705 JUN 10 3 20 PM '86
Palo Alto, CA 94301 OFFICIAL RECORDS
SANTA CLARA COUNTY
LAURIE KANE
TENANCY IN COMMON AND MAINTENANCE AGREEMENT,
DECLARATION OF COVENANTS, CONDITIONS AND RESTRICTIONS,
AND GRANT OF EASEMENTS
THIS AGREEMENT, DECLARATION AND GRANT, made on the date hereinafter set
forth, by SKYVIEW 2400-EL CAMINO REAL, a California limited partnership
("Skyview"), and SOBRATO DEVELOPMENT COMPANY 850, a California limited
partnership ("Sobrato"), is made with reference to the following facts:
A. Skyview owns property located in the City of Mountain View ("City")
County of Santa Clara, consisting of Lots 3-I, 3-IIA, 3-IIB, 3-IIC, 4A, 4B, 5,
6A, 6B and 7 described on that subdivision map entitled "Tract No. 7813"
("Map"), which map was filed for record in the Office of the Recorder of Santa
Clara County, California, on the 10th day June, 1986, Book 561 of Maps, pages
1, 2, 3 & 4 (the "Skyview Property").
B. Sobrato owns Lot 1 described on the Map (the "Sobrato Property").
C. Sobrato and Skyview each own an undivided one-half (1/2) interest
in Lot 2 described on the Map. Lot 2 consists of a three (3) level underground
garage ("garage" or "garage property").
D. The parties intend to: (1) share use of the garage; (2) provide for
management of the garage; (3) impose upon their respective properties mutually
beneficial protective covenants, conditions and restrictions; and (4) grant
certain reciprocal easements over portions of their respective properties.
NOW, THEREFORE, Skyview and Sobrato hereby declare that all of the
property described above shall be held, sold, leased, mortgaged, encumbered,
rented, used, occupied, improved and conveyed subject to the following
declarations, limitations, easements, restrictions, covenants, conditions, which
are imposed as equitable servitudes pursuant to a general plan for the
development of the property for the purpose of enhancing and protecting the
value and desireability of the property and every part thereof, and which shall
run with the real property and be binding on Sobrato and Skyview and their
successors and assigns, and on all parties having or acquiring any right, title
or interest in or to the described property or any part thereof, their heirs,
successors and assigns, and shall inure to the benefit of each owner thereof.
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[LAW OFFICES OF JOHN PAUL HANNA LETTERHEAD]
<PAGE> 28
ARTICLE I
GARAGE
1.1 Construction: Sobrato shall construct the garage, at its expense,
pursuant to plans and specifications approved by Sobrato and Skyview and by the
City. Sobrato shall pay all bills incurred in the construction of the garage so
that title to Lot 2 shall be delivered to Sobrato and Skyview free from any
lien claims or encumbrances, together with a fully paid for CLTA title
insurance policy insuring fee title in the owners, free from liens and
encumbrances. Sobrato shall warrant the garage against material defects in
design and construction for a period of one (1) year from the date that notice
of completion is filed and title is transferred in undivided interests to
Sobrato and Skyview, whichever occurs later.
1.2 Management: Sobrato (the "managing owner") shall manage the garage,
and may hire a professional management company (the "manager") for this purpose
under a contract entered into after competitive bidding based on bids from two
(2) or more responsible bidders. The term of the contract shall not exceed one
(1) year. The managing owner may delegate any of its duties hereunder to the
manager. Sobrato shall serve as managing owner so long as the parties agree,
and when the owners no longer agree that Sobrato shall be the managing owner,
other arrangements satisfactory to Sobrato and Skyview shall be made.
1.3 Maintenance: The managing owner shall be responsible for
maintenance of the garage, with the actual maintenance to be performed by the
manager described in section 1.2.
1.4 Insurance: The managing owner shall obtain the following insurance
on the garage and the appurtenances thereto:
A. Casualty: So-called "fire and extended coverage, all risk"
insurance, with earthquake and flood endorsements, if reasonably available,
insuring the garage against loss for the full replacement value cost thereof,
containing a deductible not exceeding five percent (5%) of the replacement
value of the garage;
B. Liability: Comprehensive general liability insurance insuring the
owners of the garage and their tenants against liability for personal injury,
bodily injury, death, and damage to property occurring or resulting fom an
occurrence in, on, or about the garage and its appurtenances, with combined
single limit coverage of Ten Million Dollars ($10,000,000); and
C. Workers' Compensation: Workers' compensation insurance as
required by statute.
1.5 Contracts: The managing owner may enter into contracts
including, without
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limitation, contracts for management, maintenance and security of the garage.
1.6 Destruction and Rebuilding: If the garage improvements are
substantially damaged (more than fifty percent (50%) destroyed) or destroyed by
fire, earthquake or other catastrophe, the owners shall decide within a maximum
of three (3) months after the catastrophe whether to rebuild. If either owner
decides not to continue operations and desires not to rebuild the garage, and
the other owner desires or is required by the terms of any lease or mortgage
affecting the garage to rebuild the garage and to continue operations, the
owner deciding not to rebuild and continue operations shall remove all rubble
from its property and leave its lot landscaped according to a standard
comparable to the standard existing in the project just prior to the
catastrophe, and the owner electing to rebuild and continue operations shall be
entitled to receive all of the proceeds from the insurance policy covering the
garage and to use that proceeds to reconstruct the garage or such portion
thereof as is necessary to permit that owner to continue operations. Damage
resulting in less than fifty percent (50%) destruction shall be repaired in all
cases.
1.7 Condemnation: If in the event of the taking of all or any portion of
the garage, the proceeds of condemnation shall be distributed equally to the
owners subject to the rights of their mortgagees, if any.
1.8 Security: The managing owner shall acquire and install the
surveillance equipment (television cameras) for maintenance of security in the
garage and the cost thereof shall be included in operating costs to be shared
as provided in section 1.9. Skyview and Sobrato shall each, at their own
expense, construct one (1) monitoring station for their respective use. The
stations shall be linked together for purposes of communication. Each party
shall provide its own monitoring and security guards, if desired, at its own
expense. No owner of the garage nor any of their agents, employees or tenants
shall be liable to any other owner or its agents, employees or tenants for
failing to provide security for the garage.
1.9 Cost Sharing: Except as provided in section 1.8, all costs of
operation, maintenance, management, taxes, and insurance premiums relating to
the garage ("garage expenses") shall be borne by the fee title owner(s) of Lot 2
in proportion to their interest in Lot 2. The managing owner, in its reasonable
discretion, shall determine and cause to be collected from said owners of Lot 2,
reasonable reserves for capital improvements and extraordinary garage expenses.
The managing owner also shall prepare and deliver to the owners of Lot 2, not
less than forty-five (45) nor more than sixty (60) days before the beginning of
the calendar year a report consisting of: (1) estimated annual revenue and
garage expenses for the ensuing calendar year; (b) the
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amount of the total cash reserves currently available; (c) the actual garage
expenses for the preceding calendar year; (d) the total garage assessment paid
by each owner during the preceding calendar year; and (e) the amount of
estimated monthly assessments to be paid by each owner during the ensuing
calendar year. If the report indicates that the actual garage expenses, plus
reserves, for any particular calendar year were not equal to the garage
assessments payable for such year by the owners of Lot 2 the difference shall
be paid by or to the managing owner within ten (10) days of the managing
owner's report, to the end that the managing owner shall receive from each
owner of Lot 2 each year that owner's proportionate share of actual garage
expenses, plus reserves. The managing owner shall make available for inspection
by any owner of Lot 2, or its representative, at the property during normal
business hours, the books, records, and invoices supporting the garage
assessments and payments demanded for garage assessments. If any such
inspection should disclose a discrepancy of five percent (5%) or more, the
managing owner shall pay all cost of the inspection.
1.10 Towing of Automobiles: Certain parking spaces in the garage are
reserved for exclusive use of certain persons. The managing owner or the
manager are authorized to have any automobiles which are illegally or
improperly parked anywhere in the project towed at the expense of the owner of
said vehicle. The managing owner may hire any towing company to tow such cars.
1.11 Income from Parking Fees: All income from fees charged to the
public for use of the garage shall be used for current expenses of maintenance,
operation, and insurance, and any surplus shall be deposited to a reserve
account for capital improvements and emergencies.
1.12 Capital Costs: In the event any extraordinary expenses or
expenditures for capital improvements are required, and the proceeds of current
operations and reserves are insufficient for such purpose, the managing owner
may require capital contributions to be made by the owners of Lot 2 in the same
ratio as provided for cost sharing in section 1.9.
1.13 Managing Owner: The managing owner shall not be personally liable
for ordinary mistakes in judgment or for any conduct in his capacity as
managing owner except for active negligence or willful misconduct in managing
the operation and maintenance of the garage, or in selecting and supervising a
manager for the garage.
1.14 Payment of Costs: On the first day of each calendar month the
owners of Lot 2 shall pay their respective shares of the monthly garage
expenses upon receipt of the monthly assessment from the manager. Any
assessment not paid within fifteen (15) days after the due date (as specified
in the assessment) shall be delinquent, shall bear
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interest at the rate of twelve percent (12%) per annum from the due date until
paid, and shall incur a late payment penalty in the amount of ten percent (10%)
of the assessment. The owners of Lot 2 agree that a lien with a private power of
sale for a delinquent assessment, including interest, penalty and attorney's
fees, is hereby granted against the interest of said delinquent owner in Lot 2,
and that the lien may be enforced by sale of the delinquent owner's interest in
Lot 2 by the managing owner pursuant to the provisions of Section 2924-2924h of
the California Civil Code applicable to the exercise of powers of sale in
mortgages and deeds of trust, or in any other manner permitted by law.
1.15 Waiver of Partition: Each party forever waives the right to bring any
partition action to divide lot 2 under Title 10.5 of Part II of the California
Code of Civil Procedure, or any successor partition statutes thereto.
ARTICLE II
EASEMENTS
2.1 Easements for Ingress and Egress: Skyview hereby grants to Sobrato for
the benefit of the Sobrato Property as the dominant tenement easements for
ingress and egress over Lot 3-I as the servient tenement and Sobrato hereby
grants to Skyview for the benefit of the Skyview Property as the dominant
tenement easements for ingress and egress over Lot 1 as the servient tenement.
Said easements are for pedestrian traffic only over the walkways and other
access routes located on the open space areas of said lots (those areas not
occupied by buildings).
2.2 Garage Parking and Use: The owners of Lot 2, their occupants, tenants
and invitees shall have rights of ingress and egress to and from and parking
within the garage (except in spaces reserved for the exclusive use of the owners
and occupants as provided in section 2.3), and to the extent required for
vehicular access to the garage, easements for ingress and egress over that
portion of Lots 1 and 3-I within paved driveways and garage entrances and exits.
2.3 Exclusive Use of Parking Spaces: Certain parking spaces in the garage
are reserved for the exclusive use of certain persons as provided in Exhibit "A"
attached hereto and incorporated by reference herein. In the event that any
owner of Lot 2 fails to pay its share of monthly garage expenses
("delinquency"), and should the delinquency continue for one hundred twenty
(120) days, all of the rights of said owner of Lot 2 and its successor, members,
tenants, and all other persons claiming rights in Lot 2 through said owner shall
be suspended and the manager shall be authorized to prevent access to the garage
and to the reserved spaces by all such parties. In the event that the owner of a
condominium, who belongs to a condominium association which is an owner of Lot
2,
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fails to pay any amounts payable to the association in connection with the use
of the garage for a period of ten (10) days after the due date of such payment,
that association may immediately file a lien against the condominium interest of
the delinquent condominium owner pursuant to covenants, conditions and
restrictions encumbering the condominium, and may notify the manager of the
garage to suspend the parking privileges of the delinquent condominium owner.
Once parking privileges are suspended with respect to a person, the manager of
the garage may blockade the space assigned to such person to prevent its being
used until the delinquency is cured.
2.4 Drainage: Reciprocal drainage and sewer facility easements are granted
over Lots 1, 2 and 3-I as a benefit and burden on each of these lots for the
flow of surface water, and for installation, inspection, maintenance, repair,
replacement, and removal of storm sewer and sanitary sewer facilities. Said
easements are limited to the open space areas of said lots which are not
occupied by buildings.
2.5 Utilities: Reciprocal utility easements are granted over Lots 1, 2 and
3-I as a benefit and burden on each of these lots for installation, inspection,
maintenance, repair, replacement and removal of water, electric, gas, telephone,
television and other utility facilities. Said reciprocal easements are limited
to the open space areas of said lots which are not occupied by buildings.
2.6 Encroachment Easements: Reciprocal encroachment easements are granted
over Lots 1, 2 and 3-I as a benefit and burden on each of these lots for
purposes of accommodating any encroachment of foundations, and overhangs of
exterior walls, windows, and roofs which are built in accordance with the
original design, plans and specifications of the parties, or due to minor
engineering errors, minor errors in original construction, settlement or
shifting of the buildings, or similar clauses. There shall be valid easement for
the maintenance of said encroachments as long as they shall exist and the rights
and obligations of owner shall not be altered in any way by said encroachment,
settling or shifting. In the event a structure is partially or totally
destroyed, and then repaired or rebuilt, the owners of each adjoining lot agree
that minor encroachments over adjoining lots shall be permitted and there shall
be valid easements for the maintenance of said encroachments so long as they
shall exist.
2.8 View Easement: A view easement is granted over Lot 1 as the servient
tenement in favor of Lots 3-I, 3-IIA, 3-IIB, 3-IIC, 4A, 4B, 5, 6A, 6B and 7 as
the dominant tenements for preservation of the view over Lot 1 that will exist
upon completion of the proposed seven (7) story office building upon Lot 1 in
accordance with the final plans approved by the City. The purpose of this view
easement is to prohibit
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additional construction on Lot 1 which would increase the height or mass of the
seven (7) story office building or which would take place within the open space
area of Lot 1.
2.9 Structural Repair Easements: Reciprocal structural repair easements are
granted over Lots 1, 2, 3-I, 3-IIA, 3-IIB, 3-IIC, 4A, 4B, 5, 6A, 6B and 7 as a
benefit and burden on each of these lots for allowing such access over any
adjoining lot subject to this easement as may be reasonably necessary in order
to make any structural repairs to an improvement on a lot, provided that the
owner making such improvements or repairs to its lot shall fully reimburse the
owner of the adjoining lot for any damages thereto (including business
interruption or injuries to persons) resulting from the exercise of the easement
rights described herein.
2.10 Easements to Accompany Conveyance of Lot: The easements described in
this Article II are permanent and appurtenant to the respective dominant
tenements, and shall automatically accompany the conveyance of any lot, even
though the description in the instrument of conveyance may refer only to the fee
title to the lot.
ARTICLE III
USE RESTRICTIONS
3.1 Nuisances: No noxious, illegal, or seriously offensive activities shall
be carried on upon any lot, or in any part of the property, nor shall anything
be done thereon which may be or may violate any law, rule or regulation of any
applicable governmental entity or any private covenant, condition, or
restriction affecting the garage become a nuisance to or which may in any way
interfere with the quiet enjoyment of each of the owners of his respective lot.
3.2 Landscaping: Lots 1 and 3-I shall be landscaped in accordance with
plans and specifications submitted to and approved by the City. Landscaping
shall be installed within ninety (90) days of completion of buildings. After
installation, landscaping shall be maintained in a sightly and well-kept
condition by the owner, lessee, licensee or other occupant of the lot or its
agent, at its expense. All landscaped areas shall be irrigated with a system
designed for automatic operation.
3.3 Ground Maintenance:
A. Grass, hedges, shrubs, vines and mass planting of any type on each
lot shall be kept trimmed and shall at regular intervals be mowed, trimmed and
cut so as to maintain the same in a neat and attractive manner. Trees, shrubs,
vines and plants which die shall be promptly removed and replaced with living
plants of like kind and quality.
B. No weeds, vegetation, rubbish, debris, garbage, objects, waste
materials, or materials of any kind whatsoever shall be placed or permitted to
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accumulate upon any portion of a lot, which would render it unsanitary,
unsightly, offensive, or detrimental to any property in the vicinity thereof or
to the occupants of any such property in such vicinity.
C. No building material of any kind or character shall be placed or
stored upon any lot so as to be open to view by the public or neighbors, unless
such material will be used and is used within three (3) months for the
construction of buildings or structures upon the lot upon which the material is
stored.
3.4 Exterior Light Fixtures: No exterior lighting fixture shall be
installed on any lot without adequate and proper shielding of the source of the
light. No exterior lighting fixtures shall be installed that may become a
nuisance to adjacent lots subject to his Declaration. Office lighting on Lot 1
shall be kept at a minimum during periods when the offices are not occupied to
minimize glare affecting the residential areas of the property.
3.5 Excavations: No excavation for stone, gravel, sand, dirt or earth shall
be made on any portion of a lot, except for the construction of buildings,
walls, fences, foundations, structures, landscaping, swimming pools and other
improvements, plans and specifications for which excavations have been approved
by the City; provided, however, that the owners reserve the right to excavate,
fill and grade on any lot or on any portion thereof, or to do such other work of
improvement thereon as may be necessary to the construction and completion of
public improvements.
3.6 Clothes Lines: No exterior clothes lines shall be erected or maintained
and there shall be no outside laundering or drying of clothes. No draping of
towels, carpets, or laundry over railings shall be allowed.
3.7 Balcony Storage: No storage on balconies shall be permitted. No balcony
shall be enclosed.
3.8 Pets: No pets shall be allowed in Lot 1. No pets shall be allowed in
Lot 3-I unless on a leash.
ARTICLE IV
GENERAL
4.1 Enforcement: Any owner shall have the right to enforce, by any
proceeding at law or in equity, all restrictions, conditions, covenants,
reservations, liens, and charges now or hereafter imposed by the provisions of
this Declaration, and in such action shall be entitled to recover reasonable
attorneys' fees as are ordered by Court. Failure by any owner to enforce any
covenant or restriction herein contained shall in no event be deemed a waiver of
the right to do so thereafter. Any owner alleged to be in
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default of any provision hereof shall be given ten (10) days to cure any alleged
default before legal or disciplinary action may be taken. The owner(s) of both
properties and their tenants shall have the right to enforce or require
enforcement of this Agreement. This Agreement shall be binding upon and
enforceable against owners and all tenants of the owner(s).
4.2 Records: The managing owner shall keep accurate and complete books,
ledgers and records regarding the management and maintenance of the garage,
which shall be open to inspection at all times by all owners on reasonable
notice. The managing owner shall render accountings as often as requested by the
other owner(s) and shall provide a complete annual accounting and report no
later than sixty (60) days after the close of the calendar year.
4.3 Taxes: The managing owner shall pay the property taxes promptly prior
to delinquency of installments.
4.4 Term: The covenants and restrictions of this Declaration shall run with
and bind the Sobrato, Skyview and garage properties, and shall inure to the
benefit of and shall be enforceable by the owner of any such property subject to
this Declaration, its respective legal representatives, heirs, successors and
assigns, for a term of fifty (50) years from the date this Declaration is
recorded, after which time they shall be automatically extended for successive
periods of ten (10) years, unless an instrument in writing, signed by all of the
then owners of the lots, has been recorded within the year preceding the
beginning of each successive period of ten (10) years, agreeing to change said
covenants and restrictions in whole or in part, or to terminate the same.
4.5 Notices: Any notice permitted or required by this Declaration may be
delivered either personally or by mail. If delivery is by mail, it shall be
deemed to have been delivered seventy-two (72) hours after a copy of the same
has been deposited in the United States mail, first class or registered, postage
prepaid, addressed to the person to be notified at the current address given by
such person to the managing owner. Copies of any notices delivered hereunder
regarding any alleged default or other matters specifically requested shall be
given to any requesting lender that holds a first deed of trust against any lot
on the Map at the address that the lender has provided the managing owner.
4.6 Invalidity of Any Provision: Should any provision or portion hereof be
declared invalid or in conflict with any law of the jurisdiction where this
project is situated, the validity of all other provisions and portions hereof
shall remain unaffected and in full force and effect.
-9-
<PAGE> 36
4.7 Successors In Interest: This Declaration and the covenants,
conditions, easements and agreements contained herein shall be binding upon and
inure to the benefit of the parties and their permitted assigns and permitted
successors in interest, including one or more owners' associations which any of
the owners may create and to which any of the owners may assign all or a portion
of their rights and obligations hereunder. In the event that Skyview assigns it
rights and obligations to one or more owners' associations or owners, said
associations and/or owners shall designate a single representative who shall
exercise the rights of the owner of a one-half (1/2) undivided interest in Lot 2
on behalf of the individuals and associations who collectively own the one-half
(1/2) interest initially owned by Skyview. The rights and duties hereunder are
appurtenant to the respective properties and any transfer of a fee interest in
the property encumbered by this Agreement (other than a lease or a transfer for
security purposes only) transfers the rights and duties. From and after the date
of such transfer, the transferor shall have no further rights or duties
hereunder provided that the transferor shall remain liable for any breach of its
duties hereunder that occurred before the transfer.
4.8 Reciprocal Indemnity Provisions: Sobrato and Skyview each agree on
behalf of themselves and their respective agents, tenants, employees,
successors, and assigns, to forever release each other and their respective
agents, tenants, employees, successors, and assigns from all damages, claims,
causes of action, costs, liabilities, attorneys' fees, and expenses which are to
be covered by the insurance to be carried under this agreement or which are
actually compensated by insurance. Each party shall cause any insurance policy
carried by it to contain a valid waiver by the insurer of its right of
subrogation against all other parties thereto and said party's agents, tenants,
employees, successors, and assigns. Except as expressly set forth to the
contrary herein, Sobrato and Skyview each agree to hold the other party and its
agents, employees and contractors harmless from claims for injury and/or damage
arising out of their active negligence or wilfull misconduct.
4.9 Amendments: This Declaration may be amended by unanimous vote of the
owners of the property subject hereto. The owners agree to approve and adopt all
amendments reasonably required by the City of Mountain View and the Department
of Real Estate of the State of California. The provisions of section 2.3
pertaining to the exclusive use of certain parking spaces for certain persons
(as provided in Exhibit "A" attached hereto and incorporated by reference
herein) shall not be amended or revoked without the express written consent of
the City of Mountain View. Any amendment must
-10-
<PAGE> 37
be recorded in the Recorder's Office of the County of Santa Clara. No amendment
shall adversely affect the rights of the holder of any mortgage of record prior
to the recordation of such amendment.
4.10 Cooperation: Each party agrees to cooperate in making any revisions
to this Agreement that may be requested by any lender that holds or will hold a
first deed of trust on any lot shown on the Map, provided such revisions do not
materially affect any rights or duties hereunder.
SKYVIEW 2400-EL CAMINO REAL SOBRATO DEVELOPMENT COMPANY 850
A California Limited Partnership A California Limited Partnership
By: /s/ WALTER J. HARRINGTON By: /s/ JOHN MICHAEL SOBRATO
----------------------------- -----------------------------------
Walter J. Harrington John Michael Sobrato, A General
Partner
By: /s/ ROBERT GRANUM II
-----------------------------------
Robert Granum II, A General Partner
By: /s/ JOHN A. SOBRATO
-----------------------------------
John A. Sobrato as Trustee for the
John A. Sobrato and Susan A.
Sobrato 1979 Revocable Trust, A
General Partner
DATED: June 9, 1986
-11-
<PAGE> 38
[SEAL] MARY K. FRENCH
STATE OF CALIFORNIA ) NOTARY PUBLIC-CALIFORNIA
) ss. SANTA CLARA COUNTY
COUNTY OF Santa Clara ) My Comm. Expires July 31, 1988
On June 9, l986, before me, the undersigned, a Notary Public in and for
said State, personally appeared Walter J. Harrington, personally known to me (or
proved to me on the basis of satisfactory evidence) to be the person that
executed this instrument, on behalf of the partnership, and acknowledged to me
that the partnership executed it.
IN WITNESS WHEREOF I have hereunto set my hand and affixed my official
seal in the County of Santa Clara the day and year in this certificate first
above written.
/s/ MARY K. FRENCH
---------------------------------------------
Notary Public, State of California
[SEAL] MARY K. FRENCH
STATE OF CALIFORNIA ) NOTARY PUBLIC-CALIFORNIA
) ss. SANTA CLARA COUNTY
COUNTY OF Santa Clara ) My Comm. Expires July 31, 1988
On June 9, 1986, before me, the undersigned, a Notary Public in and for
said State, personally appeared John Michael Sobrato, personally known to me
(or proved to me on the basis of satisfactory evidence) to be the person that
executed this instrument, on behalf of the partnership, and acknowledged to me
that the partnership executed it.
IN WITNESS WHEREOF I have hereunto set my hand and affixed my official
seal in the County of Santa Clara the day and year in this certificate first
above written.
/s/ MARY K. FRENCH
---------------------------------------------
Notary Public, State of California
[SEAL] MARY K. FRENCH
STATE OF CALIFORNIA ) NOTARY PUBLIC-CALIFORNIA
) ss. SANTA CLARA, COUNTY
COUNTY OF Santa Clara ) My Comm. Expires July 31, 1988
On June 9, 1986, before me, the undersigned, a Notary Public in and for
said State, personally appeared Robert Granum II, personally known to me (or
proved to me on the basis of satisfactory evidence) to be the person that
executed this instrument, on behalf of the partnership, and acknowledged to me
that the partnership executed it.
IN WITNESS WHEREOF I have hereunto set my hand and affixed my official
seal in the County of Santa Clara the day and year in this certificate first
above written.
/s/ MARY K. FRENCH
---------------------------------------------
Notary Public, State of California
-12-
<PAGE> 39
STATE OF CALIFORNIA )
) ss.
COUNTY OF Santa Clara )
On June 9, 1986, before me, the undersigned, a Notary Public in and for
said State, personally appeared John A. Sobrato, Trustee, personally known to me
(or proved to me on the basis of satisfactory evidence) to be the person that
executed this instrument, on behalf of the partnership, and acknowledged to me
that the partnership executed it.
IN WITNESS WHEREOF I have hereunto set my hand and affixed my official seal
in the County of Santa Clara the day and year in this certificate first above
written.
/s/ MARY K. FRENCH
---------------------------------------------
Notary Public, State of California
[SEAL] MARY K. FRENCH
NOTARY PUBLIC-CALIFORNIA
SANTA CLARA COUNTY
My Comm. Expires July 31, 1988
-13-
<PAGE> 40
TENANCY IN COMMON AND MAINTENANCE AGREEMENT,
DECLARATION OF COVENANTS, CONDITIONS AND RESTRICTIONS,
AND GRANT OF EASEMENTS
EXHIBIT "A"
Parking
Two hundred sixty-six (266) parking spaces in the garage (Lot 2) are reserved
for the exclusive use of the owners and occupants of Lots 4A, 5, 6A, and 7. The
blocks of spaces identified in the three (3) pages attached hereto as Exhibit
"A-1" are as follows:
No. of
Lot No. Parking Spaces Level
------- -------------- -----
4A 96 B & C
5 37 A
6A 96 B & C
7 37 A
Declarant and the owners of Lots 4A, 5, 6A, and 7 hereby specifically reserve
the right at any time in the future to make specific assignments of parking
spaces within the block of spaces hereby assigned to a particular lot to the
condominium owners within each lot in accordance with a condominium declaration
and condominium plan to be filed of record.
Sixty (60) spaces located in the garage (Lot 2) are reserved for the exclusive
use of the owner(s), visitors and occupants of Lot 1 all of the time (24 hours
per day). The block of sixty (60) spaces are identified on Exhibit "A-2"
attached hereto.
An additional four hundred (400) parking spaces within the garage, which spaces
are are identified on the three (3) pages attached hereto as Exhibit "A-3"
attached hereto, may be used by the owners, visitors and occupants of Lots
3-IIA, 3-IIB and 3-IIC, 4A, 5, 6A, and 7, between the hours of 6:00 P.M. and
7:30 A.M. on business days, and at any time on weekends and holidays, which use
will be shared with the owner/occupants of Lot 1 during the same time. Said four
hundred (400) spaces are exclusively reserved for the use of the owner(s),
visitors and occupant(s) of Lot 1 between 7:30 A.M. and 6:00 P.M. on business
days. Prohibition of resident parking in these spaces during such hours is to be
strictly enforced if parking congestion occurs on surrounding streets or
properties which results from this project, as determined by the City of
Mountain View.
The four hundred sixty (460) total spaces provided for the use of Lot 1 owners,
visitors and occupants as provided above, are to be available at no charge (in
addition to rental and fees paid under the applicable lease or leases) to the
occupants of the office building on Lot 1.
All of the parking spaces located within Lot 3-I are reserved for use by owners
and occupants of Lots 3-I, 3-IIA, 3-IIB and 3-IIC and 4A, 5, 6A and 7, and shall
be under the control of Skyview until conveyance of Lot 3-I to the owners of
Lots 4A, 5, 6A, and 7, or the condominium association at which time control
shall be assumed by the condominium association(s) created to manage Lots 4A, 5,
6A, and 7.
<PAGE> 41
[GRAPHIC]
SHARED 144 SPACES - PURPLE LEVEL C - EXHIBIT A-3
<PAGE> 42
[GRAPHIC]
SHARED 167 SPACES - PURPLE LEVEL B - EXHIBIT A-3
<PAGE> 43
[GRAPHIC]
SHARED 89 SPACES - PURPLE LEVEL A - EXHIBIT A-3
<PAGE> 44
[GRAPHIC]
ASK ONLY 60 SPACES - GREEN LEVEL A - EXHIBIT A-2
<PAGE> 45
[GRAPHIC]
SKYVIEW 96 SPACES - RED LEVEL C - EXHIBIT A-1
<PAGE> 46
[GRAPHIC]
SKYVIEW 96 SPACES - RED LEVEL B - EXHIBIT A-1
<PAGE> 47
[GRAPHIC]
SKYVIEW 74 SPACES - RED LEVEL A - EXHIBIT A-1
<PAGE> 48
SUBLEASE
THIS SUBLEASE ("Sublease"), dated as of March __, 1999, for reference
purposes only, is entered into by and between THE DIALOG CORPORATION, a Delaware
corporation, formerly Dialog Information Services, Inc., a California
corporation ("Sublessor"), and I-STORM, INC., a Nevada corporation
("Sublessee").
RECITALS
A. Sublessor leased certain premises ("Premises") including a
building containing approximately one hundred thirty three thousand, five
hundred (133,500) square feet (the "Building") located at the address commonly
known as 2440 El Camino Real, Mountain View, California, pursuant to a certain
Lease between Sublessor, as Tenant, and Sobrato Development Companies #850, a
California limited partnership (hereinafter "Master Lessor"), as Landlord,
dated March 10, 1994 (as may be amended or otherwise modified from time to
time, the "Master Lease"), a copy of which Master Lease is attached hereto as
EXHIBIT A. Capitalized terms herein not otherwise defined herein shall have the
same meanings as provided in the Master Lease.
B. Sublessor desires to sublease to Sublessee, and Sublessee
desires to sublease from Sublessor, a portion of the Premises upon the terms
and conditions provided for herein.
NOW, THEREFORE, in consideration of the mutual covenants and conditions
contained herein, Sublessor and Sublessee covenant and agree as follows:
AGREEMENT
1. SUBLEASED PREMISES.
(a) Subject to the terms and conditions set forth herein,
Sublessor hereby subleases to Sublessee, and Sublessee hereby subleases from
Sublessor, approximately eleven thousand four hundred eighty-six (11,486)
rentable square feet. Such square footage includes space located on the fifth
floor of the Building (the "Subleased Premises"), as well as the nonexclusive
right to use, in common with Sublessor and other tenants of the building, the
Common Use Areas (as defined below). The Subleased Premises are more
particularly described in EXHIBIT B attached hereto.
(b) Sublessee and Sublessor hereby agree that the calculation
of the rentable square footage of the Subleased Premises includes an equitable
apportionment made by Sublessor based upon Sublessee's Pro-Rata Share (as
hereinafter defined), attributable to Sublessor's right to non-exclusive usage
of the Common Use Areas. "Common Use Areas" shall mean those areas located on
the first and fifth floors of the Building and designated as such on EXHIBIT C,
which Common Use Areas consist of a lobby area, cafeteria, locker rooms, rest
rooms and conference rooms. Sublessor and Sublessee hereby agree that
Sublessor's determination of the rentable square footage of the Subleased
Premises, as set forth herein, shall be conclusive for the purpose of this
Sublease.
1.
<PAGE> 49
(c) Sublessee shall provide Sublessor with reasonable prior
written notice requesting use of any of the conference rooms comprising the
Common Use Areas. Sublessor and Sublessor shall work in good faith to establish
a schedule of use of such conference rooms mutually acceptable to all parties
possessing the right to non-exclusive use of such conference rooms.
2. TERM.
(a) The term of this Sublease (the "Term") shall commence on
March 23, 1999 (the "Commencement Date").
(b) Notwithstanding said Commencement Date, if for any
reason Sublessor cannot deliver possession of the Subleased Premises to
Sublessee in the condition required under this Sublease on or before said date,
Sublessor shall not be subject to any liability therefor, nor shall such failure
affect the validity of this Sublease or the obligations of Sublessee hereunder
or extend the term hereof; but in such case Sublessee shall not be obligated to
pay Rent (as hereinafter defined) or otherwise be liable to Sublessor until the
sixteenth (16th) day following the date that possession of the Subleased
Premises is tendered to Sublessee; provided, however that if Sublessee fails to
inform Sublessor on or before the date which is seven (7) business days prior to
the Commencement Date of the number of Sublessor's workstations which Sublessee
would like to retain in the Subleased Premises pursuant to a separate agreement
with Sublessor, and as a result of such failure, Sublessor is unable to deliver
possession of the Subleased Premises to Sublessee in the condition required
under this Sublease on or before the Commencement Date, then all of Sublessee's
obligations under this Sublease shall commence on the Commencement Date, except
for the payment of Rent, which obligation shall commence on April 1, 1999.
(c) The Term of this Sublease shall end on February 18, 2001
(the "Expiration Date"), unless earlier terminated in accordance with the terms
of this Sublease.
3. RENT.
(a) Throughout the Term of this Sublease, Sublessee shall pay
monthly rent ("Rent") to Sublessor, which Rent is comprised of Basic Rent (as
hereinafter defined) and Additional Rent (as hereinafter defined), in the
following amounts:
(i) Commencing on April 1, 1999, Sublessee shall pay
Sublessor an initial monthly basic rent ("Basic Rent") for the Subleased
Premises in the amount of Two and 45/100 Dollars ($2.45) per rentable square
foot. On the first anniversary of the Commencement Date and continuing for the
remainder of the Term, the monthly Basic Rent shall increase to the amount of
Two and 55/100 Dollars ($2.55) per rentable square foot.
(ii) In addition to Basic Rent, commencing upon April
1, 1999, Sublessee shall pay to Sublessor as additional rent ("Additional Rent")
Sublessee's pro rata share ("Sublessee's Pro-Rata Share") of expenses incurred
by Sublessor with respect to operating expenses for the Premises (including,
without limitation, costs incurred for utilities, building security and
janitorial services), common area maintenance costs, taxes and assessments,
costs of insurance procured by Master Lessor or Sublessor pursuant to Paragraph
12 of the Master Lease,
2.
<PAGE> 50
and any and all additional expenses payable by Sublessor to Master Lessor
pursuant to the Master Lease (collectively, "Operating Expenses"). Sublessor and
Sublessee hereby agree that Sublessee's Pro-Rata Share shall be the quotient
derived by dividing the number of rentable square feet of the Subleased Premises
by 133,500. To the extent that Sublessor notifies Sublessee that any items
constituting Additional Rent are due and payable under the Master Lease on a
monthly basis, such Additional Rent shall be paid by Sublessee to Sublessor as
and when Basic Rent is paid. To the extent that such items constituting
Additional Rent are billed from time to time to Sublessor by Master Lessor, such
Additional Rent shall be paid by Sublessee to Sublessor within fourteen (14)
days after Sublessee's receipt from Sublessor of an invoice therefor, and
Sublessor shall thereupon promptly remit such Additional Rent to Master Lessor.
Sublessor hereby represents that the common area of the Building has been
maintained according to reasonable commercial real estate business practices
prior to the Commencement Date. Sublessee shall bear no responsibility for
payment of Additional Rent for common area maintenance costs relating to
maintenance required during, but deferred beyond, the period prior to the
Commencement Date or resulting from lack of reasonable maintenance prior to the
Commencement Date.
(b) Rent shall be payable to Sublessor in lawful money of
the United States, in advance, without prior notice, abatement, demand, or
offset, on or before the first day of each calendar month during the term
hereof. If any rental period does not constitute a full calendar month, then
Rent for that month shall be prorated on a daily basis based upon the calendar
month. All Rent shall be paid to Sublessor at the address specified for notice
to Sublessor in SECTION 20, below, or at such other place as Sublessor may
designate by notice to Sublessee. Notwithstanding the foregoing requirement for
payment of Rent on or before the first day of each calendar month, Sublessor
agrees to waive the late charges fee as defined in Section 6 of the Master Lease
in the event that all amounts due and payable are received from Sublessee by
Sublessor within five (5) days after the first day of each calendar month.
(c) In the event of any damage, casualty, or condemnation
affecting the Subleased Premises, Rent payable by Sublessee shall be abated
hereunder, but only to the extent that rent under the Master Lease is abated,
and Sublessee waives any right to terminate this Sublease in connection with
such damage, casualty, or condemnation except to the extent the Master Lease is
also terminated as to the Subleased Premises or any portion thereof.
(d) Notwithstanding any of the foregoing, Sublessor and
Sublessee agree that, on or before February 1, 2000, Sublessor shall determine
the aggregate Operating Expenses actually paid by Sublessee to Sublessor for the
period from April 1, 1999 to January 31, 2000. In the event that the aggregate
Operating Expenses paid by Sublessee to Sublessor over such time period exceeds
the product of (i) the monthly amount of Eight Thousand Forty and 20/100 Dollars
($8,040.20) (seventy cents per rentable square foot multiplied by 11,486
rentable square feet) and (ii) the number of months in the period, then
Sublessor shall notify Sublessee in writing that such excess will be used to
reduce Sublessee's Basic Rent payments commencing with the month of February of
2000 and until such excess is exhausted. In addition, as of the Expiration Date,
Sublessor shall determine the aggregate Operating Expenses actually paid by
Sublessee to Sublessor for the period from February 1, 2000 through the
Expiration Date. In the event that the aggregate Operating Expenses paid by
Sublessee to Sublessor over such time period exceeds the product of(a) the
monthly amount of Eight Thousand Four Hundred Ninety-Nine and 64/100
3.
<PAGE> 51
Dollars ($8,499.64) (seventy-four cents per rentable square foot multiplied by
11,486 rentable square feet) and (b) the number of full months and prorations
for partial months in the period, then Sublessor shall reimburse Sublessee for
such excess on the Expiration Date. Further, if the Expiration Date occurs prior
to February 18, 2001, the periods noted above will be adjusted as appropriate.
4. SECURITY DEPOSIT
(a) Upon its execution of this Sublease, Sublessee shall
deposit with Sublessor, and shall maintain with Sublessor throughout the Term of
this Sublease, the sum of Twenty-Eight Thousand One Hundred and Forty and 70/100
Dollars ($28,140.70) as security for Sublessee's faithful performance of
Sublessee's obligations hereunder. Sublessor shall not be required to keep said
deposit separate from its general accounts, and no trust relationship is created
herein between Sublessor and Sublessee with respect to said security deposit.
(b) If Sublessee fails to pay rent or other charges due
hereunder, or otherwise defaults with respect to any provision of this Sublease,
Sublessor may use, apply, or retain all or any portion of said deposit for the
payment of any rent or other charge in default or for the payment of any sum to
which Sublessor may become obligated by reason of Sublessee's default, or to
compensate Sublessor for any loss or damage which Sublessor may suffer thereby.
If Sublessor so uses or applies all or any portion of said deposit, Sublessee
shall within ten (10) days after written demand therefor deposit cash with
Sublessor in an amount sufficient to restore said deposit to the full amount
hereinabove stated and Sublessee's failure to do so shall be a material breach
of this Sublease.
(c) If Sublessee performs all of Sublessee's obligations
hereunder, said security deposit, or so much thereof as has not theretofore been
applied by Sublessor, shall be returned, without payment of interest or other
increment for its use to Sublessee (or, at Sublessor's option, to the last
permitted assignee, if any, of Sublessee's interest hereunder) at the expiration
of the term hereof and within thirty (30) days after Sublessee has vacated the
Subleased Premises.
5. IMPROVEMENTS/CONDITION OF SUBLEASED PREMISES.
(a) Sublessor shall deliver the Subleased Premises to
Sublessee in its "as-is" condition, provided, that (i) as of the Commencement
Date, the roof and the building systems servicing the Subleased Premises
(including HVAC, mechanical and plumbing) shall be in good working order and
repair, (ii) Sublessor, at its expense, shall install a double-door entry to the
Subleased Premises, (iii) Sublessor, at its expense, shall repair any damage to
the floor of the Subleased Premises caused by the installation or removal of
Sublessor's workstations that currently reside thereon and (iv) the Subleased
Premises shall be free of dirt and debris and in "broom clean" condition. Except
as set forth in the immediately preceding sentence, Sublessor shall have no
obligation to make any alterations or improvements to the Subleased Premises.
(b) Sublessee has used due diligence in inspecting the
Subleased Premises and, subject to subparagraph (a) above, agrees to accept the
Subleased Premises in "as-is" condition and with all faults as of the date of
Sublessee's execution of this Sublease, without any
4.
<PAGE> 52
representation or warranty of any kind or nature whatsoever, or any obligation
on the part of Sublessor to modify, improve or otherwise prepare the Subleased
Premises for Sublessee's occupancy.
(c) Sublessee shall be permitted, at its sole cost, subject
to its receipt of the Sublessee Improvement Allowance in accordance with the
terms of EXHIBIT D, to cause Sublessee's Initial Improvements (as defined in
EXHIBIT D) to be constructed in the Subleased Premises, provided that Sublessee
shall obtain the prior written consent of Sublessor to the same and shall comply
with both this Sublease (including, without limitation, EXHIBIT D hereto) and
the Master Lease with regard to such improvements, including, without
limitation, (i) obtaining the consent of Master Lessor with regard thereto, and
(ii) either removing or surrendering Sublessee's Initial Improvements with the
Subleased Premises at the expiration of this Sublease, as the case may be, in
strict accordance with Master Lessor's direction. In connection with Sublessee's
construction of Sublessee's Initial Improvements, Sublessor shall provide to
Sublessee the Sublessee Improvement Allowance in accordance with the terms of
EXHIBIT D.
6. MASTER LEASE.
(a) This Sublease shall be subject and subordinate to all of
the terms and provisions of the Master Lease, and Master Lessor shall have all
rights in respect of the Master Lease and the Subleased Premises as set forth
therein. Except for payments of rent required under the Master Lease (which
payments shall be made by Sublessor), and, except as otherwise provided herein,
Sublessee hereby assumes and agrees to perform for Sublessor's benefit, during
the term of this Sublease, all of Sublessor's obligations under the Master Lease
insofar as they relate to the Subleased Premises (hereinafter the "Assumed
Obligations"), which accrue during the term of this Sublease.
(b) Sublessee shall fully perform all of the Assumed
Obligations and shall indemnify, defend, protect, and hold harmless Sublessor
and Master Lessor from any and all liability, damages, liabilities, claims
proceedings, actions, demands and costs (including reasonable attorneys' fees)
resulting, directly or indirectly, from Sublessee's failure to perform the
Assumed Obligations.
7. INCORPORATION OF MASTER LEASE.
(a) Except as otherwise provided in this Sublease, all of the
terms and provisions of the Master Lease are incorporated into and made a part
of this Sublease, and the rights and obligations of the parties under the Master
Lease are hereby imposed upon the parties hereto with respect to the Subleased
Premises, the Sublessor being substituted for the "Landlord" in the Master
Lease, the Sublessee being substituted for the "Tenant" in the Master Lease, the
Subleased Premises being substituted for "Premises" in the Master Lease, and
"Sublease" being substituted for "Lease" in the Master Lease.
(b) Wherever there are time limits contained in the Master
Lease (i) calling or allowing for the service of notice by the "Tenant"
thereunder, (ii) pertaining to events of default by the "Tenant" thereunder, or
(iii) within which the "Tenant" thereunder must perform any act or observe any
term, covenant or condition thereunder, the same shall be deemed amended for
5.
<PAGE> 53
the purposes of this Sublease to provide for time limits of two (2) days less
than those provided for in the Master Lease.
(c) Notwithstanding the foregoing, the following paragraphs
of the Master Lease are not incorporated herein: Paragraph 1, the first three
sentences of Paragraph 3, Paragraph 5, Paragraph 7, the first through third
sentences of Paragraph 8, the first two sentences of Paragraph 10, the first two
sentences of Paragraph 11(b), the final sentence of Paragraph 11(c), Paragraph
14, Paragraphs 26, 29E and 31, the second full paragraph of Paragraph 32 and
Paragraphs 37, 38, 40 and 44.
(d) For the purposes of incorporating the terms and
provisions of the Master Lease into this Sublease, the following changes to the
Master Lease terms shall apply to this Sublease (references are to Paragraphs of
the Master Lease):
PARAGRAPH COMMENTS/AMENDMENTS
3 Sublessee shall be responsible for payment of
Sublessee's Pro-Rata Share of fixed and variable costs
associated with the garage.
4 Notwithstanding anything to the contrary in Paragraph 4,
Sublessee shall not be permitted to use the Subleased
Premises for light manufacturing purposes. In addition,
Sublessee's right to erect any satellite/microwave
transmission devices on the roof of the Building
pursuant to Paragraph 4 shall be subject to Sublessee's
obtaining the prior written consent of Sublessor
(whose consent shall not be unreasonably withheld or
delayed) and of Master Lessor.
11.A. Notwithstanding anything to the contrary in Paragraph
11.A., Sublessee shall be obligated, at its sole cost,
to keep and maintain, repair and replace the interior of
the Subleased Premises in the condition required
thereunder. Sublessor shall keep and maintain, repair
and replace the exterior of the Subleased Premises and
the common areas of the Building as required under the
Master Lease and shall maintain the service contracts
required under Paragraph 11.A., and Sublessor shall
charge Sublessee's Pro-Rata Share of all such costs to
Sublessee as Additional Rent.
12.C. The first sentence of Paragraph 12.C shall be amended to
replace the $5,000,000 general aggregate limit for
Sublessee's insurance coverage with a $2,000,000 general
aggregate limit. In addition, Sublessee shall name the
Master Lessor and Sublessor as additional insureds on any
and all insurance policies that are required under the
Master Lease.
(e) Notwithstanding the foregoing, Sublessee hereby agrees
to waive, release, indemnify, defend and hold Master Lessor and Sublessor
harmless to the same extent as Sublessor waives, releases, indemnifies and holds
Master Lessor harmless pursuant to the Master Lease.
6.
<PAGE> 54
8. SUBLESSOR'S OBLIGATIONS.
(a) Except as expressly otherwise provided herein, Sublessor
shall have no obligation to Sublessee with respect to the Subleased Premises or
the performance by Master Lessor of any obligations of Master Lessor under the
Master Lease. Sublessee understands and recognizes that certain services are
required to be performed by Master Lessor under the Master Lease. Sublessee
shall not seek nor require Sublessor to perform any of such services, nor shall
Sublessee make any claim upon Sublessor for any damages which may arise by
reason of any breach or negligence, whether by omission or commission, by Master
Lessor or its agents in the performance (or nonperformance) of such services.
Notwithstanding the incorporation hereunder of certain provisions of the Master
Lease, including, without limitation, Paragraphs 11, 12(B) and 28, Sublessor
does not assume the obligations of Master Lessor under the Master Lease, but
agrees that, if and to the extent that the Master Lease requires Master Lessor
to provide utilities, insurance, maintenance, repairs, rebuilding, upgrading or
any other services in connection with the operation of the Subleased Premises,
Sublessee may notify Sublessor of any failure of Master Lessor to provide such
services and Sublessor shall thereafter use commercially reasonable efforts to
enforce Sublessor's rights under the Master Lease for the benefit of Sublessee,
provided that Sublessor shall not be required to incur any material costs or
expenses in connection therewith. Sublessee hereby expressly waives all rights
to make repairs at the expense of Sublessor or Master Lessor as provided by
statute or otherwise.
9. CONSENT OF MASTER LESSOR. If Sublessee desires to take any
action which requires the consent of Master Lessor pursuant to the terms of the
Master Lease, including, without limitation, the making of alterations or the
possession of hazardous materials, then, notwithstanding anything to the
contrary herein, (a) Sublessor, independently, shall have the same rights of
approval or disapproval as Master Lessor has under the Master Lease, and (b)
Sublessee shall not take any such action until it obtains the consent of both
Sublessor and Master Lessor, and (c) Sublessee shall request that Sublessor
obtain Master Lessor's consent on Sublessee's behalf, unless Sublessor and
Master Lessor agree that Sublessee may contact Master Lessor directly with
respect to the specific action for which Master Lessor's consent is required.
Any consent required of Sublessor conclusively shall be deemed reasonably
withheld, if consent also is required of the Master Lessor, and Master Lessor
withholds Master Lessor's consent.
10. INDEMNITY. Sublessee shall indemnify, defend, protect, and hold
Sublessor and Master Lessor harmless from and against all actions, claims,
demands, costs, liabilities, losses, reasonable attorneys' fees, damages,
penalties, and expenses (collectively "Claims") which may be brought or made
against Sublessor or Master Lessor or which Sublessor or Master Lessor may pay
or incur to the extent caused by (i) a breach of this Sublease or the Master
Lease by Sublessee, (ii) any violation of law by Sublessee or its employees,
agents, contractors or invitees (collectively, "Agents") relating to the use or
occupancy of the Subleased Premises or the Premises, (iii) any act or omission
by Sublessee or its Agents resulting in contamination of any part or all of the
Subleased Premises or the Premises by any hazardous materials or substances, or
(iv) the negligence or willful misconduct of Sublessee or its Agents.
11. ASSIGNMENT AND SUBLETTING. Sublessee shall have the right to
assign this Sublease or sublet all or a portion of the Subleased Premises with
the prior written consent of both Sublessor (whose approval shall not be
unreasonably withheld or delayed) and Master
7.
<PAGE> 55
Lessor, in accordance with the terms of the Master Lease and this Sublease.
Notwithstanding any of the foregoing, in the event that Sublessee wishes to
assign this Sublease or sub-sublease any portion of the Subleased Premises,
Sublessee shall provide Sublessor with written notice of Sublessee's desire to
assign this Sublease or sub-sublease such portion of the Subleased Premises
prior to engaging in any efforts to market the same. Following Sublessor's
receipt of such notice, Sublessor shall have ten (10) days in which it may elect
to terminate this Sublease with respect to the space described in Sublessee's
notice (in the case of termination as to a portion of the Subleased Premises,
Sublessee's obligations under the Sublease as to the balance of the Subleased
Premises remaining shall be proportionately reduced). In the event that
Sublessor fails to timely exercise such right of recapture, Sublessee shall have
the right to market the Sublease for assignment or such portion of the Subleased
Premises for sub-sublease. Following Sublessor's receipt of all agreements,
statements and additional required information in connection with any proposed
assignment or sub-sublease, Sublessor shall have a period of ten (10) business
days within which to notify Sublessee in writing that the Sublessor elects (i)
to permit Sublessee to assign/sublet such space to the named assignee/subtenant
on the terms and conditions set forth in the notice or (ii) to refuse consent.
Sublessor agrees that Sublessor's consent with respect thereto shall not be
unreasonably withheld, conditioned or delayed, provided that Sublessor's consent
shall conclusively be deemed reasonably withheld, if consent also is required of
Master Lessor, and Master Lessor withholds such consent.
12. EARLY TERMINATION. Upon any termination of the Master Lease,
this Sublease shall also terminate, and, upon such termination, Sublessor shall
return to Sublessee any amounts of the security deposit which have not otherwise
been applied and any amounts prepaid by Sublessee to Sublessor which have not
been credited towards the payment of rent or other expenses. To the extent the
Master Lease grants Sublessor any discretionary rights to terminate the Master
Lease, whether due to casualty, cancellation, or otherwise, Sublessor shall be
entitled to exercise or not exercise such right in its sole discretion.
13. SURRENDER OF SUBLEASED PREMISES. Upon the expiration or earlier
termination of this Sublease, Sublessee shall surrender the Subleased Premises
in the condition required for surrender under the Master Lease.
14. SIGNAGE. Sublessee shall not place or permit to be placed, in,
upon, or about the Building any signs or advertisements not approved by
Sublessor in its sole discretion. Sublessor agrees to provide, at its sole cost,
signage for Sublessee in the main lobby area on the ground floor and outside
Sublessee's main entryway to the Subleased Premises on the fifth floor of the
Building.
15. PARKING. Sublessee shall be entitled to the non exclusive and
unassigned use of 3.2 parking spaces per 1,000 rentable square feet of leased
space. Sublessee shall not be charged for the use of such parking spaces
throughout the Term.
16. UTILITIES. Sublessor shall provide heating and air conditioning
to the Subleased Premises during the following standard building hours of
operation: 6:00 a.m. to 6:00 p.m., Monday through Friday; 7:00 a.m. to 3:00
p.m., Saturday and Sunday. In addition, Sublessor shall provide, upon prior
notice from Sublessee within the time periods set forth in the immediately
following sentence, heating and air conditioning during hours outside of
standard
8.
<PAGE> 56
building hours ("Excess Services"), and Sublessee shall pay to Sublessor as
Additional Rent the costs actually incurred by Sublessor in providing such
Excess Services. Sublessee shall provide prior notice to Sublessor of any
requirements for Excess Services (a) no later than 2 p.m. on any weekday for
Excess Services required to be provided during such weekday after 6 p.m. and
(b) no later than 2 p.m. on any Friday for Excess Services required to be
provided at any time during the immediately ensuing weekend. The cost of all
utilities serving the Subleased Premises shall be passed through to Sublessee
as Additional Rent, to the extent any such utility is not being directly
provided to Sublessee by the utility company. Sublessor reserves the right to
cause to be installed meters to separately monitor the utility usage of
individual tenants. If Sublessor has meters so installed, then the cost passed
through to tenants shall not be a pro-rata allocation, but shall be based upon
actual consumption. Sublessor shall not be liable for a loss of or injury to
property, however occurring, through or in connection with or incidental to
furnishing or failure to furnish any utilities to the Subleased Premises, and
Sublessee shall not be entitled to abatement or reduction of any portion of
Rent as a result thereof.
17. NO THIRD PARTY RIGHTS. The benefit of the provisions of this
Sublease is expressly limited to Sublessor and Sublessee. Under no
circumstances will any third party be construed to have any rights as a third
party beneficiary with respect to any of said provisions; provided, however,
that Master Lessor shall be entitled to the benefit of Sublessee's (a)
assumption of Sublessor's obligations, as "Tenant" under the Master Lease,
pursuant to SECTION 6 above, and (b) indemnities set forth in this Sublease.
18. CONFLICTS. In the event of any conflict between the
incorporated provisions of the Master Lease and the Sublease, the provisions of
this Sublease shall govern and control.
19. BROKERAGE. Each party warrants and represents to the other that
such party has not retained the services of any real estate broker, finder or
any other person whose services would form the basis for any claim for any
commission or fee in connection with this Sublease or the transactions
contemplated hereby, except for the following parties: Sublessor represents
that it has retained CB Richard Ellis ("CB"), and Sublessee represents that it
has retained Allhouse Deaton ("Allhouse"). Sublessor shall pay directly to CB
its fees due on account hereof, in accordance with its listing agreement.
Allhouse shall look solely to CB for payment of its commission or fee in
connection with this Sublease. Each party agrees to save, defend, indemnify and
hold the other party free and harmless from any breach of its warranty and
representation as set forth in this paragraph, including the other party's
reasonable attorneys' fees.
9.
<PAGE> 57
20. NOTICES.
(a) Notices and other communications hereunder shall be in
writing and shall be given or made by personal delivery, certified mail or
reputable overnight courier addressed to the parties at their respective
addresses set forth below, or at any other address which either party may
hereafter designate for such purpose by a written notice; it being expressly
understood that as of the Commencement Date, all notices shall be sent to the
following addresses:
<TABLE>
<S> <C>
TO SUBLESSOR AT: The Dialog Corporation
2440 West El Camino Real
Mountain View, CA 94040-1400
Attn: Denise Bryant, Esq.
WITH COPY TO: Cooley Godward LLP
1 Maritime Plaza
San Francisco, CA 94111
Attn: Felice Liang
TO SUBLESSEE AT: (prior to the Commencement Date)
I-Storm, Inc.
480 Cowper Street
Palo Alto, CA 94301
Attn: President
(on and after the Commencement Date)
At the Subleased Premises
</TABLE>
Notices shall be deemed received on the date of actual delivery (or refusal to
accept delivery) as indicated on the return receipt or airbill.
21. COUNTERPARTS. This Sublease may be executed in any number of
counterparts, each of which counterparts shall be deemed to be an original, and
all of which together shall constitute one and the same instrument.
22. EXHIBITS. All exhibits referred to in this Sublease are
attached hereto and incorporated herein by reference.
23. MASTER LESSOR CONSENT. This Sublease is subject to the consent
of the Master Lessor, pursuant to Paragraph 29 of the Master Lease.
24. MEDIATION/BINDING ARBITRATION. If a disagreement arises
regarding this Sublease or in the event that any claim is made related to
performance by Sublessor or Sublessee under this Sublease, the parties hereto
agree to participate in and submit this matter to nonbinding mediation as a
condition to initiating any action. If the matter is not resolved by such
process, any controversy or claim arising out of or relating to the Sublease
shall be resolved by binding arbitration in accordance with the rules set forth
in California Code of Civil Procedure Sections 1280, et seq. If arbitration is
required, the parties shall be limited to one deposition by
10.
<PAGE> 58
each side. No other depositions, nor any other form of discovery, shall be
conducted by either side. The purpose of this provision is to limit the costs
of arbitration for both sides. If arbitration is required, it shall be final
and binding and it is understood that there shall be no jury and Sublessor and
Sublessee, by accepting this mediation/binding arbitration provision, expressly
waive any and all rights to a jury.
IN WITNESS WHEREOF, the parties have executed this Sublease as of the
date first written above.
THE DIALOG CORPORATION, I-STORM, INC.,
a Delaware corporation, a Nevada corporation.
formerly Dialog Information Services, Inc.
<TABLE>
<S> <C>
By: By: /s/ ROBERT L. TOMZ
---------------------------------- ----------------------------------
Robert L. Tomz
Its: Its: VP & CFO
--------------------------------- ---------------------------------
By: By:
---------------------------------- ----------------------------------
Its: Its:
--------------------------------- ---------------------------------
</TABLE>
11.
<PAGE> 59
EXHIBIT A
MASTER LEASE
A-1.
<PAGE> 60
EXHIBIT B
SUBLEASED PREMISES
B-1.
<PAGE> 61
[DIAGRAM]
[ ]Fifth Floor Sublease Premises
[ ]Common Use Area (Floor)
Fifth Floor
- --------------------------------------------------------------------------------
2440 El Camino, Mountain View EXHIBIT B
<PAGE> 62
[DIAGRAM]
[ ]Common Use Area (Floor)
[ ]Common Use Area (Building)
[ ]Common Use Area (Conference Facilities)
Ground Floor
- --------------------------------------------------------------------------------
2440 El Camino, Mountain View EXHIBIT C
<PAGE> 63
EXHIBIT C
COMMON USE AREAS
C-1.
<PAGE> 64
EXHIBIT D
WORK LETTER
1. SUBLESSEE'S INITIAL IMPROVEMENTS. Sublessee shall construct, furnish or
install within the Subleased Premises, at its sole cost and expense, in
compliance with its obligations under the Master Lease and the Sublease, all
improvements, equipment or fixtures that are necessary for Sublessee's use and
occupancy of the Premises (the "Sublessee's Initial Improvements"). The
construction, furnishing and installation of Sublessee's Initial Improvements,
is referred to herein as the "Improvement Work". The Improvement Work shall be
performed in accordance with the following provisions:
a. Sublessee will be responsible for delivery to Sublessor of the
final space plans, the basic engineering information and the final working
drawings and specifications with respect to the Improvement Work (collectively,
"Sublessee's Final Plans") by April 1, 1999. Sublessee shall cause all
Sublessee's Final Plans to be prepared by licensed architects, and where
appropriate, licensed mechanical, electrical and structural engineers.
b. Sublessee's Final Plans shall be subject to Sublessor's
approval, which approval shall not be unreasonably withheld. If Sublessor
disapproves Sublessee's Final Plans, or any portion thereof, Sublessor shall
promptly notify Sublessee thereof and of the revisions that Sublessor
reasonably requires in order to obtain Sublessor's approval. As promptly as
reasonably possible thereafter, but in no event later than seven (7) days after
Sublessor's notice, Sublessee shall submit to Sublessor plans and
specifications incorporating the revisions required by Sublessor. Said
revisions shall be subject to Sublessor's approval, which shall not be
unreasonably withheld. This procedure shall be repeated until Sublessee's
Final Plans are finally approved by Sublessor and written approval has been
received by Sublessee. The final plans and specifications approved by
Sublessor, shall be referred to as the "Approved Plans".
c. Sublessee shall diligently obtain all building and other
permits, licenses and other approvals (collectively, "Permits") necessary to
construct the Improvement Work in compliance with all applicable laws, rules,
codes, standards and regulations (collectively, "Applicable Laws") prior to the
commencement of such work. Sublessee's Initial Improvements shall be diligently
constructed in compliance with the Approved Plans, with all of the terms and
conditions of the Master Lease and Sublease and with all Applicable Laws.
d. Prior to commencing construction, Sublessee shall deliver to
Sublessor evidence of insurance as called for hereinbelow and executed copies
of the applicable Permits for such work.
e. After final approval of the Approved Plans by Master Lessor
and Sublessor, Sublessee shall proceed promptly to commence performance of the
Improvement Work. Sublessee's contractors and subcontractors shall be
acceptable to and approved in writing by Sublessor, which approval shall not be
unreasonably withheld or delayed, except that Sublessee hereby agrees to use
Newcomb Mechanical and Access Electric for its HVAC and electrical contractors,
respectively.
D-l.
<PAGE> 65
f. Sublessee shall hire its own general contractor ("Contractor")
to complete Sublessee's Initial Improvements, which Contractor shall provide
labor and materials bond(s) reasonably satisfactory to Sublessor and carry
insurance coverage in an amount and form and issued by a carrier reasonably
satisfactory to Sublessor, endorsed to show Sublessor as an additional insured.
Sublessee shall furnish to Sublessor a copy of the executed contract between
Sublessee and Contractor covering all of Sublessee's obligations under this
EXHIBIT D.
g. Sublessor shall have the right to post in a conspicuous
location on Sublessee's Premises, as well as record with the county recorder, a
Notice of Nonresponsibility.
h. Sublessee shall, upon completion of its work, submit to
Sublessor two (2) complete sets of plans (one (1) reproducible) and
specifications covering all of the Improvement Work, including architectural,
electrical, and plumbing, as built.
2. EVIDENCE OF COMPLETION OF IMPROVEMENT WORK. Upon the completion of the
Improvement Work, Sublessee shall:
a. Submit to Sublessor a detailed breakdown of Sublessee's final
and total construction costs, together with receipted evidence showing payment
thereof, satisfactory to Sublessor.
b. Submit to Sublessor certifications from Contractor and
Sublessee's architect that the Improvement Work has been substantially
completed in accordance with the Approved Plans.
c. Submit to Sublessor copies of final lien releases from all
contractors and subcontractors furnishing labor or services.
d. Submit to Sublessor all evidence reasonably available from
governmental authorities showing compliance with any and all other laws, orders
and regulations of any and all governmental authorities having jurisdiction
over the Subleased Premises, including, without limitation, authorization for
physical occupancy of the Subleased Premises.
d. Submit to Sublessor the as-built plans and specifications
referred to above.
3. SUBLESSEE IMPROVEMENT ALLOWANCE. Subject to Sublessee's satisfaction of
the requirements of this PARAGRAPH 3, Sublessor shall provide Sublessee with a
cash tenant improvement allowance (the "Sublessee Improvement Allowance") in
an amount of up to Two Dollars ($2.00) per rentable square foot for the
Subleased Premises, which may be applied to payments in respect of
architectural and engineering fees, consultants, legal fees, moving expenses,
equipment or communication requirements and hard costs of construction in
connection with the Improvement Work.
a. Sublessor shall make payment to Sublessee of an amount up to
the amount of the Sublessee Improvement Allowance due Sublessee, provided that,
(i) no default exists under the Sublease, (ii) no lien has been filed with
respect to the Improvement Work that has not been
D-2
<PAGE> 66
released, (iii) Sublessee is in compliance with all Permits, (iv) all insurance
required hereunder, under the Master Lease and under the Sublease, is in full
force and effect and (v) Sublessee has submitted to Sublessor all items
required pursuant to PARAGRAPH 2 above.
b. Sublessor shall not be obligated to make payments in excess of
the Sublessee Improvement Allowance. Sublessee shall bear and pay any and all
costs of the Improvement Work in excess of the Sublessee Improvement Allowance.
D-3
<PAGE> 1
Exhibit 10.11
I-STORM, INC.
1998 STOCK OPTION PLAN
ADOPTED/EFFECTIVE JULY 23, 1998
TERMINATION DATE: JULY 22, 2008
1. PURPOSES.
(a) ELIGIBLE OPTION RECIPIENTS. The persons eligible to receive Options
are the Employees, Directors and Consultants of the Company and its Affiliates.
(b) AVAILABLE OPTIONS. The purpose of the Plan is to provide a means by
which eligible recipients of Options may be given an opportunity to benefit from
increases in value of the Common Stock through the granting of the following
Options: (i) Incentive Stock Options, and (ii) Nonstatutory Stock Options. The
Options granted under the Plan and the Common Stock subject to such Options are
exempt from section 5 of the Securities Act and any state or local law requiring
registration for the offer or sale of securities pursuant to Section 1145 of the
United States Bankruptcy Code and the Order Confirming Debtors' First Amended
Joint Plant of Reorganization dated April 16, 1998.
(c) GENERAL PURPOSE. The Company, by means of the Plan, seeks to retain
the services of the group of persons eligible to receive Options, to secure and
retain the services of new members of this group and to provide incentives for
such persons to exert maximum efforts for the success of the Company and its
Affiliates.
2. DEFINITIONS.
(a) "AFFILIATE" means any parent corporation or subsidiary corporation
of the Company, whether now or hereafter existing, as those terms are defined in
Sections 424(e) and (f), respectively, of the Code.
(b) "BOARD" means the Board of Directors of the Company.
(c) "CODE" means the Internal Revenue Code of 1986, as amended.
(d) "COMMITTEE" means a Committee appointed by the Board in accordance
with subsection 3(d).
(e) "COMMON STOCK" means the common stock of the Company.
(f) "COMPANY" means I-Storm, Inc., a Nevada corporation, or any
successor thereto.
(g) "CONSULTANT" means any person, including an advisory board member or
an advisor, (1) engaged by the Company or an Affiliate to render consulting or
advisory services and who is compensated for such services or (2) who is a
member of the Board of Directors of an Affiliate. However, the term "Consultant"
shall not include either Directors of the Company
1.
<PAGE> 2
who are not compensated by the Company for their services as Directors or
Directors of the Company who are merely paid a director's fee by the Company for
their services as Directors.
(h) "CONTINUOUS SERVICE" means that the Optionholder's service with the
Company or an Affiliate, whether as an Employee, Director or Consultant, is not
interrupted or terminated. The Optionholder's Continuous Service shall not be
deemed to have terminated merely because of a change in the capacity in which
the Optionholder renders service to the Company or an Affiliate as an Employee,
Consultant or Director or a change in the entity for which the Optionholder
renders such service, provided that there is no interruption or termination of
the Optionholder's Continuous Service. For example, a change in status from an
Employee of the Company to a Consultant of an Affiliate or a Director of the
Company will not constitute an interruption of Continuous Service. The Board or
the chief executive officer of the Company, in that party's sole discretion, may
determine whether Continuous Service shall be considered interrupted in the case
of any leave of absence approved by that party, including sick leave, military
leave or any other personal leave.
(i) "COVERED EMPLOYEE" means the chief executive officer and the four
(4) other highest compensated officers of the Company for whom total
compensation is required to be reported to stockholders under the Exchange Act,
as determined for purposes of Section 162(m) of the Code.
(j) "DIRECTOR" means a member of the Board of Directors of the Company.
(k) "DISABILITY" means the permanent and total disability of a person
within the meaning of Section 22(e)(3) of the Code.
(l) "EMPLOYEE" means any person employed by the Company or an Affiliate.
Mere service as a Director or payment of a director's fee by the Company or an
Affiliate shall not be sufficient to constitute "employment" by the Company or
an Affiliate.
(m) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
(n) "FAIR MARKET VALUE" means, as of any date, the value of the Common
Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or traded on the Nasdaq National Market or the Nasdaq SmallCap Market,
the Fair Market Value of a share of Common Stock shall be the closing sales
price for such stock (or the closing bid, if no sales were reported) as quoted
on such exchange or market (or the exchange or market with the greatest volume
of trading in the Common Stock) on the last market trading day prior to the day
of determination, as reported in THE WALL STREET JOURNAL or such other source as
the Board deems reliable.
(ii) In the absence of such markets for the Common Stock, the Fair
Market Value shall be determined in good faith by the Board.
2.
<PAGE> 3
(o) "INCENTIVE STOCK OPTION" means an Option intended to qualify as an
incentive stock option within the meaning of Section 422 of the Code and the
regulations promulgated thereunder.
(p) "NON-EMPLOYEE DIRECTOR" means a Director of the Company who either
(i) is not a current Employee or Officer of the Company or its parent or a
subsidiary, does not receive compensation (directly or indirectly) from the
Company or its parent or a subsidiary for services rendered as a consultant or
in any capacity other than as a Director (except for an amount as to which
disclosure would not be required under Item 404(a) of Regulation S-K promulgated
pursuant to the Securities Act ("Regulation S-K")), does not possess an interest
in any other transaction as to which disclosure would be required under Item
404(a) of Regulation S-K and is not engaged in a business relationship as to
which disclosure would be required under Item 404(b) of Regulation S-K; or (ii)
is otherwise considered a "non-employee director" for purposes of Rule 16b-3.
(q) "NONSTATUTORY STOCK OPTION" means an Option that does not qualify as
an Incentive Stock Option.
(r) "OFFICER" means a person who is an officer of the Company within the
meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(s) "OPTION" means an Incentive Stock Option or a Nonstatutory Stock
Option granted pursuant to the Plan.
(t) "OPTION AGREEMENT" means a written agreement between the Company and
an Optionholder evidencing the terms and conditions of an individual Option
grant. Each Option Agreement shall be subject to the terms and conditions of the
Plan.
(u) "OPTIONHOLDER" means a person to whom an Option is granted pursuant
to the Plan or, if applicable, such other person who holds an outstanding
Option.
(v) "OUTSIDE DIRECTOR" means a Director of the Company who either (i) is
not a current employee of the Company or an "affiliated corporation" (within the
meaning of Treasury Regulations promulgated under Section 162(m) of the Code),
is not a former employee of the Company or an "affiliated corporation" receiving
compensation for prior services (other than benefits under a tax qualified
pension plan), was not an officer of the Company or an "affiliated corporation"
at any time and is not currently receiving direct or indirect remuneration from
the Company or an "affiliated corporation" for services in any capacity other
than as a Director or (ii) is otherwise considered an "outside director" for
purposes of Section 162(m) of the Code.
(w) "PLAN" means this I-Storm, Inc. 1998 Stock Option Plan.
(x) "PLAN OF REORGANIZATION" means the LVL Communications Corporation,
LVL Advertising, Inc. and LVL Interactive, Inc. Debtors' First Amended Joint
Plan of Reorganization dated April 16, 1998, as it may be amended from time to
time.
(y) "RULE 16b-3" means Rule 16b-3 promulgated under the Exchange Act or
any successor to Rule 16b-3, as in effect from time to time.
3.
<PAGE> 4
(z) "SECURITIES ACT" means the Securities Act of 1933, as amended.
(aa) "TEN PERCENT STOCKHOLDER" means a person who owns (or is deemed to
own pursuant to Section 424(d) of the Code) stock possessing more than ten
percent (10%) of the total combined voting power of all classes of stock of the
Company or of any of its Affiliates.
3. ADMINISTRATION.
(a) ADMINISTRATION BY BOARD. The Board will administer the Plan unless
and until the Board delegates administration to a Committee, as provided in
subsection 3(d).
(b) POWERS OF BOARD. The Board shall have the power, subject to, and
within the limitations of, the express provisions of the Plan and the terms of
the Plan of Reorganization:
(i) To construe and interpret the Plan and Options granted under
it, and to establish, amend and revoke rules and regulations for its
administration. The Board, in the exercise of this power, may correct any
defect, omission or inconsistency in the Plan or in any Option Agreement, in a
manner and to the extent it shall deem necessary or expedient to make the Plan
fully effective.
(ii) To amend the Plan or an Option as provided in Section 11.
(iii) Generally, to exercise such powers and to perform such acts as
the Board deems necessary or expedient to promote the best interests of the
Company which are not in conflict with the provisions of the Plan.
(c) POWERS OF THE COMPENSATION COMMITTEE. Notwithstanding the foregoing,
the Compensation Committee of the Board (the "Compensation Committee") shall
have the sole power to determine from time to time which of the persons eligible
under the Plan shall be granted Options; when and how each Option shall be
granted; what type or combination of types of Option shall be granted; the
provisions of each Option granted (which need not be identical), including the
time or times when a person shall be permitted to receive stock pursuant to an
Option; and the number of shares with respect to which an Option shall be
granted to each such person. Neither the Compensation Committee nor the Board
may delegate these powers nor may the Board vest these powers in itself.
(d) DELEGATION TO COMMITTEE.
(i) GENERAL. The Board may delegate its powers relating to the
administration of the Plan to a Committee or Committees of one or more members
of the Board, and the term "Committee" shall apply to any person or persons to
whom such authority has been delegated. If administration is delegated to a
Committee, the Committee shall have, in connection with the administration of
the Plan, the powers theretofore possessed by the Board, including the power to
delegate to a subcommittee any of the administrative powers the Committee is
authorized to exercise (and references in this Plan to the Board shall
thereafter be to the Committee or subcommittee), subject, however, to such
resolutions, not inconsistent with the provisions of the Plan, as may be adopted
from time to time by the Board. The Board may abolish the Committee at any time
and revest in the Board the administration of the Plan.
4.
<PAGE> 5
(ii) COMMITTEE COMPOSITION WHEN COMMON STOCK IS PUBLICLY TRADED. At
such time as the Common Stock is publicly traded, in the discretion of the
Board, the Compensation Committee may consist solely of two or more Outside
Directors, in accordance with Section 162(m) of the Code, and/or solely of two
or more Non-Employee Directors, in accordance with Rule 16b-3. The Compensation
Committee may (i) delegate to a committee of one or more members of the Board
who are not Outside Directors, the authority to grant Options to eligible
persons who are either (a) not then Covered Employees and are not expected to be
Covered Employees at the time of recognition of income resulting from such
Option or (b) not persons with respect to whom the Company wishes to comply with
Section 162(m) of the Code and/or (ii) delegate to a committee of one or more
members of the Board who are not Non-Employee Directors the authority to grant
Options to eligible persons who are not then subject to Section 16 of the
Exchange Act.
4. SHARES SUBJECT TO THE PLAN.
(a) SHARE RESERVE. Subject to the provisions of Section 10 relating to
adjustments upon changes in stock, the stock that may be issued pursuant to
Options shall not exceed in the aggregate one million four hundred thousand
(1,400,000) shares of Common Stock.
(b) REVERSION OF SHARES TO THE SHARE RESERVE. If any Option shall for
any reason expire or otherwise terminate, in whole or in part, without having
been exercised in full, the stock not acquired under such Option shall revert to
and again become available for issuance under the Plan. If any Common Stock
acquired pursuant to the exercise of an Option shall for any reason be
repurchased by the Company under an unvested share repurchase option provided
under the Plan, the stock repurchased by the Company under such repurchase
option shall not revert to and again become available for issuance under the
Plan.
(c) SOURCE OF SHARES. The stock subject to the Plan may be unissued
shares or reacquired shares, bought on the market or otherwise.
5. ELIGIBILITY.
(a) ELIGIBILITY FOR SPECIFIC OPTIONS. Incentive Stock Options may be
granted only to Employees. Nonstatutory Stock Options may be granted to
Employees, Directors and Consultants.
(b) TEN PERCENT STOCKHOLDERS. No Ten Percent Stockholder shall be
eligible for the grant of an Incentive Stock Option unless the exercise price of
such Option is at least one hundred ten percent (110%) of the Fair Market Value
of the Common Stock at the date of grant and the Option is not exercisable after
the expiration of five (5) years from the date of grant.
(c) SECTION 162(m) LIMITATION. Subject to the provisions of Section 11
relating to adjustments upon changes in stock, no employee shall be eligible to
be granted Options covering more than five hundred thousand (500,000) shares of
the Common Stock during any calendar year.
5.
<PAGE> 6
6. OPTION PROVISIONS.
Each Option shall be in such form and shall contain such terms and
conditions as the Board shall deem appropriate. All Options shall be separately
designated Incentive Stock Options or Nonstatutory Stock Options at the time of
grant, and a separate certificate or certificates will be issued for shares
purchased on exercise of each type of Option. The provisions of separate Options
need not be identical, but each Option shall include (through incorporation of
provisions hereof by reference in the Option or otherwise) the substance of each
of the following provisions:
(a) TERM. Subject to the provisions of subsection 5(b) regarding Ten
Percent Stockholders, no Incentive Stock Option shall be exercisable after the
expiration of ten (10) years from the date it was granted.
(b) EXERCISE PRICE OF AN OPTION. Subject to the provisions of subsection
5(b) regarding grants of Incentive Stock Options to Ten Percent Stockholders,
the exercise price of each Incentive Stock Option shall be not less than one
hundred percent (100%) of the Fair Market Value of the stock subject to the
Option on the date the Option is granted. The exercise price of each
Nonstatutory Stock Option shall be not less than eighty-five percent (85%) of
the Fair Market Value of the stock subject to the Option on the date the Option
is granted. Notwithstanding the foregoing, an Option may be granted with an
exercise price lower than that set forth in the preceding sentence if such
Option is granted pursuant to an assumption or substitution for another option
in a manner satisfying the provisions of Section 424(a) of the Code.
(c) CONSIDERATION. The purchase price of stock acquired pursuant to an
Option shall be paid, to the extent permitted by applicable statutes and
regulations, either (i) in cash at the time the Option is exercised or (ii) at
the discretion of the Board at the time of the grant of the Option (or
subsequently in the case of a Nonstatutory Stock Option) by delivery to the
Company of other Common Stock, according to a deferred payment or other
arrangement (which may include, without limiting the generality of the
foregoing, the use of other Common Stock) with the Optionholder or in any other
form of legal consideration that may be acceptable to the Board; provided,
however, that at any time that the Company is incorporated in Delaware, payment
of the Common Stock's "par value," as defined in the Delaware General
Corporation Law, shall not be made by deferred payment.
In the case of any deferred payment arrangement, interest shall be
compounded at least annually and shall be charged at the minimum rate of
interest necessary to avoid the treatment as interest, under any applicable
provisions of the Code, of any amounts other than amounts stated to be interest
under the deferred payment arrangement.
(d) TRANSFERABILITY OF AN INCENTIVE STOCK OPTION. An Incentive Stock
Option shall not be transferable except by will or by the laws of descent and
distribution and shall be exercisable during the lifetime of the Optionholder
only by the Optionholder. Notwithstanding the foregoing provisions of this
subsection 6(d), the Optionholder may, by delivering written notice to the
Company, in a form satisfactory to the Company, designate a third party who, in
the event of the death of the Optionholder, shall thereafter be entitled to
exercise the Option.
6.
<PAGE> 7
(e) TRANSFERABILITY OF A NONSTATUTORY STOCK OPTION. A Nonstatutory Stock
Option shall be transferable to the extent provided in the Option Agreement. If
the Nonstatutory Stock Option does not provide for transferability, then the
Nonstatutory Stock Option shall not be transferable except by will or by the
laws of descent and distribution and shall be exercisable during the lifetime of
the Optionholder only by the Optionholder. Notwithstanding the foregoing
provisions of this subsection 6(e), the Optionholder may, by delivering written
notice to the Company, in a form satisfactory to the Company, designate a third
party who, in the event of the death of the Optionholder, shall thereafter be
entitled to exercise the Option.
(f) VESTING. Except as specified otherwise in the Plan of
Reorganization, the total number of shares of Common Stock subject to an Option
shall vest and therefore become exercisable in equal periodic installments and
no Option may be granted under the Plan that will fully vest earlier than three
(3) years from the date it is granted. The Option may be subject to such other
terms and conditions on the time or times when it may be exercised (which may be
based on performance or other criteria) as the Board may deem appropriate. The
vesting provisions of individual Options may vary. The provisions of this
subsection 6(f) are subject to any Option provisions governing the minimum
number of shares as to which an Option may be exercised.
(g) TERMINATION OF CONTINUOUS SERVICE. In the event an Optionholder's
Continuous Service terminates (other than upon the Optionholder's death or
Disability), the Optionholder may exercise his or her Option (to the extent that
the Optionholder was entitled to exercise it as of the date of termination) but
only within such period of time ending on the earlier of (i) the date three (3)
months following the termination of the Optionholder's Continuous Service (or
such longer or shorter period specified in the Option Agreement), or (ii) the
expiration of the term of the Option as set forth in the Option Agreement. If,
after termination, the Optionholder does not exercise his or her Option within
the time specified in the Option Agreement, the Option shall terminate.
(h) EXTENSION OF TERMINATION DATE. An Optionholder's Option Agreement
may also provide that if the exercise of the Option following the termination of
the Optionholder's Continuous Service (other than upon the Optionholder's death
or Disability) would be prohibited at any time solely because the issuance of
shares would violate any applicable legal requirements, then the Option shall
terminate on the earlier of (i) the expiration of the term of the Option set
forth in subsection 6(a) or (ii) the expiration of a period of three (3) months
after the termination of the Optionholder's Continuous Service during which the
exercise of the Option would not be in violation of such legal requirements.
(i) DISABILITY OF OPTIONHOLDER. In the event an Optionholder's
Continuous Service terminates as a result of the Optionholder's Disability, the
Optionholder may exercise his or her Option (to the extent that the Optionholder
was entitled to exercise it as of the date of termination), but only within such
period of time ending on the earlier of (i) the date twelve (12) months
following such termination (or such longer or shorter period specified in the
Option Agreement) or (ii) the expiration of the term of the Option as set forth
in the Option Agreement. If, after termination, the Optionholder does not
exercise his or her Option within the time specified herein, the Option shall
terminate.
7.
<PAGE> 8
(j) DEATH OF OPTIONHOLDER. In the event (i) an Optionholder's Continuous
Service terminates as a result of the Optionholder's death or (ii) the
Optionholder dies within the period (if any) specified in the Option Agreement
after the termination of the Optionholder's Continuous Service for a reason
other than death, then the Option may be exercised (to the extent the
Optionholder was entitled to exercise the Option as of the date of death) by the
Optionholder's estate, by a person who acquired the right to exercise the Option
by bequest or inheritance or by a person designated to exercise the option upon
the Optionholder's death pursuant to subsection 6(d) or 6(e), but only within
the period ending on the earlier of (1) the date eighteen (18) months following
the date of death (or such longer or shorter period specified in the Option
Agreement) or (2) the expiration of the term of such Option as set forth in the
Option Agreement. If, after death, the Option is not exercised within the time
specified herein, the Option shall terminate.
(k) EARLY EXERCISE. The Option may, but need not, include a provision
whereby the Optionholder may elect at any time before the Optionholder's
Continuous Service terminates to exercise the Option as to any part or all of
the shares subject to the Option prior to the full vesting of the Option. Any
unvested shares so purchased may be subject to an unvested share repurchase
option in favor of the Company or to any other restriction the Board determines
to be appropriate.
(l) RE-LOAD OPTIONS. Without in any way limiting the authority of the
Board to make or not to make grants of Options hereunder, the Board shall have
the authority (but not an obligation) to include as part of any Option Agreement
a provision entitling the Optionholder to a further Option (a "Re-Load Option")
in the event the Optionholder exercises the Option evidenced by the Option
Agreement, in whole or in part, by surrendering other shares of Common Stock in
accordance with this Plan and the terms and conditions of the Option Agreement.
Any such Re-Load Option shall (i) provide for a number of shares equal to the
number of shares surrendered as part or all of the exercise price of such
Option; (ii) have an expiration date which is the same as the expiration date of
the Option the exercise of which gave rise to such Re-Load Option; and (iii)
have an exercise price which is equal to one hundred percent (100%) of the Fair
Market Value of the Common Stock subject to the Re-Load Option on the date of
exercise of the original Option. Notwithstanding the foregoing, a Re-Load Option
shall be subject to the same exercise price and term provisions heretofore
described for Options under the Plan.
Any such Re-Load Option may be an Incentive Stock Option or a Nonstatutory
Stock Option, as the Board may designate at the time of the grant of the
original Option; provided, however, that the designation of any Re-Load Option
as an Incentive Stock Option shall be subject to the one hundred thousand
dollars ($100,000) annual limitation on exercisability of Incentive Stock
Options described in subsection 9(d) and in Section 422(d) of the Code. There
shall be no Re-Load Options on a Re-Load Option. Any such Re-Load Option shall
be subject to the availability of sufficient shares under subsection 4(a) and
the "Section 162(m) Limitation" on the grants of Options under subsection 5(c)
and shall be subject to such other terms and conditions as the Board may
determine which are not inconsistent with the express provisions of the Plan
regarding the terms of Options.
8.
<PAGE> 9
7. COVENANTS OF THE COMPANY.
(a) AVAILABILITY OF SHARES. During the terms of the Options, the Company
shall keep available at all times the number of shares of Common Stock required
to satisfy such Options.
(b) LEGAL COMPLIANCE. The Company shall seek to obtain from each
regulatory commission or agency having jurisdiction over the Plan such authority
as may be required to grant Options and to issue and sell shares of Common Stock
upon exercise of the Options; provided, however, that this undertaking shall not
require the Company to register under the Securities Act the Plan, any Option or
any stock issued or issuable pursuant to any such Option. If, after reasonable
efforts, the Company is unable to obtain from any such regulatory commission or
agency the authority which counsel for the Company deems necessary for the
lawful issuance and sale of stock under the Plan, the Company shall be relieved
from any liability for failure to issue and sell stock upon exercise of such
Options unless and until such authority is obtained.
8. USE OF PROCEEDS FROM STOCK.
Proceeds from the sale of stock pursuant to Options shall constitute
general funds of the Company.
9. MISCELLANEOUS.
(a) ACCELERATION OF EXERCISABILITY AND VESTING. The Board shall have the
power to accelerate the time at which an Option may first be exercised or the
time during which an Option or any part thereof will vest in accordance with the
Plan, notwithstanding the provisions in the Option stating the time at which it
may first be exercised or the time during which it will vest; provided that
except as provided in the Plan of Reorganization, no such acceleration shall
result in an Option becoming fully vested earlier than three (3) years from the
date on which it was granted unless the acceleration occurs as a result of a
Change in Control as described in subsection 10(c).
(b) STOCKHOLDER RIGHTS. No Optionholder shall be deemed to be the holder
of, or to have any of the rights of a holder with respect to, any shares subject
to such Option unless and until such Optionholder has satisfied all requirements
for exercise of the Option pursuant to its terms.
(c) NO EMPLOYMENT OR OTHER SERVICE RIGHTS. Nothing in the Plan or any
instrument executed or Option granted pursuant thereto shall confer upon any
Optionholder or other holder of Options any right to continue to serve the
Company or an Affiliate in the capacity in effect at the time the Option was
granted or shall affect the right of the Company or an Affiliate to terminate
(i) the employment of an Employee with or without notice and with or without
cause, (ii) the service of a Consultant pursuant to the terms of such
Consultant's agreement with the Company or an Affiliate or (iii) the service of
a Director pursuant to the Bylaws of the Company or an Affiliate, and any
applicable provisions of the corporate law of the state in which the Company or
the Affiliate is incorporated, as the case may be.
9.
<PAGE> 10
(d) INCENTIVE STOCK OPTION $100,000 LIMITATION. To the extent that the
aggregate Fair Market Value (determined at the time of grant) of stock with
respect to which Incentive Stock Options are exercisable for the first time by
any Optionholder during any calendar year (under all plans of the Company and
its Affiliates) exceeds one hundred thousand dollars ($100,000), the Options or
portions thereof which exceed such limit (according to the order in which they
were granted) shall be treated as Nonstatutory Stock Options.
(e) WITHHOLDING OBLIGATIONS. To the extent provided by the terms of an
Option Agreement, the Optionholder may satisfy any federal, state or local tax
withholding obligation relating to the exercise or acquisition of stock under an
Option by any of the following means (in addition to the Company's right to
withhold from any compensation paid to the Optionholder by the Company) or by a
combination of such means: (i) tendering a cash payment; (ii) authorizing the
Company to withhold shares from the shares of the Common Stock otherwise
issuable to the Optionholder as a result of the exercise or acquisition of stock
under the Option; provided that the Company shall not be authorized to withhold
shares of Common Stock in excess of the minimum statutory withholding rates for
federal and state tax purposes, including payroll taxes; or (iii) delivering to
the Company owned and unencumbered shares of the Common Stock.
10. ADJUSTMENTS UPON CHANGES IN STOCK.
(a) CAPITALIZATION ADJUSTMENTS. If any change is made in the stock
subject to the Plan, or subject to any Option, without the receipt of
consideration by the Company (through merger, consolidation, reorganization,
recapitalization, reincorporation, stock dividend, dividend in property other
than cash, stock split, liquidating dividend, combination of shares, exchange of
shares, change in corporate structure or other transaction not involving the
receipt of consideration by the Company), the Plan will be appropriately
adjusted in the class(es) and maximum number of securities subject to the Plan
pursuant to subsection 4(a) and the maximum number of securities subject to
award to any person pursuant to subsection 5(c), and the outstanding Options
will be appropriately adjusted in the class(es) and number of securities and
price per share of stock subject to such outstanding Options. Such adjustments
shall be made by the Board, the determination of which shall be final, binding
and conclusive. (The conversion of any convertible securities of the Company
shall not be treated as a transaction "without receipt of consideration" by the
Company.)
(b) CHANGE IN CONTROL--DISSOLUTION OR LIQUIDATION. In the event of a
dissolution or liquidation of the Company, then such Options shall be terminated
if not exercised (if applicable) prior to such event.
(c) CHANGE IN CONTROL--ASSET SALE, MERGER, CONSOLIDATION OR REVERSE
MERGER. In the event of (1) a sale of substantially all of the assets of the
Company, (2) a merger or consolidation in which the Company is not the surviving
corporation or (3) a reverse merger in which the Company is the surviving
corporation but the shares of Common Stock outstanding immediately preceding the
merger are converted by virtue of the merger into other property, whether in the
form of securities, cash or otherwise, then any surviving corporation or
acquiring corporation shall assume any Options outstanding under the Plan or
shall substitute similar Options (including an award to acquire the same
consideration paid to the stockholders in the transaction described in this
subsection 10(c) for those outstanding under the Plan. In the event
10.
<PAGE> 11
any surviving corporation or acquiring corporation refuses to assume such
Options or to substitute similar Options for those outstanding under the Plan,
then with respect to Options held by Optionholders whose Continuous Service has
not terminated, the vesting shall be accelerated in full, and the Options shall
terminate if not exercised at or prior to such event. With respect to any other
Options outstanding under the Plan, such Options shall terminate if not
exercised prior to such event.
11. AMENDMENT OF THE PLAN AND OPTIONS.
(a) AMENDMENT OF PLAN. Subject to the terms of the Plan of
Reorganization, the Board may at any time, and from time to time, amend the
Plan. However, except as provided in Section 10 relating to adjustments upon
changes in stock, no amendment shall be effective unless approved by the
stockholders of the Company to the extent stockholder approval is necessary to
satisfy the requirements of Section 422 of the Code, Rule 16b-3 or any Nasdaq or
securities exchange listing requirements.
(b) STOCKHOLDER APPROVAL. The Board may, in its sole discretion, submit
any other amendment to the Plan for stockholder approval, including, but not
limited to, amendments to the Plan intended to satisfy the requirements of
Section 162(m) of the Code and the regulations thereunder regarding the
exclusion of performance-based compensation from the limit on corporate
deductibility of compensation paid to certain executive officers.
(c) CONTEMPLATED AMENDMENTS. It is expressly contemplated that the Board
may amend the Plan in any respect the Board deems necessary or advisable to
provide eligible Employees with the maximum benefits provided or to be provided
under the provisions of the Code and the regulations promulgated thereunder
relating to Incentive Stock Options and/or to bring the Plan and/or Incentive
Stock Options granted under it into compliance therewith.
(d) NO IMPAIRMENT OF RIGHTS. Rights under any Option granted before
amendment of the Plan shall not be impaired by any amendment of the Plan unless
(i) the Company requests the consent of the Optionholder, and (ii) the
Optionholder consents in writing.
(e) AMENDMENT OF OPTIONS. Subject to the requirements of the Plan and
the terms of the Plan of Reorganization, the Compensation Committee may at any
time, and from time to time, amend the terms of any one or more Options;
provided, however, that the rights under any Option shall not be impaired by any
such amendment unless (i) the Compensation Committee requests the consent of the
Optionholder, and (ii) the Optionholder consents in writing.
12. TERMINATION OR SUSPENSION OF THE PLAN.
(a) PLAN TERM. The Board may suspend or terminate the Plan at any time.
Unless sooner terminated, the Plan shall terminate on the day before the tenth
(10th) anniversary of the date the Plan is adopted by the Board or approved by
the stockholders of the Company, whichever is earlier. No Options may be granted
under the Plan while the Plan is suspended or after it is terminated.
11.
<PAGE> 12
(b) NO IMPAIRMENT OF RIGHTS. Rights and obligations under any Option
granted while the Plan is in effect shall not be impaired by suspension or
termination of the Plan, except with the written consent of the Optionholder.
13. EFFECTIVE DATE OF PLAN.
The Plan shall become effective July 23, 1998, but no Incentive Stock
Option shall be exercised unless and until the Plan has been approved by the
stockholders of the Company, which approval shall be within twelve (12) months
before or after the date the Plan is adopted by the Board. In the event that the
Plan is not submitted to the stockholders of the Company for approval prior to
July 23, 1999, all Incentive Stock Options granted under the Plan shall
automatically be converted into Nonstatutory Stock Options, and no further
Incentive Stock Options shall be granted under the Plan.
12.
<PAGE> 1
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
I-Storm, Inc. has one subsidiary:
LVL Communications Corporation, a Nevada corporation.
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 5,000
<SECURITIES> [BLANK]
<RECEIVABLES> 548,502
<ALLOWANCES> (400,067)
<INVENTORY> [BLANK]
<CURRENT-ASSETS> 312,330
<PP&E> 499,197
<DEPRECIATION> (418,531)
<TOTAL-ASSETS> 3,485,130
<CURRENT-LIABILITIES> 3,756,780
<BONDS> 259,641
600,000
[BLANK]
<COMMON> 52,084
<OTHER-SE> (1,183,374)
<TOTAL-LIABILITY-AND-EQUITY> 3,485,130
<SALES> 811,000
<TOTAL-REVENUES> 836,000
<CGS> 259,000
<TOTAL-COSTS> 911,000
<OTHER-EXPENSES> 1,893,000
<LOSS-PROVISION> 269,000
<INTEREST-EXPENSE> 218,000
<INCOME-PRETAX> 2,760,000
<INCOME-TAX> [BLANK]
<INCOME-CONTINUING> (2,542,000)
<DISCONTINUED> [BLANK]
<EXTRAORDINARY> [BLANK]
<CHANGES> [BLANK]
<NET-INCOME> (2,760,000)
<EPS-BASIC> (0.56)
<EPS-DILUTED> (0.56)
</TABLE>
