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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1998
Commission File Number 0-14692
Global MAINTECH Corporation
Minnesota 41-1523657
State of Incorporation I.R.S. Employer Identification No.
7578 Market Place Drive
Eden Prairie, MN 55344,
(612) 944-0400
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under 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 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 _X_ No ___
Check if disclosure of delinquent filers in response to Item 405 of Regulations
S-B is not 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.
[x]
The Company's revenues for the Fiscal Year Ended December 31, 1998 totaled
$6,209,000.
The aggregate market value of voting stock held by non-affiliates of the
registrant as of March 5, 1999 was approximately $29,681,000 based upon the
closing bid price on the OTC Bulletin Board on that date. The number of shares
of the Company's no par value common stock outstanding as of March 5, 1999 was
18,409,397.
Transitional Small Business Disclosure Format (Check One):
Yes ___ No _X_
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Proxy Statement for the Annual Meeting of Shareholders
for the year ended December 31, 1998 are incorporated by reference in part III
Copies of the Company's Forms 10-KSB, as filed with the Securities and Exchange
Commission, may be obtained free of charge from James Geiser at the Company,
7578 Market Place Drive, Eden Prairie, Minnesota 55344, phone 612-944-0400
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SAFE HARBOR STATEMENT UNDER THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Annual Report on Form 10-KSB contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. These
forward-looking statements involve risks and uncertainties that may cause the
Company's actual results to differ materially from the results discussed in the
forward-looking statements. Factors that might cause such differences include,
but are not limited to, the uncertainty in the Company's ability to continue to
operate profitably in the future; failure of the Company to meet its future
additional capital requirements; loss of key personnel; failure of the Company
to respond to evolving industry standards and technological changes; inability
of the Company to compete in the industry in which it operates; failure of the
Company to successfully integrate the operations of newly acquired businesses;
lack of market acceptance of the Company's products, including products under
development; failure of the Company to secure adequate protection for the
Company's intellectual property rights; and the Company's exposure to product
liability claims. The forward-looking statements are qualified in their entirety
by the cautions and risk factors set forth in Exhibit 99, under the caption
"Cautionary Statement," to this Annual Report on Form 10-KSB for the year ended
December 31, 1998.
PART I
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Item 1. Description of Business.
General
The Company, through its wholly owned subsidiaries Global MAINTECH, Inc. and
SinglePoint Systems, Inc., designs, develops and markets a computer system,
consisting of hardware and software, which monitors and controls diverse
computers in a data center from a single, master console. The Virtual Command
Center ("VCC" or "VCC Unit") can simultaneously manage mainframes, mid-range
computers (e.g., UNIX, Microsoft and Windows NT platforms) and networks. The VCC
is designed to perform three primary functions: (a) consolidate consoles
(computer terminal with access to the internal operation of a computer) into one
monitor, a "virtual console" or single point of control: (b) monitor and control
the computers connected to the virtual console; and (c) automate most, if not
all, of the routine processes performed by computer platforms and operating
systems. It is an external system that monitors and controls the subject
mainframe and other data center computers from a workstation-quality reduced
instruction set computer ("RISC") which is housed separately from the computers
it controls. VCC users are able to reduce staffing levels, consolidate all data
center operations and technical support functions to a single location
regardless of the physical location of the data center(s) and achieve improved
levels of operational control and system availability.
In 1995, the Company installed it first three VCC Units in the data centers
of a large industrial and financial company. In 1996, the Company sold or leased
seven additional VCC Units and added two new customers. As of December 31, 1997,
the Company had sold or leased a cumulative total of twenty-one VCC Units to a
total of eight customers. As of December 31, 1998, the Company had sold or
leased a cumulative total of 38 VCC Units to a total of 14 customers. The
Company's customers include: General Electric Capital Corporation, Burlington
Northern Santa Fe Railroad, Storage Technology Corporation, Systems Management
Specialists, Inc., Ferntree Computer Corp. (Australia), SAP America, Inc.,
Deluxe Corporation, Bank One Services Corp., BMC Software, Frontier Information
Technologies, Inc., Merrill Lynch & Co. Inc., Southern California Gas Company,
Alltel Information Services, Spiegel Inc. and Minnesota Mining and Manufacturing
Company. Our existing customers are not required to buy additional hardware
products or to renew their software license and maintenance agreements with us
when such licenses and agreements expire. Therefore, a significant portion of
our revenue is derived from non-recurring revenue sources.
In an effort to enhance its revenue base, the Company purchased two new
product lines during 1998. Effective November 1, 1998, the Company purchased
substantially all of the assets of Enterprise Solutions, Inc., an Ohio
corporation ("ESI"). As a result of this acquisition, the Company obtained
software products that notify the proper person(s) by telephone, pager or the
internet of critical data center events-event notification software and a
consulting business that focuses on solving systems management problems in data
centers. On February 28, 1998, the Company licensed certain software and
purchased certain assets relating to the system software business of Infinite
Graphics Incorporated, a Minnesota corporation ("IGI"). The Company will use
such software and assets to design, assemble and market computer-aided design
and manufacturing software systems that operate on a variety of mid-range and
personal computer platforms.
Systems Management Software
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The VCC competes with internal monitoring software, which monitors certain
pieces of hardware and software applications in the computer in which such
internal software is installed, sold by other companies. Annual sales of
systems-management software were estimated to be $6.8 billion as of November
1996. It is believed this market will grow to almost $10 billion by 2000, which
would represent a compound annual growth rate of approximately 30%.
The Company believes the VCC also is well suited for use in enterprise
computing applications. Enterprise computing is the term associated with the
hardware and software which enables computer that contain different processors
to be linked together. The VCC has its own proprietary software and hardware
which allow it to form an enterprise computing management system. The VCC can be
used to monitor and control desktop servers, mid-range servers and mainframes.
Sales of all UNIX-based enterprise computing applications in 1997 were
approximately $33 billion.
The Company is engaged primarily in the business of manufacturing and
selling VCC Units. This line of business generated all of the Company's revenue
in 1996 and 1997, and the majority of revenue for the year ended December 31,
1998.
The Company was incorporated under the laws of the State of Minnesota in
1985 under the name Computer Aided Time Share, Inc. In 1995, the Company changed
its name to Global MAINTECH Corporation. As of December 31, 1998, the Company
had no employees and its operating subsidiaries, Global MAINTECH, Inc. and
SinglePoint Systems, Inc. had 69 and 18 employees, respectively.
See also "Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Recent Developments."
Item 2. Description of Property.
The Company's headquarters is located at 7578 Market Place Drive, Eden
Prairie, MN 55344. The lease for this location, 17,369 square feet, terminates
on September 30, 2001. In May 1998 the Company entered into a three year office
lease for 1,012 square feet located at 19700 Fairchild Road, Suite 320, Irvine,
CA 92612 to conduct sales and technical development. In conjunction with an
asset purchase the Company acquired two office leases at 4020 Moore Ave., Suite
115, San Jose, CA 95117 with 2,062 square feet and 6059 Frantz Road, Suite 101,
Dublin, OH 43017 with 1,152 square feet. These leases provide for monthly
payments through October 31, 2002 of $4,846 and December 14, 2000 of $1,200,
respectively and are used as sales and technical development offices. The
Company is responsible for utilities, insurance, and other operating expenses at
all locations.
Item 3. Legal Proceedings.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted to a vote of the Company's shareholders
during the quarter ended December 31, 1998.
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PART II
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Item 5. Market for Common Equity and Related Stockholder Matters.
General.
The Company's common stock trades on the OTC Bulletin Board under the
symbol "GLBM".
The following are the high and low bid quotations for the Company's
common stock as reported on the OTC Bulletin Board during each quarter of the
fiscal years ended December 31, 1998 and 1997. These quotations represent prices
quoted between dealers, without retail mark-up, mark-down or commission, and may
not necessarily represent actual transactions.
Year Ended December 31, 1998
Common Stock
Quarter High Low
---------------------------------
First $ 2.75 $ 1.88
Second 2.75 1.94
Third 2.34 1.13
Fourth 1.69 1.06
Year Ended December 31, 1997
Common Stock
Quarter High Low
---------------------------------
First $ 2.56 $ 1.44
Second 2.75 1.50
Third 2.38 1.69
Fourth 2.88 1.94
As of March 5, 1999, the Company had approximately 3,100 shareholders of
record. The Company has not paid cash dividends on its common stock and does not
anticipate paying cash dividends in the foreseeable future.
Sales of Unregistered Securities.
Offering of Series B Preferred Stock and Warrants. From late August 1998
until December 31, 1998, the Company offered up to 615,385 units for sale in a
private placement of securities of which 335,961 units were sold to accredited
investors. Each unit consisted of one share of Series B Preferred Stock and one
Warrant to purchase shares of Common Stock. The purchase price per unit was
$6.50. The securities were offered under Rule 506 of Regulation D of the
Securities Act.
Each share of Series B Preferred Stock entitles the holder thereof to
receive an annual dividend equal to $0.52. Until February 15, 1999, each share
of Series B Preferred Stock is convertible into that number of shares of Common
Stock equal to the per unit purchase price divided by $3.25, subject to certain
adjustments. Thereafter, each share of Series B Preferred Stock is convertible
into that number of shares of Common Stock equal to the per unit purchase price
divided by 80% of the average closing bid price of the Common Stock for the 20
consecutive trading days prior to the conversion date, subject to certain
adjustments; provided, however, that such average price may not be greater than
$2.50 nor less than $0.75. All outstanding shares of Series B Preferred Stock
will be automatically converted into Common Stock on September 23, 2001 if the
Company has registered such common shares under the Securities Act and the
Common Stock is traded on Nasdaq.
Each Warrant is a five-year callable warrant to purchase Common Stock at
$3.25 per share. The number of shares of Common Stock for which the Warrant in
each unit will be exercisable will equal the number of shares of Common Stock
into which the associated share of Series B Preferred Stock contained in the
unit will have been converted. The Warrants are callable by the Company provided
the Common Stock has not traded below $4.375 for 20 consecutive trading days
prior to the call exercise date, the underlying shares are registered under the
Securities Act and the Common Stock is traded on Nasdaq.
In connection with the offering of the Series B Preferred Stock and
Warrants described above, the Company agreed to use its best efforts to register
the shares of Common Stock underlying the Series B Preferred Stock and the
Warrants and to pay a penalty if such registration was not effective by February
28, 1999. The registration statement for such Common Stock was not effective by
February 28,1999, and as of the date of this report is still not effective. As a
result, the Company is paying a penalty to the investors in the offering equal
to 1% of the purchase price of the units for each of the first two 30-day
periods following February 28, 1999 and 3% for every 30-day period thereafter
until the registration statement has been declared effective.
The Company issued 335,961 of such units for total gross proceeds of
$2,183,747. The Company paid Miller, Johnson & Kuehn $126,687 in placement agent
commissions and $23,302 for accountable expenses, including legal fees, incurred
in connection with the offering.
Unregistered Issuance in Connection with Asset Purchase from Asset
Sentinel, Inc. The Company, through its wholly owned subsidiary Global MAINTECH,
Inc. ("GMI"), purchased substantially all the assets of Asset Sentinel, Inc., a
Minnesota corporation ("ASI"), pursuant to an Asset Purchase Agreement effective
as of October 1, 1998 by and among the Company, GMI and ASI.
The Company purchased ASI's computer software products, and the
trademarks and copyrights related thereto, and assumed no liabilities of ASI.
The primary assets acquired by the Company were a suite of software products,
including CERBERUS, CAD/COM 4.0 and SentinelSwitch, which provide updated
mapping of network, cable and telephone lines in buildings and computer centers.
The acquired software may be offered by the Company to customers as an
additional component of the Company's base VCC unit or as a stand-alone product.
The purchase price was paid as follows: $279,320 was paid by the
cancellation of a note receivable from ASI and the remainder was paid by a note
payable to ASI in the amount of $145,680 due within six months of the closing
date (for a total of $425,000). The note payable was issued pursuant to Section
4(2) of the Securities Act.
The purchase price of the assets is subject to adjustment depending on
the sales generated by the Company using the purchased assets during the
18-month period following the closing of the transaction. The adjustment to the
purchase price, if any, will equal Sales (as defined below) multiplied by 2.2;
provided, however, that the amount of such adjustment shall not exceed
$2,200,000. "Sales" means the greater of (a) the annualized sales generated by
the Company using the purchased assets during the 18-month period following the
closing or (b) the sales generated by the Company using the purchased assets
during the 12-month period from April 1, 1999 through March 31, 2000. The
payment of the adjustment, if any, by GMI shall be in cash or Common Stock at
the discretion of GMI. Any shares of Common Stock issued in connection with the
adjustment will be issued pursuant to Section 4(2) of the Securities Act.
Unregistered Issuance in Connection with Asset Purchase from Enterprise
Systems, Inc. The Company, through its wholly owned subsidiary Singlepoint
Systems, Inc. ("SSI"), purchased substantially all of the assets of Enterprise
Solutions, Inc., an Ohio corporation ("ESI"), pursuant to an Asset Purchase
Agreement effective as of November 1, 1998 (the "Purchase Agreement") by and
among the Company, GMI, SSI and ESI.
In addition to purchasing substantially all of the assets of ESI
(including rights under and to ESI's computer software products, the trademarks
and copyrights related thereto, ESI's ongoing leases, contracts and certain
office equipment), the Company assumed certain liabilities of ESI. The primary
assets acquired by the Company were a suite of software products, including
AlarmPoint and PhonePoint, which provide intelligent software linked to
telephones, pagers and the Internet for notification of critical events. This
software is linked to other systems management tools and delivers timely and
critical information to the proper person(s) for problem resolution. The
acquired software will be offered by the Company to customers as an additional
component of the Company's base VCC unit. The Company also obtained ESI's
short-term consulting business, which assists companies to optimize their
existing systems management and network management tools. The Company expects
that this consulting business will generate sales of newly acquired software and
of VCC units.
The purchase price was paid as follows: $200,000 was paid in cash to
ESI; options to purchase a maximum of 1,700,000 shares of Common Stock or a
minimum of 400,000 shares of Common Stock, subject to earnings events over the
18 months following the closing, were issued to the shareholders of ESI (the
"Shareholder Options"); and options to purchase a maximum of 80,000 shares of
Common Stock were issued to the employees of ESI (the "Employee Options"). All
such options have an exercise price equal to $1.25 and expire on December 9,
2003.
The purchase price of the assets is subject to adjustment depending on
the after-tax earnings generated by the Company using the purchased assets
during the 18-month period following the closing of the transaction ("Adjusted
Earnings"). In the event the Adjusted Earnings are less than certain amounts set
forth in the Purchase Agreement, the number of shares that may be purchased
under the Shareholder Options may be reduced by up to 1,300,000 shares.
Conversely, the Company will pay ESI the excess, if any, of the Earn-out Amount
(as defined below) over the Option Value (as defined below). "Earn-out Amount"
means the greater of (a) 18 times the sum of the Adjusted Earnings for the
first, second, third and tenth through eighteenth months following the
acquisition or (b) 16 times the sum of the Adjusted Earnings for the seventh
month through the eighteenth month following the acquisition. "Option Value"
means $200,000 plus the product of the number of shares subject to the
Shareholder Options (after any adjustments as described above) multiplied by the
spread between the exercise price thereof and the average daily closing price of
the Company's Common Stock during the month immediately preceding the last month
of the Earn Out Period. Notwithstanding the foregoing, in the event the Earn-out
Amount minus the Option Value is less than $5,000,000, the Company, at its
option, will either pay the difference to ESI or return the purchased assets
(and related liabilities) to ESI as of the end of the Earn-out period. In the
event such assets are returned to ESI, the Shareholder Options and the Employee
Options will be canceled.
All securities issued in connection with this transaction were issued
under Section 4(2) of the Securities Act.
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Results of Operations
The consolidated financial statements that accompany this discussion show
the operating results of the Company for the years ended December 31, 1998 and
1997. These results include the operations of Global MAINTECH, Inc. and its
wholly owned subsidiaries.
Net sales for the year ended December 31, 1998 were approximately $6,209,000
compared to net sales of $3,003,000 in the year ended December 31, 1997. Sales
of the Virtual Command Center or VCC and other systems were approximately
$4,246,000 in 1998 compared to approximately $2,138,000 in 1997. Maintenance
fees were approximately $948,000 in 1998 on previously sold systems and
consulting fees were approximately $704,000. Maintenance and consulting fees in
1997 were approximately $702,000 and $132,000, respectively. During 1998 the
Company also recorded approximately $312,000 of revenue primarily relating to
the sale of computer parts compared to $30,000 from such sales in 1997. These
revenue activities reflect the installation of a cumulative total of 38 VCC
units with 14 customers compared to a cumulative total of 21 VCC units with
eight customers as of December 31, 1997, and the sale of system software to
numerous other customers. The gross margin on sales was approximately 63% in
1998 compared to 75% in 1997. The decrease in gross margin in 1998 is primarily
related to the approximate $687,000 increase in amortization of capitalized
software costs.
Selling, general and administrative costs for the year ended December 31,
1998 were approximately $4,414,000 compared to approximately $1,649,000 for the
same period in the prior year. This $2,765,000 increase is related to a
$1,187,000 increase in salary expense which reflects an increase in paid
employees which grew during the year from 26 to 87. In addition, the Company
increased the allowance for doubtful accounts $300,000 during 1998. Advertising,
travel and entertainment costs increased $150,000 and $245,000, respectively, in
the year ended 1998 versus 1997. This reflects the increased activities in the
business: marketing and travel expenses are directly related to increased
selling activities. Professional and technical costs, depreciation expense,
rent, and utilities costs increased approximately $94,000, $434,000, $152,000
and $119,000, respectively. These increases are all primarily related to
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increased business activities of the Company. Professional and technical
expenses which include legal, accounting and investor relations expenses
increased due to additional business activity during 1998 (see--Recent
Developments). Depreciation, rent and utilities expenses increased as a function
of the increase in equipment purchases and space for new employees. Research and
development expenses in 1998 and 1997 relate to the ongoing maintenance of
existing software and are comprised of salaries, consulting fees for technical
expertise, and recruiting expenses.
Non-operating expenses in the year ended December 31, 1998 consisted of
interest expense, interest income and amortization of deferred debt issue costs
indicated as "Other". The increased interest expense is substantially due to the
cost of the $2,000,000 of subordinated debt issued by the Company on June 19,
1997. Interest income in 1998 is primarily due to lease income where the Company
has acted as lessor of its VCC systems. In 1997 interest income was primarily
the result of short-term investments of excess cash. Amortization ($44,294
annually on a straight-line basis over five years) of deferred debt issue costs
of $225,223 relates to the issuance of $2,000,000 of subordinated debt.
Liquidity and Capital Resources
As of December 31, 1998, the Company had positive working capital of
approximately $2,068,000 compared to approximately $2,884,000 as of December 31,
1997. The decrease in positive working capital as of December 31, 1998 is
primarily due to the net loss.
Net cash used in operating activities for the year ended December 31, 1998
was approximately $1,283,000 compared to approximately $302,000 used by such
activities in the year ended December 31, 1997. During the year ended December
31, 1998 operating funds of approximately $92,000 were used by net loss prior to
depreciation/amortization and allowance for doubtful accounts. Operating funds
were also used for assets including inventory, accounts receivable and prepaid
expenses of approximately $718,000. Increases in short-term liabilities provided
cash of approximately $780,000.
Cash used for investing activities in the year ended December 31, 1998 of
approximately $3,603,000 reflects investments of approximately $2,052,000 in
capitalized computer software development costs, which represent costs incurred
after technological feasibility has been established in connection with the
development of enhancements to one or more particular software programs, and
approximately $1,277,000 in purchases of companies and purchases of software.
Additionally, the Company invested approximately $1,076,000 of property and
equipment. Cash was provided by the sale of sales-type leases 737,000 and the
collection of a note receivable. In 1997 the Company invested approximately
$782,000 in capitalized computer software development costs, $942,000 in both
sales-type and operating leases of the Company's equipment, $109,000 in
purchased technology and patent costs, $75,000 in notes receivable and purchased
$362,000 of property and equipment.
Net cash of approximately $3,822,000 was provided by financing activities in
the year ended December 31, 1998. This is the result of net proceeds from the
issuance of Common Stock of approximately $1,489,000 primarily through two
separate private placements at per share prices of $1.90 and $1.50, the issuance
of Series B Preferred Stock of $2,184,000 and the issuance of short-term notes
payable, $250,000 of which are secured by accounts receivable. These proceeds
were partially offset by current maturity over the next twelve months of
$100,000 related to the $2,000,000 of subordinated notes payable issued in 1997.
In the year ended December 31, 1997 cash was provided by the issuance of Common
Stock of $2,768,000, the issuance of $2,000,000 of subordinated notes payable
and the collection of a $30,000 note receivable. These proceeds in 1997 were
offset by decreases in short-term notes payable of approximately $320,000 and
the disbursement of $212,000 for deferred debt costs related to the issuance of
$2,000,000 of subordinated notes payable.
Presently, the Company believes it has sufficient working capital to pay its
current liabilities. In addition to the proceeds received from the issuance of
debt and equity discussed above, the Company believes its working capital will
improve as the Company's profitability improves. This depends on the Company's
ability to collect its accounts receivable and to make sales sufficient to
realize the full value of its current inventory. Since the Company has recently
achieved gross margins of approximately 63% on its sales, management believes
the Company's financial health will improve as additional sales are realized. To
that end, the Company has continued to purchase additional inventory in
anticipation of additional sales. Nevertheless, the Company can provide no
assurance as to its future profitability and access to the capital markets.
During the year ended December 31, 1998, the Company's liquidity was
reduced through its investment in current assets and its capital resources were
used to make investments in long-term assets. For the last three months the
Company has been negotiating with Mezzanine Capital to allow availability of a
working capital line of credit of
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approximately $1,000,000 as such working capital line is allowed according to
the terms of the loan and security agreement dated June 19, 1997, which was
executed in connection with the issuance of $2,000,000 of Subordinated debt. As
of the date of this report the Company has a commitment from another lender to
provide this working capital line secured by accounts receivable. The Company's
operating plan for the year ending December 31, 1999 anticipates a substantial
increase in sales over the year ended December 31, 1998 with a commensurate
increase in earnings. The projected increase in sales is based on an increase in
sales of the Company's traditional products and an increase in sales resulting
from the Company's acquisitions during 1998. As a result this operating plan
projects an increase in liquidity from sales and earnings and from access to
capital markets to exceed the Company's anticipated investment in long-term
assets. While the Company believes in the viability of its operating plan and
currently anticipates that it will continue to have access to capital markets,
there can be no assurances to that effect.
Year 2000 Issue
Background. Many currently installed computer systems and software are coded
to accept only two-digit entries in the date code fields. These date code fields
will need to accept four-digit entries to distinguish 21st century dates from
20th century dates. This problem could result in system failures or
miscalculations causing disruptions of business operations (including, among
other things, a temporary inability to process transactions, send invoices or
engage in other similar business activities). As a result, many companies'
computer systems and software will need to be upgraded or replaced in order to
comply with year 2000 requirements. The potential global impact of the year 2000
problem is not known, and, if not corrected in a timely manner, could affect the
Company and the U.S. and world economy generally.
State of Readiness. The Company has analyzed the potential effect of the
year 2000 issue on both the system software included in the Company's products
and its internal systems (e.g., word processing and billing software), including
its information technology ("IT") and non-IT systems (which systems contain
embedded technology in manufacturing or process control equipment containing
microprocessors or other similar circuitry). The Company's year 2000 compliance
program includes the following phases: identifying systems that need to be
modified or replaced; carrying out remediation work to modify existing systems
or convert to new systems; and conducting validation testing of systems and
applications to ensure compliance. The Company is currently in the remediation
phase of this program with respect to software purchased or licensed from
software vendors by the Company and used internally and has completed the
validation phase of this program with respect to its own products.
The amount of remediation work required to address year 2000 problems is not
expected to be extensive. The Company has tested all of the system software
included in its products and determined that it is year 2000 compliant. In
addition, the Company has requested and received documentation from vendors
supplying software for its primary business applications addressing year 2000
compliance. In all cases, vendors' responses indicated that their applications
were either currently year 2000 compliant or that they would be compliant by the
end of 1998. Therefore, the Company will be required to modify some of its
existing software applications in order for its internal computer systems to
function properly in the year 2000 and thereafter. The Company estimates that it
will complete its year 2000 compliance program for all of its significant
internal systems no later than July 1, 1999. The Company also has had informal
discussions with its major suppliers and customers regarding their efforts to
address the year 2000 problem. These actions are intended to help mitigate the
possible external impact of the year 2000 problem. However, it is impossible to
fully assess the potential consequences in the event service interruptions from
suppliers occur or in the event that there are disruptions in such
infrastructure areas as utilities, communications, transportation, banking and
government.
Costs. Because essentially all of the Company's products and internal
systems were created in the last few years, such products and internal systems
were designed to avoid the year 2000 problem. As a result, the total cost for
resolving the Company's year 2000 issues is expected to be less than $10,000, a
negligible amount of which has been spent through December 31, 1998. The total
cost estimate includes the cost of replacing or upgrading non-compliant systems
that were otherwise planned (but perhaps accelerated due to the year 2000 issue)
or which have significant improvements and benefits unrelated to year 2000
issues. Estimates of year 2000 costs are based on numerous assumptions, and
there can be no assurance that the estimates are correct or that actual costs
will not be materially greater than anticipated.
Contingency. The Company has not yet developed a contingency plan to provide
for continuity of processing in the event of various problem scenarios, but it
will assess the need to develop such a plan based on the outcome of the
validation phase of all of its systems and any additional results from surveys
of its major suppliers and customers with respect to their year 2000 compliance.
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Risk. Based on its assessments to date, the Company believes it will not
experience any material disruption as a result of year 2000 problems with
respect to its products and the third-party systems it uses for its internal
functions, and, in any event, the Company does not anticipate the year 2000
issues it will encounter will be significantly different than those encountered
by other computer hardware and software manufacturers, including its
competitors. For example, if certain critical third-party providers, such as
those providers supplying electricity, water or telephone service, experience
difficulties resulting in disruption of service to the Company, a shutdown of
the Company's operations at individual facilities could occur for the duration
of the disruption. Assuming no major disruption in service from utility
companies or other critical third-party providers, the Company believes that it
will be able to manage its total year 2000 transition without any material
effect on the Company's results of operations or financial condition.
Recent Developments
Offering of Series B Preferred Stock and Warrants
From late August 1998 until December 31, 1998, the Company offered up to
615,385 units for sale in a private placement of securities of which 335,961
units were sold. Each unit consisted of one share of Series B Preferred Stock
and one Warrant to purchase shares of Common Stock. The purchase price per unit
was $6.50.
Each share of Series B Preferred Stock entitles the holder thereof to
receive an annual dividend equal to $0.52. Until February 15, 1999, each share
of Series B Preferred Stock is convertible into that number of shares of Common
Stock equal to the per unit purchase price divided by $3.25, subject to certain
adjustments. Thereafter, each share of Series B Preferred Stock is convertible
into that number of shares of Common Stock equal to the per unit purchase price
divided by 80% of the average closing bid price of the Common Stock for the 20
consecutive trading days prior to the conversion date, subject to certain
adjustments; provided, however, that such average price may not be greater than
$2.50 nor less than $0.75. All outstanding shares of Series B Preferred Stock
will be automatically converted into Common Stock on September 23, 2001 if the
Company has registered such common shares under the Securities Act and the
Common Stock is traded on the Nasdaq.
Each Warrant expires in five years, and is callable by the Company and
entitles its holder to purchase Common Stock at $3.25 per share. The number of
shares of Common Stock for which the Warrant in each unit will be exercisable
will equal the number of shares of Common Stock into which the associated share
of Series B Preferred Stock contained in the unit will have been converted. The
Warrants are callable by the Company provided the Common Stock has not traded
below $4.375 for 20 consecutive trading days prior to the call exercise date,
the underlying shares are registered under the Securities Act and the Common
Stock is traded on the Nasdaq.
In connection with the offering of the Series B Preferred Stock and
Warrants described above, the Company agreed to use its best efforts to register
the shares of Common Stock underlying the Series B Preferred Stock and the
Warrants and to pay a penalty if such registration was not effective by February
28, 1999. The registration statement for such Common Stock was not effective by
February 28,1999, and as of the date of this report is still not effective. As a
result, the Company is paying a penalty to the investors in the offering equal
to 1% of the purchase price of the units for each of the first two 30-day
periods following February 28, 1999 and 3% for every 30-day period thereafter
until the registration statement has been declared effective.
The Company issued 335,961 of such units for total gross proceeds of
$2,183,747. The Company paid Miller, Johnson & Kuehn $126,687 in placement agent
commissions and $23,302 for accountable expenses, including legal fees, incurred
in connection with the offering.
Asset Purchase from Asset Sentinel, Inc.
The Company, through its wholly owned subsidiary Global MAINTECH, Inc.
("GMI"), purchased substantially all the assets of Asset Sentinel, Inc., a
Minnesota corporation ("ASI"), pursuant to an Asset Purchase Agreement effective
as of October 1, 1998 by and among the Company, GMI and ASI. Immediately prior
to the acquisition, ASI was a start-up company engaged in the development of a
network and electrical line mapping software suite of products.
The Company purchased no assets other than the rights under and to ASI's
computer software products and the trademarks and copyrights related thereto,
and assumed no liabilities of ASI. The primary assets acquired by the Company
were a suite of software products, including CERBERUS, CAD/COM 4.0 and
SentinelSwitch, which provide updated mapping of network, cable and telephone
lines in buildings and computer centers. The acquired software may be offered by
the Company to customers as an additional component of the Company's base VCC
unit or as a stand-alone product.
7
<PAGE>
The transaction was treated as an asset purchase for accounting
purposes. The purchase price of $425,000 was delivered as follows: $279,320 was
paid by the cancellation of a note receivable from ASI and the remainder was
paid by a note payable to ASI in the amount of $145,680 due within six months of
the closing date.
The purchase price of the assets is subject to adjustment depending on
the sales generated by the Company using the purchased assets during the 18-
month period following the closing of the transaction. The adjustment to the
purchase price, if any, will equal Sales (as defined below) multiplied by 2.2;
provided, however, that the amount of such adjustment shall not exceed
$2,200,000. "Sales" means the greater of (a) the annualized sales generated by
the Company using the purchased assets during the 18-month period following the
closing or (b) the sales generated by the Company using the purchased assets
during the 12-month period from April 1,1999 through March 31, 2000. The payment
of the adjustment, if any, by GMI shall be in cash or Common Stock at the
discretion of GMI.
Asset Purchase from Enterprise Systems, Inc.
The Company, through its wholly owned subsidiary Singlepoint Systems,
Inc. ("SSI"), purchased substantially all the assets of Enterprise Solutions,
Inc., an Ohio corporation ("ESI"), pursuant to an Asset Purchase Agreement
effective as of November 1, 1998 (the "Purchase Agreement") by and among the
Company, GMI, SSI and ESI. Immediately prior to the acquisition, ESI was a
market leader in critical event notification software for data center
management, and provided engineering/project management consulting to implement
enterprise automation tools in small, medium and large data centers.
In addition to purchasing substantially all of the assets of ESI, the
Company assumed certain liabilities of ESI, including rights under and to ESI's
computer software products, the trademarks and copyrights related thereto, ESI's
ongoing leases, contracts and certain office equipment. The primary assets
acquired by the Company were a suite of software products, including AlarmPoint
and PhonePoint, which provide intelligent software linked to telephones, pagers
and the Internet for notification of critical events. This software is linked to
other systems management tools and delivers timely and critical information to
the proper person(s) for problem resolution. The acquired software will be
offered by the Company to customers as an additional component of the Company's
base VCC unit. The Company also obtained ESI's short-term consulting business,
which assists companies to optimize their existing systems management and
network management tools. The Company expects that this consulting business will
generate sales of newly acquired software and of VCC units.
The transaction was treated as an asset purchase for accounting
purposes. The purchase price was delivered as follows: $200,000 was paid in cash
to ESI; options to purchase a maximum total of 1,700,000 shares of Common Stock
or a minimum of 400,000 shares subject to earnings events over the next 18
months were issued to the shareholders of ESI (the "Shareholder Options"); and
options to purchase a maximum total of 80,000 shares of Common Stock were issued
to the employees of ESI (the "Employee Options"). All such options have an
exercise price equal to $1.25 and expire on December 9, 2003.
The purchase price of the assets is subject to adjustment depending on
the after-tax earnings generated by the Company using the purchased assets
during the 18-month period following the closing of the transaction ("Adjusted
Earnings"). In the event the Adjusted Earnings are less than certain amounts set
forth in the Purchase Agreement, the number of shares that may be purchased
under the Shareholder Options may be reduced by up to 1,300,000 shares.
Conversely, the Company will pay ESI the excess, if any, of the Earn-out Amount
(as defined below) over the Option Value (as defined below). "Earn-out Amount"
means the greater of (a) 18 times the sum of the Adjusted Earnings for the
first, second, third and tenth through eighteenth months following the
acquisition or (b) 16 times the sum of the Adjusted Earnings for the seventh
month through the eighteenth month following the acquisition. "Option Value"
means $200,000 plus the product of the number of shares subject to the
Shareholder Options (after any adjustments as described above) multiplied by the
spread between the exercise price thereof and the average daily closing price of
the Company's Common Stock during the month immediately preceding the last month
of the Earn Out Period. Notwithstanding the foregoing, in the event the Earn-out
Amount minus the Option Value is less than $5,000,000, the Company, at its
option, will either pay the difference to ESI or return the purchased assets
(and related liabilities) to ESI as of the end of the Earn-out period. In the
event such assets are returned to ESI, the Shareholder Options and the Employee
Options will be canceled.
Issuance of Promissory Note and Warrants
On February 23, 1999, the Company received a loan in the amount of
$500,000 from five partners in the investment firm of Andersen, Weinroth & Co.
In exchange for the loan, the Company issued a promissory note in the amount of
$500,000 and Warrants to purchase up to 400,000 shares of Common Stock.
8
<PAGE>
The promissory note bears interest at an annual rate of 10% payable on
April 30, 1999, and upon repayment of the balance due under the note on its
maturity date of July 31, 1999. To secure payment under the promissory note, the
Company granted the investors in the offering a security interest on both its
current assets and its noncurrent assets. Holders of the Warrants may exercise
them by paying the exercise price in cash or by converting the Warrants under a
cashless exercise option. Holders of the Warrants also have the right to
"demand" and "piggyback" registration rights under certain circumstances. The
Warrants are exercisable at $1.08 per share, subject to adjustment. Warrants
with respect to 133,800 shares are callable by the Company upon the occurrence
of certain conditions set forth in the Warrants. Warrants with respect to the
remaining 266,200 shares are noncallable.
Acquisition of Breece Hill Technologies, Inc.
On March 5, 1999, the Company entered into an Agreement and Plan of
Merger (the "Merger Agreement") with GMI, BHT Acquisition, Inc. (a new
subsidiary of GMI created solely for purposes of the merger and referred to
herein as "Merger Subsidiary") and Breece Hill Technologies, Inc. ("BHT"). Under
the terms of the Merger Agreement, shortly after approval of the merger by the
stockholders of BHT, and the satisfaction or waiver of the terms and conditions
contained in the Merger Agreement (which is expected to occur in April 1999),
the merger subsidiary will merge with and into BHT, BHT, as the surviving
corporation (the "Surviving Corporation"), will become a subsidiary of GMI and
the Board of Directors of the Surviving Corporation will be comprised of the
directors of Merger Subsidiary and the officers of the Surviving Corporation
will be the officers of the Company.
In exchange for all of the outstanding shares of BHT common and
preferred stock, the Company will deliver one or more warrants to purchase
4,500,000 shares of Common Stock (subject to adjustment) and may also be
required to deliver, one year after the Closing Date, Common Stock and cash
under the Earn Out Provisions of the Merger Agreement. In connection with the
merger, the Company and GMI also will guarantee up to $3,800,000 of outstanding
debt of BHT.
Options and Warrants of BHT. At or prior to the Effective Time (when the
Certificate of Merger is duly filed with the Secretary of State of the State of
Delaware or at another time specified in the Certificate of Merger), each
outstanding option to purchase the common stock of BHT will be canceled and
replaced with warrants (a "Replacement Warrant") to purchase Common Stock of the
Company. The number of shares subject to such Replacement Warrants and the
exercise prices thereunder are as more fully described under Section 2.07 of the
Merger Agreement. The H&QGF Warrants (as defined in the Merger Agreement) will
be converted at the Effective Time into new warrants, in form and substance to
be agreed upon by the parties to the Merger Agreement (the "Replacement
Warrants"), to purchase a like number of shares of Common Stock at an initial
exercise price of $4.125, subject to adjustment as set forth in the Replacement
Warrants. The Non-H&QGF Warrants (as defined in the Merger Agreement) will
remain outstanding following the Merger, and the holders of such warrants will
have the option, at any time within 395 days of the Closing Date, to convert
each share of Surviving Corporation Common Stock acquired upon exercise of such
warrants into a share of the merger consideration.
Dissenters' Rights. If the merger and the Merger Agreement are approved by BHT's
stockholders and not abandoned or terminated, any holder of BHT's common stock
or preferred stock may, by not voting for approval of the Merger Agreement and
by following the procedures set forth in Section 262 of the Delaware General
Corporation Law ("DGCL"), be entitled to have such stockholder's shares
appraised and to receive payment of the "fair value" of such shares pursuant to
Section 262
Registration Rights. The Escrow Stock, Escrow Warrants (as such terms are
defined in the Merger Agreement) and the Common Stock issuable upon exercise of
the Escrow Warrants (the "Warrant Stock") will not be registered under the
Securities Act or applicable state securities laws as of the Effective Time, but
will have certain "piggyback" and "demand" registration rights set forth in
Schedule 6.05 of the Merger Agreement.
Conditions to the Parties' Obligations to Consummate the Merger. Consummation of
the Merger is subject to numerous conditions, including (i) the truth and
correctness of the representations and warranties made by the parties to the
Merger Agreement, (ii) the approval of the Merger by BHT's stockholders, (iii)
the qualification of no more than 12% of BHT's common stock as Dissenters'
Shares under Delaware law, (iv) the cancellation of certain of BHT's debt held
by the Stockholder Lenders (as defined in the Merger Agreement), (v) the
negotiation and execution by Hambrecht & Quist Guaranty Finance, LLC ("H&QGF,"
an investor in, and creditor of, BHT), the Company and GMI of up to $3,000,000
in loans to be made by H&QGF to the Company or GMI pursuant to the terms of the
H&QGF Agreement (as defined in the Merger Agreement) and the negotiation and
execution of a collateral agreement by and among the Company, GMI, BHT and
H&QGF. The parties to the Merger may waive compliance with any of the conditions
set forth in the Merger Agreement.
9
<PAGE>
Termination or Amendment of the Merger Agreement. The Company, GMI, Merger
Subsidiary and BHT may, by written agreement among them, amend the Merger
Agreement at any time prior to the Effective Time. After the stockholders of BHT
have approved the Merger Agreement, however, no amendment can be made which
changes the terms of the Merger Agreement in a way that is adverse to the
stockholders of BHT, unless such amendment is approved by the stockholders. The
Merger Agreement may also be terminated by the parties at any time prior to the
filing of the Certificate of Merger, whether before or after action by the
stockholders of BHT, by mutual agreement of the parties, upon the occurrence of
a breach of representation or covenant contained in the Merger Agreement, if the
Merger has not been approved by the BHT stockholders by March 31, 1999 or if
there has been a material adverse effect on the business of BHT, the Company or
GMI, among others.
The Merger will be treated as a stock purchase for accounting and
financial reporting purposes. Promptly after the Effective Time, the Surviving
Corporation will create and issue shares of a new class of preferred stock (the
"Series B Preferred Stock") in exchange for the cancellation of $1,000,000 of
debt of the Surviving Corporation held by H&QGF and its participants, Greyrock
Business Credit and Cruttenden Roth. The Series B Preferred Stock will be
convertible into common stock of the Surviving Corporation at the rate of one
share of common stock for each share of Series B Preferred Stock converted.
Immediately upon issuance of common stock of the Surviving Corporation in
connection with the conversion of Series B Preferred Stock, the common stock so
issued will be deemed converted into an equal number of shares of the Company's
Common Stock.
Issuance of Series C Preferred Stock
On March 25, 1999, the Company issued 1,600 shares of its Series C
Convertible Preferred Stock (the "Series C Preferred Stock") to certain
accredited investors in a private offering. In connection with such offering,
the Company also issued warrants to the investors to purchase up to 100,000
shares of Common Stock. Settondown Capital International Ltd., the placement
agent used in connection with the offering, received 75 shares of Series C
Preferred Stock and a warrant to purchase an aggregate of 100,000 shares of
Common Stock, in addition to $96,000 in fees for costs incurred in connection
with the offering, including legal fees.
The holders of Series C Preferred Stock are not entitled to vote except
in the event the Company desires to issue shares of a class or series of
preferred stock which could adversely effect the rights of such holders, or as
may otherwise be required by law. The holders of Series C Preferred Stock are
entitled to receive dividends at an annual rate of 8% of the stated value
($1,000) of the Series C Preferred Stock, subject to the prior declaration or
payment of any dividend to which the holders of the Company's Series A Preferred
Stock and the Series B Preferred Stock are entitled. Dividends on shares of the
Series C Preferred Stock are cumulative and are payable only upon conversion of
the Series C Preferred Stock.
At any time after the earlier to occur of the 61st day after issueance
or the effective date of a registration statement registering the shares of
Common Stock to be issued upon conversion of the Series C Preferred Stock, each
share of Series C Preferred Stock is convertible into that number of shares of
Common Stock equal to the stated value of each such share ($1,000) divided by
the lesser of $2.50 or 80% of the average of the three trading days that have
the lowest volume weighted average prices of the Common Stock during the 15
trading days immediately predceding the conversion date. All outstanding shares
of Series C Preferred Stock will be automatically converted into Common Stock on
March 25, 2002.
Each warrant is a five-year callable warrant to purchase Common Stock at
$1.66 per share.
The Company agreed to use its best efforts to register the shares of
Common Stock underlying the Series C Preferred Stock and the Warrants and to pay
a penalty if such registration is not effective by the 121st day after issuance
of the Series C Preferred Stock. This penalty is equal to 2% of the purchase
price of the Series C Preferred Stock for the first 30-day period following such
120-day period and 3% of such purchase price for every 30-day period therafter
until the registration statement has been declared effective.
Issuance of Convertible Note
On March 9, 1999, the Company issued a $100,000 convertible note payable
to an accredited investor, convertible into Common Stock at $1.25 per share at a
6% per annum rate of interest. The convertible note payable is subordinate to
current and future debt issued by the Company and is due on September 9, 1999.
10
<PAGE>
Item 7. Financial Statements.
Index to Financial Data
Page
----
Independent Auditors' Report 12
Consolidated balance sheets 13
Consolidated statements of operations 15
Consolidated statements of stockholders' equity 16
Consolidated statements of cash flows 17
Notes to consolidated financial statements 18
11
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders of Global MAINTECH Corporation:
We have audited the accompanying consolidated balance sheets of Global MAINTECH
Corporation and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Global MAINTECH
Corporation and subsidiaries as of December 31, 1998 and 1997, and the results
of their operations and their cash flows for the years then ended, in conformity
with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Minneapolis, Minnesota
March 29, 1999
12
<PAGE>
GLOBAL MAINTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31, December 31,
1998 1997
---------- ----------
CURRENT ASSETS
Cash and cash equivalents $ 664,066 $1,726,889
Accounts receivable, less allowance for
doubtful accounts of $300,000
and $15,000, respectively 2,283,578 576,573
Employee receivables 147,466 26,111
Inventories 861,418 797,435
Prepaid expenses and other 80,094 77,308
Notes receivable -- 75,000
Current portion of investment in
sales-type leases 20,776 286,997
---------- ----------
Total current assets 4,057,398 3,566,313
Property and equipment, net 1,042,432 308,347
Leased equipment 124,658 209,033
Software development costs, net 2,273,834 955,835
Purchased technology and other intangibles, net 1,419,008 60,000
Net investment in sales-type leases,
net of current portion 22,410 492,918
Other assets, net 193,191 271,003
---------- ----------
TOTAL ASSETS $9,132,931 $5,863,449
========== ==========
The accompanying notes are an integral part of these consolidated statements.
13
<PAGE>
GLOBAL MAINTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
----------- -----------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 867,120 $ 396,159
Current portion of notes payable 395,680 --
Convertible subordinated debentures 200,000 100,000
Accrued liabilities compensation and payroll taxes 267,581 123,605
Other 31,049 10,588
Deferred revenue 228,231 52,443
----------- -----------
Total current liabilities 1,989,661 682,795
----------- -----------
Subordinated notes payable, less current portion 1,700,000 1,900,000
----------- -----------
Total liabilities 3,689,661 2,582,795
STOCKHOLDERS' EQUITY
Voting, convertible preferred stock - Series A, convertible into
one common stock share for each preferred share, no par value;
887,980 shares authorized; 129,176 shares in 1998 and
244,113 shares in 1997 issued and outstanding; total liquidation
preference of outstanding shares-$242,200 $ 60,584 $ 114,489
Voting, convertible preferred stock - Series B, convertible on or
before September 23, 2001 based on price of common stock;
conversion price not to exceed $2.50 per share or be less than
$0.75; dividend of 8% payable in cash or common stock of
Company; no par value; 615,385 shares authorized; 335,961
shares in 1998 and none in 1997 issued and outstanding; total
liquidation preference of outstanding shares-$2,183,769 2,183,769 --
Common stock, no par value; 48,496,635 shares authorized;
18,409,397 shares in 1998 and 17,084,858 shares in 1997
issued and outstanding -- --
Additional paid-in-capital 7,362,796 5,295,829
Notes receivable-officers (294,500) (294,500)
Accumulated deficit (3,869,379) (1,835,164)
----------- -----------
Total stockholders' equity 5,443,270 3,280,654
----------- -----------
$ 9,132,931 $ 5,863,449
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
14
<PAGE>
GLOBAL MAINTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended
December 31,
1998 1997
------------ ------------
<S> <C> <C>
Net sales:
Systems $ 4,245,684 $ 2,138,323
Maintenance, consulting and other 1,963,625 864,184
------------ ------------
Total net sales 6,209,309 3,002,507
Cost of sales:
Systems 1,127,361 417,225
Maintenance, consulting and other 1,195,941 344,808
------------ ------------
Total cost of sales 2,323,302 762,033
------------ ------------
Gross profit 3,886,007 2,240,474
Operating expenses:
Selling, general and administrative 4,414,140 1,649,394
Research and development 1,291,253 319,859
------------ ------------
Income (loss) from operations (1,819,386) 271,221
Other income (expense):
Interest expense (286,272) (183,004)
Interest income 146,786 92,406
Other (44,294) (22,147)
------------ ------------
Total other expense, net (183,780) (112,745)
------------ ------------
Income from continuing operations before income taxes (2,003,166) 158,476
Provision for income taxes -- --
------------ ------------
Income (loss) from continuing operations (2,003,166) 158,476
Gain from discontinued operations -- 70,000
------------ ------------
Net income (loss) $ (2,003,166) $ 228,476
============ ============
Accrual of cumulative dividends on
Series B convertible preferred stock (31,049) --
------------ ------------
Net income (loss) attributable
to common stockholders (2,034,215) 228,476
============ ============
Basic earnings (loss) per common share:
Continuing operations $ (0.11) $ 0.010
-- 0.004
------------ ------------
Net earnings (loss) $ (0.11) $ 0.014
============ ============
Diluted earnings (loss) per common share:
Continuing operations $ (0.11) $ 0.008
Discontinued operations -- 0.004
------------ ------------
Net earnings (loss) $ (0.11) $ 0.012
============ ============
Shares used in calculations:
Basic 18,351,712 15,918,047
Diluted 18,351,712 19,555,417
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
15
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
Preferred stock A Preferred stock B Common stock
--------------------------------------------------------
Shares amount Shares amount Shares amount
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 700,667 $328,601 -- -- 13,260,534 --
Net income -- -- -- -- -- --
Common stock issued -- -- -- -- 2,752,800 --
Stock issue costs -- -- -- -- -- --
Common stock options and warrants exercised -- -- -- -- 614,970 --
Exercise officer stock options -- -- -- -- -- --
Converted preferred shares Series A (456,554) (214,112) -- -- 456,554 --
- ------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 244,113 $114,489 -- -- 17,084,858 --
Net loss -- -- -- -- -- --
Accrual of cumulative dividends on Series B
convertible preferred stock -- -- -- -- -- --
Common stock issued -- -- -- -- 1,092,001 --
Values of stock options issued in acquisition -- -- -- -- -- --
Stock issue costs -- -- -- -- -- --
Common stock options and warrants exercised -- -- -- -- 117,601 --
Preferred shares Series B -- -- 335,961 2,183,769 -- --
Converted preferred shares Series A (114,937) (53,905) -- -- 114,937 --
- ------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 129,176 $60,584 335,961 $2,183,769 18,409,397 --
</TABLE>
[WIDE TABLE CONTINUED FROM ABOVE]
<TABLE>
<CAPTION>
Additional Notes
paid-in Receivable- Accumulated
capital Officers defict Total
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1996 $2,243,438 ($324,500) ($2,063,640) $183,899
Net income -- -- 228,476 228,476
Common stock issued 2,779,600 -- -- 2,779,600
Stock issue costs (302,278) -- -- (302,278)
Common stock options and warrants exercised 360,957 -- -- 360,957
Exercise officer stock options -- 30,000 -- 30,000
Converted preferred shares Series A 214,112 -- -- --
- -------------------------------------------------------------------------------------------------
Balance at December 31, 1997 $5,295,829 ($294,500) ($1,835,164) $3,280,654
Net loss -- -- (2,003,166) (2,003,166)
Accrual of cumulative dividends on Series B
convertible preferred stock -- -- (31,049) (31,049)
Common stock issued 1,800,350 -- -- 1,800,350
Values of stock options issued in
acquisition 524,000 -- -- 524,000
Stock issue costs (346,922) -- -- (346,922)
Common stock options and warrants exercised 35,634 -- -- 35,634
Preferred shares Series B -- -- -- 2,183,769
Converted preferred shares Series A 53,905 -- -- --
- -------------------------------------------------------------------------------------------------
Balance at December 31, 1998 $7,362,796 ($294,500) ($3,869,379) $5,443,270
</TABLE>
16
<PAGE>
GLOBAL MAINTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Years Ended
December 31,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(2,003,166) $ 228,476
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation and amortization 1,610,981 433,981
Allowance for doubtful accounts 300,000 --
Changes in operating assets and liabilities:
Accounts receivable (1,532,221) (124,974)
Employee receivables (121,355) (4,592)
Inventories (63,983) (579,492)
Prepaid expenses and other (2,786) (50,602)
Accounts payable 337,397 155
Accrued liabilities 112,500 2,253
Deferred revenue 79,859 (207,304)
----------- -----------
Cash used by operating activities (1,282,774) (302,099)
----------- -----------
Cash flows from investing activities:
Sale of investment in sales-type leases 736,729 (779,915)
Purchase of property and equipment (1,076,176) (361,869)
Reduction in leased equipment -- (162,548)
Investment in software development costs (2,052,188) (781,516)
Investment in other assets (9,460) (108,900)
Purchase of companies, net of cash acquired (1,276,786) --
Payments received on notes receivable 75,000 (75,000)
----------- -----------
Cash used by investing activities (3,602,881) (2,269,748)
----------- -----------
Cash flows from financing activities:
Disbursements for deferred debt costs -- (212,470)
Net proceeds from issuance of common stock 1,489,063 2,768,279
Net proceeds from issuance of preferred stock 2,183,769 --
Proceeds (payments) short-term notes payable 250,000 (319,963)
Payments received on officers notes receivable -- 30,000
Proceeds (payments) long-term notes payable (100,000) 2,000,000
----------- -----------
Cash provided by financing activities 3,822,832 4,265,846
----------- -----------
Net increase (decrease) in cash (1,062,823) 1,693,999
Cash and cash equivalents at beginning of period 1,726,889 32,890
----------- -----------
Cash and cash equivalents at end of period $ 664,066 $ 1,726,889
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid for: Interest $ 200,584 $ 200,584
Income taxes $ 9,999 $ 9,999
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
17
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GLOBAL MAINTECH CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1. Nature of Business and Summary of Significant Accounting Policies
Nature of business: Global MAINTECH, Inc., the Company's principal operating
subsidiary, produces and assembles a computer software and hardware product that
it sells as a console consolidation and console management solution to the
systems and network management marketplace primarily in the United States. The
product is called the Virtual Command Center ("VCC").
The VCC is a tool designed to do three functions: the first is to consolidate
consoles (computer terminals with access to the internal operation of a
computer) into one monitor, a "virtual console" or single point of control; the
second is to monitor and control the computers connected to the virtual console;
and, the third is to automate most, if not all, of the routine processes
performed by computer operators in data centers. The VCC can be operated from a
remote location and accepts multiple different computer platforms and operating
systems. It is an external system that monitors and controls the subject
mainframe and other data center computers from a workstation quality RISC
computer, which is housed separately from the computers it controls. VCC users
are able to reduce staffing levels, consolidate all data center operations and
technical support functions to a single location regardless of the physical
location of the data center(s) and achieve improved levels of operational
control and system availability.
In an effort to enhance its revenue base, the Company purchased three new
product lines during 1998. On February 28, 1998, the Company licensed certain
software and purchased certain assets relating to the system software business
of Infinite Graphics Incorporated, a Minnesota corporation ("IGI"). The Company
is using such software and assets to design, assemble and market computer-aided
design and manufacturing software systems that operate on a variety of mid-range
and personal computer platforms. On October 1, 1998, the Company purchased the
software of Asset Sentinel, Inc., a Minnesota corporation ("ASI"). As a result
of this acquisition, The Company obtained a network and electrical line mapping
suite of programs that operate on personal computer platforms. Effective
November 1, 1998, the Company purchased substantially all of the assets of
Enterprise Solutions, Inc., an Ohio corporation ("ESI"). As a result of this
acquisition, the Company obtained software products that notify the proper
person(s) by telephone, pager or the internet of critical data center
events-event notification software and a consulting business that focuses on
solving systems management problems in data centers.
Principles of consolidation: The consolidated financial statements include the
accounts of Global MAINTECH Corporation and its wholly owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated.
New accounting pronouncements: In June 1998, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards ("SFAS") No. 133,
Accounting for Derivative Instruments and Hedging Activities. The Statement is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
The Company has not assessed the impact of this Statement.
Cash and cash equivalents: The Company considers all highly liquid investments
purchased with an original maturity of three months or less to be cash
equivalents.
Inventory: Inventory is stated on a first in, first out (FIFO) basis at the
lower of cost or market.
Property and equipment: Property and equipment is recorded at cost and is
comprised primarily of computer and office equipment. Depreciation is provided
for principally using the double declining balance method, based on the
estimated useful lives of the respective assets which generally have lives of
three years.
Maintenance and repairs are charged to expense as incurred.
Revenue recognition: Revenue from product sales is recognized upon the latter of
shipment or final acceptance. Deferred revenue is recorded when the Company
receives customer payments before shipment or acceptance or before maintenance
revenues are earned. The Company sells maintenance agreements which require
minor updates of software to be delivered to the customers free of charge. New
versions of the Company's software representing a major upgrade are not a part
of the maintenance agreements. The Company expenses the costs of minor updates
to its software as incurred.
18
<PAGE>
GLOBAL MAINTECH CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The Company recognizes revenue from leasing activities in accordance with SFAS
No. 13, Accounting for Leases. Accordingly, leases that transfer substantially
all the benefits and risks of ownership are accounted for as sales-type leases.
All other leases are accounted for as operating leases.
Under the sales-type method, profit is recognized at lease inception by
recording revenue and cost. Revenue consists of the present value of the future
minimum lease payments discounted at the rate implicit in the lease. Cost
consists of the equipment's book value. The present value of the estimated value
of the equipment at lease termination (the residual value), which is generally
not material, and the present value of the future minimum lease payments are
recorded as assets. In each period, interest income is recognized as a
percentage return on asset carrying values.
The Company is the lessor of equipment under operating leases expiring in
various years. The cost of equipment subject to such leases is recorded as
leased equipment and is depreciated on a straight-line basis over the estimated
service life of the equipment. Operating lease revenue is recognized as earned
over the term of the underlying lease.
Capitalized software development costs: Under the criteria set forth in SFAS No.
86, Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed, capitalization of software development costs begins upon the
establishment of technological feasibility of the software. The establishment of
technological feasibility and the ongoing assessment of the recoverability of
these costs require considerable judgment by management with respect to certain
external factors, including, but not limited to, anticipated future gross
product revenues, estimated economic life, and changes in software and hardware
technology. Capitalized software development costs are amortized utilizing the
straight-line method over the estimated economic life of the software not to
exceed three years.
The carrying value of a software development asset is regularly reviewed by the
Company and a loss is recognized when the unamortized costs are not recoverable
based on the estimated cash flows to be generated from the applicable software.
Purchased technology and other intangibles: The Company has recorded the excess
of purchase price over net tangible assets as purchased technology and customer
lists based on the fair value of these intangibles at the date of purchase.
These assets are amortized over their estimated economic lives of five years
using the straight-line method. Recorded amounts for purchased technology are
regularly reviewed and recoverability assessed. The review considers factors
such as whether the amortization of these capitalized amounts can be recovered
through forecasted undiscounted cash flows.
Other assets: Other assets is comprised of patents and capitalized debt issuance
costs. Patents are stated at cost and are amortized over three years or over the
useful life using the straight-line method. Capitalized debt issuance costs are
stated at cost and are amortized over the term of the related debt agreement.
Recorded amounts for patents are regularly reviewed and recoverability assessed.
The review considers factors such as whether the amortization of these
capitalized amounts can be recovered through forecasted undiscounted cash flows.
Research and development: Research and development costs are expensed as
incurred.
Stock Based Compensation: The Company has adopted the disclosure requirements
under SFAS No. 123, Accounting and Disclosure of Stock-Based Compensation. As
permitted under SFAS No. 123, the Company applies Accounting Principles Board
Opinion No. 25 (APB No. 25), Accounting for Stock Issued to Employees, and
related interpretations in accounting for is plans. Accordingly, no compensation
expense has been recognized for its stock-based compensation plans.
Earnings (loss) per share: Basic and diluted net earnings (loss) per share is
computed by dividing the net earnings (loss) by the weighted average number of
shares of common stock outstanding during the period. During 1998, dilutive
shares were excluded from the net loss per share computation as their effect is
antidilutive.
19
<PAGE>
GLOBAL MAINTECH CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The weighted average shares and total dilutive shares used in the calculation of
basic and diluted earnings per share are as follows:
Years Ended December 31,
1998 1997
---------------------------
Basic Earnings Per Share
Weighted average shares 18,351,712 15,918,047
Diluted Earnings Per Share
Weighted average shares 18,351,712 15,918,047
Stock options - 2,765,174
Warrants - 628,083
Conversion of preferred stock, series A - 244,113
Conversion of preferred stock, series B - -
---------------------------
Total dilutive shares 18,351,712 19,555,417
===========================
Antidilutive stock options excluded 5,332,000 83,000
Antidilutive warrants excluded 2,859,000 600,000
Income taxes: Deferred taxes are provided on an asset and liability method for
temporary differences and operating loss and tax credit carryforwards. Temporary
differences are the differences between the reported amounts of assets and
liabilities and their tax bases. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than not that
some portion or all of the deferred tax assets will not be realized. Deferred
tax assets and liabilities are adjusted for the effects of changes in tax laws
and rates on the date of enactment.
Fair value of instruments: All financial instruments are carried at amounts that
approximate estimated fair values.
Reclassifications: Certain amounts previously reported in 1997 have been
reclassified to conform to the 1998 presentation.
Use of estimates: The preparation of financial statements in accordance with
generally accepted accounting principles require management of the Company to
make a number of estimates and assumptions relating to the reporting of assets
and liabilities and the disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from these
estimates.
Note 2. Recovery from Discontinued Operation
The Company's Board of Directors made the decision to discontinue that portion
of the operations which brokered and sold parts for IBM mainframe computers in
1995. Effective December 31, 1995 these operations were sold to Norcom
Resources, Inc. ("Norcom"). A portion of the sale included a $70,000 note
receivable from Norcom which the Company treated as uncollectible. However, in
March 1997 the Company collected the full amount of such note receivable and
recorded a recovery related to the discontinued operation.
20
<PAGE>
GLOBAL MAINTECH CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 3. Inventories
Inventories consists of the following:
December 31,
------------------------
1998 1997
----------- -------
Raw materials $ 609,412 526,379
Completed systems 386,759 271,056
--------------------------------------------
Total inventories $ 996,171 797,435
=========== ==========
Note 4. Net Investment in Sales-type Leases
The Company began leasing equipment as lessor under sales-type leases in 1997.
The components of net investment in sales-type leases as of December 31, 1998
and 1997, are as follows:
1998 1997
--------- ---------
Minimum lease payments receivable $ 45,336 $ 892,323
Less: Unearned revenue (2,150) (112,408)
---------------------------------------------------------------
43,186 779,915
Less: current portion (20,776) (286,997)
---------------------------------------------------------------
Investment in sales-type lease,
net of current portion $ 22,410 $ 492,918
Future minimum lease payments to be received under sales-type leases are
$23,654, and $21,682 in 1999 and 2000, respectively.
Note 5. Capital Assets
Certain of the Company's capital assets are comprised of the following:
December 31,
--------------------------
1998 1997
--------------------------
Property and equipment
Computer and officer equipment $ 1,642,691 400,192
- ----------------------------------------------------------------------------
Accumulated depreciation (600,259) (91,845)
- ----------------------------------------------------------------------------
Property and equipment, net $ 1,042,432 308,347
- ----------------------------------------------------------------------------
Leased equipment
- ----------------------------------------------------------------------------
Leased equipment $ 235,922 269,688
- ----------------------------------------------------------------------------
Accumulated depreciation (111,264) (60,655)
- ----------------------------------------------------------------------------
Leased equipment, net $ 124,658 209,033
- ----------------------------------------------------------------------------
Software development costs
- ----------------------------------------------------------------------------
Software development costs $ 3,307,422 1,255,235
- ----------------------------------------------------------------------------
Accumulated amortization (1,033,588) (299,400)
- ----------------------------------------------------------------------------
Software development costs, net $ 2,273,834 955,835
- ----------------------------------------------------------------------------
Purchased Technology
- ----------------------------------------------------------------------------
Software, licenses and customer lists $ 1,630,739 75,000
- ----------------------------------------------------------------------------
Accumulated amortization (211,731) (15,000)
- ----------------------------------------------------------------------------
Purchased technology costs, net $ 1,419,008 60,000
- ----------------------------------------------------------------------------
21
<PAGE>
GLOBAL MAINTECH CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Other assets
Patents $ 107,386 101,680
Deferred debt issue costs 225,224 221,470
Accumulated amortization (139,419) (52,147)
---------------------------
Other assets, net $ 193,191 271,003
Note 6. Acquisitions
On February 27, 1998, the Company acquired certain assets, liabilities and
perpetual software licenses of a division of Infinite Graphics, Inc., ("IGI") a
computer-aided design and manufacturing software business. The consideration
paid for IGI included $700,000 in cash and an amount up to $3,300,000 in
contingent consideration based on certain operating results of IGI over a period
of 15 months from the date of acquisition. Net identifiable liabilities of
$78,446 were assumed consisting of $50,000 in fixed assets and $128,446 in
current liabilities. The acquisition was accounted for as a purchase and the net
liabilities and results of operations have been included in the Company's
consolidated financial statements from the acquisition date. The contingent
consideration, if paid, will be allocated to the intangible assets and amortized
over the remaining useful lives of those assets. As of December 31, 1998, the
Company has not paid any contingent consideration, and if paid, this amount will
be included as an increase to purchased technology and amortized over the
remaining useful life of the asset. The Company has recorded $778,446 as
purchased technology and customer lists and will amortize these amounts straight
line over the estimated useful life of three to five years.
On October 1, 1998, the Company acquired the rights to Asset Sentinel, Inc.'s
("ASI") technology, which is a network mapping software suite of products. Total
consideration for the assets was $425,000, which included conversion of a note
owed to the Company by ASI of $279,320 plus a note payable due six months from
closing of $145,680. In addition, the Company has agreed to pay contingent
consideration in the amount of $2,200,000, based on certain sales milestones of
the ASI products for 18 months after acquisition, payable in cash or Company
Common Stock, to be determined by the Company. The Company did not acquire any
tangible assets or assume any liabilities, and therefore, the entire purchase
price has been recorded as purchased technology and is being amortized over its
estimated economic life of 5 years. The acquisition was recorded as a purchase
and the resulting asset and results from operations of ASI have been included in
the Company's financial statements from the acquisition date. ASI is a start-up
company and prior to the acquisition ASI had essentially no revenues. As of
December 31, 1998, the Company has not paid any contingent consideration, and if
paid, this amount will be included as an increase to purchased technology and
amortized over the remaining useful life of the asset.
On November 1, 1998, the Company acquired the rights and liabilities of
Enterprise Solutions, Inc. ("ESI"). Total consideration paid for the acquisition
was $200,000 plus contingent consideration of options to purchase up to
1,700,000 shares of common stock exercisable at the fair market value at the
date of grant ($1.25). This contingent consideration will be adjusted based on
the earnings of ESI for a period of 18 months following the closing and become
exercisable at that date through 30 months following the acquisition. The
maximum amount of adjustment to the contingent shares is 1,300,000 shares.
The fair value of 400,000 shares is included in the purchase price of
ESI. The fair value of the minimum shares was calculated using the Black Scholes
option pricing methodology with a volatility of 112%, dividend of 0, risk free
interest rate of 4.5% and a five-year life is $524,000. In the event ESI does
not meet certain earn-out calculations reaching $5,000,000, the Company, at its
option, will either pay ESI the difference or return the purchased assets and
assumed liabilities, as of the date the earn-out calculation is made, to ESI.
Net identifiable assets of $269,173 were assumed consisting of accounts
receivable of $474,784, fixed assets of $116,324 and current liabilities of
$321,935. The acquisition was accounted for as a purchase and the net assets and
results of operations have been included in the Company's consolidated financial
statements from the acquisition date. The Company has recorded an intangible
asset consisting of purchased technology and customer lists of $397,031 and will
amortize these amounts straight line over the economic useful life of 5 years.
The fair value of the contingent additional options, if granted, will be
allocated to purchased technology and amortized over the remaining useful lives
of those assets.
22
<PAGE>
GLOBAL MAINTECH CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The following unaudited pro forma information represents the results of
operations as if the acquisitions had taken place at the beginning of the
periods presented.
Unaudited
----------------------------------------------------
1998 1997
As reported Pro-forma As reported Pro-forma
------------------------ -----------------------
Revenue 6,209,309 7,466,162 3,002,507 6,303,050
Net earnings (loss) (2,003,166) (1,799,035) 228,476 1,165,806
Net earnings (loss)
attributable to
common stockholders (2,034,215) (1,830,084) 228,476 1,165,806
Basic earnings
(loss) per share (0.11) (0.10) 0.01 0.07
23
<PAGE>
GLOBAL MAINTECH CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 7. Notes Payable
Notes payable at December 31, 1998 and 1997 are comprised of the following:
1998 1997
-------------------- -------------------
Interest Interest
Amount Rate Amount rate
-------------------- -------------------
Notes payable to Bank Windsor
due June 1, 1999 $ 250,000 9.5% -- --
Acquisition note payable to
Asset Sentinel, Inc. $ 145,000 -- -- --
Subordinated notes payable to
Mezzanine Capital Partners and
Marquette Bancshares, Inc. due in
installments of various amounts as
described below through
June 30, 2002 $1,900,000 14.00% $2,000,000 14.00%
---------- ---------
1,900,000 2,000,000
---------- ---------
Less current portion (200,000) (100,000)
---------- ---------
$1,700,000 $1,900,000
=========== ==========
On June 19, 1997 the Company issued subordinated notes payable in the form of
two $1,000,000 notes payable to Mezzanine Capital Partners, Inc. and Marquette
Bancshares, Inc., respectively. The interest rate of 14% is fixed for the term
of the notes. Aggregate installments of $200,000, $300,000, $300,000, and
$1,100,000 are due for the years 1999 through 2002, respectively. The notes are
subject to a 5% prepayment penalty through June 30, 1998 and a 4% prepayment
penalty from July 1, 1998 through June 30, 1999 and may be prepaid without
penalty thereafter. The Company incurred costs related to the issuance of this
debt in the amount of $221,470 which includes the estimated fair value of
warrants to purchase a total of 530,000 shares of common stock at $1.80 per
share that were issued in connection with the issuance of notes payable. These
costs are being amortized on a straight-line basis over the five year term of
such debt.
The Company has a revolving line of credit at Bank Windsor in the amount of
$250,000 secured by accounts receivable. Borrowings under this revolver carry a
floating rate of interest at prime plus 2%. At year-end this rate was 9.5%.
In connection with an Asset Purchase Agreement dated October 1, 1998, the
Company purchased the technology assets of Asset Sentinel, Inc. in the amount of
$425,000 payable over 6 months. As of December 31, 1998, the unpaid balance was
$145,680. The unpaid balance is interest free.
In February 1999, the Company issued a $500,000 secured subordinated note
payable to certain principals of Anderson, Weinroth & Co. The note was issued
pursuant to a Loan and Security Agreement dated February 23, 1999 at a fixed
interest rate of 10%, is due on July 31, 1999 and may be prepaid without
penalty. The security interest granted to these note holders is subordinate to
the notes payable to Mezzanine Capital Partners, Inc. and Marquette Bancshares,
Inc. The Company incurred legal costs related to the issuance of this debt and
issued warrants, which expire on February 23, 2004, to purchase 400,000 shares
of common stock at $1.08 per share. The Company may call a one-third portion of
the warrants if the common stock price exceeds $3.00 per share for twenty
consecutive trading days.
On March 9, 1999 the Company issued a $100,000 convertible note payable to an
accredited investor, convertible into common stock of the Company at $1.25 per
share at a 6% per annum rate of interest. The convertible note payable is
subordinate to current and future debt issued by the Company and is due on
September 9, 1999.
Note 8. Stockholders' Equity
Common stock warrants: The Company issued warrants in 1998 in conjunction with
common stock issued pursuant to a private placement of 400,000 shares of common
stock in February 1998. These warrants are exercisable at $1.90 per share and
expire on July 21, 2003. The Company also issued warrants pursuant to a
subsequent private placement of common stock in August 1998, which are
exercisable at $2.60 and expire on July 16, 2003. Additional warrants to
purchase shares of common stock were issued pursuant to a private placement of
Series B Cumulative Convertible Preferred Stock ("Series B Stock"). The number
of warrants issued is equal to the number of shares of common stock issued at
the time the Series B Stock is converted to common stock. The warrants are
exercisable at $3.25 or may be called by the Company in the event the common
stock price trades above $4.375 for a period of 20 consecutive trading days and
the Company's Common Stock is traded on Nasdaq.
24
<PAGE>
GLOBAL MAINTECH CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The Company issued warrants in 1997 in conjunction with common stock issued
pursuant to the Private Placement Memorandum dated November 25, 1996. These
warrants are exercisable at $0.75 per share and expire on February 28, 2002.
During 1997 the Company also issued warrants pursuant to a subsequent private
placement of common stock in June 1997, which are exercisable at $1.40 and
expire on June 6, 2002. An additional 530,000 warrants were issued in 1997,
which are exercisable at a per share price of $1.80 and expire in the year 2002.
These warrants were issued in connection with the $2,000,000 of subordinated
debt issued in June 1997 (Note 7).
The total warrants outstanding as of December 31, 1998 was 3,541,979. Such
warrants are exercisable at a weighted average price of $2.59 per share and
expire in 2000 through 2004.
Common stock options: The Company's stock option plan ("Plan"), provides for
granting to the Company's employees, directors and consultants, qualified
incentive and nonqualified options to purchase common shares of stock. The Plan
was amended during 1995 to increase the number of aggregate options that can be
issued to 10,000,000 shares of common stock. Qualified incentive options must be
granted with exercise prices equal to the fair market value of the stock at the
date of grant. Nonqualified options must be granted with exercise prices equal
to at least 85% percent of the fair market value of the stock at the date of
grant.
The Company applies APB No. 25, Accounting for Stock Issued to Employees, and
related interpretations in accounting for its stock options. As a result no
compensation expense has been recognized for stock-based compensation plans. Had
the Company determined compensation cost based on the fair value at the grant
date for its stock options under SFAS No. 123, Accounting and Disclosure of
Stock-Based Compensation, the Company's net income and earnings per share would
have been reduced by approximately $30,000 and $18,000 in 1998 and 1997,
respectively. The Company made this calculation using the Black-Scholes option
pricing model with the following assumptions: volatility of 113%, risk-free
interest rate of 4.5%, and an expected life of 5 years.
This pro-forma effect does not include the compensation cost of stock options
currently issued but which do not vest until future years nor does it include
the compensation cost of stock options issued prior to 1995. Therefore, the full
impact of calculating compensation cost for stock options under SFAS No. 123 is
not reflected in the pro-forma net income amounts presented above.
Information with respect to stock options under the plan are summarized as
follows:
Incentive Stock Nonqualified
Options Options
---------------------------------------
Weighted Weighted
average average
exercise exercise
Shares price Shares price
------------------- ------------------
Total outstanding at December 31, 1996 2,615,000 $0.49 83,000 $5.87
Granted 1,432,000 $1.51 -- --
Canceled (75,000) $1.00 -- --
Exercised (455,000) $0.40 -- --
------------------- ------------------
Total outstanding at December 31, 1997 3,517,000 $0.79 83,000 $5.87
Granted 3,543,000 $1.51 -- --
Canceled (337,000) $1.92 50,000 $5.63
Exercised (77,000) $0.36 -- --
------------------- ------------------
Total outstanding at December 31, 1998 6,646,000 $1.11 33,000 $6.25
=================== ==================
Options for 3,314,000 shares of common stock were exercisable at a weighted
average exercise price of $0.74 as of December 31, 1998.
25
<PAGE>
GLOBAL MAINTECH CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Common stock issued: In 1998 the Company issued a total of 1,092,001 shares of
common stock. These shares were issued pursuant to two separate private
placement issues: one ending July 8, 1998; and one ending August 11, 1998. In
addition, 114,937 and 456,554 shares of common stock were issued to holders of
preferred stock series A on a one-for-one exchange conversion in accordance with
terms of the preferred stock in 1998 and 1997, respectively. The new issues of
common stock were issued pursuant to an exemption from registration under Rule
506 of Regulation D of the Securities Act of 1933, as amended.
In 1997 the Company issued a total of approximately 2,752,800 shares of common
stock. These shares were issued pursuant to two separate private placement
issues: one ending February 1997; and one ending July 1997. Specifically, the
Company issued 1,652,800 and 653,500 shares of common stock in 1997 and 1996,
respectively at $0.75 per share pursuant to the private placement memorandum
dated November 1996. During 1997 the Company also issued 1,100,000 shares of
common stock at $1.40 per share pursuant to a private placement dated June 1997.
In addition, 455,000 shares of common stock were issued due to the exercise of
qualified stock options by certain non-officer employees or former employees of
the Company and 159,970 shares of common stock were issued to converting
warrantholders. Stock issue costs were $302,277 in 1997.
Preferred stock issued: From late August 1998 until December 31, 1998, the
Company offered up to 615,385 units for sale in a private placement of
securities of which 335,961 units were sold. Each unit consisted of one share of
Series B Preferred Stock and one Warrant to purchase shares of Common Stock. The
purchase price per unit was $6.50.
Each share of Series B Preferred Stock entitles the holder thereof to receive an
annual dividend equal to $0.52. Until February 15, 1999, each share of Series B
Preferred Stock is convertible into that number of shares of Common Stock equal
to the per unit purchase price divided by $3.25, subject to certain adjustments.
Thereafter, each share of Series B Preferred Stock is convertible into that
number of shares of Common Stock equal to the per unit purchase price divided by
80% of the average closing bid price of the Common Stock for the 20 consecutive
trading days prior to the conversion date, subject to certain adjustments;
provided, however, that such average price may not be greater than $2.50 nor
less than $0.75. All outstanding shares of Series B Preferred Stock will be
automatically converted into Common Stock on September 23, 2001 if the Company
has registered such common shares under the Securities Act and the Common Stock
is traded on the Nasdaq.
Each Warrant expires in five years, and is callable by the Company and entitles
its holder to purchase Common Stock at $3.25 per share. The number of shares of
Common Stock for which the Warrant in each unit will be exercisable will equal
the number of shares of Common Stock into which the associated share of Series B
Preferred Stock contained in the unit will have been converted. The Warrants are
callable by the Company provided the Common Stock has not traded below $4.375
for 20 consecutive trading days prior to the call exercise date, the underlying
shares are registered under the Securities Act and the Common Stock is traded on
the Nasdaq.
In connection with the offering of the Series B Preferred Stock and Warrants
described above, the Company agreed to use its best efforts to register the
shares of Common Stock underlying the Series B Preferred Stock and the Warrants
and to pay a penalty if such registration was not effective by February 28,
1999. The registration statement for such Common Stock was not effective by
February 28,1999, and as of the date of this report is still not effective. As a
result, the Company is paying a penalty to the investors in the offering equal
to 1% of the purchase price of the units for each of the first two 30-day
periods following February 28, 1999 and 3% for every 30-day period thereafter
until the registration statement has been declared effective.
The Company issued 335,964 of such units for total gross proceeds of $2,183,747.
The Company paid Miller, Johnson & Kuehn $126,687 in placement agent commissions
and $23,302 for accountable expenses, including legal fees, incurred in
connection with the offering.
Note 9. Income Taxes
At December 31, 1998, the Company had a net operating loss carryforward of
approximately $7.0 million. Approximately $3.6 million of the net operating loss
carryforward will be subject to an annual limitation as defined by Section 382
of the Internal Revenue Code of approximately $200,000.
26
<PAGE>
GLOBAL MAINTECH CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Current and future equity transactions could further limit the net operating
losses available in any one year.
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and liabilities as of December 31, 1998 and 1997 are
shown as follows:
Year Ended Year Ended
December 31, December 31,
1998 1997
----------- -----------
Deferred tax assets
Allowance for doubtful accounts $ 127,000 $ 5,000
Purchased technology 58,000 --
Net operating loss carryforward 2,911,000 1,360,000
----------- -----------
Subtotal 3,096,000 1,365,000
Less valuation allowance for
deferred tax asset (2,032,000) (1,212,000)
----------- -----------
Deferred tax liabilities 1,064,000 153,000
Depreciation (153,000) (153,000)
Capitalized software (911,000) --
----------- -----------
Net deferred tax assets $ -- $ --
=========== ===========
The provision for income taxes consists of the following for the years ended
December 31, 1998 and 1997:
Year Ended Year Ended
December 31, December 31,
1998 1997
----------- -----------
Current
Federal $ - $ -
State - -
----------- -----------
Total - -
Deferred - -
----------- -----------
Total $ - $ -
=========== ===========
27
<PAGE>
GLOBAL MAINTECH CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The income tax expense (benefit) differed from the amounts computed by applying
the U. S. federal income tax rate of 34% as a result of the following:
Year Ended Year Ended
December 31, December 31,
1998 1997
------------- -------------
Expense (benefit) at statutory rate $(681,076) $77,000
State income tax benefit,
net of federal (102,216) 13,000
Change in valuation allowance 820,000 (94,000)
Other 36,708 4,000
------------ ------------
Actual tax expense (benefit) $ - $ -
============ ============
Note 10. Operating Leases
Company as Lessor: The Company leases equipment, primarily VCC units, under
noncancelable operating leases expiring in various years. The cost of equipment
subject to such leases is recorded as leased equipment.
The operating lease payment stream related to leases initiated in 1996 was
assigned to a third party, on a non-recourse basis, for a lump sum payment to
the Company in 1996. The present value of the cash received was recorded as
deferred revenue and is being recognized into revenue over the term of the
underlying leases. These
underlying leases, after being extended, terminated in 1998. Deferred revenue
recorded by the Company related to these leases as of December 31, 1997 was
approximately $20,000, respectively. Future minimum lease payments to be
received for operating leases in which the payment stream has not been assigned
to a third party are $15,192 and $11,224 for 1999 and 2000, respectively.
Company as Lessee: The Company has operating leases for certain development
related IBM computers, office equipment and its office premises. The rental
payments under these leases are charged to expense as incurred. All the leases
provide that the Company pay taxes, maintenance, insurance, and other operating
expenses applicable to the leases. Lease expense in 1998 and 1997 was
approximately $94,000 and $112,000, respectively. The future minimum lease
payments are approximately $94,000 and $94,000 for the years 1999 and 2000,
respectively.
Note 11. Subsequent Events
Acquisition of Breece Hill Technologies, Inc.
On March 5, 1999, the Company entered into an Agreement and Plan of Merger (the
"Merger Agreement") with GMI, BHT Acquisition, Inc. (a new subsidiary of GMI
created solely for purposes of the merger and referred to in this discussion as
"Merger Subsidiary") and Breece Hill Technologies, Inc. ("BHT"). Under the terms
of the Merger Agreement, shortly after approval of the merger by the
stockholders of BHT, and the satisfaction or waiver of the terms and conditions
contained in the Merger Agreement (which is expected to occur in April 1999),
the Merger Subsidiary will merge with and into BHT, BHT, as the surviving
corporation (the "Surviving Corporation"), will become a subsidiary of GMI and
the Board of Directors of the Surviving Corporation will be comprised of the
directors of Merger Subsidiary and the officers of the Surviving Corporation
will be the officers of BHT.
28
<PAGE>
GLOBAL MAINTECH CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
In exchange for all of the outstanding shares of BHT common and preferred stock,
the Company will deliver one or more warrants to purchase 4,500,000 shares of
GMC Common Stock (subject to adjustment) and may also be required to deliver,
one year after the Closing Date, GMC Common Stock and cash under the Earn Out
Provisions of the Merger Agreement. In connection with the merger, the Comapny
and Global MAINTECH, Inc. also will guarantee up to $3,800,000 of outstanding
debt of BHT.
For additional details concerning the merger, please refer to the Merger
Agreement attached hereto as Exhibit 2.2.
Issuance of Series C Preferred Stock
On March 25, 1999, the Company issued 1,600 shares of its Series C Convertible
Preferred Stock (the "Series C Preferred Stock") to certain accredited investors
in a private offering. In connection with such offering, the Company also issued
warrants to the investors to purchase up to 100,000 shares of Common Stock.
Settondown Capital International Ltd., the placement agent used in connection
with the offering, received 75 shares of Series C Preferred Stock and a warrant
to purchase an aggregate of 100,000 shares of Common Stock, in addition to
$96,000 in fees for costs incurred in connection with the offering, including
legal fees.
The holders of Series C Preferred Stock are not entitled to vote except
in the event the Company desires to issue shares of a class or series of
preferred stock which could adversely effect the rights of such holders, or as
may otherwise be required by law. The holders of Series C Preferred Stock are
entitled to receive dividends at an annual rate of 8% of the stated value
($1,000) of the Series C Preferred Stock, subject to the prior declaration or
payment of any dividend to which the holders of the Company's Series A Preferred
Stock and the Series B Preferred Stock are entitled. Dividends on shares of the
Series C Preferred Stock are cumulative and are payable only upon conversion of
the Series C Preferred Stock.
29
<PAGE>
Item 8. Changes in and disagreements with Accountants.
Not applicable.
PART III
--------
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act.
The information with respect to Directors of the Company under the
caption "Election of Board of Directors" contained in the Company's Proxy
Statement relating to the Annual Meeting of Shareholders for the year ending
December 31, 1998 is incorporated herein by reference.
The information with respect to the Executive Officers of the Company
under the caption "Executive Officers" contained in the Company's Proxy
Statement relating to the Annual Meeting of Shareholders for the year ending
December 31, 1998 is incorporated herein by reference.
The information contained under the caption "Section 16(a) Beneficial
Ownership Reporting Compliance" contained in the Company's Proxy Statement
relating to the Annual Meeting of Shareholders for the year ending December 31,
1998 is incorporated herein by reference.
Item 10. Executive Compensation.
The information contained under the caption "Executive Compensation" in
the Company's Proxy Statement relating to the Annual Meeting of Shareholders for
the year ending December 31, 1998 is incorporated herein by reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The information contained under the caption "Security Ownership of
Certain Beneficial Owners and Management" in the Company's Proxy Statement
relating to the Annual Meeting of Shareholders for the year ending December 31,
1998 is incorporated herein by reference.
Item 12. Certain Relationships and Related Transactions.
The information contained under the caption "Related Transactions" in
the Company's Proxy Statement relating to the Annual Meeting of Shareholders for
the year ending December 31, 1998 is incorporated herein by reference.
Item 13. Exhibits and Reports on Form 8-K.
(a) Index of Exhibits (Not included herein.)
Exhibit
Description Number
----------- ------
Agreement and Plan of Merger dated December 6, 1994, as 2.1
amended, among the Company, Mirror Consolidation
Company, and MAINTECH Resources, Inc. (the Articles of
Merger are attached thereto as Exhibit A) (incorporated
herein by reference to the Registrant's Form 8-K filed
with the Commission on January 19, 1995).
Agreement and Plan of Merger dated March 5, 1999, among 2.2
the Company, BHT Acquisition, Inc., and Breece Hill
Technologies, Inc.
30
<PAGE>
Bylaws of the Company, as amended (incorporated herein 3.1
by reference to the Registrant's Form S-1 (File No.
33-34894)).
Second Amended and Restated Articles of Incorporation of 3.2
the Company (incorporated herein by reference to the
Registrant's Form 10-QSB for the quarter ended September
30, 1998. (File No. 0-14692)).
Certificate of Designation of Series C Convertible 3.3
Preferred Stock, as filed on March 24, 1999 and
corrected on March 30, 1999.
Form of 11% Convertible Subordinated Debenture due July 4.1
1, 1996 (incorporated herein by reference to the
Registrant's Form 10-KSB for the year ended March 31,
1991.)
Form of Registration Agreement between the Company and 4.2
holders of the Company's 11% Convertible Subordinated
Debentures Due July 1, 1996 (incorporated herein by
reference to the Registrant's Form 10-K for the year
ended March 31, 1991).
Form of Certificate of the Company's Series A 4.3
Convertible Preferred Stock (incorporated herein by
reference to the Registrant's Form 10-KSB for the year
ended December 31, 1994).
Form of Certificate of the Company's Common Stock 4.4
following change of corporate name (incorporated herein
by reference to the Registrant's Form 10-KSB for the
year ended December 31, 1995).
Form of Promissory Note, dated June 19, 1997, issued to 4.5
each of Marquette Bancshares, Inc. and Mezzanine Capital
Partners, Inc. (incorporated by reference to the
Registrant's Form SB-2, as amended (File No. 333-33477)).
Form of Preferred Stock and Warrant Purchase Agreement, 4.6
including Form of Warrant and Registration Rights exhibit
thereto, relating to sale of Series B Convertible
Preferred Stock and Callable Common Stock Warrants during
the fourth quarter of 1998.
Form of Certificate of the Company's Series B 4.7
Convertible Preferred Stock.
Form of Series C Convertible Preferred Stock Purchase 4.8
Agreement, dated March 24, 1999, which sets forth the
rights of the holders of Series C Convertible Preferred
Stock and the Warrants issued in connection therewith.
Form of Certificate of the Company's Series C 4.9
Convertible Preferred Stock;
The Company's 1989 Stock Option Plan (incorporated 10.1
herein by reference to Exhibit 28 to the Registrant's
Registration Statement on Form S-8, (File 33-33576)).
Amendments No. 1 and 2, dated October 17, 1991 and April 10.2
24, 1992, respectively, to the Company's 1989 Stock
Option Plan (incorporated herein by reference to the
Registrant's Form 10-K for the year ended March 31,
1992).
Mirror Technologies, Incorporated 401(K) Plan effective 10.3
April 1, 1992 (incorporated herein by reference to the
Registrant's Form 10-K for the year ended March 31,
1992).
Exclusive Distributor and Licensing Agreement between 10.4
Yutaka Takagi and Circle Corporation and MAINTECH
Resources, Inc. and Global MAINTECH, Inc. dated December
20, 1994 (incorporated herein by reference to the
Registrant's Form 10-KSB for the year ended December 31,
1994).
Amendment No. 3, dated May 15, 1995 to the Company's 10.5
1989 Stock Option Plan (incorporated herein by reference
to the Registrant's Form 10-KSB for the year ended
December 31, 1995).
Asset Purchase Agreement, dated November 1, 1998, by and 10.6
among Global MAINTECH, Inc., Global MAINTECH
Corporation, Singlepoint Systems, Inc. and Enterprise
Solutions, Inc. (incorporated herein by reference to the
Registrant's Form 8-K filed with the Commission on
December 23, 1998 (File No. 0-14692)).
License and Asset Purchase Agreement between Infinite 10.7
Graphics Incorporated and the Company dated February 27,
1998 (incorporated herein by reference to the Registrant's
Form 10-KSB for the year ended December 31, 1997).
Office Lease between the Company and Compass Marketing, 10.8
Inc., sublessor, and Glenborough Realty Trust
Incorporated, lessor, dated March 3, 1998 (incorporated
herein by reference to the Registrant's Form 10-KSB for the
year ended December 31, 1997).
Subsidiaries of the Registrant (incorporated herein by 21
31
<PAGE>
reference to the Registrant's Form 10-KSB for the year
ended December 31, 1994).
Consent of KPMG Peat Marwick LLP 23
Financial Data Schedule 27
Cautionary Statement 99
(b) Reports on Form 8-K
Form 8-K was filed on December 23, 1998 in connection with the Company's
acquisition of the assets from Enterprise Systems, Inc. (File No. 0-14692).
32
<PAGE>
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Global MAINTECH Corporation
Dated: March 31, 1999 By /s/ James Geiser
-----------------------------
James Geiser
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
- ---- ----- ----
<S> <C> <C>
/s/ David McCaffrey Chief Executive Officer March 31, 1999
- ------------------------------------ (Principal Executive Officer) and
David McCaffrey Director
/s/ James Geiser Chief Financial Officer and Secretary March 31, 1999
- ------------------------------------ (Principal Financial and Accounting
James Geiser Officer)
/s/ Robert E. Donaldson Director March 31, 1999
- ------------------------------------
Robert E. Donaldson
/s/ John E. Haugo Director March 31, 1999
- ------------------------------------
John E. Haugo
/s/ John Clarey Director March 31, 1999
- ------------------------------------
John Clarey
/s/ Douglas Pihl Director March 31, 1999
- ------------------------------------
Douglas Pihl
</TABLE>
33
<PAGE>
Exhibit Index
Exhibit
Description Number
----------- ------
Agreement and Plan of Merger dated March 5, 1999, 2.2
among the Company, BHT Acquisition, Inc., and Breece
Hill Technologies, Inc.
Certificate of Designation of Series C Convertible 3.3
Preferred Stock, as filed on March 24, 1999 and
corrected on March 30, 1999.
Form of Preferred Stock and Warrant Purchase Agreement, 4.6
including Form of Warrant and Registration Rights exhibit
thereto, relating to sale of Series B Convertible
Preferred Stock and Callable Common Stock Warrants
during the fourth quarter of 1998.
Form of Certificate of the Company's Series B 4.7
Convertible Preferred Stock.
Form of Series C Convertible Preferred Stock Purchase 4.8
Agreement, dated March 24, 1999, which sets forth the
rights of the holders of Series C Convertible Preferred
Stock and the Warrants issued in connection therewith.
Form of Certificate of the Company's Series C 4.9
Convertible Preferred Stock;
Consent of KPMG Peat Marwick LLP 23
Financial Data Schedule 27
Cautionary Statement 99
35
<PAGE>
________________________________________________________________________________
AGREEMENT AND PLAN OF MERGER
by and among
Global MAINTECH Corporation,
Global MAINTECH, Inc.,
BHT Acquisition, Inc.
and
Breece Hill Technologies, Inc.
March 5, 1999
________________________________________________________________________________
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE I
THE MERGER........................................................................ 1
1.01 The Merger.......................................................... 1
1.02 Certificate of Merger; Effective Time............................... 1
1.03 Effect of Merger.................................................... 1
1.04 Closing............................................................. 2
1.05 Certificate of Incorporation; Bylaws................................ 2
1.06 Directors and Officers.............................................. 2
1.07 Certain Defined Terms............................................... 2
ARTICLE II
CONVERSION OF SECURITIES; EXCHANGE OF CERTIFICATES................................ 2
2.01 Conversion of Securities............................................ 2
2.02 Earn Out Payment; Value of Escrow Fund.............................. 3
2.03 Dissenting Shares................................................... 4
2.04 Rights of Holders of Converted Securities........................... 5
2.05 Adjustments to Merger Consideration................................. 6
2.06 Exchange of Certificates; Escrow Fund; Deductions from Escrow Fund.. 6
2.07 Stock Options....................................................... 9
2.08 Notices to Option Holders........................................... 9
2.09 H&QGF Warrants...................................................... 9
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY..................................... 10
3.01 Incorporation and Corporate Power................................... 10
3.02 Execution, Delivery; Valid and Binding Agreements................... 11
3.03 Approval of the Merger Agreement and Plan of Merger;
Meeting of Stockholders............................................. 11
3.04 No Breach........................................................... 11
3.05 Governmental Authorities; Consents.................................. 11
3.06 Subsidiaries ....................................................... 12
3.07 Capital Stock....................................................... 12
3.08 Financial Statements................................................ 12
3.09 Absence of Undisclosed Liabilities.................................. 13
3.10 No Material Adverse Changes......................................... 13
3.11 Absence of Certain Developments..................................... 13
3.12 Title to Properties................................................. 15
3.13 Accounts Receivable................................................. 16
3.14 Inventory........................................................... 16
3.15 Tax Matters......................................................... 16
3.16 Contracts and Commitments........................................... 18
3.17 Intellectual Property Rights........................................ 19
3.18 Litigation.......................................................... 20
3.19 Warranties.......................................................... 20
3.20 Employees........................................................... 20
3.21 Employee Benefit Plans.............................................. 20
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
3.22 Insurance........................................................... 21
3.23 Affiliate Transactions.............................................. 22
3.24 Customers and Suppliers............................................. 22
3.25 Officers and Directors; Bank Accounts............................... 22
3.26 Compliance with Laws; Permits....................................... 22
3.27 Environmental Matters............................................... 23
3.28 Brokerage........................................................... 25
3.29 Disclosure.......................................................... 25
3.30 Year 2000 Compliance................................................ 26
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF GMC, GMI AND MERGER SUBSIDIARY.... 26
4.01 Incorporation and Corporate Power................................... 26
4.02 Execution, Delivery; Valid and Binding Agreements................... 26
4.03 No Breach........................................................... 26
4.04 Merger Subsidiary................................................... 27
4.05 Governmental Authorities; Consents.................................. 27
4.06 Brokerage........................................................... 27
4.07 Year 2000 Compliance................................................ 27
4.08 Litigation.......................................................... 28
4.09 Disclosure.......................................................... 28
ARTICLE V
COVENANTS OF THE COMPANY 28
5.01 Conduct of the Business............................................. 28
5.02 Access to Books and Records......................................... 30
5.03 Meeting of Stockholders............................................. 30
5.04 Regulatory Filings.................................................. 31
5.05 Conditions.......................................................... 31
5.06 No Shop............................................................. 31
5.07 Information Statement............................................... 31
5.08 Disclosure Schedules................................................ 31
5.09 Collateral Agreement................................................ 31
ARTICLE VI
COVENANTS OF GMI AND MERGER SUBSIDIARY............................................ 32
6.01 Regulatory Filings.................................................. 32
6.02 Conditions.......................................................... 32
6.03 Board Representation................................................ 32
6.04 Loan to The Company................................................. 32
6.05 Registration Rights................................................. 32
6.06 Disclosure Schedules................................................ 32
6.07 Delivery of Escrow Warrants......................................... 32
6.08 Collateral Agreement................................................ 33
ARTICLE VII
CONDITIONS TO CLOSING............................................................. 33
7.01 Conditions to GMC's, GMI's and Merger Subsidiary's Obligations...... 33
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
7.02 Conditions to the Company's Obligations............................. 36
ARTICLE VIII
TERMINATION....................................................................... 37
8.01 Termination......................................................... 37
8.02 Effect of Termination............................................... 38
ARTICLE IX
ADDITIONAL AGREEMENTS............................................................. 39
9.01 Intercompany Financing.............................................. 39
9.02 Disposition of Assets............................................... 39
9.03 Series B Preferred Stock............................................ 39
9.04 Certain Loans from H&QGF, GBC and CR to the Company
and the Surviving Corporation....................................... 40
9.05 Confidentiality..................................................... 40
9.06 Solicitation........................................................ 41
9.07 Employee Benefit Plans.............................................. 41
9.08 Directors' and Officers' Indemnification and Insurance.............. 41
9.09 Escrow Agreement.................................................... 42
ARTICLE X
SURVIVAL; INDEMNIFICATION......................................................... 43
10.01 Survival of Representations and Warranties.......................... 43
10.02 Indemnification by the Company...................................... 43
10.03 Indemnification by GMI.............................................. 44
10.04 Method of Asserting Claims.......................................... 44
ARTICLE XI
MISCELLANEOUS..................................................................... 46
11.01 Press Releases and Announcements.................................... 46
11.02 Expenses............................................................ 46
11.03 Amendment and Waiver................................................ 46
11.04 Notices............................................................. 47
11.05 Assignment.......................................................... 47
11.06 Severability........................................................ 47
11.07 Complete Agreement.................................................. 48
11.08 Counterparts........................................................ 48
11.09 Governing Law....................................................... 48
11.10 No Third-Party Beneficiaries........................................ 48
</TABLE>
iii
<PAGE>
SCHEDULES
6.05 Registration Rights
EXHIBITS
Exhibit A - Form of Escrow Warrant
iv
<PAGE>
AGREEMENT AND PLAN OF MERGER
----------------------------
This Agreement and Plan of Merger (this "Agreement") dated as of March
5, 1999, is made and entered into by and among Global MAINTECH Corporation, a
Minnesota corporation ("GMC"), Global MAINTECH, Inc., a Minnesota corporation
("GMI"), BHT Acquisition, Inc., a Delaware corporation and wholly owned
subsidiary of GMI ("Merger Subsidiary") and Breece Hill Technologies, Inc., a
Delaware corporation (the "Company").
WHEREAS, the respective Boards of Directors of GMI, Merger Subsidiary
and the Company have determined that it is advisable and in the best interests
of the respective corporations and their stockholders that Merger Subsidiary be
merged with and into the Company in accordance with the Delaware General
Corporation Law (the "DGCL") and the terms of this Agreement pursuant to which
the Company will be the surviving corporation and will become a wholly owned
subsidiary of GMI (the "Merger"); and
WHEREAS, GMC, GMI, Merger Subsidiary and the Company desire to make
certain representations, warranties, covenants, and agreements in connection
with, and to establish various conditions precedent to, the Merger.
NOW, THEREFORE, in consideration of the representations, warranties,
covenants and agreements set forth in this Agreement, the parties hereto hereby
agree as follows:
ARTICLE I
THE MERGER
1.01 The Merger. Upon the terms and subject to the conditions set
----------
forth in this Agreement, at the Effective Time, Merger Subsidiary shall be
merged with and into the Company in accordance with the DGCL, whereupon the
separate existence of Merger Subsidiary shall cease, and the Company shall
continue as the surviving corporation (the "Surviving Corporation").
1.02 Certificate of Merger; Effective Time. As soon as practicable
-------------------------------------
after satisfaction or, to the extent permitted hereunder, waiver of all
conditions to the Merger set forth in Article VII, the parties shall cause the
Merger to be consummated by filing a certificate of merger (the "Certificate of
Merger") with the Secretary of State of the State of Delaware and make all other
filings or recordings required by the DGCL in connection with the Merger and the
transactions contemplated by this Agreement. The Merger shall become effective
at such time as the Certificate of Merger is duly filed with the Secretary of
State of the State of Delaware or at such later time as may be agreed by the
parties in writing and specified in the Certificate of Merger (the "Effective
Time"). Notwithstanding the foregoing, solely for accounting purposes, the
merger will be deemed to be effective as of March 15, 1999.
1.03 Effect of Merger. From and after the Effective Time, the
----------------
Surviving Corporation shall possess all the rights, privileges, powers and
franchises and be subject to all of the
1
<PAGE>
restrictions, disabilities and duties of the Company and Merger Subsidiary, all
as provided under the DGCL.
1.04 Closing. The closing of the Merger (the "Closing") will take
-------
place at 10:00 a.m. on a date to be specified by the parties, which shall be no
later than the second business day after satisfaction or waiver of the
conditions set forth in Article VII (the "Closing Date"), at a time and place
and by a method as mutually agreed to by the parties.
1.05 Certificate of Incorporation; Bylaws. At the Effective Time, the
------------------------------------
Certificate of Incorporation and Bylaws of the Company, as in effect immediately
prior to the Effective Time, shall be the Certificate of Incorporation and
Bylaws of the Surviving Corporation.
1.06 Directors and Officers. The directors of Merger Subsidiary shall
----------------------
be the initial directors of the Surviving Corporation. The officers of the
Company shall be the initial officers of the Surviving Corporation.
1.07 Certain Defined Terms. Certain defined terms used throughout
---------------------
this document and its exhibit contain the word "Escrow." The word "Escrow" in
such defined terms is employed for ease of reference only, and not by way of
limitation with respect to the arrangement under which the Merger Consideration
(as defined in Section 2.01, below) is held and distributed. Accordingly, the
use of the word "Escrow" in such defined terms shall not exclude the possibility
that such defined terms relate to one or more custodial, distribution or other
arrangements entered into by the parties hereto in order to effectuate the
purposes of this Agreement.
ARTICLE II
CONVERSION OF SECURITIES; EXCHANGE OF CERTIFICATES
2.01 Conversion of Securities. As of the Effective Time, by virtue of
------------------------
the Merger and without any action on the part of the holder of any shares of
capital stock of Merger Subsidiary or the Company, GMC shall deposit with
Hambrecht & Quist Guaranty Finance, LLC ("H&QGF"), pursuant to a collateral
agreement consistent with this Agreement to be executed by and among H&QGF and
the parties to this Agreement prior to the Closing Date (the "Collateral
Agreement"), one or more warrants, in substantially the same form as the Form of
Warrant attached hereto as Exhibit A, to purchase 4,500,000 shares of GMC Common
Stock, no par value (the "Escrow Warrants," which, together with the Earn Out
Payment, if any, provided for in Section 2.02 hereof, shall be referred to as
the "Merger Consideration"), and:
(a) Each share of the Company's Common Stock ("Company Common Stock")
issued and outstanding immediately prior to the Effective Time (other than any
Dissenting Shares, as defined in Section 2.04 hereof) shall be converted into
one share, or unit (an "Escrow Unit"), of the Escrow Fund (as defined in Section
2.06(a)); provided, however, that each share of Company Common Stock issued and
outstanding immediately prior to the
2
<PAGE>
Effective Time and owned by GMC, GMI, Merger Subsidiary or the Company or any
direct or indirect subsidiary of GMC, GMI, Merger Subsidiary or the Company
shall be canceled and extinguished without any conversion thereof and no payment
shall be made with respect thereto.
(b) Each share of the Company's Series A Convertible Preferred Stock
(the "Series A Preferred Stock") issued and outstanding immediately prior to the
Effective Time (other than any Dissenting Shares) shall be converted into one
Escrow Unit; provided, however, that in the event that an Escrow Unit is worth
less than $1.65 (as determined pursuant to Section 2.02) as of the earlier of
365 days after the Closing Date or the date of the first disbursement of the
Escrow Fund to holders of Escrow Units (the "Calculation Date"), each such share
of Series A Preferred Stock shall be deemed to have been allocated additional
Escrow Units (or fractions thereof) immediately prior to the Calculation Date in
order that each such share shall have been converted into the right to receive
Merger Consideration valued at $1.65 (or such lesser amount based upon a pro
rata distribution of the remainder of the Escrow Fund (after the distributions
set forth in Section 2.06) among all such preferred shares if the Escrow Fund is
insufficient to satisfy such payment of $1.65, in which case no Merger
Consideration shall be distributed to any holder of Common Stock pursuant to
Section 2.01(a) or Section 2.01(c)).
(c) Each outstanding warrant to purchase Company Common Stock which
is issued and outstanding immediately prior to the Effective Time and which is
held by persons other than H&QGF, Greyrock Business Credit ("GBC") and
Cruttenden Roth ("CR")(collectively, the "Non-H&QGF Warrants") will remain
outstanding following the Effective Time. The parties hereto agree that in the
event that any such warrants are exercised after the Effective Time, the holder
of the shares of Common Stock of the Surviving Corporation issued upon such
exercise may, at any time prior to the later of the Calculation Date or 30 days
after the Earn Out Date, opt to convert such shares into Escrow Units at the
rate of one Escrow Unit for each share of Common Stock of the Surviving
Corporation so issued. The consideration, if any, paid by the holder of a Non-
H&QGF Warrant upon exercise of such a warrant shall be delivered to the
Surviving Corporation and recorded on its books as paid-in capital.
(d) Each share of common stock, no par value per share, of Merger
Subsidiary ("Merger Subsidiary Common Stock") issued and outstanding immediately
prior to the Effective Time shall be converted into 100,000 validly issued,
fully paid and nonassessable shares of Common Stock of the Surviving
Corporation.
2.02 Earn Out Payment; Value of Escrow Fund. The "Earn Out Payment
--------------------------------------
Amount," as referred to herein, shall mean (a) the Adjusted Sales (as defined
below) less (b) the sum of (i) the Warrant Value (as defined below) and (ii) the
cash and GMC Common Stock valued at $5,000,000 delivered pursuant to Section
6.04 and Section 9.01. The payment of such amount, if any, is hereinafter
referred to as the "Earn Out Payment." At least 15% but not greater than 50% of
the Earn Out Payment shall be in the form of cash. The balance of the Earn Out
Payment shall be in the form of shares of GMC Common Stock, valued at a per
share price
3
<PAGE>
equal to 90% of the average closing price for the 30 trading-day period ending
on the last day of the Earn Out Period. Subject to the foregoing, GMC shall
determine in its sole discretion the proportion of stock and cash it pays
pursuant to the Earn Out Payment. "Earn Out Period," as referred to herein,
shall mean the 365-day period following the Effective Time. "Adjusted Sales,"
as referred to herein, shall mean (a) 68% of the Surviving Corporation's non-IBM
sales, net of any discounts, warranties and uncollected debts, plus (b) the
greater of (i) 47.1% of the Surviving Corporation's sales of Q2.15 to IBM during
the Earn Out Period, or (ii) 85% of the Surviving Corporation's sale of the
Q2.15 product line to IBM plus 100% of the gross, pre-tax profit of the
Surviving Corporation's sales during the Earn Out Period of any other fixed or
intangible assets of the Surviving Corporation sold outside the ordinary course
of the Surviving Corporation's business, all as calculated by
PriceWaterhouseCoopers, LLP, or such other accounting firm as GMI and the
Stockholders' Representative shall mutually agree to use (the "First Auditor").
"Warrant Value," as referred to herein, shall mean 4,500,000 multiplied by the
excess, if any, of the average closing bid price for the 30 trading-day period
ending on the last day of the Earn Out Period over the exercise price of such
Escrow Warrants on the last day of the Earn Out Period. Promptly following
calculation of the Earn Out Payment Amount, GMC shall deliver cash and shares of
GMC Common Stock representing the Earn Out Payment to the H&QGF pursuant to the
Collateral Agreement. Notwithstanding anything in this Agreement to the
contrary, in no event shall GMC be required to deliver more than 10,000,000
shares of GMC Common Stock, in the aggregate (as adjusted from time to time to
reflect the effect of any stock split, reverse split, stock dividend,
reorganization, recapitalization or other like change with respect to GMC Common
Stock), pursuant to this Section 2.02 or under the Escrow Warrants issued
pursuant to Section 2.01(a).
In the event that either GMC, GMI or Merger Subsidiary, on the one
hand, or the Company, on the other, dispute the Earn Out Payment Amount
calculated by the First Auditor, the disputing party may, by providing the non-
disputing party with notice of its objection to the Earn Out Payment Amount, as
calculated, within 30 days of the disputing party's receipt of notice of such
calculation, obtain a second calculation of the Earn Out Payment Amount by an
independent auditor mutually acceptable to the disputing and non-disputing
parties (the "Second Auditor"). If the Second Auditor's calculation of the Earn
Out Payment Amount varies by more than 10% from the First Auditor's calculation
of the Earn Out Payment Amount, then the calculation of the Second Auditor shall
be used as the Earn Out Payment Amount. If, however, the Second Auditor's
calculation of the Earn Out Payment Amount varies by 10% or less from the First
Auditor's calculation of the Earn Out Payment Amount, the calculation of the
First Auditor shall be used as the Earn Out Payment Amount.
The value of the Escrow Fund shall be the Warrant Value plus the Earn
Out Payment Amount (the "Escrow Value"). The value of an Escrow Unit shall be
the Escrow Value, as reduced pursuant to Section 2.06(a) hereof, divided by the
Number of Escrow Units outstanding and deemed outstanding as of the Calculation
Date.
4
<PAGE>
2.03 Dissenting Shares.
-----------------
(a) Notwithstanding anything in this Agreement to the contrary, if
Section 262 of the DGCL shall be applicable to the Merger, shares of Company
Common Stock or Series A Preferred Stock that are issued and outstanding
immediately prior to the Effective Time and which are held by stockholders who
have not voted such shares in favor of the Merger, who shall have delivered,
prior to any vote on the Merger, a written demand to the Company for the
appraisal of such shares in the manner provided in Section 262 of the DGCL and
who, as of the Effective Time, shall not have effectively withdrawn or lost such
right to dissenters' rights ("Dissenting Shares") shall not be converted into
Escrow Units or represent a right to receive the Merger Consideration pursuant
to Section 2.01 hereof and an escrow agreement to be executed by the parties to
this agreement on or before the Earn Out Date (the "Escrow Agreement"), but the
holders thereof shall be entitled only to such rights as are granted by Section
262 of the DGCL. Each holder of Dissenting Shares who becomes entitled to
payment for such shares pursuant to Section 262 of the DGCL shall receive
payment therefor from the Surviving Corporation in accordance with the DGCL;
provided, however, that if any such holder of Dissenting Shares shall have
effectively withdrawn such holder's demand for appraisal of such shares or lost
such holder's right to appraisal and payment of such shares under Section 262 of
the DGCL, such holder or holders (as the case may be) shall forfeit the right to
appraisal of such shares and each such share shall thereupon be deemed to have
been canceled, extinguished and converted, as of the Effective Time, into Escrow
Units and represent the right to receive payment of the Merger Consideration, as
provided in Section 2.01 hereof and the Escrow Agreement.
(b) The Company shall give GMI (i) prompt notice of any written
demand for fair value, any withdrawal of a demand for fair value and any other
instrument served pursuant to Section 262 of the DGCL received by the Company,
and (ii) the opportunity to direct all negotiations and proceedings with respect
to demands for fair value under such Section 262 of the DGCL. The Company shall
not, except with the prior written consent of GMI, voluntarily make any payment
with respect to any demand for fair value or offer to settle or settle any such
demand.
2.04 Rights of Holders of Converted Securities. On and after the
-----------------------------------------
Effective Time and until surrendered for exchange, each outstanding stock
certificate which immediately prior to the Effective Time represented shares of
Company Common Stock or Series A Preferred Stock (other than Dissenting Shares)
and each stock certificate that represented Company Common Stock that was issued
upon the exercise of a Non-H&QGF Warrant, which certificate was converted into
Escrow Units pursuant to Section 2.01(c) (which certificates are collectively
referred to herein as the "Certificates"), shall be deemed for all purposes to
evidence ownership of and to represent solely the right to receive that portion
of the Merger Consideration to which the holder thereof is entitled to receive
pursuant to this Article II, which right shall be uncertificated (the issuance,
or allocation, of Escrow Units shall be recorded solely in the books of the
Transfer Agent (as such term is defined in Section 2.06(a) hereof)). In any
matters relating to the Certificates, the Transfer Agent may rely conclusively
upon the record of holders of
5
<PAGE>
Certificates maintained by the Company containing the names and addresses of
such holders at the Effective Time (or in the case of Certificates resulting
from the exercise of Non-H&QGF Warrants, as of the Calculation Date).
2.05 Adjustments to Merger Consideration. The number of shares
-----------------------------------
issuable pursuant to the Escrow Warrants, the exercise price thereof and the
number of shares to be issued pursuant to the Earn Out Payment shall be adjusted
to reflect fully the effect of any stock split, reverse split, stock dividend
(including any dividend or distribution of securities convertible into Company
Common Stock, Series A Preferred Stock or GMC Common Stock), reorganization,
recapitalization or other like change with respect to Company Common Stock,
Series A Preferred Stock or GMC Common Stock occurring after the date of this
Agreement and prior to the Effective Time.
2.06 Exchange of Certificates; Escrow Fund; Deductions from Escrow
-------------------------------------------------------------
Fund.
- ----
(a) Issuance of Escrow Warrants; Appointment of Escrow Agent. As of
--------------------------------------------------------
the Effective Time, GMC shall, pursuant to the Collateral Agreement, deposit
with H&QGF the Escrow Warrants issuable pursuant to Section 2.01. In addition,
promptly following the final determination of the Earn Out Payment as provided
for in Section 2.02, GMC shall deposit with H&QGF such cash (the "Escrow Cash")
and shares of GMC Common Stock (the "Escrow Shares," and each individually an
"Escrow Share"), if any, issuable pursuant to Section 2.02 (such Escrow Cash and
Escrow Shares, if any, together with the Escrow Warrants, being hereinafter
referred to as the "Escrow Fund"). H&QGF (i) shall hold the Escrow Fund as
security for its claims and any claims of GMC or GMI against the Escrow Fund
described in the Letter Agreement by and among H&QGF, the Company and GMI dated
as of February 23, 1999 (the "Letter Agreement"), including any claims (A) by
GMC or GMI for indemnification hereunder, (B) by H&QGF pursuant to its rights
(including the dividend payment rights set forth in Section 9.03 hereof and the
liquidation preferences to be set forth in the Surviving Corporation's
Certificate of Incorporation) as holder of the Surviving Corporation's Series B
Nonvoting Preferred Stock to be created pursuant to Section 9.03 (the "Series B
Preferred Stock"), (C) by H&QGF, GBC or CR in connection with the Business Loan
Agreement in the amount of approximately $2,900,000, which amount represents the
Company's debt held by H&QGF, GBC or CR as of the date of this Agreement less
the $1,000,000 to be converted into Series B Preferred Stock pursuant to Section
9.04 hereof, and (D) by H&QGF, GBC or CR for any compensation payment due with
respect to certain contractual obligations of the Company existing immediately
prior to the Effective Time pursuant to certain warrants held by H&QGF, GBC and
CR, which warrants represent the right to purchase an aggregate of 777,441
shares of the Company's Common Stock (the "Compensation Payment"), and (ii)
shall, in its sole discretion but in any event no later than upon satisfaction
of the H&QGF Conditions (as defined below), deliver the remainder of the Escrow
Fund, if any (following satisfaction of the claims set forth above), to the
Escrow Agent for distribution to the holders of surrendered Certificates
pursuant to the terms of this Agreement and the Escrow Agreement. Except as
contemplated in the preceding sentence and by Section 2.06(f), the Escrow Fund
shall not be used for any other
6
<PAGE>
purpose. GMI shall make available to the Escrow Agent from time to time, as
needed, cash sufficient to pay cash in lieu of fractional shares pursuant to
Section 2.06(e).
The H&QGF Conditions, as referred to herein, shall be that (i) the
Surviving Corporation shall not be in default of its Business Loan Agreement or
related Security Agreement with H&QGF, (ii) GMC shall have delivered the Earn
Out Payment, if any, to H&QGF, (iii) any Compensation Payment due shall have
been made from the Escrow Fund and (iv) either (A) GMC's Common Stock shall have
traded at or above $4.00 per share for twenty consecutive trading days, or (B)
there shall be an offer to buy from H&QGF (or other current holder thereof)
without recourse, warranty or representation the Series B Preferred Stock for
$1,000,000 plus any accrued but unpaid dividends thereon and, if such offer
shall be accepted by H&QGF, such purchase price shall be paid in full.
(b) Exchange Procedures. As promptly as practicable after the
-------------------
Effective Time, the Surviving Corporation or its designee, as transfer agent
(the "Transfer Agent"), shall mail to each holder of record of a Certificate
that was converted into Escrow Units pursuant to Section 2.01 a letter of
transmittal in customary form. The letter of transmittal shall specify that
delivery of Certificates shall be effected, and risk of loss and title to the
Certificates shall pass, only upon delivery of the Certificates to the Transfer
Agent. The Transfer Agent shall accompany the letter of transmittal with
instructions for use in effecting the surrender of the Certificates in exchange
for Escrow Units. Upon surrender of a Certificate for cancellation to the
Transfer Agent, together with such letter of transmittal, duly executed, and
such other documents as the Transfer Agent may reasonably require, the holder of
such Certificate shall be entitled to receive such holder's proportionate share
of the Escrow Fund pursuant to the provisions of this Article II, the Letter
Agreement and the Escrow Agreement, including cash in lieu of fractional shares
of GMC Common Stock to which such holder is entitled pursuant to Section 2.06(e)
hereof and any dividends or other distributions to which such holder is entitled
pursuant to Section 2.06(c) hereof. The Transfer Agent shall forthwith cancel
the Certificates so surrendered, and shall record in its books all Escrow Units
outstanding and deemed outstanding pursuant to this Agreement.
If there is a transfer of Certificate ownership which is not
registered in the transfer records of the Company, the Escrow Units into which
such Certificate was converted may be credited to a person other than the person
in whose name the Certificate so surrendered is registered, if, upon
presentation to the Transfer Agent, such Certificate shall be properly endorsed
or otherwise be in proper form for transfer and the person requesting such
payment shall pay any transfer or other taxes required by reason of the
allocation of Escrow Units to a person other than the registered holder of such
Certificate or establish to the reasonable satisfaction of GMC that such tax has
been paid or is not applicable. Except as provided in Section 2.03, until
surrendered as contemplated by this Section 2.06(b), each Certificate shall be
deemed at any time after the Effective Time to represent only the right to
receive the Merger Consideration due to the holder of the Escrow Units into
which such Certificate was converted, including cash in lieu of any fractional
shares of GMC Common Stock as contemplated by this
7
<PAGE>
Section 2.06 and any dividends or other distributions to which such holder is
entitled pursuant to Section 2.06(c). No interest shall be paid or shall accrue
on any cash held in the Escrow Fund or payable pursuant to Sections 2.06(c) or
2.06(e).
(c) Distributions with Respect to Unexchanged Shares. GMC shall pay
------------------------------------------------
no dividends and make no other distributions with respect to GMC Common Stock
with a record date after the Effective Time to the holder of any unsurrendered
Certificate with respect to the shares of GMC Common Stock to be issued upon
release of the Escrow Fund, and GMI shall make no cash payment in lieu of
fractional shares with respect to such GMC Common Stock pursuant to Section
2.06(e), until the holder of record of such Certificate surrenders such
Certificate.
(d) No Further Ownership Rights in Certificates. The Escrow Units
-------------------------------------------
issued upon the surrender of Certificates for exchange in accordance with the
terms hereof and the Letter Agreement shall be deemed to have been issued in
full satisfaction of all rights pertaining to such Certificates.
(e) No Fractional Shares or Escrow Warrants to Purchase Fractional
--------------------------------------------------------------
Shares.
- ------
(i) No fractional shares, or Escrow Warrants to purchase fractional
shares, of GMC Common Stock shall be issued upon distribution of the Escrow
Fund, and such fractional share interests shall not entitle the owner thereof to
vote or to any rights of a stockholder of GMC.
(ii) Notwithstanding any other provision of this Agreement, each holder of
a Certificate exchanged for Escrow Units pursuant to the Merger who would
otherwise have been entitled to receive a fraction of an Escrow Share or an
Escrow Warrant to purchase a fraction of a share of GMC Common Stock (after
taking into account all Certificates delivered by such holder) shall receive, in
lieu thereof, cash (without interest) in an amount equal to such fractional part
of a share of GMC Common Stock multiplied by either the closing price of GMC
Common Stock on the Calculation Date (in the case of a fractional share) or the
excess of the closing price of GMC Common Stock on the Calculation Date over the
Exercise Price of such Escrow Warrant (in the case of an Escrow Warrant to
purchase a fractional share).
(f) Termination of Escrow Fund. The Escrow Agent shall deliver any
--------------------------
portion of the Escrow Fund, which remains undistributed to the holders of
Certificates for two years after the Effective Time, to GMI, upon demand,
provided that the H&QGF Conditions have been satisfied. Any holders of
Certificates who have not theretofore complied with this Article II shall
thereafter look only to GMI for payment of their claim for Merger Consideration,
including any cash in lieu of fractional shares of GMC Common Stock and any
dividends or distributions with respect to GMC Common Stock.
8
<PAGE>
(g) No Liability. None of GMC, GMI, Merger Subsidiary, the Company,
------------
the Surviving Corporation, H&QGF or the Escrow Agent shall be liable to any
person in respect of any portion of the Escrow Fund paid to a public official
pursuant to any applicable abandoned property, escheat, or similar law.
(h) Investment of Escrow Fund. H&QGF and the Escrow Agent shall be
-------------------------
entitled to hold, invest and co-mingle any Escrow Cash with their own cash
accounts and money market accounts. H&QGF and the Escrow Agent shall allocate
interest to the Escrow Fund at the Applicable Bank Rate (defined below) on the
Escrow Cash for the period of time that the Escrow Cash is held by H&QGF or the
Escrow Agent, respectively. The Applicable Bank Rate shall be the rate at which
Silicon Valley Bank pays interest on money market accounts or deposit accounts
of amounts most nearly comparable to the amount of Escrow Cash so held by H&QGF
and the Escrow Agent.
(i) Lost Certificates. If any Certificate shall have been lost,
-----------------
stolen, or destroyed, then upon the making of an affidavit of that fact by the
person claiming such Certificate to be lost, stolen, or destroyed, and, if
required by the Surviving Corporation, upon the delivery to the Surviving
Corporation of a bond in such sum as the Surviving Corporation may direct as
indemnity against any claim that may be made against it with respect to such
Certificate, such person shall be entitled to receive that portion of the Escrow
Fund to which he or she is entitled pursuant to the terms and conditions set
forth in this Article II.
2.07 Stock Options. Each option (individually, a "Stock Option" and,
-------------
collectively, the "Stock Options") issued pursuant to the Company's Stock Option
Plan (the "Option Plan") and outstanding immediately prior to the Effective Time
(an "Outstanding Stock Option") shall be canceled and replaced with an option to
purchase GMC Common Stock under the Global MAINTECH Corporation 1989 Stock
Option Plan (a "Replacement Option") at an exercise price equal to the exercise
price of such Outstanding Stock Option immediately prior to the Effective Time
divided by 0.4. The Replacement Options shall not be exercisable until after
the Earn Out Date (as defined in Section 9.03). The number of shares issuable
upon exercise of each Replacement Option shall equal the number of shares
issuable (immediately prior to the Effective Time) upon exercise of the
Outstanding Stock Option that it replaced divided by a number to be agreed upon
by the parties to this Agreement on or before the Closing Date.
2.08 Notices to Option Holders. As soon as practicable after the
-------------------------
Effective Time, GMC shall deliver to each holder of a Stock Option an
appropriate notice setting forth such holder's rights pursuant thereto. GMC
shall take all corporate action necessary to reserve for issuance a sufficient
number of shares of GMC Common Stock for delivery pursuant to the exercise of
Replacement Options.
2.09 H&QGF Warrants. The outstanding warrants to purchase Company
--------------
Common Stock that are held by H&QGF, GBC and CR (collectively, the "H&QGF
Warrants") shall be converted at the Effective Time into new warrants in form
and substance to be agreed
9
<PAGE>
upon by GMC and the holders of the H&QGF Warrants (the "Replacement Warrants")
to purchase a like number of shares of GMC Common Stock at an initial exercise
price of $4.125, subject to adjustment as set forth in the Replacement Warrants.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
---------------------------------------------
The Company hereby makes the representations and warranties set forth
below to GMI and Merger Subsidiary, except as set forth in the Disclosure
Schedule referencing this Article III and delivered by the Company to GMI and
Merger Subsidiary no later than 10 days before the Closing Date (the "Disclosure
Schedule") (which Disclosure Schedule sets forth the exceptions to the
representations and warranties contained in this Article III under captions
referencing the Sections to which such exceptions apply). When used in
connection with the Company, the term "Material Adverse Change" means any
change, event or effect that is or is reasonably likely to be materially adverse
to the business, assets (including intangible assets), liabilities, financial
condition or results of operations of the Company and its subsidiaries taken as
a whole; provided, however, that a Material Adverse Change shall not include any
adverse effect following the date of this Agreement on the business, financial
condition or results of operations of the Company, taken as a whole, that is
attributable to the Merger contemplated by this Agreement or the announcement of
the Merger. Disclosure under any section shall constitute disclosure under the
Disclosure Schedule without the need for cross-references. All descriptions of
agreements or other matters appearing herein are summary in nature and are
qualified by reference to the complete documents, which have been supplied to
GMI and Merger Subsidiary, or counsel to GMI and Merger Subsidiary or which the
Company will make available to GMI or Merger Subsidiary upon request. In no
event shall any disclosure hereunder be deemed to constitute an acknowledgment
that such disclosure is material to the business or financial condition of the
Company.
3.01 Incorporation and Corporate Power. The Company is a corporation
---------------------------------
duly incorporated, validly existing and in good standing under the laws of the
State of Delaware and, subject to approval of this Agreement by the Company's
stockholders, has the requisite corporate power and authority to execute and
deliver this Agreement and the Certificate of Merger and to perform its
obligations hereunder and thereunder. The Company has the corporate power and
authority and all authorizations, licenses, permits and certifications necessary
to own and operate its properties and to carry on its business as now conducted
and presently proposed to be conducted. The copies of the Company's Certificate
of Incorporation and Bylaws which have been furnished by the Company to GMI and
Merger Subsidiary prior to the date hereof reflect all amendments made thereto
and are correct and complete as of the date hereof. The Company is qualified to
do business as a foreign corporation in every jurisdiction in which the nature
of its business or its ownership of property requires it to be so qualified,
except for those jurisdictions in which the failure to be so qualified would
not, individually or in the aggregate, result in a Material Adverse Change in
the Company.
10
<PAGE>
3.02 Execution, Delivery; Valid and Binding Agreements. The
-------------------------------------------------
execution, delivery and performance of the Letter Agreement, this Agreement, the
Collateral Agreement and the Certificate of Merger by the Company and the
consummation of the transactions contemplated hereby and thereby have been duly
and validly authorized by all requisite corporate action, and no other corporate
proceedings on its part are necessary to authorize the execution, delivery and
performance of the Letter Agreement, this Agreement, the Collateral Agreement
and the Certificate of Merger, other than, with respect to this Agreement,
approval by the board of directors and stockholders of the Company. The Letter
Agreement and this Agreement have been duly executed and delivered by the
Company and constitute the valid and binding obligations of the Company,
enforceable in accordance with their terms, and the Collateral Agreement and
Certificate of Merger, when executed and delivered by the Company, shall
constitute the valid and binding obligations of the Company, enforceable in
accordance with their terms.
3.03 Approval of the Merger Agreement and Plan of Merger; Meeting of
---------------------------------------------------------------
Stockholders. The Company hereby represents that its Board of Directors has, by
- ------------
resolutions duly adopted at a meeting held on March __, 1999, approved this
Agreement and the Certificate of Merger and the transactions contemplated hereby
and thereby, including the Merger, and resolved to recommend approval of this
Agreement by the Company's stockholders. None of the resolutions described in
this Section 3.03 has been amended or otherwise modified in any respect since
the date of adoption thereof and all such resolutions remain in full force and
effect.
3.04 No Breach. To the knowledge of the Company, the execution,
---------
delivery and performance of this Agreement and the Certificate of Merger by the
Company and the consummation by the Company of the transactions contemplated
hereby and thereby do not conflict with or result in any breach of any of the
provisions of, constitute a default under, result in a violation of, result in
the creation of a right of termination or acceleration or any lien, security
interest, charge or encumbrance upon any assets of the Company, or require any
authorization, consent, approval, exemption or other action by or notice to any
court or other governmental body, under the provisions of the Certificate of
Incorporation or Bylaws of the Company or any indenture, mortgage, lease, loan
agreement or other agreement or instrument by which the Company is bound or
affected, or any law, statute, rule or regulation or order, judgment or decree
to which the Company is subject, except as would not result in a Material
Adverse Change in the Company.
3.05 Governmental Authorities; Consents. Except for the filing of the
----------------------------------
Certificate of Merger with the Secretary of State of the State of Delaware, the
Company is not required to submit any notice, report or other filing with any
governmental authority in connection with the execution or delivery by it of
this Agreement or the Certificate of Merger or the consummation of the
transactions contemplated hereby or thereby. Except as set forth in the
Disclosure Schedule under the caption referencing this Section 3.05, no consent,
approval or authorization of any governmental or regulatory authority or any
other party or person (except the approval of this Agreement by the stockholders
of the Company) is required to be obtained by
11
<PAGE>
the Company in connection with its execution, delivery and performance of this
Agreement or the Certificate of Merger or the transactions contemplated hereby
or thereby.
3.06 Subsidiaries. Except as otherwise set forth in the Disclosure
------------
Schedule under the caption referencing this Section 3.06, the Company does not
own any stock, partnership interest, joint venture interest or any other
security or ownership interest issued by any other corporation, organization or
entity. All issued and outstanding shares of capital stock of any of the
subsidiaries set forth in such Disclosure Schedule are owned by the Company,
either directly or through one or more other subsidiaries, free and clear of all
liens, charges, encumbrances, claims and options of any nature. All of the
outstanding shares of capital stock of such subsidiaries have been duly and
validly authorized and issued, and are fully paid and nonassessable.
3.07 Capital Stock. The authorized capital stock of the Company
-------------
consists of 30,000,000 shares of Common Stock, par value $0.01 per share, of
which, as of the date hereof, 15,683,368 shares are issued and outstanding and
10,000,000 shares of Preferred Stock, par value $0.01 per share, of which, as of
the date hereof 912,244 shares of Series A Preferred Stock are issued and
outstanding. In addition, as of the date hereof, there are outstanding options
to purchase 3,461,500 shares of Company Common Stock and outstanding warrants to
purchase 2,978,306 shares of Company Common Stock. All of such outstanding
shares of Company Common Stock and Preferred Stock, options and warrants have
been duly authorized and are validly issued, fully paid and nonassessable. The
Company has no other equity securities or securities containing any equity
features authorized, issued or outstanding. There are no agreements or other
rights or arrangements existing which provide for the sale or issuance of
capital stock by the Company and, except for the options and warrants described
above, there are no rights, subscriptions, warrants, options, conversion rights
or agreements of any kind outstanding to purchase or otherwise acquire from the
Company any shares of capital stock or other securities of the Company of any
kind. There are no agreements or other obligations (contingent or otherwise)
which may require the Company to repurchase or otherwise acquire any shares of
its capital stock.
3.08 Financial Statements. The Company has delivered to GMI copies of
--------------------
(a) the unaudited balance sheet, as of December 31, 1998, of the Company (the
"Latest Balance Sheet") and the unaudited statements of earnings, stockholders'
equity and cash flows of the Company for the year ended December 31, 1998 (such
statements and the Latest Balance Sheet being herein referred to as the "Latest
Financial Statements") and (b) the audited balance sheets, as of December 31,
1997, 1996 and 1995 of the Company and the audited statements of earnings,
stockholders' equity and cash flows of the Company for each of the years ended
1997, 1996 and 1995 (collectively, the "Annual Financial Statements"). The
Latest Financial Statements and the Annual Financial Statements are based upon
the information contained in the books and records of the Company and the
Company has used its best efforts to ensure that, except as set forth in the
Disclosure Schedule referencing this Section 3.08, the Latest Financial
Statements and the Annual Financial Statements fairly present, in all material
respects, the financial condition of the
12
<PAGE>
Company as of the dates thereof and results of operations for the periods
referred to therein. The Annual Financial Statements have been prepared in
accordance with generally accepted accounting principles, consistently applied
throughout the periods indicated. The Company has used its best efforts to
ensure that the Latest Financial Statements have been prepared in accordance
with generally accepted accounting principles applicable to unaudited interim
financial statements (and thus may not contain all notes and may not contain
prior period comparative data which are required to be prepared in accordance
with generally accepted accounting principles) consistently with the Annual
Financial Statements and reflect all adjustments necessary to a fair statement
of the results for the interim period(s) presented.
3.09 Absence of Undisclosed Liabilities. Except as reflected in the
----------------------------------
Latest Balance Sheet, the Company has no liabilities (whether accrued, absolute,
contingent, unliquidated or otherwise, whether due or to become due, whether
known or unknown, and regardless of when asserted) arising out of transactions
or events heretofore entered into, or any action or inaction, or any state of
facts existing, with respect to or based upon transactions or events heretofore
occurring, except (i) liabilities which have arisen after the date of the Latest
Balance Sheet in the ordinary course of business (none of which is a material
uninsured liability for breach of contract, breach of warranty, tort,
infringement, claim or lawsuit), or (ii) as otherwise set forth in the
Disclosure Schedule under the caption referencing this Section 3.09.
3.10 No Material Adverse Changes. Since the date of the Latest
---------------------------
Balance Sheet (the "Balance Sheet Date"), there has been no Material Adverse
Change in the Company.
3.11 Absence of Certain Developments. Except as set forth in the
-------------------------------
Disclosure Schedule referencing this Section 3.11, since the Balance Sheet Date,
the Company has not:
(a) borrowed any amount or incurred or become subject to any
liability in excess of $25,000, except (i) current liabilities incurred in the
ordinary course of business and (ii) liabilities under contracts entered into in
the ordinary course of business;
(b) mortgaged, pledged or subjected to any lien, charge or any other
encumbrance, any of its assets with a fair market value in excess of $25,000,
except (i) liens for current property taxes not yet due and payable, (ii) liens
imposed by law and incurred in the ordinary course of business for obligations
not yet due to carriers, warehousemen, laborers, materialmen and the like, (iii)
liens in respect of pledges or deposits under workers' compensation laws, (iv)
liens set forth under the caption referencing this Section 3.11 in the
Disclosure Schedule, or (v) liens voluntarily created in the ordinary course of
business, all of which liens aggregate less than $25,000;
(c) discharged or satisfied any lien or encumbrance or paid any
liability, in each case with a value in excess of $25,000, other than current
liabilities paid in the ordinary course of business;
13
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(d) sold, assigned or transferred (including, without limitation,
transfers to any employees, affiliates or stockholders) any tangible assets with
a fair market value in excess of $25,000, or canceled any debts or claims, in
each case, except in the ordinary course of business;
(e) sold, assigned or transferred (including, without limitation,
transfers to any employees, affiliates or stockholders) any patents, trademarks,
trade names, copyrights, trade secrets or other intangible assets;
(f) disclosed, to any person other than GMI or Merger Subsidiary and
authorized representatives of GMI or Merger Subsidiary, any proprietary
confidential information, other than pursuant to a confidentiality agreement
prohibiting the use or further disclosure of such information, which agreement
is identified in the Disclosure Schedule under the caption referencing this
Section 3.11 and is in full force and effect on the date hereof;
(g) waived any rights of material value or suffered any extraordinary
losses or adverse changes in collection loss experience, whether or not in the
ordinary course of business or consistent with past practice;
(h) declared or paid any dividends or other distributions with
respect to any shares of the Company's capital stock or redeemed or purchased,
directly or indirectly, any shares of the Company's capital stock or any
options, except as permitted under Section 5.01(b) hereof;
(i) issued, sold or transferred any of its equity securities,
securities convertible into or exchangeable for its equity securities or
warrants, options or other rights to acquire its equity securities, or any bonds
or debt securities;
(j) taken any other action or entered into any other transaction
other than in the ordinary course of business and in accordance with past custom
and practice, or entered into any transaction with any "Insider" (as defined in
Section 3.23 hereof) which would result in a Material Adverse Change in the
Company, other than employment arrangements otherwise disclosed in this
Agreement and the Disclosure Schedule, or the transactions contemplated by this
Agreement;
(k) suffered any material theft, damage, destruction or loss of or to
any property or properties owned or used by it, whether or not covered by
insurance;
(l) made or granted any bonus or any wage, salary or compensation
increase to any director, officer, employee who earns more than $50,000 per
year, or consultant or made or granted any increase in any employee benefit plan
or arrangement, or amended or terminated any existing employee benefit plan or
arrangement, or adopted any new employee benefit plan or arrangement or made any
commitment or incurred any liability to any labor organization;
14
<PAGE>
(m) made any single capital expenditure or commitment therefor in
excess of $100,000;
(n) made any loans or advances to, or guarantees for the benefit of,
any persons such that the aggregate amount of such loans, advances or guarantees
at any time outstanding is in excess of $25,000;
(o) made charitable contributions or pledges which in the aggregate
exceed $25,000; or
(p) made any change in accounting principles or practices from those
utilized in the preparation of the Annual Financial Statements.
3.12 Title to Properties.
-------------------
(a) The Company does not own any real property. The real property
demised by the leases (the "Leases") described under the caption referencing
this Section 3.12 in the Disclosure Schedule constitutes all of the real
property used or occupied by the Company (the "Real Property"). The Real
Property has access, sufficient for the conduct of the Company's business as now
conducted or as presently proposed to be conducted, to public roads and to all
utilities, including electricity, sanitary and storm sewer, potable water,
natural gas and other utilities, used in the operation of the business of the
Company at that location.
(b) The Leases are in full force and effect, and the Company holds a
valid and existing leasehold interest under each of the Leases for the term set
forth under such caption in the Disclosure Schedule. The Company has delivered
to GMI complete and accurate copies of each of the Leases, and none of the
Leases has been modified in any respect, except to the extent that such
modifications are disclosed by the copies delivered to GMI. The Company is not
in material default, and no circumstances exist which, if unremedied, would,
either with or without notice or the passage of time or both, result in such
default under any of the Leases; nor, to the best knowledge of the Company, is
any other party to any of the Leases in default.
(c) The Company owns good and marketable title to each of the
tangible properties and tangible assets reflected on the Latest Balance Sheet or
acquired since the date thereof, free and clear of all liens and encumbrances,
except for (i) liens for current taxes not yet due and payable, (ii) liens set
forth under the caption referencing this Section 3.12 in the Disclosure
Schedule, (iii) the properties subject to the Leases, (iv) assets disposed of
since the date of the Latest Balance Sheet in the ordinary course of business,
(v) liens imposed by law and incurred in the ordinary course of business for
obligations not yet due to carriers, warehousemen, laborers and materialmen and
(vi) liens in respect of pledges or deposits under workers' compensation laws,
all of which liens aggregate less than $25,000.
15
<PAGE>
(d) All of the buildings, machinery, equipment and other tangible
assets necessary for the conduct of the Company's business are in good condition
and repair, ordinary wear and tear excepted, and are usable in the ordinary
course of business. There are no defects in such assets or other conditions
relating thereto which, in the aggregate, materially adversely affect the
operation or value of such assets. The Company owns, or leases under valid
leases, all buildings, machinery, equipment and other tangible assets necessary
for the conduct of its business.
(e) To the best of the Company's knowledge, the Company is not in
violation of any applicable zoning ordinance or other law, regulation or
requirement relating to the operation of any properties used in the operation of
its business, and the Company has not received any notice of any such violation,
or the existence of any condemnation proceeding with respect to any of the Real
Property, except, in each case, with respect to violations the potential
consequences of which do not or will not result in a Material Adverse Change in
the Company.
(f) The Company has no knowledge of improvements made or contemplated
to be made by any public or private authority, the costs of which are to be
assessed as special taxes or charges against any of the Real Property, and there
are no present assessments.
3.13 Accounts Receivable. The accounts receivable reflected on the
-------------------
Latest Balance Sheet are valid receivables, are not subject to valid
counterclaims or setoffs, and are collectible in accordance with their terms,
except as otherwise described in the Disclosure Schedule under the caption
referencing this Section 3.13, and except to the extent of the bad debt reserve
reflected on the Latest Balance Sheet.
3.14 Inventory. The Company's inventory of raw materials, work in
---------
process and finished goods consists of items of a quality and quantity usable
and, with respect to finished goods only, saleable at the Company's normal
profit levels, in each case, in the ordinary course of the Company's business.
The Company's inventory of finished goods is not slow-moving as determined in
accordance with past practices, obsolete or damaged and is merchantable and fit
for its particular use. The Company has on hand or has ordered and expects
timely delivery of such quantities of raw materials and has on hand such
quantities of work in process and finished goods as are reasonably required
timely to fill current orders on hand which require delivery within 60 days and
to maintain the manufacture and shipment of products at its normal level of
operations. As of the date of the Latest Balance Sheet, the values at which
such inventory is carried on the Latest Balance Sheet are in accordance with
generally accepted accounting principles. The Disclosure Schedule, under the
caption referencing this Section 3.14, contains a materially complete and
accurate summary of the Company's inventory of raw materials, work in progress
and finished goods as of January 18, 1999.
16
<PAGE>
3.15 Tax Matters.
-----------
(a) Each of the Company and any subsidiary, any affiliated, combined
or unitary group of which the Company or any subsidiary is or was a member, any
"Plans" (as defined in Section 3.21 hereof), as the case may be (each, a "Tax
Affiliate" and, collectively, the "Tax Affiliates"), has (except where the
failure to do so would not result in a Material Adverse Change in the Company):
(i) timely filed (or has had timely filed on its behalf) all returns,
declarations, reports, estimates, information returns, and statements
("Returns") required to be filed or sent by it in respect of any "Taxes" (as
defined in subsection (i) below) or required to be filed or sent by it by any
taxing authority having jurisdiction; (ii) timely and properly paid (or has had
paid on its behalf) all Taxes shown to be due and payable on such Returns; (iii)
established on its Latest Balance Sheet, in accordance with generally accepted
accounting principles, reserves that are adequate for the payment of any Taxes
not yet due and payable; (iv) complied with all applicable laws, rules, and
regulations relating to the withholding of Taxes and the payment thereof
(including, without limitation, withholding of Taxes under Sections 1441 and
1442 of the Internal Revenue Code of 1986, as amended (the "Code"), or similar
provisions under any foreign laws), and timely and properly withheld from
individual employee wages and paid over to the proper governmental authorities
all amounts required to be so withheld and paid over under all applicable laws.
(b) There are no liens for Taxes upon any assets of the Company or of
any Tax Affiliate, except liens for Taxes not yet due.
(c) No deficiency for any Taxes has been proposed, asserted or
assessed against the Company or the Tax Affiliates that has not been resolved
and paid in full. No waiver, extension or comparable consent given by the
Company or the Tax Affiliates regarding the application of the statute of
limitations with respect to any Taxes or Returns is outstanding, nor is any
request for any such waiver or consent pending. There has been no Tax audit or
other administrative proceeding or court proceeding with regard to any Taxes or
Returns, nor is any such Tax audit or other proceeding pending, nor has there
been any notice to the Company by any Taxing authority regarding any such Tax,
audit or other proceeding, or, to the best knowledge of the Company, is any such
Tax audit or other proceeding threatened with regard to any Taxes or Returns.
The Company does not expect the assessment of any additional Taxes of the
Company or the Tax Affiliates and is not aware of any unresolved questions,
claims or disputes concerning the liability for Taxes of the Company or the Tax
Affiliates which would exceed the estimated reserves established on its books
and records.
(d) Neither the Company nor any Tax Affiliate is a party to any
agreement, contract or arrangement that would result, separately or in the
aggregate, in the payment of any "excess parachute payments" within the meaning
of Section 280G of the Code and the consummation of the transactions
contemplated by this Agreement will not be a factor causing payments to be made
by the Company or any Tax Affiliate that are not deductible (in whole or in
part) under Section 280G of the Code.
17
<PAGE>
(e) Neither the Company nor any Tax Affiliate has requested any
extension of time within which to file any Return, which Return has not since
been filed.
(f) All transactions that could give rise to an understatement of
federal income tax (within the meaning of Section 6661 of the Code as it applied
prior to repeal) or an underpayment of tax (within the meaning of Section 6662
of the Code) were reported in a manner for which there is substantial authority
or were adequately disclosed (or, with respect to Returns filed before the
Closing Date, will be reported in such a manner or adequately disclosed) on the
Returns required in accordance with Sections 6661(b)(2)(B) and 6662(d)(2)(B) of
the Code.
(g) Neither the Company nor any Tax Affiliate has filed any consent
under Section 341(f) of the Code.
(h) All Taxes of the Company which will be due and payable, whether
now or hereafter, for any period ending on, ending on and including, or ending
prior to the Closing Date, shall have been paid by or on behalf of the Company
or shall be reflected on the Company's books as an accrued Tax liability, either
current or deferred, the amount of which as of the date of the Latest Financial
Statements is as set forth therein and the amount of which as of the date of any
subsequent interim financial statements shall be as set forth therein and in
Section 3.15 of the Company Disclosure Schedule.
(i) For purposes of this Agreement, the terms "Tax" and "Taxes" mean
all taxes, charges, fees, levies, or other assessments, including, without
limitation, all net income, gross income, gross receipts, sales, use, ad
valorem, transfer, franchise, profits, license, withholding, payroll,
employment, social security, unemployment, excise, estimated, severance, stamp,
occupation, property, or other taxes, customs duties, fees, assessments, or
charges of any kind whatsoever, including, without limitation, all interest and
penalties thereon, and additions to tax or additional amounts imposed by any
taxing authority, domestic or foreign, upon the Company or any Tax Affiliate.
3.16 Contracts and Commitments.
-------------------------
(a) The Disclosure Schedule under the caption referencing this
Section 3.16 lists all material agreements, whether oral or written, to which
the Company is a party, which are currently in effect, and which relate to the
operation of the Company's business, including all of those involving the
expenditure by, or potential obligation of, the Company of $25,000 or more and
any (i) collective bargaining agreement or contract with any labor union, (ii)
bonus, pension, profit sharing, retirement or other form of deferred
compensation plan, (iii) hospitalization insurance or other welfare benefit plan
or practice, whether formal or informal, (iv) stock purchase, stock option or
similar plan, (v) contract for the employment of any officer, individual
employee or other person on a full-time or consulting basis or relating to
severance pay for any such person, (vi) confidentiality agreement, (vii)
contract, agreement or understanding relating to
18
<PAGE>
the voting of capital stock or the election of directors of the Company and any
other agreement not entered into in the ordinary course of business; provided,
however, that this Section 3.16(a) shall not apply to purchase orders made or
obtained by the Company in the ordinary course of its business.
(b) The Company has performed all obligations required to be
performed by it in connection with the contracts or commitments required to be
disclosed in the Disclosure Schedule under the caption referencing this Section
3.16 and is not in receipt of any claim of default under any contract or
commitment required to be disclosed under such caption; the Company has no
present expectation or intention of not fully performing any material obligation
pursuant to any contract or commitment required to be disclosed under such
caption; and the Company has no knowledge of any breach or anticipated breach by
any other party to any contract or commitment required to be disclosed under
such caption.
(c) Prior to the date of this Agreement, GMI and Merger Subsidiary
have been supplied with a true and correct copy of each written contract or
commitment, and a written description of each oral contract or commitment,
referred to under the caption referencing this Section 3.16 in the Disclosure
Schedule, together with all amendments, waivers or other changes thereto.
3.17 Intellectual Property Rights. The Disclosure Schedule describes
----------------------------
under the caption referencing this Section 3.17 all rights in patents, patent
applications, trademarks, service marks, trade names, corporate names,
copyrights, trade secrets, know-how or other intellectual property rights owned
by, licensed to or otherwise controlled by the Company or used in, developed for
use in or necessary to the conduct of the Company's business as now conducted or
planned to be conducted. The Company owns and possesses all right, title and
interest, or holds a valid license to use, or prior to the Effective Time will
own and possess or hold a valid license to use, the rights set forth under such
caption. The Disclosure Schedule describes under the caption referencing this
Section 3.17 all intellectual property rights which have been licensed to third
parties and those intellectual property rights which are licensed from third
parties. The Company has taken all necessary action to protect the intellectual
property rights set forth under such caption. The Company has not received any
notice of, nor are there any facts known to the Company which indicate a
likelihood of, any infringement or misappropriation by, or conflict from, any
third party with respect to the intellectual property rights which are listed;
to the best knowledge of the Company, no claim by any third party contesting the
validity of any intellectual property rights listed in the Disclosure Schedule
has been made, is currently outstanding or is threatened; the Company has not
received any notice of any infringement, misappropriation or violation by the
Company of any intellectual property rights of any third parties and the Company
has not, to the best of its knowledge, infringed, misappropriated or otherwise
violated any such intellectual property rights; and no infringement, illicit
copying, misappropriation or violation has occurred or will occur with respect
to products currently being sold by the Company or with respect to the products
currently under development (in their present state of development) or with
respect to the conduct of the Company's business as now conducted.
19
<PAGE>
3.18 Litigation. Except as set forth in the Disclosure Schedule
----------
under the caption referencing this Section 3.18, there are no actions, suits,
proceedings, orders or investigations pending or, to the best knowledge of the
Company, threatened against the Company, at law or in equity, or before or by
any federal, state, municipal or other governmental department, commission,
board, bureau, agency or instrumentality, domestic or foreign.
3.19 Warranties. The Disclosure Schedule summarizes under the caption
----------
referencing this Section 3.19 all claims, to the best knowledge of the Company,
outstanding, pending or threatened for breach of any warranty relating to any
products sold by the Company prior to the date hereof. The description of the
Company's product warranties set forth under the caption referencing this
Section 3.19 is correct and complete in all material respects. The reserves for
warranty claims on the Latest Balance Sheet are consistent with the Company's
prior practices and are fully adequate to cover all warranty claims made against
any products of the Company sold prior to the date thereof.
3.20 Employees. (a) To the best knowledge of the Company, no
---------
executive employee of the Company and no group of the Company's employees has
any plans to terminate his or its employment; (b) the Company has complied with
all laws relating to the employment of labor, including provisions thereof
relating to wages, hours, equal opportunity, collective bargaining and the
payment of social security and other taxes; (c) the Company has no material
labor relations problem pending and its labor relations are satisfactory; (d)
there are no workers' compensation claims pending against the Company nor is the
Company aware of any facts that would give rise to such a claim; (e) to the best
knowledge of the Company, no employee of the Company is subject to any secrecy
or noncompetition agreement or any other agreement or restriction of any kind
that would impede in any way the ability of such employee to carry out fully all
activities of such employee in furtherance of the business of the Company; and
(f) no employee or former employee of the Company has any claim with respect to
any intellectual property rights of the Company set forth under the caption
referencing Section 3.17 hereof in the Disclosure Schedule.
3.21 Employee Benefit Plans.
----------------------
(a) Except as set forth under the caption referencing Section 3.21
hereof in the Disclosure Schedule, with respect to all employees and former
employees of the Company and all dependents and beneficiaries of such employees
and former employees, (i) the Company does not maintain or contribute to any
nonqualified deferred compensation or retirement plans, contracts or
arrangements; (ii) the Company does not maintain or contribute to any qualified
defined contribution plans (as defined in Section 3(34) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), or Section 414(i)
of the Code; (iii) the Company does not maintain or contribute to any qualified
defined benefit plans (as defined in Section 3(35) of ERISA or Section 414(j) of
the Code); and (iv) the Company does not maintain or contribute to any employee
welfare benefit plans (as defined in Section 3(1) of ERISA).
20
<PAGE>
(b) To the extent required (either as a matter of law or to obtain
the intended tax treatment and tax benefits), all employee benefit plans (as
defined in Section 3(3) of ERISA) which the Company does maintain or to which it
does contribute (collectively, the "Plans") comply in all material respects with
the requirements of ERISA and the Code. With respect to the Plans, (i) all
required contributions which are due have been made and a proper accrual has
been made for all contributions due in the current fiscal year; (ii) there are
no actions, suits or claims pending, other than routine uncontested claims for
benefits; and (iii) there have been no prohibited transactions (as defined in
Section 406 of ERISA or Section 4975 of the Code).
(c) GMI and Merger Subsidiary have received true and complete copies
of (i) the most recent determination letter, if any, received by the Company
from the Internal Revenue Service regarding the Plans which the Company
maintains or to which it contributes and any amendment to any Plan made
subsequent to any Plan amendments covered by any such determination letter; (ii)
the most recent financial statements and annual report or return for the Plans;
and (iii) the most recently prepared actuarial valuation reports.
(d) The Company does not contribute (and has not ever contributed) to
any multi-employer plan, as defined in Section 3(37) of ERISA. The Company has
no actual or potential liabilities under Section 4201 of ERISA for any complete
or partial withdrawal from a multi-employer plan. The Company has no actual or
potential liability for death or medical benefits after separation from
employment, other than (i) death benefits under the employee benefit plans or
programs (whether or not subject to ERISA) set forth under the caption
referencing this Section 3.21 in the Disclosure Schedule and (ii) health care
continuation benefits described in Section 4980B of the Code.
(e) Neither the Company nor any of its directors, officers, employees
or other "fiduciaries," as such term is defined in Section 3(21) of ERISA, has
committed any breach of fiduciary responsibility imposed by ERISA or any other
applicable law with respect to the Plans which would subject the Company, GMC,
GMI, Merger Subsidiary, the Surviving Corporation, GMI's subsidiaries or any of
their respective directors, officers or employees to any liability under ERISA
or any applicable law.
(f) The Company has not incurred any liability for any tax or civil
penalty or any disqualification of any employee benefit plan (as defined in
Section 3(3) of ERISA) imposed by Sections 4980B and 4975 of the Code and Part 6
of Title I and Section 502(i) of ERISA.
3.22 Insurance. The Disclosure Schedule, under the caption
---------
referencing this Section 3.22, lists and briefly describes each insurance policy
maintained by the Company with respect to the Company's properties, assets and
operations and sets forth the date of expiration of each such insurance policy.
All of such insurance policies are in full force and effect and are issued by
insurers of recognized responsibility. The Company is not in default in any
material respect with regard to its obligations under any of such insurance
policies.
21
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3.23 Affiliate Transactions. Except as disclosed under the caption
----------------------
referencing this Section 3.23 in the Disclosure Schedule, and other than
pursuant to this Agreement, no officer, director or employee of the Company or
any member of the immediate family of any such officer, director or employee, or
any entity in which any of such persons owns any beneficial interest (other than
any publicly-held corporation whose stock is traded on a national securities
exchange or in the over-the-counter market and less than one percent of the
stock of which is beneficially owned by any of such persons) (collectively
"Insiders"), has any agreement with the Company (other than normal employment
arrangements) or any interest in any property, real, personal or mixed, tangible
or intangible, used in or pertaining to the business of the Company (other than
ownership of capital stock of the Company). None of the Insiders has any direct
or indirect interest in any competitor, supplier or customer of the Company or
in any person, firm or entity from whom or to whom the Company leases any
property, or in any other person, firm or entity with whom the Company transacts
business of any nature. For purposes of this Section 3.23, the members of the
immediate family of an officer, director or employee shall consist of the
spouse, parents, children, siblings, mothers- and fathers-in-law, sons- and
daughters-in-law, and brothers- and sisters-in-law of such officer, director or
employee.
3.24 Customers and Suppliers. The Disclosure Schedule under the
-----------------------
caption referencing this Section 3.24 lists the 10 largest customers and the 10
largest suppliers of the Company for the fiscal years ended December 31, 1997
and 1998 and sets forth opposite the name of each such customer or supplier the
approximate percentage of net sales or purchases by the Company attributable to
such customer or supplier for each such period. Since the Balance Sheet Date,
no customer or supplier listed on the Disclosure Schedule under the caption
referencing this Section 3.24 has indicated to the Company that it will stop or
decrease the rate of business done with the Company except for changes in the
ordinary course of the Company's business.
3.25 Officers and Directors; Bank Accounts. The Disclosure Schedule,
-------------------------------------
under the caption referencing this Section 3.25, lists all officers and
directors of the Company and all of the Company's bank accounts (designating
each authorized signer).
3.26 Compliance with Laws; Permits.
-----------------------------
(a) The Company and its officers, directors, agents and employees
have complied in all material respects with all applicable laws, regulations and
other requirements, including, but not limited to, federal, state, local and
foreign laws, ordinances, rules, regulations and other requirements pertaining
to product labeling, consumer products safety, equal employment opportunity,
employee retirement, affirmative action and other hiring practices, occupational
safety and health, workers' compensation, unemployment and building and zoning
codes, which materially affect the business of the Company or the Real Property
and to which the Company may be subject, and to the best knowledge of the
Company, no claims have been filed against the Company alleging a violation of
any such laws, regulations or other requirements. The Company has no knowledge
of any action, pending or threatened, to change the zoning or
22
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building ordinances or any other laws, rules, regulations or ordinances
affecting the Real Property. The Company is not relying on any exemption from
or deferral of any such applicable law, regulation or other requirement that
would not be available to GMI after it acquires the Company's properties, assets
and business.
(b) The Company has, in full force and effect, all licenses, permits
and certificates, from federal, state, local and foreign authorities (including,
without limitation, federal and state agencies regulating occupational health
and safety) necessary to conduct its business and own and operate its properties
(other than Environmental Permits, as such term is defined in Section 3.27(c)
hereof) (collectively, the "Permits"). A true and correct list of all the
Permits is set forth under the caption referencing this Section 3.26 in the
Disclosure Schedule. The Company has conducted its business in compliance with
all material terms and conditions of the Permits.
(c) The Company has not made or agreed to make gifts of money, other
property or similar benefits (other than incidental gifts of articles of nominal
value) to any actual or potential customer, supplier, governmental employee or
any other person in a position to assist or hinder the Company in connection
with any actual or proposed transaction.
(d) In particular, but without limiting the generality of the
foregoing, the Company to its best knowledge has not violated in any material
respect and has no liability, and has not received a notice or charge asserting
any violation of or liability, under the federal Occupational Safety and Health
Act of 1970 or any other federal or state acts (including rules and regulations
thereunder) regulating or otherwise affecting employee health and safety.
3.27 Environmental Matters.
---------------------
(a) As used in this Section 3.27, the following terms shall have the
following meanings:
(i) "Hazardous Materials" means any dangerous, toxic or
hazardous pollutant, contaminant, chemical, waste, material or substance as
defined in or governed by any federal, state or local law, statute, code,
ordinance, regulation, rule or other requirement relating to such substance
or otherwise relating to the environment or human health or safety,
including without limitation any waste, material, substance, pollutant or
contaminant that might cause any injury to human health or safety or to the
environment or might subject the Company to any imposition of costs or
liability under any Environmental Law.
(ii) "Environmental Laws" means all applicable federal, state,
local and foreign laws, rules, regulations, codes, ordinances, orders,
decrees, directives, permits, licenses and judgments relating to pollution,
contamination or protection of the environment (including, without
limitation, all applicable federal, state, local and foreign
23
<PAGE>
laws, rules, regulations, codes, ordinances, orders, decrees, directives,
permits, licenses and judgments relating to Hazardous Materials in effect
as of the date of this Agreement).
(iii) "Release" shall mean the spilling, leaking, disposing,
discharging, emitting, depositing, ejecting, leaching, escaping or any
other release or threatened release, however defined, whether intentional
or unintentional, of any Hazardous Material.
(b) The Company and the Real Property are in material compliance with
all applicable Environmental Laws.
(c) The Company has obtained, and maintained in full force and
effect, all environmental permits, licenses, certificates of compliance,
approvals and other authorizations necessary to conduct its business and own or
operate the Real Property (collectively, the "Environmental Permits"). A true
and correct copy of each such Environmental Permit shall be provided by the
Company to GMI and Merger Subsidiary at least 10 days prior to the Closing. The
Company has conducted its business in material compliance with all terms and
conditions of the Environmental Permits. The Company has filed all reports and
notifications required to be filed under and pursuant to all applicable
Environmental Laws.
(d) Except as set forth in the Disclosure Schedule under the caption
referencing this Section 3.27, to the best of the Company's knowledge, (i) no
Hazardous Materials have been generated, treated, contained, handled, located,
used, manufactured, processed, buried, incinerated, deposited, stored, or
released on, under or about any part of the Company or the Real Property, (ii)
the Company and the Real Property and any improvements thereon, contain no
asbestos, urea, formaldehyde, radon at levels above natural background,
polychlorinated biphenyls (PCBs) or pesticides, and (iii) no aboveground or
underground storage tanks are located on, under or about the Real Property, or
have been located on, under or about the Real Property and then subsequently
been removed or filled. If any such storage tanks exist on, under or about the
Real Property, such storage tanks have been duly registered with all appropriate
governmental entities and are otherwise in compliance with all applicable
Environmental Laws.
(e) Except as set forth in the Disclosure Schedule under the caption
referencing this Section 3.27, the Company has not received notice alleging in
any manner that the Company is, or might be potentially responsible for any
Release of Hazardous Materials, or any costs arising under or violation of
Environmental Laws.
(f) To the best of the Company's knowledge, no expenditure will be
required in order for GMI, Merger Subsidiary or the Surviving Corporation to
comply with any Environmental Laws in effect at the time of the Closing in
connection with the operation or continued operation of the business of the
Company or the Real Property in a manner consistent with the current operation
thereof by the Company.
24
<PAGE>
(g) The Company and the Real Property are not and have not been
listed on the United States Environmental Protection Agency National Priorities
List of Hazardous Waste Sites, or any other list, schedule, law, inventory or
record of hazardous or solid waste sites maintained by any federal, state or
local agency.
(h) The Company has disclosed and delivered to GMI and Merger
Subsidiary all environmental reports and investigations which the Company has
obtained or ordered with respect to the business of the Company and the Real
Property.
(i) To the best of the Company's knowledge, no part of the business
of the Company or the Real Property have been used as a landfill, dump or other
disposal, storage, transfer, handling or treatment area for Hazardous Materials,
or as a gasoline service station or a facility for selling, dispensing, storing,
transferring, disposing or handling petroleum and/or petroleum products.
(j) To the best of the Company's knowledge, no lien has been attached
or filed against the Company or the Real Property in favor of any governmental
or private entity for (i) any liability or imposition of costs under or
violation of any applicable Environmental Law; or (ii) any Release of Hazardous
Materials.
(k) The Company, on behalf of itself and its successors and assigns,
hereby waives, releases and agrees not to bring any claim, demand, cause of
action or proceeding, including without limitation any cost recovery action,
against GMI, Merger Subsidiary or the Surviving Corporation under any
Environmental Law.
3.28 Brokerage. Except as set forth in the Disclosure Schedule
---------
referencing this Section 3.28, no third party shall be entitled to receive any
brokerage commissions, finder's fees, fees for financial advisory services or
similar compensation in connection with the transactions contemplated by this
Agreement based on any arrangement or agreement made by or on behalf of the
Company.
3.29 Disclosure. Neither this Agreement nor any of the Exhibits
----------
hereto nor any of the documents delivered by or on behalf of the Company
pursuant to Article VII hereof nor the Disclosure Schedules nor any of the
financial statements referred to in Section 3.08 hereof, taken as a whole,
contains any untrue statement of a material fact regarding the Company or its
business or any of the other matters dealt with in this Article III relating to
the Company or the transactions contemplated by this Agreement. This Agreement,
the Exhibits hereto, the documents delivered to GMI and Merger Subsidiary by or
on behalf of the Company pursuant to Article VII hereof, the Disclosure Schedule
and the financial statements referred to in Section 3.08 hereof, taken as a
whole, do not omit any material fact necessary to make the statements contained
herein or therein, in light of the circumstances in which they were made, not
misleading, and there is no fact which has not been disclosed to GMI or Merger
Subsidiary of
25
<PAGE>
which any officer or director of the Company is aware which materially affects
adversely or could reasonably be anticipated to result in a Material Adverse
Change in the Company.
3.30 Year 2000 Compliance. All software and hardware used by the
--------------------
Company is Year 2000 Compliant, including date century recognition, calculations
which accommodate same century and multi-century formulas and date values that
reflect the century. As used herein, "Year 2000 Compliant" shall mean the
ability of such software and hardware to (i) consistently handle date
information before, during and after January 1, 2000, including but not limited
to accepting date input, providing date output, and performing calculations on
dates or portions of dates; (ii) function accurately in accordance with all
documentation without interruption before, during and after January 1, 2000,
without any change of operations associated with the advent of the new century;
(iii) respond to two-digit date input in a way that resolves any ambiguity as to
century in a disclosed, defined and predetermined manner; and (iv) store and
provide output of date information in ways that are unambiguous as to century.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF GMC, GMI AND MERGER SUBSIDIARY
----------------------------------------------------------------
GMC, GMI and Merger Subsidiary, jointly and severally, hereby
represent and warrant to the Company that:
4.01 Incorporation and Corporate Power. Each of GMC, GMI and Merger
---------------------------------
Subsidiary is a corporation duly incorporated, validly existing and in good
standing under the laws of the State of Minnesota and Delaware, as applicable,
with the requisite corporate power and authority to enter into this Agreement
and the Certificate of Merger and perform its obligations hereunder and
thereunder.
4.02 Execution, Delivery; Valid and Binding Agreements. The
-------------------------------------------------
execution, delivery and performance of the Letter Agreement, this Agreement and
the Collateral Agreement by GMC, GMI and Merger Subsidiary, and the Certificate
of Merger, by Merger Subsidiary, and the consummation of the transactions
contemplated hereby and thereby have been duly and validly authorized by all
requisite corporate action, and no other corporate proceedings on its part are
necessary to authorize the execution, delivery or performance of the Letter
Agreement, this Agreement, the Collateral Agreement or the Certificate of
Merger. The Letter Agreement and this Agreement have been duly executed and
delivered by GMC, GMI and Merger Subsidiary and constitute the valid and binding
obligations of GMC, GMI and Merger Subsidiary, enforceable in accordance with
their terms, and the Certificate of Merger, when executed and delivered by
Merger Subsidiary, will constitute the valid and binding obligation of Merger
Subsidiary, enforceable in accordance with its terms.
4.03 No Breach. GMI is not in violation of any term of its
---------
Certificate of Incorporation, Bylaws or in any material respect of any agreement
required to be filed as an exhibit to any registration statements or reports
filed with the SEC by GMC. GMI has complied
26
<PAGE>
with, is not in violation of, and has not received any notices of violation with
respect to, any federal, state, local or foreign statute, law or regulation with
respect to the conduct of its business, or the ownership or operation of its
business, except for such violations or failures to comply as could not be
reasonably expected to result in a Material Adverse Change in GMI. The
execution, delivery and performance of this Agreement by GMC, GMI and Merger
Subsidiary and the Certificate of Merger by Merger Subsidiary and the
consummation by GMC, GMI and Merger Subsidiary of the transactions contemplated
hereby and thereby do not conflict with or result in any breach of any of the
provisions of, constitute a default under, result in a violation of, result in
the creation of a right of termination or acceleration or any lien, security
interest, charge or encumbrance upon any assets of GMC, GMI or Merger
Subsidiary, or require any authorization, consent, approval, exemption or other
action by or notice to any court or other governmental body, under the
provisions of the Articles of Incorporation or Certificate of Incorporation, as
applicable or the Bylaws of GMC, GMI or Merger Subsidiary or any indenture,
mortgage, lease, loan agreement or other agreement or instrument by which GMC,
GMI or Merger Subsidiary is bound or affected, or any law, statute, rule or
regulation or order, judgment or decree to which GMC, GMI or Merger Subsidiary
is subject.
4.04 Merger Subsidiary. All of the outstanding capital stock of
-----------------
Merger Subsidiary is owned by GMI free and clear of any lien, claim or
encumbrance or any agreement with respect thereto. Since the date of its
incorporation, Merger Subsidiary has not engaged in any activity of any nature
except in connection with or as contemplated by this Agreement and the
Certificate of Merger.
4.05 Governmental Authorities; Consents. Except for the filing of the
----------------------------------
Certificate of Merger with the Secretary of State of the State of Delaware,
neither GMC, GMI nor Merger Subsidiary is required to submit any notice, report
or other filing with any governmental authority in connection with the execution
or delivery by it of this Agreement or the Certificate of Merger or the
consummation of the transactions contemplated hereby or thereby. No consent,
approval or authorization of any governmental or regulatory authority or any
other party or person is required to be obtained by GMC, GMI or Merger
Subsidiary in connection with its execution, delivery and performance of this
Agreement or the Certificate of Merger or the transactions contemplated hereby
or thereby.
4.06 Brokerage. No third party shall be entitled to receive any
---------
brokerage commissions, finder's fees, fees for financial advisory services or
similar compensation in connection with the transactions contemplated by this
Agreement based on any arrangement or agreement made by or on behalf of GMC, GMI
or Merger Subsidiary.
4.07 Year 2000 Compliance. All software and hardware used by GMC and
--------------------
GMI is Year 2000 Compliant, including date century recognition, calculations
which accommodate same century and multi-century formulas and date values that
reflect the century. As used herein, "Year 2000 Compliant" shall mean the
ability of such software and hardware to (i) consistently handle date
information before, during and after January 1, 2000, including but
27
<PAGE>
not limited to accepting date input, providing date output, and performing
calculations on dates or portions of dates; (ii) function accurately in
accordance with all documentation without interruption before, during and after
January 1, 2000, without any change of operations associated with the advent of
the new century; (iii) respond to two-digit date input in a way that resolves
any ambiguity as to century in a disclosed, defined and predetermined manner;
and (iv) store and provide output of date information in ways that are
unambiguous as to century.
4.08 Litigation. To the best knowledge of GMC and GMI, there is no
----------
action, suit, proceeding, claim, arbitration or investigation pending, or
threatened against GMI or Merger Subsidiary which in any manner challenges or
seeks to prevent, enjoin, alter or materially delay any of the transactions
contemplated by this Agreement or the Merger.
4.09 Disclosure. Neither this Agreement, nor any of the Exhibits
----------
hereto, nor any of the documents delivered by or on behalf of GMC or GMI
pursuant to Article VII hereof, nor any document filed with the Securities and
Exchange Commission pursuant to the Securities Exchange Act of 1934, nor the
Disclosure Schedules to be furnished by GMC, GMI or Merger Subsidiary, taken as
a whole, contains any untrue statement of a material fact regarding GMC, GMI or
their businesses or any of the other matters dealt with in this Article IV
relating to GMC, GMI or the transactions contemplated by this Agreement. Except
as disclosed in the Disclosure Schedule referencing this Section 4.09, this
Agreement, the Exhibits hereto, the documents delivered to the Company by or on
behalf of GMC, GMI and Merger Subsidiary pursuant to Article VII hereof, taken
as a whole, do not omit any material fact necessary to make the statements
contained herein or therein, in light of the circumstances in which they were
made, not misleading, and there is no fact which has not been disclosed to the
Company of which any officer or director of GMC or GMI is aware which materially
affects adversely or could reasonably be anticipated to result in a Material
Adverse Change in GMC or GMI.
ARTICLE V
COVENANTS OF THE COMPANY
------------------------
5.01 Conduct of the Business. The Company shall observe each term set
-----------------------
forth in this Section 5.01 and the Company agrees that, from the date hereof
until the Effective Time, unless otherwise consented to by GMI or Merger
Subsidiary in writing:
(a) The business of the Company shall be conducted only in, and the
Company shall not take any action except in, the ordinary course of the
Company's business, on an arm's-length basis and in accordance in all material
respects with all applicable laws, rules and regulations and the Company's past
custom and practice;
(b) The Company shall not, directly or indirectly, do or permit to
occur any of the following: (i) issue or sell any additional shares of, or any
options, warrants, conversion privileges or rights of any kind to acquire any
shares of, any of its capital stock; (ii) sell, pledge, dispose of or encumber
any of its assets, except in the ordinary course of business; (iii) amend or
28
<PAGE>
propose to amend its Certificate of Incorporation or Bylaws; (iv) split, combine
or reclassify any outstanding shares of Common Stock, or declare, set aside or
pay any dividend or other distribution payable in cash, stock, property or
otherwise with respect to shares of Common Stock; (v) redeem, purchase or
acquire or offer to acquire any shares of Common Stock or other securities of
the Company, with the exception of up to 100,000 shares of the Company's Common
Stock that may be repurchased from current or former employees of the Company at
a per share price not to exceed $1.00; (vi) acquire (by merger, exchange,
consolidation, acquisition of stock or assets or otherwise) any corporation,
partnership, joint venture or other business organization or division or
material assets thereof; (vii) incur any indebtedness for borrowed money or
issue any debt securities except the borrowing of working capital in the
ordinary course of business and consistent with past practice; (viii)
accelerate, beyond the normal collection cycle, collection of accounts
receivable; or (ix) enter into or propose to enter into, or modify or propose to
modify, any agreement, arrangement or understanding with respect to any of the
matters set forth in this Section 5.01(b);
(c) The Company shall not, directly or indirectly, (i) enter into or
modify any employment, severance or similar agreements or arrangements with, or
grant any bonuses, salary increases, severance or termination pay to, any
officers or directors or consultants; or (ii) in the case of employees, officers
or consultants who earn in excess of $50,000 per year, take any action with
respect to the grant of any bonuses, salary increases, severance or termination
pay or with respect to any increase of benefits payable in effect on the date
hereof;
(d) The Company shall not adopt or amend any bonus, profit sharing,
compensation, stock option, pension, retirement, deferred compensation,
employment or other employee benefit plan, trust, fund or group arrangement for
the benefit or welfare of any employees or any bonus, profit sharing,
compensation, stock option, pension, retirement, deferred compensation,
employment or other employee benefit plan, agreement, trust, fund or
arrangements for the benefit or welfare of any director;
(e) The Company shall not cancel or terminate its current insurance
policies or cause any of the coverage thereunder to lapse, unless simultaneously
with such termination, cancellation or lapse, replacement policies providing
coverage equal to or greater than the coverage under the canceled, terminated or
lapsed policies for substantially similar premiums are in full force and effect;
(f) The Company shall (i) use its best efforts to preserve intact the
Company's business organization and goodwill, keep available the services of the
Company's officers and employees as a group and maintain satisfactory
relationships with suppliers, distributors, customers and others having business
relationships with the Company; (ii) confer on a regular and frequent basis with
representatives of GMI or Merger Subsidiary to report operational matters and
the general status of ongoing operations; (iii) not intentionally take any
action which would render, or which reasonably may be expected to render, any
representation or warranty made by it in this Agreement materially untrue at the
Closing; (iv) notify GMI and Merger
29
<PAGE>
Subsidiary of any emergency or other change in the normal course of the
Company's business or in the operation of the Company's properties and of any
governmental or third party complaints, investigations or hearings (or
communications indicating that the same may be contemplated) if such emergency,
change, complaint, investigation or hearing would be material, individually or
in the aggregate, to the business, operations or financial condition of the
Company or to the Company's, GMI's or Merger Subsidiary's ability to consummate
the transactions contemplated by this Agreement; and (v) promptly notify GMI and
Merger Subsidiary in writing if the Company shall discover that any
representation or warranty made by it in this Agreement was when made, or has
subsequently become, untrue in any respect;
(g) The Company shall (i) file any Tax returns, elections or
information statements with respect to any liabilities for Taxes of the Company
or other matters relating to Taxes of the Company which pursuant to applicable
law must be filed prior to the Closing Date; (ii) promptly upon filing provide
copies of any such Tax returns, elections or information statements to GMI and
Merger Subsidiary; (iii) make any such Tax elections or other discretionary
positions with respect to Taxes taken by or affecting the Company only upon
prior consultation with and consent of GMI or Merger Subsidiary; and (iv) not
amend any Return; and
(h) The Company shall not perform any act referenced by (or omit to
perform any act which omission is referenced by) the terms of Section 3.11.
5.02 Access to Books and Records. Between the date hereof and the
---------------------------
Closing Date, the Company shall afford to GMI, Merger Subsidiary and their
authorized representatives (the "GMI's Representatives") full access during
normal business hours and upon reasonable notice to the offices, properties,
books, records, officers, employees and other items of the Company, and
otherwise provide such assistance as is reasonably requested by GMI and Merger
Subsidiary in order that GMI and Merger Subsidiary may have a full opportunity
to make such investigation and evaluation as it shall reasonably desire to make
of the business and affairs of the Company; provided, however, that the Company
and its agents shall have no obligation to provide any documents or information
that is subject to attorney-client privilege or that is confidential attorney
work product. In addition, the Company and its officers and directors shall
cooperate fully (including providing introductions, where necessary) with GMI to
enable GMI to contact such third parties, including customers, prospective
customers, specifying agencies, vendors, or suppliers of the Company as GMI
deems reasonably necessary to complete its due diligence; provided that GMI
agrees not to initiate such contacts without the prior approval of the Company,
which approval will not be unreasonably withheld.
5.03 Meeting of Stockholders. The Company shall, promptly after the
-----------------------
date of this Agreement and in no event later than April 5, 1999, take all action
necessary in accordance with the DGCL and its Certificate of Incorporation and
Bylaws to convene a meeting of the stockholders of the Company for the purpose
of voting to approve this Agreement and the Merger, and the Company shall
consult with GMI in connection therewith. The Company shall use its best efforts
to solicit from the stockholders of the Company proxies in favor of this
30
<PAGE>
Agreement and the Merger and shall take all other actions necessary or advisable
to secure the vote or consent of stockholders required by the DGCL to approve
this Agreement and the Merger, unless otherwise required by the applicable
fiduciary duties of directors of the Company, as determined by such directors in
good faith after consultation with independent legal counsel.
5.04 Regulatory Filings. The Company shall, as promptly as practicable
------------------
after the execution of this Agreement, make or cause to be made all filings and
submissions under any laws or regulations applicable to the Company for the
consummation of the transactions contemplated herein. The Company will
coordinate and cooperate with GMI and Merger Subsidiary in exchanging such
information, will not make any such filing without providing to GMI and Merger
Subsidiary a final copy thereof for their review and consent at least two full
business days in advance of the proposed filing and will provide such reasonable
assistance as GMI and Merger Subsidiary may request in connection with all of
the foregoing.
5.05 Conditions. The Company shall take all commercially reasonable
----------
actions necessary or desirable to cause the conditions set forth in Section 7.01
to be satisfied and to consummate the transactions contemplated herein as soon
as reasonably possible after the satisfaction thereof (but in any event within
three business days of such date).
5.06 No Shop. The Company shall not enter into any agreement, or make
-------
any undertaking or commitment, (i) to merge or consolidate with, or acquire
substantially all of the property and assets of, any other corporation or
person, (ii) to sell, lease or exchange all or substantially all of their
respective properties and assets to any other corporation or person or (iii)
otherwise to cause the ownership or control of the Company or any of its
subsidiaries to be transferred to any party other than GMI.
5.07 Information Statement. The Company shall promptly provide to GMI
---------------------
the information pertaining to the Company, including financial statements,
necessary for GMI to prepare an information statement, which shall be sent to
all holders of the Company's Common Stock and Preferred Stock for the purpose of
approving this Agreement and the Merger at a meeting of such holders to be held
on or prior to March 30, 1999 (the "Information Statement").
5.08 Disclosure Schedules. The Company shall provide the Disclosure
--------------------
Schedules required hereunder to GMI at least 10 days prior to the Closing Date.
5.09 Collateral Agreement. The Company shall enter into the Collateral
--------------------
Agreement referenced in Section 2.01 hereof.
31
<PAGE>
ARTICLE VI
COVENANTS OF GMI AND MERGER SUBSIDIARY
--------------------------------------
GMI and Merger Subsidiary covenant and agree with the Company as
follows:
6.01 Regulatory Filings. GMI or Merger Subsidiary shall, as promptly
------------------
as practicable after the execution of the Agreement, make or cause to be made
all filings and submissions under any laws or regulations applicable to GMI and
Merger Subsidiary necessary for the consummation of the transactions
contemplated herein. GMI and Merger Subsidiary will coordinate and cooperate
with the Company in exchanging such information, will not make any such filing
without providing to the Company a final copy thereof for its review and consent
at least two full business days in advance of the proposed filing and will
provide such reasonable assistance as the Company may request in connection with
all of the foregoing.
6.02 Conditions. GMI or Merger Subsidiary shall take all commercially
----------
reasonable actions necessary or desirable to cause the conditions set forth in
Section 7.02 to be satisfied and to consummate the transactions contemplated
herein as soon as reasonably possible after the satisfaction thereof (but in any
event within three business days of such date).
6.03 Board Representation. GMC shall use its best efforts to cause to
--------------------
be elected to GMI's Board of Directors, as of the Closing Date and from time to
time thereafter, as necessary, two persons nominated by Vernon F. Taylor III
(the "Stockholders' Representative") and a third person 150 days after the
Effective Date if GMI's net worth 150 days after the Effective Date is less than
the sum of $12,000,000 and GMI's investment in the Surviving Corporation.
6.04 Loan to The Company. On or before the Closing Date, GMI shall
-------------------
loan to the Company $2,500,000, which loan shall be converted into a
contribution to capital immediately following the Effective Time.
6.05 Registration Rights. Holders of the GMC Common Stock to be issued
-------------------
in connection with the Earn Out Payment, if any, pursuant to Section 2.02 and
upon exercise of the Escrow Warrants (the "Unregistered GMC Common Stock") shall
have the registration rights set forth in Schedule 6.05 hereto, subject to the
terms and conditions set forth therein.
6.06 Disclosure Schedules. GMC, GMI and Merger Subsidiary shall
--------------------
provide their respective Disclosure Schedules to the Company at least 10 days
prior to the Closing Date.
6.07 Delivery of Escrow Warrants. On or before the Effective Time, GMC
---------------------------
shall deliver the Escrow Warrants to H&QGF as secured party under the Business
Loan Agreement.
32
<PAGE>
6.08 Collateral Agreement. GMI and Merger Subsidiary shall enter into
--------------------
the Collateral Agreement referenced in Section 2.01 hereof.
ARTICLE VII
CONDITIONS TO CLOSING
---------------------
7.01 Conditions to GMC's, GMI's and Merger Subsidiary's Obligations.
--------------------------------------------------------------
The obligation of GMC, GMI and Merger Subsidiary to consummate the transactions
contemplated by this Agreement is subject to the satisfaction of the following
conditions at or before the Effective Time:
(a) The representations and warranties set forth in Article III
hereof shall be true and correct in all material respects at and as of the
Effective Time as though then made and as though the Effective Time had been
substituted for the date of this Agreement throughout such representations and
warranties (without taking into account any disclosures by the Company of
discoveries, events or occurrences arising on or after the date hereof), except
that any such representation or warranty made as of a specified date (other than
the date hereof) shall only need to have been true on and as of such date;
(b) The Company shall have performed in all material respects all of
the covenants and agreements required to be performed by them prior to the
Effective Time under this Agreement;
(c) The Company shall have obtained, or caused to be obtained, each
consent and approval necessary in order that the transactions contemplated
herein not constitute a material breach or violation of, or result in a right of
termination or acceleration of, or creation of any encumbrance on any of the
Company's assets pursuant to the provisions of, any agreement, arrangement or
undertaking of or affecting the Company or any license, franchise or permit of
or affecting the Company;
(d) The Letter Agreement, this Agreement, the Certificate of Merger
and the Merger shall have been duly and validly authorized by the board of
directors of the Company and this Agreement shall have been duly and validly
approved by the stockholders of the Company, the Company shall have delivered to
GMI evidence, in form satisfactory to GMI's counsel, of such authorization and
approval, and the Certificate of Merger shall have been duly executed by the
Company;
(e) All material governmental filings, authorizations and approvals
that are required for the consummation of the transactions contemplated by this
Agreement or the Certificate of Merger shall have been duly made and obtained;
(f) There shall not be threatened, instituted or pending any action
or proceeding, before any court or governmental authority or agency, domestic or
foreign,
33
<PAGE>
(i) challenging or seeking to make illegal, or to delay or otherwise directly or
indirectly restrain or prohibit, the consummation of the transactions
contemplated hereby or seeking to obtain material damages in connection with
such transactions, (ii) seeking to prohibit direct or indirect ownership or
operation by GMI or Merger Subsidiary of all or a material portion of the
business or assets of the Company or to GMI or Merger Subsidiary or any of their
subsidiaries or the Company to dispose of or to hold separately all or a
material portion of the business or assets of GMI or Merger Subsidiary and their
subsidiaries or of the Company, as a result of the transactions contemplated
hereby, (iii) seeking to require direct or indirect transfer or sale by GMI or
Merger Subsidiary of any of the shares of Company Common Stock, (iv) seeking to
invalidate or render unenforceable any material provision of this Agreement, the
Certificate of Merger or any of the other agreements attached as exhibits hereto
(collectively, the "Related Agreements"), or (v) otherwise relating to and
materially adversely affecting the transactions contemplated hereby;
(g) There shall not be any action taken, or any statute, rule,
regulation, judgment, order or injunction enacted, entered, enforced,
promulgated, issued or deemed applicable to the transactions contemplated hereby
by any federal, state or foreign court, government or governmental authority or
agency, which would reasonably be expected to result, directly or indirectly, in
any of the consequences referred to in Section 7.01(f) hereof;
(h) GMI shall have completed its due diligence investigation of the
Company, including the Company's financial statements, tax returns, contracts,
employee benefit plans, real property and equipment, and such investigation
shall be satisfactory to GMI in its sole discretion, and the officers of the
Company shall have made themselves available for additional due diligence as
reasonably requested by GMI at any time before the Closing Date; provided,
however, that GMI's satisfaction with its due diligence in its sole discretion,
as a closing condition, shall terminate at the end of the tenth calendar day
following the mailing of the Information Statement to be prepared pursuant to
Section 5.07 hereof;
(i) The Company's Disclosure Schedules shall not contain or disclose
any fact or circumstance existing as of the date of this Agreement which has not
been disclosed to GMI as of the date of this Agreement (with the understanding
that write-downs of evaluation units, demonstration units, consigned units and
parts and other equipment has been disclosed to GMI as of the date of this
Agreement) regarding the business, assets, properties, condition (financial or
otherwise) or results of operations of the Company which, individually or in the
aggregate with other such facts and circumstances, are reasonably likely to
cause the Company or its business to realize a loss, cost, expense or diminution
in value, or otherwise result in an adverse effect on the business, assets,
properties, condition (financial or otherwise) or results of operations of the
Company, taken as a whole, of $250,000 or more (a "Material Adverse Effect");
(j) There shall have been no damage, destruction or loss of or to any
property or properties owned or used by the Company, whether or not covered by
insurance, which, in the
34
<PAGE>
aggregate, has, or would be reasonably likely to have, a Material Adverse Effect
on the Company;
(k) No more than 12% of the outstanding shares of Company Common
Stock shall be qualified to be Dissenting Shares as of the Effective Time;
(l) GMI shall have received from counsel for the Company a written
opinion, dated the date of the Effective Time, addressed to GMC, GMI and Merger
Subsidiary and reasonably satisfactory to counsel for GMI;
(m) Prior to the Effective Time, the Company shall have delivered to
GMI all of the following:
(i) a certificate of the Secretary of the Company, dated as of
the date of the Effective Time, stating that the conditions precedent set forth
in subsections (a) and (b) above have been satisfied;
(ii) a copy of each of (X) the text of the resolutions adopted
by the board of directors of the Company authorizing the execution, delivery and
performance of the Letter Agreement, this Agreement and the Certificate of
Merger and the consummation of all of the transactions contemplated by this
Agreement and the Certificate of Merger and (Y) the Bylaws of the Company, along
with a certificate executed on behalf of the Company by its corporate secretary
certifying to GMI that such copies are true and correct copies of such
resolutions and Bylaws, respectively, and that such resolutions and bylaws were
duly adopted and have not been amended or rescinded;
(iii) the Company's minute books, stock transfer records,
corporate seal and other materials related to the Company's corporate
administration;
(iv) a copy of the Certificate of Incorporation of the Company,
certified by the Secretary of State of the State of Delaware, and Certificates
of Good Standing from the Secretary of State of the State of Delaware evidencing
the good standing of the Company in such jurisdiction;
(v) copies of the third party and governmental consents and
approvals and of the authorizations referred to in subsections (c), (d) and (e)
above;
(vi) incumbency certificates executed on behalf of the Company
by its corporate secretary certifying the signature and office of each officer
executing this Agreement and the Certificate of Merger and the Related
Agreements executed by the Company;
(vii) an executed copy of each of the Related Agreements;
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<PAGE>
(viii) such other certificates, documents and instruments as GMI
reasonably requests related to the transactions contemplated hereby;
(n) Vernon Taylor Jr., Vernon Taylor III and the Ruth and Vernon
Taylor Foundation (the "Stockholder Lenders") shall have canceled $280,000 of
short-term Company debt, plus accrued but unpaid interest, in exchange for the
issuance by the Company to the Stockholder Lenders of a number of shares of the
Company's Common Stock equal to the amount of such debt and accrued but unpaid
interest divided by $1.00;
(o) No more than 35 of the stockholders of the Company shall not be
"accredited investors" within the meaning of Rule 501 under the 1933 Act, and
the Company shall have delivered to GMI evidence, in form satisfactory to GMI's
counsel, of compliance with this condition; and
(p) H&QGF, GMC and GMI shall have negotiated and executed loan
agreements providing for one or more loans in the aggregate amount of up to
$3,000,000 to be made by H&QGF to GMC, GMI or the Surviving Corporation.
(q) The Company shall have executed the Collateral Agreement.
7.02 Conditions to the Company's Obligations. The obligation of the
---------------------------------------
Company to consummate the transactions contemplated by this Agreement is subject
to the satisfaction of the following conditions at or before the Effective Time:
(a) The representations and warranties set forth in Article IV hereof
will be true and correct in all material respects at and as of the Effective
Time as though then made and as though the Effective Time had been substituted
for the date of this Agreement throughout such representations and warranties,
except that any such representation or warranty made as of a specified date
(other than the date hereof) shall only need to have been true on and as of such
date;
(b) GMI and Merger Subsidiary shall have performed in all material
respects all the covenants and agreements required to be performed by them prior
to the Effective Time under this Agreement and the Certificate of Merger prior
to the Effective Time, and Merger Subsidiary shall have executed the Certificate
of Merger;
(c) All material governmental filings, authorizations and approvals
that are required for the consummation of the transactions contemplated hereby
will have been duly made and obtained;
(d) There shall not be threatened, instituted or pending any action
or proceeding, before any court or governmental authority or agency, domestic or
foreign, (i) challenging or seeking to make illegal, or to delay or otherwise
directly or indirectly restrain
36
<PAGE>
or prohibit, the consummation of the transactions contemplated by this Agreement
or the Certificate of Merger or seeking to obtain material damages in connection
with such transactions, (ii) seeking to invalidate or render unenforceable any
material provision of this Agreement, the Certificate of Merger or any of the
Related Agreements, or (iii) otherwise relating to and materially adversely
affecting the transactions contemplated hereby or thereby;
(e) There shall not be any action taken, or any statute, rule,
regulation, judgment, order or injunction, enacted, entered, enforced,
promulgated, issued or deemed applicable to the transactions contemplated by
this Agreement or the Certificate of Merger by any federal, state or foreign
court, government or governmental authority or agency, which would reasonably be
expected to result, directly or indirectly, in any of the consequences referred
to in Section 7.02(d) hereof;
(f) The Company shall have received from counsel for GMI and Merger
Subsidiary a written opinion, dated as of the date of the Effective Time,
addressed to the Company and reasonably satisfactory to the Company's counsel;
and
(g) At or prior to the Effective Time, GMI shall have delivered to
the Company (i) a certificate of the Secretary of GMI, dated as of the date of
the Effective Time, stating that the conditions precedent set forth in
subsections (a) and (b) above have been satisfied, (ii) a copy of each of (X)
the text of the resolutions adopted by the board of directors of GMC, GMI and
Merger Subsidiary authorizing the execution, delivery and performance of the
Letter Agreement, this Agreement and the Certificate of Merger and the
consummation of all of the transactions contemplated by the Letter Agreement,
this Agreement and the Certificate of Merger and (Y) certificates executed on
behalf of each of GMC, GMI and Merger Subsidiary by their respective corporate
secretaries certifying to the Company that such copies are true and correct
copies of such resolutions and that such resolutions were duly adopted and have
not been amended or rescinded, and (iii) an executed copy of each of the Related
Agreements.
(h) GMI and Merger Subsidiary shall have executed the Collateral
Agreement.
ARTICLE VIII
TERMINATION
-----------
8.01 Termination. This Agreement may be terminated at any time prior
-----------
to the Effective Time:
(a) by the mutual consent of GMC, GMI, Merger Subsidiary and the
Company;
(b) by either GMC, GMI or Merger Subsidiary, on the one hand, or the
Company, on the other, if there has been a material misrepresentation, breach of
warranty or
37
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breach of covenant on the part of the other in the representations, warranties
and covenants set forth in this Agreement;
(c) by either GMC, GMI or Merger Subsidiary, on the one hand, or the
Company, on the other, if the transactions contemplated by this Agreement or the
Certificate of Merger have not been approved by the Company's stockholders by
April 5, 1999; provided that neither will be entitled to terminate this
Agreement pursuant to this Section 8.01(c) if such party's willful breach of
this Agreement has prevented the stockholder approval of the transactions
contemplated by this Agreement or the Certificate of Merger;
(d) by GMC, GMI or Merger Subsidiary if, after the date hereof, there
shall have been a Material Adverse Effect or if an event shall have occurred
which, so far as reasonably can be foreseen, would result in any such Material
Adverse Effect, except to the extent such Material Adverse Effect is directly
caused by GMC, GMI or Merger Subsidiary;
(e) by the Company if after the date hereof, there shall have been a
fact or circumstance regarding the business, assets, properties, condition
(financial or otherwise), results of operations of the GMC or GMI which,
individually or in the aggregate with other such facts and circumstances, are
reasonably likely to cause GMC or GMI or their respective businesses to realize
a loss, cost, expense or diminution in value, or otherwise result in an adverse
effect on the business, assets, properties, condition (financial or otherwise)
or results of operations of GMC or GMI, taken as a whole, of $250,000 or more,
or if an event shall have occurred which, so far as reasonably can be foreseen,
would result in any such result, except to the extent such result is directly
caused by the Company; or
(f) by GMC, GMI or Merger Subsidiary if, before the end of the tenth
calendar day following the mailing of the Information Statement to be prepared
pursuant to Section 5.07 hereof, GMI shall be unsatisfied with the results of
its due diligence investigation contemplated in Section 7.01(h).
8.02 Effect of Termination. In the event of termination of this
---------------------
Agreement as provided in Section 8.01 by either GMC, GMI or Merger Subsidiary,
on the one hand, or the Company, on the other, all provisions of this Agreement
shall terminate and there shall be no liability on the part of any of GMC, GMI,
Merger Subsidiary, or the Company or the Company's stockholders, officers or
directors, except that Sections 9.04, 9.05, 11.01, 11.02, 11.03 and 11.09 hereof
shall survive indefinitely, and the parties to this Agreement shall remain
liable for willful breaches of this Agreement prior to the time of such
termination.
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<PAGE>
ARTICLE IX
ADDITIONAL AGREEMENTS
---------------------
9.01 Intercompany Financing.
----------------------
(a) On or before 90 days after the Closing Date, GMI shall deliver
$2,500,000 in cash as a capital contribution to the Surviving Corporation. If
GMI shall fail to make such capital contribution in full within 90 days of the
Closing Date, the unpaid balance shall be delivered in the form of GMC Common
Stock valued in the amount of such unpaid balance based on the average closing
price for the 20 trading day period ending on the 90/th/ day after the Closing
Date, which GMC Common Stock shall be delivered by GMC to the Surviving
Corporation. GMC shall have the right at any time after such delivery to
repurchase some or all of the GMC Common Stock so delivered at the product of
(i) the average closing price of GMC Common Stock for the 20 trading day period
ending one day before the date on which such shares were delivered to the
Surviving Corporation (the "Base Price") and (ii) 120% (the "Repurchase Price");
provided that GMC shall have the obligation to repurchase at the Repurchase
Price, on or before the Earn Out Date (as defined in Section 9.03 hereof), all
of the GMC Common Stock so delivered; provided, however, that GMC shall deliver
only the Base Price to the Surviving Corporation and shall deliver the remainder
of the Repurchase Price to the Escrow Agent for deposit into the Escrow Fund for
the benefit of the holders of the Escrow Units.
(b) The funds received by the Company and the Surviving Corporation
pursuant to Section 6.04 and this Section 9.01 shall be used by the Company and
the Surviving Corporation for working capital purposes only, shall be paid to
H&QGF only pursuant to the Company's obligations under its debt agreements held
by H&QGF, unless GMI shall consent thereto, in advance, in writing, and shall in
no case be distributed to the holders of the Company's securities (other than as
repayment of intercompany indebtedness to GMI or GMC after the Closing).
Immediately following the first disbursement of cash from GMI to the Company
under the loan of $2,500,000 to be made pursuant to Section 6.04, the Company
shall obtain the prior approval of GMI for any capital expenditure of the
Company in excess of $25,000.
9.02 Disposition of Assets. GMI shall not cause the Surviving
---------------------
Corporation to dispose of any assets valued at more than $50,000 unless it has
the written consent of the Chief Executive Officer or President of the Surviving
Corporation or until 90 days or more after the Closing Date.
9.03 Series B Preferred Stock.
------------------------
(a) Promptly after the Effective Time, the Surviving Corporation
shall amend its Certificate of Incorporation to create a new class of nonvoting
preferred stock (the "Series B Preferred Stock") and shall use its best efforts
to negotiate and conclude an agreement with
39
<PAGE>
H&QGF, GBC and CR to exchange $1,000,000 of the Surviving Corporation's
indebtedness held by H&QGF, GBC and CR for 400,000 shares of such Series B
Preferred Stock.
(b) The Series B Preferred Stock shall pay a dividend at an annual
rate of 12%, in cash and in Escrow Units at a rate of $1.30 per Escrow Unit.
The dividend shall be paid entirely in Escrow Units until November 1, 1999.
From November 1, 1999 through the 365/th/ day following the Closing Date (the
"Earn Out Date"), the dividend shall be paid 50% in cash and 50% in Escrow
Units. After the Earn Out Date, the dividend shall be paid entirely in cash.
All dividends to be paid in Escrow Units pursuant to this Section 9.03
(including all Escrow Units due up to and through the Earn Out Date) shall be
deemed prepaid at Closing. All dividends due in cash shall be paid quarterly in
arrears by the Surviving Corporation.
(c) Each share of Series B Preferred Stock shall be convertible into
one share of the common stock of the Surviving Corporation ("Surviving
Corporation Common Stock"); provided, however, that upon any such conversion
each share of Surviving Corporation Common Stock so issued shall immediately be
deemed tendered to GMC in exchange for one share of GMC Common Stock to be
delivered by GMC to the former holder of the Series B Preferred Stock.
9.04 Certain Loans from H&QGF, GBC and CR to the Company and the
-----------------------------------------------------------
Surviving Corporation. Reference is made herein to an "Existing Business Loan
- ---------------------
Agreement" which shall mean the Business Loan Agreement between the Company and
H&QGF dated September 30, 1996, as amended on April 24, 1997, and including all
documents related thereto. On the Closing Date, the Existing Business Loan
Agreement shall be assumed by the Surviving Corporation and amended to change
certain of its terms and provisions, and the resulting post-Closing agreement
between the Surviving Corporation and H&QGF shall be referred to as the
"Business Loan Agreement." Each share of Company Common Stock received by
H&QGF, GBC and CR as interest earned before the Closing Date under certain loans
from H&QGF (and its participants, GBC and CR) to the Company pursuant to the
Existing Business Loan Agreement shall be converted as of the Closing Date into
one Escrow Unit, pursuant to Section 2.01(a) hereof. Interest under the
Business Loan Agreement, which interest shall accrue at an annual rate of 9.75%,
shall be prepaid to H&QGF, GBC and CR on the Closing Date for interest to be
earned up to and including the ninetieth day following the Closing Date (the
"Prepaid Interest"). Such Prepaid Interest shall be paid in Escrow Units at the
rate of one Escrow Unit for each $1.30 of Prepaid Interest.
9.05 Confidentiality.
---------------
(a) For purposes of this Section 9.04, a "party" shall refer to (a)
the Company and (b) together, GMI and Merger Subsidiary. Each party shall treat
as confidential and shall cause its accountants, counsel and other
representatives to treat as confidential, all documents and information
concerning the other party furnished by the other party to such party (including
documents and information furnished prior to the date hereof) in connection with
the transactions contemplated by this Agreement, except to the extent that such
information or documents (i) at the
40
<PAGE>
time of its disclosure to the receiving party by or on behalf of the disclosing
party is already known or available to the receiving party; provided, that the
receiving party is not subject to similar restrictions on confidentiality as set
forth herein with a third party with respect to such information; (ii) is or
becomes known or available to the public other than as a result of unauthorized
disclosure by the receiving party or its directors, officers, employees, agents
or representatives, (iii) is or becomes known or available to the receiving
party without similar restrictions of confidentiality as set forth herein from a
source other than the disclosing party, provided that such source is not known
by the receiving party, after reasonable inquiry, to be bound by a
confidentiality agreement with, or other obligation of secrecy to, the
disclosing party that would prohibit such disclosures to the receiving party by
such other party; (iv) is independently generated by the receiving party and not
derived from confidential information; or (v) is required to be disclosed by the
receiving party by law, regulation, court order or other legal process. Subject
to the foregoing, each party will not release or disclose such information or
documents to any person other than its representatives in connection with this
Agreement and will not use such information for purposes other than as
contemplated by this Agreement. In the event of the termination of this
Agreement, each party hereto shall, and shall cause its representatives to,
deliver to the other party the originals of all documents obtained by such party
or on behalf of such party from the other party in connection with this
Agreement, whether so obtained before or after the execution hereof, and such
party shall, and shall cause its representatives to, destroy all copies thereof.
(b) Unless otherwise required by law, no party shall disclose to any
person (other than the party's representatives) any information regarding the
transactions contemplated by this Agreement, including the existence and terms
of this Agreement.
9.06 Solicitation. Each of the Company, GMI and Merger Subsidiary
------------
consent that from the date hereof until three years after termination of this
Agreement pursuant to Article VIII or the Effective Time, whichever occurs
first, they will not (except in connection with the transactions contemplated
hereby) offer to hire, hire, attempt to offer to hire or attempt to hire any
employees of GMI or Merger Subsidiary (in the case of the Company) or the
Company (in the case of GMI or Merger Subsidiary).
9.07 Employee Benefit Plans. GMI shall allow retained employees of
----------------------
the Company to participate, effective as of the Closing Date, under the terms of
the GMI's Employee Benefit Plans, including without limitation its health,
medical, disability, life or other insurance, retirement, 401(k) or severance
plans, as employees of similar salary and position at GMI or its subsidiaries as
if such employees had been employees of GMI subsidiaries during their employment
by the Company. Nothing herein shall (i) obligate GMI to offer employment to or
to continue to employ any person employed by the Company prior to the Effective
Time or (ii) prevent GMI from reducing or discontinuing any benefit for all of
its employees, including those employed by the Company prior to the Effective
Time. Any employee of the Company retained by GMI shall be an "at will"
employee, unless otherwise provided by agreement between GMI and such employee.
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<PAGE>
9.08 Directors' and Officers' Indemnification and Insurance.
------------------------------------------------------
(a) Except to the extent required by law, until the second
anniversary of the Effective Time, GMI will not take any action so as to amend,
modify or repeal the provisions for indemnification of directors, officers,
stockholders, employees or agents contained in the Certificate of Incorporation
or bylaws of the Surviving Corporation (which as of the Effective Time shall be
no less favorable to such individuals than those maintained by the Company on
the date hereof) in such a manner as would adversely affect the rights of any
individual who shall have served as a director, officer, stockholder, employee
or agent of the Company prior to the Effective Time (each an "Indemnified
Party") to be indemnified by the Company in respect of their serving in such
capacities prior to the Effective Time. GMI shall indemnify all directors,
officers, employees, and stockholders who are officers or directors of the
Company against any liability or losses (including reasonable attorney's fees
for counsel who are reasonably acceptable to GMI) any of them may incur because
of any claim brought against them prior to within two years from the Effective
Time as officers, directors, employees, agents or stockholders of the Company,
and in connection therewith, shall, subject to relevant state law and the
Certificate of Incorporation and Bylaws of the Company and the Surviving
Corporation, advance reasonable attorney's fees to them to defend any such
claim; provided, however, that GMI shall be entitled to cooperate in the defense
of any such matter; and provided, further, that GMI shall not be liable for any
settlement effected without its written consent (which consent shall not be
unreasonably withheld); and provided, further, that GMI shall not be obligated
pursuant to this Section to pay the fees and disbursements of more than one
counsel for all Indemnified Parties in any single action, except to the extent
that, in the opinion of counsel for the Indemnified Parties, two or more of such
Indemnified Parties have conflicting interests in the outcome of such action.
GMI may obtain directors' and officers' liability insurance covering its
obligations under this section.
(b) GMI and the Surviving Corporation shall maintain, until April 5,
2001, the policies of directors' and officers' liability insurance maintained by
the Company as of the date hereof (or policies of at least the same coverage and
amounts containing terms that are no less advantageous to the insured parties)
with respect to claims arising from facts or events that occurred on or prior to
the Effective Time.
(c) The provisions of this Section are intended to be for the benefit
of, and shall be enforceable by, each Indemnified Party and each party entitled
to insurance coverage under paragraph (b) above, respectively, and his or her
heirs and legal representatives, and shall be in addition to any other rights an
Indemnified Party may have under the Certificate of Incorporation or Bylaws of
the Surviving Corporation, under the DGCL or otherwise.
9.09 Escrow Agreement. On or before the Earn Out Date, GMC, GMI and
----------------
the Surviving Corporation shall enter into the Escrow Agreement (as defined in
Section 2.02 hereof) pursuant to which the Merger Consideration shall be
distributed consistent with the terms of the Letter Agreement, this Agreement
and the Collateral Agreement.
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<PAGE>
ARTICLE X
SURVIVAL; INDEMNIFICATION
-------------------------
10.01 Survival of Representations and Warranties. Notwithstanding any
------------------------------------------
investigation made by or on behalf of any of the parties hereto or the results
of any such investigation and notwithstanding the participation of such party in
the Closing, the representations and warranties contained in Article III and
Article IV hereof shall survive the Effective Time for a period of one year
following the Effective Time.
10.02 Indemnification by the Company.
------------------------------
(a) Subject to the limitations of Section 10.02(b), the Company
agrees to indemnify in full GMC, GMI and Merger Subsidiary and their respective
officers, directors, employees, agents and stockholders (collectively, the "GMI
Indemnified Parties") and hold them harmless against any loss, liability,
deficiency, damage, expense or cost (including reasonable legal expenses),
whether or not actually incurred or paid (collectively, "Losses"), which GMI
Indemnified Parties may suffer, sustain or become subject to, prior to the first
anniversary of the Effective Time, as a result of (i) any misrepresentation in
any of the representations and warranties of the Company contained in this
Agreement or in any exhibits, schedules, certificates or other documents
delivered or to be delivered by or on behalf of the Company pursuant to the
terms of this Agreement or otherwise referenced or incorporated in this
Agreement (collectively, the "Related Documents"), (ii) any breach of, or
failure to perform, any agreement of the Company contained in this Agreement or
any of the Related Documents, (iii) any "Claims" (as defined in Section 10.04(a)
hereof) or threatened Claims against GMI arising out of the actions or inactions
of the Company with respect to the Company's business prior to the Effective
Time; or (iv) any untrue statement or alleged untrue statement of any material
fact contained in the Information Statement, or any amendment or supplement
thereto, or arising out of or based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein, in the light of the circumstances in which they were
made, not misleading (collectively, "GMI Losses"); provided, however, that the
Company will not be liable in any such case to the extent that any such loss,
damage, liability, cost or expense arises out to or is based upon any untrue
statement or alleged untrue statement or omission or allege omission so made in
conformity with information furnished by GMC, GMI or Merger Subsidiary.
Notwithstanding anything in this Section 10.02 to the contrary, the GMI
Indemnified Parties agree to seek indemnification from the Escrow Fund only.
(b) The Company shall be liable to the GMI Indemnified Parties for
any GMI Loss (i) only if GMI or Merger Subsidiary delivers to the Stockholder's
Representative written notice, setting forth in reasonable detail the identity,
nature and amount of GMI Losses related to such claim or claims prior to the
first anniversary of the Effective Time and (ii) only if the aggregate amount of
all GMI Losses exceeds $250,000 (the "Basket Amount"), in which case the Company
shall be obligated to indemnify the GMI Indemnified Parties only for the excess
of the
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<PAGE>
aggregate amount of all such GMI Losses over the Basket Amount. GMI or Merger
Subsidiary's failure to provide the detail required by clause (i) in the
preceding sentence shall not constitute either a breach of this Agreement by GMI
or Merger Subsidiary or any basis for the Company to assert that GMI or Merger
Subsidiary did not comply with the terms of this Section 10.03 sufficient to
cause either GMI or Merger Subsidiary to have waived its rights under this
Section 10.03.
10.03 Indemnification by GMI.
----------------------
(a) Subject to the limitations of Section 10.03(b), GMI agrees to
indemnify in full the Company and the Company's officers, directors, employees,
agents and stockholders (collectively, the "Company Indemnified Parties") and
hold them harmless against any Losses which any of the Company Indemnified
Parties may suffer, sustain or become subject to, prior to the first anniversary
of the Effective Time, as a result of (i) any misrepresentation in any of the
representations and warranties of GMI and Merger Subsidiary contained in this
Agreement or in any of the Related Documents, (ii) any breach of, or failure to
perform, any agreement of GMC, GMI or Merger Subsidiary contained in this
Agreement or any of the Related Documents, (iii) any Claims or threatened Claims
against the Company arising out of the actions or inactions of GMC, GMI or
Merger Subsidiary with respect to the Company's business or the Real Property
after the Effective Time; or (iv) any untrue statement or alleged untrue
statement of any material fact contained in the Information Statement, or any
amendment or supplement thereto, or arise out of are based upon the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein, in the light of the circumstances
in which they were made, not misleading; provided, however, that GMI will not be
liable in any such case to the extent that any such loss, damage, liability,
cost or expense arises out to or is based upon any untrue statement or alleged
untrue statement or omission or allege omission so made in conformity with
information furnished by the Company (collectively, "Company Losses").
(b) GMI will be liable to the Company Indemnified Parties for any
Company Loss (i) only if the Company delivers to GMI and Merger Subsidiary
written notice, setting forth in reasonable detail the identity, nature and
amount of Company Losses related to such claim or claims prior to the first
anniversary of the Effective Time and (ii) only if the aggregate amount of all
Company Losses exceeds the Basket Amount, in which case GMI shall be obligated
to indemnify the Company Indemnified Parties only for the excess of the
aggregate amount of all such Company Losses over the Basket Amount. The
Company's failure to provide the detail required by clause (i) in the preceding
sentence shall not constitute either a breach of this Agreement by the Company
or any basis for GMC, GMI or Merger Subsidiary to assert that the Company did
not comply with the terms of this Section 10.03 sufficient to cause either the
Company to have waived its rights under this Section 10.03.
10.04 Method of Asserting Claims. As used herein, an "Indemnified
--------------------------
Party" shall refer to a "GMI Indemnified Party" or "Company Indemnified Party,"
as applicable, the
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<PAGE>
"Notifying Party" shall refer to the party hereto whose Indemnified Parties are
entitled to indemnification hereunder, and the "Indemnifying Party" shall refer
to the party hereto obligated to indemnify such Notifying Party's Indemnified
Parties.
(a) In the event that any of the Indemnified Parties is made a
defendant in or party to any action or proceeding, judicial or administrative,
instituted by any third party for the liability or the costs or expenses of
which are Losses (any such third party action or proceeding being referred to as
a "Claim"), the Notifying Party shall give the Indemnifying Party prompt notice
thereof. The failure to give such notice shall not affect any Indemnified
Party's ability to seek reimbursement unless such failure has materially and
adversely affected the Indemnifying Party's ability to defend successfully a
Claim. The Indemnifying Party shall be entitled to contest and defend such
Claim; provided, that the Indemnifying Party (i) has a reasonable basis for
concluding that such defense may be successful and (ii) diligently contests and
defends such Claim. Notice of the intention so to contest and defend shall be
given by the Indemnifying Party to the Notifying Party within 20 business days
after the Notifying Party's notice of such Claim (but, in all events, at least
five business days prior to the date that an answer to such Claim is due to be
filed). Such contest and defense shall be conducted by reputable attorneys
employed by the Indemnifying Party. The Notifying Party shall be entitled at
any time, at its own cost and expense (which expense shall not constitute a Loss
unless the Notifying Party reasonably determines that the Indemnifying Party is
not adequately representing or, because of a conflict of interest, may not
adequately represent, any interests of the Indemnified Parties, and only to the
extent that such expenses are reasonable), to participate in such contest and
defense and to be represented by attorneys of its or their own choosing. If the
Notifying Party elects to participate in such defense, the Notifying Party will
cooperate with the Indemnifying Party in the conduct of such defense. Neither
the Notifying Party nor the Indemnifying Party may concede, settle or compromise
any Claim without the consent of the other party, which consents will not be
unreasonably withheld. Notwithstanding the foregoing, (i) if a Claim seeks
equitable relief or (ii) if the subject matter of a Claim relates to the ongoing
business of any of the Indemnified Parties, which Claim, if decided against any
of the Indemnified Parties, would materially adversely affect the ongoing
business or reputation of any of the Indemnified Parties, then, in each such
case, the Indemnified Parties alone shall be entitled to contest, defend and
settle such Claim in the first instance and, if the Indemnified Parties do not
contest, defend or settle such Claim, the Indemnifying Party shall then have the
right to contest and defend (but not settle) such Claim.
(b) In the event any Indemnified Party should have a claim against
any Indemnifying Party that does not involve a Claim, the Notifying Party shall
deliver a notice of such claim with reasonable promptness to the Indemnifying
Party. If the Indemnifying Party notifies the Notifying Party that it does not
dispute the claim described in such notice or fails to notify the Notifying
Party within 30 days after delivery of such notice by the Notifying Party
whether the Indemnifying Party disputes the claim described in such notice, the
Loss in the amount specified in the Notifying Party's notice will be
conclusively deemed a liability of the Indemnifying Party and the Indemnifying
Party shall pay the amount of such Loss to the Indemnified Party on demand. If
the Indemnifying Party has timely disputed its Liability with
45
<PAGE>
respect to such claim, the Chief Executive Officers of each of the Indemnifying
Party and the Notifying Party will proceed in good faith to negotiate a
resolution of such dispute, and if not resolved through the negotiations of such
Chief Executive Officers within 60 days after the delivery of the Notifying
Party's notice of such claim, such dispute shall be resolved fully and finally
in Minneapolis, Minnesota by a mutually acceptable arbitrator selected pursuant
to, and an arbitration governed by, the Commercial Arbitration Rules of the
American Arbitration Association. The arbitrator shall resolve the dispute
within 30 days after selection and judgment upon the award rendered by such
arbitrator may be entered in any court of competent jurisdiction.
(c) After the Closing, the rights set forth in this Article X shall
be each party's sole and exclusive remedies against the other party hereto for
misrepresentations or breaches of covenants contained in this Agreement and the
Related Documents. Notwithstanding the foregoing, nothing herein shall prevent
any of the Indemnified Parties from bringing an action based upon allegations of
fraud or other intentional breach of an obligation of or with respect to either
party in connection with this Agreement and the Related Documents. In the event
such action is brought, the prevailing party's reasonable attorneys' fees and
reasonable costs shall be paid by the nonprevailing party.
(d) Any indemnification payable under this Article X shall be, to
the extent permitted by law, an adjustment to purchase price.
ARTICLE XI
MISCELLANEOUS
-------------
11.01 Press Releases and Announcements. Prior to the Effective Time,
--------------------------------
no party hereto shall issue any press release (or make any other public
announcement) related to this Agreement or the transactions contemplated hereby
or make any announcement to the employees, customers or suppliers of the Company
without prior written approval of the other party hereto, except as may be
necessary, in the opinion of counsel to the party seeking to make disclosure, to
comply with the requirements of this Agreement, the Certificate of Merger or
applicable law. If any such press release or public announcement is so required,
the party making such disclosure shall consult with the other party prior to
making such disclosure, and the parties shall use all reasonable efforts, acting
in good faith, to agree upon a text for such disclosure which is satisfactory to
both parties.
11.02 Expenses. Except as otherwise expressly provided for herein, the
--------
Company, GMC, GMI and Merger Subsidiary will each pay all of their own expenses
(including attorneys', investment bankers' and accountants' fees) in connection
with the negotiation of this Agreement, the performance of their respective
obligations under this Agreement and the Certificate of Merger and the
consummation of the transactions contemplated hereby and thereby (whether
consummated or not).
11.03 Amendment and Waiver. This Agreement may not be amended or
--------------------
waived except in a writing executed by the party against which such amendment or
waiver is sought to be enforced; provided, however, that after the approval of
this Agreement by the stockholders of
46
<PAGE>
the Company, no amendment may be made which reduces the Merger Consideration or
which effects any changes which would materially adversely affect the
stockholders of the Company without the further approval of the stockholders of
the Company. No course of dealing between or among any persons having any
interest in this Agreement will be deemed effective to modify or amend any part
of this Agreement or any rights or obligations of any person under or by reason
of this Agreement.
11.04 Notices. All notices, demands and other communications to be
-------
given or delivered under or by reason of the provisions of this Agreement will
be in writing and will be deemed to have been given when personally delivered or
three days after being mailed, if mailed by first class mail, return receipt
requested, or when receipt is acknowledged, if sent by facsimile, telecopy or
other electronic transmission device. Notices, demands and communications to
GMI, Merger Subsidiary and the Company will, unless another address is specified
in writing, be sent to the address indicated below:
Notices to GMI or Merger Subsidiary: with a copy to:
- ----------------------------------- --------------
Mr. James Geiser Dorsey & Whitney
Global MAINTECH, Inc. 220 South Sixth Street
7578 Market Place Drive Minneapolis, MN 55402
Eden Prairie, MN 55344 Attention: Kenneth L. Cutler, Esq.
Telecopy: (612) 944-3311 Telecopy: (612) 340-8738
Notices to the Company: with a copy to:
- ---------------------- --------------
Mr. James G. Watson Brobeck Phleger & Harrison LLP
President and Chief Executive Officer 1125 Seventeenth Street, Suite 2525
Breece Hill Technologies, Inc. Denver, CO 80202
6287 Arapahoe Avenue Attention: Jeremy W. Makarechian, Esq.
Boulder, CO 80303 Telecopy: (303)299-8819
Telecopy: (303)449-2431
Notices to the Stockholders' Representative:
- -------------------------------------------
Mr. Vernon F. Taylor III
Chairman, Board of Directors
Breece Hill Technologies, Inc.
6287 Arapahoe Avenue
Boulder, CO 80303
Telecopy: (303)449-2431
11.05 Assignment. This Agreement and all of the provisions hereof will
----------
be binding upon and inure to the benefit of the parties hereto and their
respective successors and permitted assigns, except that neither this Agreement
nor any of the rights, interests or obligations hereunder may be assigned by any
party hereto without the prior written consent of the other parties hereto.
47
<PAGE>
11.06 Severability. Whenever possible, each provision of this
------------
Agreement will be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be prohibited
by or invalid under applicable law, such provision will be ineffective only to
the extent of such prohibition or invalidity, without invalidating the remainder
of such provision or the remaining provisions of this Agreement.
11.07 Complete Agreement. This Agreement, the Certificate of Merger
------------------
and the Related Agreements and other exhibits hereto, the Disclosure Schedule
and the other documents referred to herein contain the complete agreement
between the parties and supersede any prior understandings, agreements or
representations by or between the parties, written or oral, which may have
related to the subject matter hereof in any way.
11.08 Counterparts. This Agreement may be executed in one or more
------------
counterparts, any one of which need not contain the signatures of more than one
party, but all such counterparts taken together will constitute one and the same
instrument.
11.09 Governing Law. The internal law, without regard for conflicts of
-------------
laws principles, of the State of California will govern all questions concerning
the construction, validity and interpretation of this Agreement and the
performance of the obligations imposed by this Agreement.
11.10 No Third-Party Beneficiaries. Notwithstanding anything to the
----------------------------
contrary in Section 9.06, no employee or former employee of the Company shall be
entitled to rights under this Agreement as a third-party beneficiary.
[The remainder of this page was intentionally left blank. Signature page
follows.]
48
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
day and year first above written.
Global MAINTECH Corporation
By /s/ James Geiser
---------------------------
Name:
Title:
Global MAINTECH, Inc.
By /s/ James Geiser
---------------------------
Name:
Title:
BHT Acquisition, Inc.
By /s/ James Geiser
---------------------------
Name:
Title:
Breece Hill Technologies, Inc.
By /s/ James Watson
---------------------------
Name:
Title:
<PAGE>
SCHEDULE 6.05
REGISTRATION RIGHTS
1. Piggyback Registration Rights. If at any time or from time to time 90 days
-----------------------------
or more after the Closing Date, GMC proposes to register any of its securities
under the Act on any form for the registration of securities under such Act,
whether or not for its own account, other than by a registration statement on
Form S-8 or other form which does not include substantially the same information
as would be required in a form for the general registration of securities or
would not be available for the Registrable Securities (a "Piggyback Eligible
Registration"), it shall as expeditiously as possible (and at least 15 days
before the proposed registration) give written notice to all holders of
Unregistered GMC Common Stock and the Non-H&QGF Warrants, by giving such notice
to the Stockholders' Representative, specifying its intention to register and
specifying such holders' rights under this Section 1 (the "Piggyback
Registration Rights"). Upon the written request of any such holder made within
20 days after receipt of any such notice (which request shall specify the number
of shares of Unregistered GMC Common Stock intended to be disposed of by such
holder), GMC shall include in the registration statement the Unregistered GMC
Common Stock which the Company has been so requested to register by the holders
thereof (the "Selling Stockholders") and shall keep such registration statement
in effect and in compliance with each applicable Federal and state law or
regulation for 180 days (a "Piggyback Registration").
a. Withdrawal of Piggyback Registration by GMC. If, at any time after
-------------------------------------------
giving written notice of its intention to register any securities in a
Piggyback Eligible Registration but prior to the effective date of the
related registration statement, GMC shall determine for any reason not
to register such securities, GMC shall give written notice of such
determination to each Selling Stockholder, by giving such notice to
the Stockholders' Representative, and thereupon shall be relieved of
its obligation to register any Unregistered GMC Common Stock in
connection with such Piggyback Eligible Registration. All best
efforts obligations of GMC pursuant to Section 3 shall cease if GMC
determines to terminate prior to such effective date any registration
where Unregistered GMC Common Stock are being registered pursuant to
this Section 1.
b. Piggyback Registration of Underwritten Public Offerings. If a
-------------------------------------------------------
Piggyback Eligible Registration involves an offering by or through
underwriters, then, (i) all Selling Stockholders must sell their
Unregistered GMC Common Stock to the underwriters selected by GMC on
the same terms and conditions as apply to securities otherwise being
sold through the underwriters and (ii) any Selling Stockholder may
elect in writing, not later than three business days prior to the
effectiveness of the registration statement filed in connection with
such registration, not to have his, her or its Unregistered GMC Common
Stock so included in connection with such registration.
<PAGE>
c. Payment of Registration Expenses for Piggyback Registration. GMC
-----------------------------------------------------------
shall pay any and all Registration Expenses (as defined below)
incurred or made in connection with each registration of Unregistered
GMC Common Stock requested pursuant to a Piggyback Registration Right.
For purposes of this Section 1, Registration Expenses shall mean any
and all expenses incurred in connection with any registration or
action incident to performance of or compliance by GMC with Section 1,
2, 3 or 4 of this Schedule, including, without limitation, (i) all
Securities and Exchange Commission, national securities exchange and
NASD registration and filing fees; (ii) all listing fees and all
transfer agent fees; (iii) all fees and expenses of complying with
state securities or blue sky laws (including the fees and
disbursements of counsel for the underwriters in connection with blue
sky qualifications of the Unregistered GMC Common Stock); (iv) all
printing, mailing, messenger and delivery expenses; and (v) all fees
and disbursements of counsel for GMC and of its accountants, including
the expenses of any special audits or "cold comfort" letters.
d. Priority in Piggyback Eligible Registration. If a Piggyback Eligible
-------------------------------------------
Registration involves an offering by or through underwriters, GMC
shall not be required to include Unregistered GMC Common Stock therein
if and to the extent the underwriter managing the offering reasonably
believes in good faith and advises each Selling Stockholder, by
advising the Stockholders' Representative, that inclusion of the
Selling Stockholder's Unregistered GMC Common Stock would materially
adversely affect such offering; provided, that, except with respect to
Unregistered GMC Common Stock requested to be included in the
Piggyback Eligible Registration by certain officers of GMC in the
amount of $294,500 identified as "notes receivable-officers" in the
Consolidated Balance Sheets in GMC's annual report on Form 10-KSB for
the year ended December 31, 1997, (i) if other Selling Stockholders
who are employees, officers, directors or other affiliates of GMC have
requested registration of securities in the proposed offering, GMC
will reduce or eliminate such other Selling Stockholders' securities
before any reduction or elimination of Unregistered GMC Common Stock;
(ii) any such reduction or elimination (after taking into account the
effect of clause (i)) shall be pro rata to all other holders of the
--- ----
securities of GMC exercising "piggyback registration rights" similar
to those set forth herein in proportion to the respective number of
shares they have requested to be registered, and (iii) in such event,
such Selling Stockholders may delay any offering by them of all
Unregistered GMC Common Stock requested to be included or that portion
of such Unregistered GMC Common Stock eliminated for such period, not
to exceed 60 days, as the managing underwriter shall request and GMC
shall file such supplements and post-effective amendments and take
such other action necessary under Federal and state law or regulation
as may be necessary to permit such Selling Stockholders to make their
proposed offering for a period of 180 days following such period of
delay.
<PAGE>
2. Demand Registration Rights.
--------------------------
a. Request for Registration. If, at any time 30 days or more after the
------------------------
Closing Date and prior to the expiration of two years after the
Closing Date, any holder of the Unregistered GMC Common Stock requests
that GMC file a registration statement under the Act with respect to
that holder's Unregistered GMC Common Stock, GMC as soon as
practicable shall use its best efforts to file a registration
statement with respect to all Unregistered GMC Common Stock that it
has been so requested to include and obtain the effectiveness thereof
and to take all other action necessary under any Federal or state law
or regulation to permit the Unregistered GMC Common Stock that are
then held and/or that may be acquired upon the exercise of the Escrow
Warrants specified in the notices of the holder or holders thereof to
be sold or otherwise disposed of and GMC shall maintain such
compliance with each such Federal and state law and regulation for 180
days (a "Demand Registration"); provided, however, that GMC shall be
entitled to defer such registration for a period of up to 90 days if
and to the extent that its Board of Directors shall determine that
such registration would materially interfere with a pending corporate
transaction. GMC shall also promptly give written notice, by giving
such notice to the Stockholders' Representative, to the holders of any
other Unregistered GMC Common Stock and the Non-H&QGF Warrants that
have not made a request to GMC pursuant to the provisions of this
subsection (a) of its intention to effect any required registration or
qualification, and shall use its best efforts to effect as
expeditiously as possible such registration or qualification of all
other such Unregistered GMC Common Stock that are then held and/or
that may be acquired upon the exercise of Escrow Warrants, the holder
or holders of which have requested such registration or qualification
within 15 days after such notice has been given by GMC as provided in
the preceding sentence. GMC shall be required to effect a
registration or qualification pursuant to this Section 2(a) only once.
b. Payment of Registration Expenses for Demand Registration. GMC shall
--------------------------------------------------------
pay all Registration Expenses in connection with a Demand Registration
only if holders of more than 50% of the Unregistered GMC Common Stock
request registration pursuant to this Section 2. In all other cases,
the holder or holders of Unregistered GMC Common Stock to be
registered pursuant to this Section 2 shall bear all Registration
Expenses in connection with such registration.
c. Selection of Underwriters. If any Demand Registration is requested to
-------------------------
be in the form of an underwritten offering, the managing underwriter,
the co-manager (if any) and the qualified independent underwriter
required under the rules of the NASD (if any) shall be selected and
obtained by the holders of a majority of the Unregistered GMC Common
Stock to be registered. Such selection shall be subject to GMC's
consent, which consent shall not be unreasonably withheld. All fees
and expenses (other than Registration Expenses otherwise required to
be paid) of any managing underwriter, any co-manager or any qualified
independent
<PAGE>
underwriter or other independent pricer required under the rules of
the NASD shall be paid for by such underwriters or by the Selling
Stockholders.
3. Registration Procedure. If and whenever GMC is required to use its best
----------------------
efforts to take action pursuant to any Federal or state law or regulation to
permit the sale or other disposition of any Unregistered GMC Common Stock that
are then held or that may be acquired in connection with the Earn Out Payment,
if any, or the exercise of Escrow Warrants in order to effect or cause the
registration of any Unregistered GMC Common Stock under the Act as provided in
Section 1 or 2, GMC shall, as expeditiously as practicable:
a. furnish to each Selling Stockholder and the underwriters, if any,
without charge, as many copies of the registration statement, the
prospectus or prospectuses (including each preliminary prospectus) and
any amendment or supplement thereto as they may reasonably request;
b. enter into such agreements (including an underwriting agreement) and
take all other actions reasonably required in connection therewith in
order to expedite or facilitate the disposition of such Unregistered
GMC Common Stock and in such connection, if the registration is in
connection with an underwritten offering (i) make such representations
and warranties to the underwriters in such form, substance and scope
as are customarily made by issuers to underwriters in underwritten
offerings and confirm the same if and when requested; (ii) obtain
opinions of counsel to GMC and updates thereof (which counsel and
opinions in form, scope and substance shall be reasonably satisfactory
to the underwriters) addressed to the underwriters and the Selling
Stockholders covering the matters customarily covered in opinions
requested in underwritten offerings and such other matters as may be
reasonably requested by such underwriters; (iii) obtain "cold comfort"
letters and updates thereof from GMC's accountants addressed to the
underwriters, such letters to be in customary form and covering
matters of the type customarily covered in "cold comfort" letters by
underwriters and the Selling Stockholders in connection with
underwritten offerings; (iv) set forth in full in any underwriting
agreement entered into the indemnification provisions and procedures
of Section 4 with respect to all parties to be indemnified pursuant to
Section 4; and (v) deliver such documents and certificates as may be
reasonably requested by the underwriters to evidence compliance with
clause (i) of this Section 3(b) and with any customary conditions
contained in the underwriting agreement or other agreement entered
into by GMC; the above shall be done at each closing under such
underwriting or similar agreement or as and to the extent required
thereunder;
c. make available for inspection by the Stockholders' Representative all
financial and other records, pertinent corporate documents and
properties of GMC, and cause GMC's officers, directors and employees
to supply all information reasonably requested by any such
representatives in connection with such registration. Similarly, each
Selling Stockholder shall furnish to GMC such
<PAGE>
information regarding the distribution of such securities and such
other information as may otherwise be required by the Act to be
included in the related registration statement.
d. otherwise use its best efforts to comply with all applicable Federal
and state regulations; and take such other action as may be reasonably
necessary or advisable to enable each such Selling Stockholder and
each such underwriter to consummate the sale or disposition in such
jurisdiction or jurisdiction in which any such Selling Stockholder or
underwriter shall have requested that the Unregistered GMC Common
Stock be sold.
4. Indemnification. In the event that any Unregistered GMC Common Stock is
---------------
included in a registration statement pursuant to Section 6.05 of the Agreement
and this Schedule 6.05:
a. Indemnification by GMC. GMC will indemnify and hold harmless the
----------------------
Selling Stockholders and any underwriter (as defined in the 1933 Act)
for such Selling Stockholders from and against any and all loss,
damage, liability, cost and expense to which the Selling Stockholders
or any such underwriter may become subject under the 1933 Act or
otherwise, insofar as such losses, damages, liabilities, costs or
expenses are caused by any untrue statement or alleged untrue
statement of any material fact contained in such registration
statement, any prospectus contained therein or any amendment or
supplement thereto, or arise out of are based upon the omission or
alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein, in the
light of the circumstances in which they were made, not misleading,
provided however, that GMC will not be liable in any such case to the
extent that any such loss, damage, liability, cost or expense arises
out to or is based upon any untrue statement or alleged untrue
statement or omission or allege omission so made in conformity with
information furnished by any Selling Stockholder or such underwriter;
b. Indemnification by Selling Stockholders. Any Selling Stockholder and
---------------------------------------
any underwriter for the Selling Stockholders shall indemnify and hold
harmless GMC and GMI to the same extent as provided in paragraph (a)
of this Section 4 to the extent that any such loss, damage, liability,
cost or expense to which GMC and GMI may become subject is caused by
or arises out of or is based upon an untrue statement or alleged
untrue statement or omission or alleged omission made in conformity
with information furnished by such Selling Stockholder or underwriter;
and
c. Indemnification Procedure. Promptly after receipt by an indemnified
-------------------------
party pursuant to the provisions of paragraph (a) or (b) of this
Section 4 of notice of the commencement of any action involving the
subject matter of the foregoing indemnity provisions, such indemnified
party will, if a claim thereof is to be made against the indemnifying
party pursuant to the provisions of said paragraph (a) or
<PAGE>
(b), promptly notify the indemnifying party of the commencement
thereof; but the omission to so notify the indemnifying party will not
relieve it from any liability which it may have to any indemnified
party otherwise than hereunder. In case such action is brought against
any indemnified party and it notifies the indemnifying party of the
commencement thereof, the indemnifying party shall have the right to
participate in, and, to the extent that it may wish, jointly with any
other indemnifying party similarly notified, to assume the defense
thereof, with counsel satisfactory to such indemnified party;
provided, however, if the defendants in any action include both the
indemnified party and the indemnifying party and there is a conflict
of interest which would prevent counsel for the indemnifying party
from also representing the indemnified party, the indemnified party or
parties shall have the right to select separate counsel to participate
in the defense of such action on behalf of such indemnified party or
parties. After notice from the indemnifying party to such indemnified
party of its election so to assume the defense thereof, the
indemnifying party will not be liable to such indemnified party
pursuant to the provisions of said paragraph (a) or (b) for any legal
or other expense subsequently incurred by such indemnified party in
connection with the defense thereof other than reasonable costs of
investigation, unless (i) the indemnified party shall have employed
counsel in accordance with the proviso of the preceding sentence, (ii)
the indemnifying party shall not have employed counsel satisfactory to
the indemnified party to represent the indemnified party within a
reasonable time after the notice of the commencement of the action, or
(iii) the indemnifying party has authorized the employment of counsel
for the indemnified party at the expense of the indemnifying party.
5. Limitation on Registration Rights. Notwithstanding anything to the
---------------------------------
contrary contained in this Schedule 6.05, holders of the Unregistered GMC Common
Stock shall have the foregoing registration rights only to the extent that an
exemption from the registration and prospectus delivery requirements of the Act
pursuant to Rule 144 promulgated under the Act is not available.
6. Assignment. The registration and indemnification rights granted to the
----------
holders of Unregistered GMC Common Stock pursuant to this Schedule 6.05 and
Section 6.05 of the Merger Agreement shall be for the benefit of and enforceable
by the recipients of Unregistered GMC Common Stock issued in connection with the
Earn Out Payment, if any, and exercise of Escrow Warrants, and any subsequent
holders of Unregistered GMC Common Stock, whether or not any express assignment
of such rights to any such subsequent holder is made.
<PAGE>
CERTIFICATE OF DESIGNATION
of
SERIES C CONVERTIBLE PREFERRED STOCK
of
GLOBAL MAINTECH CORPORATION
(as filed on March 24, 1999 and corrected on March 30, 1999)
(Pursuant to Section 302A.401 of the Minnesota Business Corporation Act)
The undersigned hereby certifies that the Board of Directors of GLOBAL
MAINTECH CORPORATION, a Minnesota corporation (the "Company"), duly adopted the
following resolutions effective as of March 9, 1999:
RESOLVED, a series of preferred stock of the Company is created and
the relative rights, preferences, and limitations of the shares of such series
are as follows:
I. Designation and Amount. The shares of such series of Preferred Stock shall
be designated as "Series C Convertible Preferred Stock" (the "Series C Preferred
Stock") and the number of shares constituting the Series C Preferred Stock shall
be 1,675. The Series C Preferred Stock shall have a stated value (the "Stated
Value") of $1,000 per share.
II. Dividends.
A. The holders of shares of Series C Preferred Stock shall be entitled to
receive dividends, out of any assets legally available therefor, subject to the
prior declaration or payment of any dividend to which the holders of Series A
Convertible Preferred Stock of the Company (the "Series A Stock") and the Series
B Convertible Preferred Stock of the Company (the "Series B Stock") are
entitled, and prior to, and in preference to, any declaration or payment of any
dividend on the Common Stock of this Company, at a per share rate equal to eight
percent (8%) per annum of the amount of the Stated Value of the Series C
Preferred Stock, which is payable upon conversion (based upon a 365 calendar day
year) as set forth below. Dividends shall begin to accrue as of the Issuance
Date (as defined below). Any dividends payable pursuant to the provisions of
this paragraph shall, at the Company's option, be payable in cash, or
unrestricted shares of Common Stock of the Company within five Business Days (as
defined below) of when due. The number of shares of Common Stock to be issued
by the Company in lieu of a cash payment for dividends due as set forth herein
shall be equal to the number of shares of Common Stock resulting from dividing
the dollar amount of dividends owed by the Conversion Price (as defined below)
on such date as the
<PAGE>
dividends are payable (if such date is not a Trading Day, then the next Trading
Day (as defined below) immediately thereafter).
B. Such dividends shall accrue on each share of Series C Preferred Stock
from the Issuance Date, and shall accrue from day to day whether or not earned
or declared. Such dividends shall be cumulative so that if such dividends in
respect of any previous or current annual dividend period, at the annual rate
specified above, shall not have been paid or declared and a sum sufficient for
the payment thereof set apart, for all Series C Preferred Stock at the time
outstanding, the deficiency shall first be fully paid before any dividend or
other distribution shall be paid on or declared or set apart for the Series C
Preferred Stock, Common Stock or other security of the Company subordinate in
liquidation to the Series C Preferred Stock. Dividends on the Series C
Preferred Stock shall be non-participating and the holders of the Series C
Preferred Stock shall not be entitled to participate in any other dividends
beyond the cumulative dividends specified herein.
III. Liquidation, Dissolution or Winding Up.
A. In the event of any liquidation, dissolution or winding up of the
Company, whether voluntary or involuntary, subject to the prior liquidation
preference of the holders of Series A Stock and Series B Stock and prior and in
preference to any distribution of any assets of the Company to the holders of
Common Stock , holders of each share of Series C Preferred Stock shall be
entitled to receive out of the assets available for distribution to shareholders
the Stated Value per share of Series C Preferred Stock plus eight percent (8%)
per annum thereon from the Issuance Date (as defined below) to the Trading Day
(as defined below) immediately prior to such liquidation, dissolution or winding
up of the Company (the "Liquidation Amount").
B. Upon the completion of any required distribution to the holders of the
Series A Stock and Series B Stock, if the assets of the Company available for
distribution to shareholders shall be insufficient to pay the holders of shares
of Series C Preferred Stock the full Liquidation Amount to which they shall be
entitled, then any such distribution of assets of the Company shall be
distributed ratably to the holders of shares of Series C Preferred Stock.
C. After the payment of the Liquidation Amount shall have been made in
full to the holders of the Series C Preferred Stock or funds necessary for such
payment shall have been set aside by the Company in trust for the account of
holders of the Series C Preferred Stock so as to be available for such payments,
the holders of the Series C Preferred Stock shall be entitled to no further
participation in the distribution of the assets of the Company, and the
remaining assets of the Company legally available for distribution to
shareholders shall be distributed among the holders of Common Stock and any
other classes or series of Preferred Stock of the Company in accordance with
their respective terms.
IV. Voting. Holders of Series C Preferred Stock shall have no voting rights
except as expressly required by law or as expressly provided herein.
V. Conversion of Series C Preferred Stock. The holders of Series C Preferred
Stock shall have the right, at such holder's option, to convert the Series C
Preferred Stock into shares of Common Stock, on the following terms and
conditions:
<PAGE>
A. Subject to the provisions of Section XI hereof, at any time or times,
upon the earlier to occur of (i) the 61/st/ calendar day after the Issuance
Date, or (ii) the Effective Date, any holder of the Series C Preferred Stock
shall be entitled to convert any whole number of such holder's shares of Series
C Preferred Stock into that number of fully paid and nonassessable shares of
Common Stock, which is determined (per share of Series C Preferred Stock) by
dividing (x) $1,000, by (y) the Conversion Price (as defined below) (the
"Conversion Rate").
B. For purposes of this Certificate of Designation, the following terms
shall have the following meanings:
A "Business Day" shall be any day other than a Saturday, Sunday,
national holiday or a day on which the New York Stock Exchange is closed.
The "Closing Bid Price" shall mean, for any security as of any date,
the last closing bid price for such security on the Nasdaq Stock Market as
reported by Bloomberg L.P. ("Bloomberg"), or, if the Nasdaq Stock Market is not
the principal trading market for such security, the last closing bid price of
such security on the principal securities exchange or trading market where such
security is listed or traded as reported by Bloomberg, or if the foregoing do
not apply, the last closing bid price of such security in the over-the-counter
market on the NASD OTC Electronic Bulletin Board for such security as reported
by Bloomberg, or, the last closing trade price of such security as reported by
Bloomberg, or, if no last closing bid or trade price is reported for such
security by Bloomberg, the closing bid price shall be determined by reference to
the closing bid price as reported on the Principal Market. If the Closing Bid
Price cannot be calculated for such security on such date on any of the
foregoing bases, the Closing Bid Price of such security on such date shall be
the fair market value as mutually agreed by the Company and the holders of two
thirds of the outstanding shares of Series C Preferred Stock.
The "Conversion Price" shall mean, as of any Conversion Date (as
defined below) the lesser of (i) $2.50 or (ii) 80% of the average of the three
Trading Days, during the hours of 9:30 a.m. and 4:00 p.m. Eastern Time, that
have the lowest volume weighted average prices of the Common Stock during the 15
Trading Days (the "Lookback Period") immediately preceding the Conversion Date
(hereinafter referred to as the "Current Price") as reported by Bloomberg using
the "AQR" function. On the last Trading Day of each month, starting on the
first day of the fourth calendar month immediately following the Issuance Date,
the Lookback Period will be increased by two Trading Days until the Lookback
Period equals a maximum of 30 Trading Days.
"Effective Date" shall mean the date on which the Securities and
Exchange Commission (the "SEC") first declares effective a Registration
Statement registering the resale of 200% of the number of shares of Common Stock
issuable upon conversion of all of the Series C Preferred Stock outstanding on
the Trading Day immediately preceding the day such Registration Statement is
filed.
The "Issuance Date" shall mean, with respect to each share of Series C
Preferred Stock, the date of issuance of the applicable share of Series C
Preferred Stock.
A "Trading Day" shall mean a day on which the Principal Market is
open.
<PAGE>
The "Principal Market" shall mean the Nasdaq National Market, the
Nasdaq Small Cap Stock Market, the American Stock Exchange, the NASD OTC
Electronic Bulletin Board operated by the National Association of Securities
Dealers, Inc., or the New York Stock Exchange, whichever is at the time the
principal trading exchange or market for the Common Stock.
C. Holders of Series C Preferred Stock may exercise their right to
convert the Series C Preferred Stock by telecopying an executed and completed
notice of conversion in the agreed upon form (the "Notice of Conversion") to the
Company and delivering to Company the original Notice of Conversion and the
certificate representing the Series C Preferred Stock being converted by
reputable overnight courier. Each Business Day (between the hours of 7:00 a.m.
and 4:00 p.m. Pacific Time) on which a Notice of Conversion is telecopied to and
received by the Company shall be deemed a "Conversion Date". The Company will
deliver the certificates representing shares of Common Stock issuable upon
conversion of any share of Series C Preferred Stock (together with the
certificates representing the share or shares of Series C Preferred Stock not so
converted) to the holder thereof via reputable overnight courier, by electronic
transfer or otherwise within three Business Days after the Conversion Date,
provided the Company has received the original Notice of Conversion and Series C
Preferred Stock certificate being so converted on or before the close of
business of the third Business Day after the Conversion Date. In addition to
any other remedies which may be available to the holders of shares of Series C
Preferred Stock, in the event that the Company fails to deliver such shares of
Common Stock within such three Business Day period, the holder will be entitled
to revoke the relevant Notice of Conversion by delivering a notice (by similar
method) to such effect to the Company whereupon the Company and such holder
shall each be restored to their respective positions immediately prior to
delivery of such Notice of Conversion. The Notice of Conversion and Series C
Preferred Stock certificates representing the portion of the Series C Preferred
Stock converted shall be delivered as follows:
To the Company:
Global Maintech Corporation
7578 Market Place Drive
Eden Prairie, MN 55344
Attention: CEO
Telephone: (612) 944-0400
Facsimile: (612) 944-3311
with a copy to:
Ken Cutler
Dorsey & Whitney LLP
Pillsbury Center South
220 South Sixth Street
Minneapolis, Minnesota 55402-1498
Telephone: (612) 343-2194
Facsimile: (612) 340-2868
In the event that shares representing the Common Stock issuable upon
conversion of the Series C Preferred Stock (the "Conversion Shares") are not
delivered by the Company within three Business Days after the Conversion Date,
in addition to all other available remedies which such
<PAGE>
holder may be entitled, the Company shall pay to the holders thereof, in
immediately available funds, upon demand, as liquidated damages for such failure
and not as a penalty, for each $100,000 principal amount of Series C Preferred
Stock sought to be converted, $500 for each of the first ten (10) days and
$1,000 per day thereafter that the Conversion Shares are not delivered, which
liquidated damages shall run from the fourth Business Day after the Conversion
Date up until the time that either the Conversion Notice is revoked or the
Conversion Shares are delivered, at which time such liquidated damages shall
cease. Any and all payments required pursuant to this paragraph shall be payable
only in cash immediately. The payment of these liquidated damages by the Company
shall not relieve the Company of its obligations under this Certificate of
Designation.
D. If the Common Stock issuable upon the conversion of the Series C
Preferred Stock shall be changed into the same or different number of shares of
any class or classes of stock, whether by capital reorganization,
reclassification or otherwise, then and in each such event, the holders of
Series C Preferred Stock shall have the right thereafter to convert such shares
into the kind and amount of shares of stock and other securities and property
receivable upon such capital reorganization, reclassification or other change
which such holders would have received had their shares of Series C Preferred
Stock been converted immediately prior to such capital reorganization,
reclassification or other change.
E. If at any time or from time to time there shall be a capital
reorganization of the 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 Company with or into another corporation, or
the sale of all or substantially all of the Company's properties and assets to
any other person (any of which events is herein referred to as a
"Reorganization"), then as a part of such Reorganization, provision shall be
made so that the holders of the Series C Preferred Stock shall thereafter be
entitled to receive upon conversion of the Series C Preferred Stock, the number
of shares of stock or other securities or property of the Company, or of the
successor corporation resulting from such Reorganization, to which such holder
would have been entitled if such holder had converted its shares of Series C
Preferred Stock immediately prior to such Reorganization. In any such case,
appropriate adjustment shall be made in the application of the provisions of
this Section with respect to the rights of the holders of the Series C Preferred
Stock after the Reorganization, to the end that the provisions of this Section
(including adjustment of the number of shares issuable upon conversion of the
Series C Preferred Stock) shall be applicable after that event in as nearly
equivalent a manner as may be practicable.
F. Upon the occurrence of each adjustment or readjustment of the
Conversion Price of Series C Preferred Stock as provided herein, the Company, at
its expense, shall promptly compute such adjustment or readjustment in
accordance with the terms hereof and prepare and furnish to each holder of such
Series C Preferred Stock a certificate executed by the president and chief
financial officer (or in the absence of a person designated as the chief
financial officer, by the treasurer) setting forth such adjustment or
readjustment and showing in detail the facts upon which such adjustment or
readjustment are based. The Company shall, upon written request at any time of
any holder of Series C Preferred Stock, furnish or cause to be furnished to such
holder a certificate setting forth (A) the Conversion Price at the time in
effect, and (B) the number or shares of Common Stock and the amount, if any, of
other property which at the time would be received upon the conversion of a
share of Series C Preferred Stock.
<PAGE>
G. Upon receipt by the Company of evidence of the loss, theft,
destruction or mutilation of any Series C Preferred Stock certificate(s), and
(in the case of loss, theft or destruction) of indemnity or security reasonably
satisfactory to the Company, and upon the cancellation of the Series C Preferred
Stock certificate(s), if mutilated, the Company shall execute and deliver new
certificates for Series C Preferred Stock of like tenure and date. However, the
Company shall not be obligated to reissue such lost or stolen certificates for
shares of Series C Preferred Stock if the holder contemporaneously requests the
Company to convert such shares of Series C Preferred Stock into Common Stock.
H. The Company shall not issue any fraction of a share of Common Stock
upon any conversion. The Company shall round such fraction of a share of Common
Stock up to the nearest whole share.
I. In the event some but not all of the shares of Series C Preferred
Stock represented by a certificate or certificates surrendered by a holder are
converted, the Company shall execute and deliver to or on the order of the
holder, at the expense of the Company, a new certificate representing the number
of shares of Series C Preferred Stock which were not converted.
J. Each share of Series C Preferred Stock outstanding three years from
the Issuance Date shall automatically be converted into Common Stock on such
date at the Conversion Price and such date shall be deemed the Conversion Date
with respect to such shares.
K. The Company shall pay any and all original issue and/or transfer taxes
which may be imposed upon it with respect to the issuance and delivery of Common
Stock upon conversion of the Series C Preferred Stock.
L. In the event a holder shall elect to convert any share or shares of
Series C Preferred Stock as provided herein, the Company cannot refuse
conversion based on any claim that such holder or anyone associated or
affiliated with such holder has been engaged in any violation of law, unless an
injunction from a court, restraining and/or enjoining conversion of all or part
of said shares of Series C Preferred Stock shall have been issued and the
Company posts a surety bond for the benefit of such holder in the amount of 125%
of the Stated Value of the Series C Preferred Stock and dividends sought to be
converted, which is subject to the injunction, which bond shall remain in effect
until the completion of arbitration/litigation of the dispute and the proceeds
of which shall be payable to such holder in the event it obtains a favorable
judgment.
VI. No Reissuance of Series C Preferred Stock. No share or shares of Series C
Preferred Stock acquired by the Company by reason of purchase, conversion or
otherwise shall be reissued, and all such shares shall be canceled, retired and
eliminated from the shares which the Company shall be authorized to issue. The
Company may from time to time take such appropriate corporate action as may be
necessary to reduce the authorized number of shares of the Series C Preferred
Stock accordingly.
VII. Reservation of Shares. The Company shall, so long as any share or shares
of the Series C Preferred Stock are outstanding reserve and keep available out
of its authorized and unissued Common Stock, solely for the purpose of effecting
the conversion of the Series C Preferred Stock, such number of shares of Common
Stock as shall from time to time be sufficient to effect the conversion of all
of the Series C Preferred Stock then outstanding; provided that the number of
shares of Common Stock so reserved shall at no time be less than 200% of the
number of shares of
<PAGE>
Common Stock for which the Series C Preferred Stock are at any time convertible
and if at any time the number of authorized but unissued shares of Common Stock
shall not be sufficient to maintain such number of shares of Common Stock, the
Company shall take such corporate action as may be necessary to increase its
authorized but unissued shares of Common Stock to such number of shares as shall
be sufficient for such purpose.
VIII. Restrictions and Limitations.
A. Except as expressly provided herein or as required by law, so long as
any shares of Series C Preferred Stock remain outstanding, the Company shall
not, without the approval by vote or written consent by the holders of at least
two thirds of the then outstanding shares of Series C Preferred Stock, voting as
a separate class take any action that would adversely affect the rights,
preferences or privileges of the holders of Series C Preferred Stock.
B. Without limiting the generality of the preceding paragraph, the
Company shall not so long as any shares of Series C Preferred Stock remain
outstanding amend its Articles of Incorporation without the approval by the
holders of all of the then outstanding shares of Series C Preferred Stock if
such amendment would:
1. create any other class or series of capital stock entitled to
seniority as to the payment of dividends in relation to the holders of Series C
Preferred Stock;
2. reduce the amount payable to the holders of Series C Preferred
Stock upon the voluntary or involuntary liquidation, dissolution or winding up
of the Company, or change the relative seniority of the liquidation preferences
of the holders of Series C Preferred Stock to the rights upon liquidation of the
holders of other capital stock of the Company,
3. cancel or modify the conversion rights of the holders of Series C
Preferred Stock provided for in Section V herein; or
4. cancel or modify the rights of the holders of the Series C
Preferred Stock provided for in this Section.
IX. No Dilution or Impairment. The Company shall not, by amendment of its
Articles of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms of this Certificate of Designation set forth herein, but shall at all
times in good faith assist in the carrying out of all such terms and in the
taking of all such actions as may be necessary or appropriate in order to
protect the rights of the holders of the Series C Preferred Stock against
dilution or other impairment. Without limiting the generality of the foregoing,
the Company (a) shall not establish a par value of any shares of stock
receivable on the conversion of the Series C Preferred Stock above the amount
payable therefor on such conversion, (b) shall take all such action as may be
necessary or appropriate in order that the Company may validly and legally issue
fully paid and nonassessable shares of stock on the conversion of all Series C
Preferred Stock from time to time outstanding, and (c) shall not consolidate
with or merge into any other person or entity, or permit any such person or
entity to consolidate with or merge into the Company (if the Company is not the
surviving person), unless such other person or entity shall
<PAGE>
expressly assume in writing and will be bound by all of the terms of the Series
C Preferred Stock set forth herein.
X. Notices of Record Date. In the event of:
A. any taking by the Company of a record of the holders of any class of
securities for the purpose of determining the holders thereof who are entitled
to receive any dividend or other distribution, or any right to subscribe for,
purchase or otherwise acquire any shares of stock of any class or any other
securities or property, or to receive any other right, or
B. any capital reorganization of the Company, any reclassification or
recapitalization of the capital stock of the Company, any merger of the Company,
or any transfer of all or substantially all of the assets of the Company to any
other corporation, or any other entity or person, or
C. any voluntary or involuntary dissolution, liquidation or winding up of
the Company, then and in each such event the Company shall mail or cause to be
mailed to each holder of Series C Preferred Stock a notice specifying (i) the
date on which any such record is to be taken for the purpose of such dividend,
distribution or right and a description of such dividend, distribution or right,
(ii) the date on which any such reorganization, reclassification,
recapitalization, transfer, merger, dissolution, liquidation or winding up is
expected to become effective and (iii) the time, if any, that is to be fixed, as
to when the holders of record of Common Stock (or other securities) shall be
entitled to exchange their shares of Common Stock (or other securities) for
securities or other property deliverable upon such reorganization,
reclassification, recapitalization, transfer, merger, dissolution, liquidation
or winding up. Such notice shall be mailed at least ten Business Days prior to
the date specified in such notice on which such action is to be taken.
XI. Redemption.
A. For so long as the Company has not received a Notice of Conversion for
such shares, the Company may, at its option, repay, in whole or in part, the
Series C Preferred Stock shares at the Redemption Price (as defined below). The
Series C Preferred Stock is redeemable as a series, in whole or in part, by the
Company by providing written notice (the "Redemption Notice") to the holder of
the Series C Preferred Stock via facsimile at his or her address as the same
shall appear on the books of the Company (the Business Day between the hours of
7:00 a.m. and 4:00 p.m. Pacific Time the Redemption Notice is received by the
holders of the Series C Preferred Stock via facsimile is defined to be the
"Redemption Notice Date"). Within ten Trading Days after the Redemption Notice
Date the Company shall make payment of the Redemption Price (as defined below)
in immediately available funds to the holder for the shares of Series C
Preferred Stock which are the subject of the Redemption Notice (such date of
payment referred to as the "Redemption Date"). Partial redemptions shall be in
an aggregate principal amount of at least $100,000. If fewer than all of the
outstanding shares of Series C Preferred Stock are to be redeemed, the Company
will select those to be redeemed pro-rata amongst the then holders of the Series
C Preferred Stock based on the number of shares of Series C Preferred Stock then
outstanding.
B. In the event the Company serves a Redemption Notice within four
calendar months after the Issuance Date the "Redemption Price" shall be equal to
130% of the Stated Value of the shares of Series C Preferred Stock which are
subject to such Redemption Notice, plus all accrued but unpaid dividends on such
shares, and in the event the Company serves a Notice of Redemption
<PAGE>
at any time after the fourth calendar month after the Issuance Date, the
Redemption Price shall be equal to the greater of (i) 115% of the Stated Value
of the shares of Series C Preferred Stock which are subject to such Redemption
Notice, plus all accrued but unpaid dividends on such shares, or (ii) the
"Economic Benefit" of the shares of Series C Preferred Stock which are the
subject of such Redemption Notice. "Economic Benefit" shall mean the dollar
value derived if the shares of Series C Preferred Stock which were the subject
of the Redemption Notice were converted on the Redemption Notice Date and sold
on the Redemption Notice Date at the Closing Bid Price of the Common Stock on
the Redemption Notice Date.
C. The Notice of Redemption shall set forth (i) the Redemption Date and
the place fixed for redemption, (ii) the Redemption Price, (iii) a statement
that dividends on the shares of Series C Preferred Stock to be redeemed will
cease to accrue on such Redemption Date, (iv) a statement of or reference to
the conversion right set forth herein, and (v) confirmation that the Company has
the full Redemption Price reserved as set forth in F. below. If fewer than all
the shares of the Series C Preferred Stock owned by such holder are then to be
redeemed, the notice shall specify the number of shares thereof that are to be
redeemed and, if practicable, the numbers of the certificates representing such
shares. Within ten Trading Days of the Notice of Redemption Date, the Company
shall wire transfer the appropriate amount of funds to the holders of the Series
C Preferred Stock. If the Company fails to comply with the redemption provisions
set forth herein it shall not be permitted to serve a Redemption Notice for a
period of 60 calendar days after the Redemption Notice Date relating to the
Redemption Notice with which such failure to comply occurred. For the first
five Trading Days after the Notice of Redemption Date the holder of the Series C
Preferred Stock will retain his or her right to convert the Series C Preferred
Stock. In the event the Company has not complied with the redemption provisions
set forth herein the Company must comply with the delivery requirements of any
then outstanding Conversion Notice as set forth herein. The holders shall send
the shares of Series C Preferred Stock being redeemed to the Company within
three Business Days after they have received good funds for the Redemption Price
of such shares.
D. Subject to the receipt by the holders of the Series C Preferred Stock
being redeemed of the wire transfer of the Redemption Price as described above,
each share of Series C Preferred Stock to be redeemed shall be automatically
canceled and converted into a right to receive the Redemption Price, and all
rights of the Series C Preferred Stock, including the right to conversion shall
cease without further action.
E. The Redemption Price shall be adjusted proportionally upon any
adjustment of the Conversion Price as provided herein and in the event of any
stock dividend, stock split, combination of shares or similar event.
F. The Company shall not be entitled to send any Redemption Notice and
begin the redemption procedure hereunder unless it has:
(a) the full amount of the Redemption Price in cash, available in
a demand or other immediately available account in a bank or similar
financial institution, specifically allotted for such redemption;
(b) immediately available credit facilities, in the full amount
of the Redemption Price with a bank or similar financial institution
specifically allotted for such redemption; or
<PAGE>
(c) a combination of the items set forth in (i) and (ii) above,
aggregating the full amount of the Redemption Price.
XII. 4.99% Limitation. The number of shares of Common Stock which may be
acquired by any holder pursuant to the terms herein shall not exceed the number
of such shares which, when aggregated with all other shares of Common Stock then
owned by such holder, would result in such holder owning more than 4.99% of the
then issued and outstanding Common Stock at any one time. The preceding shall
not interfere with any holder's right to convert any share or shares of Series C
Preferred Stock over time which in the aggregate totals more than 4.99% of the
then outstanding shares of Common Stock so long as such holder does not own more
than 4.99% of the then outstanding Common Stock at any given time. The
foregoing limitation shall not apply to the automatic conversion upon the
Maturity Date as contained herein.
<PAGE>
FORM OF PREFERRED STOCK AND WARRANT PURCHASE AGREEMENT
This Preferred Stock and Warrant Purchase Agreement is made and entered
into as of the _____ day of ___________, 1998, between Global MAINTECH
Corporation, a Minnesota corporation, and those investors who have executed an
Acceptance on Schedule A attached hereto (collectively, the "Investors" and
each, an "Investor"). Except where the context otherwise requires, all
references to the "Company" herein shall be collectively to Global MAINTECH
Corporation and its subsidiaries, including, without limitation, Global
MAINTECH, Inc.
For good and valuable consideration, the receipt and adequacy of which are
hereby acknowledged by the Company and the Investors, the Company and the
Investors agree as follows:
1. Sale and Purchase of Securities. Subject to the terms and conditions
hereof, the Company agrees to sell to each Investor at the Closing (as defined
herein), and each Investor agrees, severally, to purchase from the Company at
the Closing, the number of Units set forth above such Investor's name on
Schedule A, each Unit consisting of one share of the Company's Series B
Convertible Cumulative Preferred Stock (the "Preferred Stock") with the rights
and preferences provided in the Certificate of Designation for such Preferred
Stock attached hereto as Exhibit A (the "Certificate of Designation") and a
five-year callable Warrant in the form attached hereto as Exhibit B (the
"Warrant") provided, however, the Company shall not be obligated to sell more
than 615,385 Units in the aggregate. Subject to adjustment as set forth in the
Warrant, the Warrant in each Unit will entitle the holder thereof to purchase
the same number of shares of common stock into which the share of Preferred
Stock contained in the same Unit will have been converted. The purchase price
per Unit is $6.50. The Units, the Preferred Stock and the Warrant are sometimes
collectively referred to herein as the "Securities."
2. Closing.
(a) Closing. Provided that Investor acceptances have been received for at
least the Minimum Offering, the closing or closings of the purchase and sale of
the Securities hereunder shall take place at the offices of Leonard, Street and
Deinard Professional Association, Minneapolis, Minnesota, at 1:00 p.m.,
Minnesota time, on September 23, 1998 or at such other place(s) or different
time(s) or day(s) as the Company in its own discretion shall determine (the
"Closing"). At the Closing, the Company will deliver to each Investor
participating in such closing a Warrant representing the right to purchase that
number of shares of the common stock of the Company to be determined at the time
of conversion of the Preferred Stock, dated such Closing date and will deliver
to each such Investor a certificate representing the number of shares of
Preferred Stock set forth above such Investor's name on Schedule A and each such
Investor shall cause to be delivered to the Company a wire transfer or check
payable to the Company in the amount set forth opposite such Investor's name on
Schedule A.
<PAGE>
3. Representations and Warranties by the Company. To induce the Investors
to enter into this Agreement and to purchase the Securities, the Company hereby
represents and warrants to the Investors as follows:
(a) Disclosure. The Company has provided each Investor with all the
information such Investor has requested in deciding whether to purchase the
Securities and all information the Company believes is necessary or appropriate
relating to an investment in the Company, including, without limitation, the
Company's Annual Report on Form 10-KSB for the year ended December 31, 1997,
Quarterly Reports on Form 10-QSB for the quarters ended March 31, 1998 and June
30, 1998, the Company's Proxy Statement for its 1998 Annual Meeting of
Shareholders and its 1997 Annual Report to Shareholders (collectively, the "SEC
Filings") press releases issued by the Company since June 30, 1998 and a Term
Sheet describing the terms of this offering and the Securities (such documents
and the SEC Filings referred to collectively as the "Disclosed Information").
There are no facts known to the Company which individually or in the aggregate
materially adversely affect the business, assets, financial condition or
prospects of the Company, except as set forth in the Disclosed Information. The
Disclosed Information fairly presents all material information regarding the
Company as of the date hereof and, as of the date of the Closing, the Disclosed
Information will (i) fairly present all material information regarding the
Company, and (ii) not include any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements therein not misleading. The SEC Filings comply in all material
respects with the requirements of the Securities Exchange Act of 1934, as
amended (the "Exchange Act") and all applicable rules and regulations of the
Securities Exchange Commission (the "Commission").
(b) Organization, Good Standing, Etc. The Company is duly incorporated and
validly existing as a corporation in good standing under the laws of the State
of Minnesota, with power and authority to own its properties and conduct its
business as now conducted and proposed to be conducted. The Company is duly
qualified to do business as a foreign corporation and is in good standing in all
states or jurisdictions in which the ownership or lease of its property or the
conduct of its business requires such qualification and the failure to be so
qualified would have a material adverse effect on the Company's business. The
Company has one active subsidiary, Global MAINTECH, Inc.
(c) Financial Statements. The financial statements (including all related
schedules and notes) included in the Disclosed Information fairly represent the
financial condition and results of operations of the Company as of the dates and
for the periods indicated; such statements have been prepared in accordance with
generally accepted accounting principles consistently applied throughout the
periods indicated; and the report of the public accountant included in the
Disclosed Information is issued by an independent public accountant within the
meaning of the Exchange Act, and the rules and regulations thereunder.
(d) Authorization and Enforceability. The Company has full legal power,
right and authority to enter into this Agreement and the Registration Rights
Agreement among the Company and the Investors, the form of which is attached
hereto as Exhibit E (the "Registration Rights Agreement") and to issue the
Securities and to carry out and perform its obligations under this Agreement and
the Registration Rights Agreement. This Agreement, the
2
<PAGE>
Registration Rights Agreement and the Securities, have been duly authorized,
executed and delivered on behalf of the Company and are the valid and binding
obligations of the Company, enforceable in accordance with their respective
terms and subject, as to enforcement, to applicable bankruptcy, insolvency,
reorganization, moratorium and other laws affecting the rights of creditors
generally, to the exercise of judicial discretion as to the availability of
equitable remedies such as specific performance and injunction and, as to
enforcement of the indemnification provisions, to limitations under applicable
securities laws. The Securities when delivered pursuant to the terms of this
Agreement will be validly issued, fully paid and nonassessable.
(e) License and Approvals. The Company has all licenses, certificates,
permits and other approvals from governmental and regulatory authorities
necessary for the conduct of its business as it is currently being conducted and
as proposed to be conducted except those which would not have a material adverse
effect on the Company if not obtained.
(f) Intellectual Property. The Company owns or possesses all assets,
patents, patent applications, trademarks, service marks, trade names, trademark
registrations, service mark registrations, copyrights, licenses, inventions,
trade secrets and rights necessary for the conduct of its business as it is
currently being conducted and as proposed to be conducted and has not received
any notice of conflict with the asserted rights of others in respect thereof. To
the best of the Company's knowledge, no name which the Company uses and no other
aspect of the business of the Company involves or gives rise to any infringement
of, or license or similar fees for, any patents, patent applications,
trademarks, service marks, trade names, trademark registrations, service mark
registrations, copyrights, licenses, inventions, trade secrets or other similar
rights of others, except for license fees payable by the Company to Circle X
Corp. of Japan for the Company's use of certain intellectual property rights
used by the Company in its VCC product, which rights are licensed to it by
Circle X Corp. of Japan.
(g) Defaults. The Company is not in breach, default or violation of, and
the execution of this Agreement and the Registration Rights Agreement and the
consummation of the transactions herein and therein contemplated will not
conflict with or result in any breach of, any of the terms or conditions of, or
constitute a default or violation under, (i) the Articles of Incorporation, as
amended, or Bylaws, as amended, of the Company, (ii) any indenture, agreement or
other instrument to which the Company is now a party, or (iii) any law or any
order, rule or regulation applicable to the Company of any court or of any
federal or state regulatory body or administrative agency having jurisdiction
over the Company or its property.
(h) Consents. No consent, authorization, approval, permit or order of or
filing with any governmental or regulatory authority is required under current
laws and regulations in connection with the execution and delivery of this
Agreement or the Registration Rights Agreement or the offer, issuance, sale or
delivery of the Securities, other than the qualification thereof, if required,
under applicable state securities laws, which qualification has been or will be
effected as a condition of the sale of the Securities to the Investors. The
Company has not, directly or through any agent other than Miller, Johnson &
Kuehn Incorporated, offered the Securities or any similar securities for sale
to, or solicited any offers to acquire such securities from, persons other than
the Investors. Under the circumstances contemplated by this
3
<PAGE>
Agreement, the offer, issuance, sale and delivery of the Securities will not,
under current laws and regulations, require compliance with the prospectus
delivery or registration requirements of the Securities Act of 1933, as amended
(the "Securities Act"). The Company has filed all reports or other documentation
that it is required to file under the Exchange Act, any rules or regulations
promulgated thereunder, the applicable rules and regulations of the National
Association of Securities Dealers ("NASD") and all applicable state securities
laws, and the information contained in such reports or other documents did not
make any untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements therein made, in the light of the
circumstances under which they were made, not misleading.
(i) Valid Issuance of Preferred Stock. The Preferred Stock, when
authorized, issued, sold and delivered in accordance with the terms hereof will
be duly authorized, validly issued, fully paid and nonassessable and after
registration under applicable securities laws as contemplated by this Agreement
will be free of restrictions on transfer and, based in part upon the
representations of the Investors in this Agreement, will be issued in compliance
with applicable securities laws.
(j) Valid Issuance of Common Stock. The shares of the Company's common
stock issuable upon conversion of the Preferred Stock and upon exercise of the
Warrant have been reserved for issuance and, when issued and delivered in
accordance with the terms thereof, will be duly authorized, validly issued,
fully paid and non-assessable, shall be free of any pledges, liens, encumbrances
and restrictions, and will be issued in compliance with all applicable
securities laws.
(k) Litigation/Proceedings. There are no pending, threatened or, to the
Company's knowledge, contemplated actions, suits, proceedings or investigations
before or by any court or governmental agency, authority or body, or any
arbitrator, which are not ordinary, routine and incidental to the business of
the Company or which might result in any material adverse change in the business
condition (financial and other) or properties of the Company.
(l) Capital Stock. The authorized capital stock of the Company consists of
50,000,000 shares, including the following: (a) 48,496,635 shares of common
stock, of which 17,549,758 shares are issued and outstanding; (b) 887,980 shares
of Series A Convertible Preferred Stock, of which 244,113 shares are issued and
outstanding; and (c) 615,385 shares of Series B Convertible Preferred Stock.
Except for an aggregate of 4,944,593 shares of the Company's common stock which
are subject to outstanding options to employees under the Company's various
stock option plans, or reserved for issuance under such plans, 1,773,398 shares
of the Company's common stock which are subject to outstanding warrants and
147,868 shares of the Company's common stock into which the Company's
outstanding Series A Convertible Preferred Stock is convertible, there are no
outstanding rights to acquire from the Company any shares of its capital stock.
All outstanding shares of the Company's capital stock have been duly authorized,
validly issued, fully paid and nonassessable and, to the Company's knowledge,
have been issued pursuant to valid registrations under, or valid exemptions
from, the registration requirements of the Securities Act and appropriate state
blue sky laws. There are no voting agreements, voting trusts, calls, pledges,
transfer restrictions (other than those imposed by federal and state securities
laws and, with respect to outstanding options or warrants, those
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imposed by the Company's stock option plans or by applicable option or warrant
agreements), liens, rights of first refusal, rights of first offer,
anti-dilution provisions or commitments of any kind relating to the issued or
unissued capital stock of the Company.
(m) Title to Properties. The Company has good and marketable title, free
and clear of all liens, encumbrances and equities, and of all charges or claims,
to all of the real and personal property owned by it, except liens, encumbrances
and equities, and charges or claims, which are not material and do not
materially affect the value of such property or interfere with the conduct of
the Company's business. The Company has valid and binding leases to all of the
real and personal property necessary for the conduct of its business with such
exceptions as do not materially interfere with the conduct of its business.
(n) Tax Returns. The Company has filed all necessary federal, state and
foreign income, franchise and other tax returns and has paid all taxes shown as
due thereon, and the Company has received no notice of any tax deficiency which
has been asserted against the Company.
(o) Authority. The Company has all requisite power and authority to issue,
sell and deliver the Preferred Stock and Warrants in accordance with and upon
the terms set forth in this Agreement. The Company has duly taken all required
action for the due and proper authorization, issuance, sale and delivery of the
Preferred Stock and Warrants. No preemptive rights or other rights of
subscription, first refusal or similar rights of security holders of the Company
exist with respect to the issuance and sale of the Preferred Stock and Warrants
by the Company or the shares of the Company's common stock issuable upon
conversion and exercise, respectively, thereof. No security holder of the
Company possesses any registration rights. The issuance of the Securities and
the shares of the Company's common stock underlying the Securities will not
result in the issuance of any additional shares of the Company's common stock or
the triggering of other anti-dilution or similar rights contained in any
options, warrants or other securities issued by, or agreements of, the Company.
(p) Investment Company. In retaining and using the proceeds from the sale
of the Securities, the Company will not be required to register as an
"Investment Company" under the Investment Company Act of 1940, as amended.
(q) Bad Boy Certification. Neither the Company, any of its predecessors,
any affiliated issuer nor any of the Company's directors, officers, beneficial
owners of 10% or more of any class of its equity securities or other affiliates
nor any promoter of the Company is subject to any of the disabilities enumerated
in Exhibit C hereto and the representations and warranties contained therein are
true and correct.
(r) Fees and Commissions. Other than pursuant to agreements with Miller,
Johnson & Kuehn, Incorporated, the Company has not incurred any liability for
any finder's or broker's fee or agent's commission in connection with the
execution and delivery of this Agreement or the consummation of the transactions
contemplated hereby.
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(s) Changes, Dividends, Etc. Except for the transactions contemplated by
this Agreement, since the date of the most recent financial statements of the
Company provided to Investors, the Company has not: (i) incurred any debts,
obligations or liabilities, absolute, accrued or contingent and whether due or
to become due, except current liabilities incurred in the ordinary course of
business which (individually or in the aggregate) will not materially and
adversely affect the business, properties or prospects of the Company; (ii) paid
any obligation or liability other than, or discharged or satisfied any liens or
encumbrances other than those securing, current liabilities, in each case in the
ordinary course of business; (iii) declared or made any payment to or
distribution to its shareholders as such, or used or redeemed any of its shares
of capital stock, or obligated itself to do so; (iv) mortgaged, pledged or
subjected to lien, charge, security interest or other encumbrance any of its
assets, tangible or intangible, except in the ordinary course of business; (v)
sold, transferred or leased any of its assets except in the ordinary course of
business; (vi) suffered any physical damage, destruction or loss (whether or not
covered by insurance) materially and adversely affecting the tangible
properties, business or prospects of the Company; (vii) encountered any labor
difficulties or labor union organizing activities; (viii) except as set forth on
Schedule 3(n), issued or sold any shares of capital stock or other securities or
granted any options other than to employees, warrants, or other purchase rights
with respect thereto other than pursuant to this Agreement; (ix) made any
acquisition or disposition of any material assets or became involved in any
other material transaction, other than for fair value in the ordinary course of
business; or (x) agreed to do any of the foregoing other than pursuant hereto.
There has been no material adverse change in the financial condition,
operations, results of operations or business of the Company since the date of
the most recent financial statements of the Company provided to the Investors.
(t) Reporting. The Company is subject to the reporting requirements of the
Securities Act and the Exchange Act and (i) has timely filed all reports and
statements required to be filed thereunder in the 12-month period prior to the
date hereof, and (ii) to the Company's knowledge, each report and statement was
true and complete in all material respects when filed.
4. Representations of the Investors. Each Investor represents for itself
that:
(a) Investment Intent. The Securities being acquired by the Investor are
being purchased for investment for the Investor's own account and not with the
view to, or for resale in connection with, any distribution or public offering
thereof. The Investor understands that the Securities have not been registered
under the Securities Act or any state securities laws by reason of their
contemplated issuance in a transaction exempt from the registration requirements
of the Securities Act and applicable state securities laws, and that the
reliance of the Company upon these exemptions is predicated in part upon this
representation by the Investor. The Investor further understands that the
Securities, and the shares of the Company's common stock issuable upon
conversion or exercise thereof, may not be transferred or resold without (i)
registration under the Securities Act and applicable state securities laws, or
(ii) an exemption from the requirements of the Securities Act and applicable
state securities laws.
(b) Location of Principal Office, Qualification as an Accredited Investor,
Etc. The state in which the Investor's principal office is located is the state
set forth in the Investor's address on Schedule A. The Investor qualifies as an
accredited investor for purposes of Regulation
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D promulgated under the Securities Act. The Investor acknowledges receipt of the
Disclosed Information and that the Company has made available to the Investor at
a reasonable time prior to the execution of this Agreement the opportunity to
ask questions and receive answers concerning the business and affairs of the
Company and the terms and conditions of the sale of Securities contemplated by
this Agreement and to obtain any additional information (which the Company
possessed or could acquire without unreasonable effort or expense) to verify the
accuracy of information furnished to the Investor. The Investor (i) is able to
bear the loss of the Investor's entire investment in the Securities without any
material adverse effect on such Investor's business, operations or prospects,
and (ii) has such knowledge and experience in financial and business matters
that such Investor is capable of evaluating the merits and risks of the
investment to be made pursuant to this Agreement.
(c) Acts and Proceedings. This Agreement has been duly authorized by all
necessary action on the part of the Investor, has been duly executed and
delivered by the Investor, and is a valid and binding agreement of the Investor.
5. Conditions of the Investors' Obligation. The obligation to purchase and
pay for the Securities at the Closing is subject to the fulfillment prior to or
on the Closing date of the conditions set forth in this Section 5. In the event
that any such condition is not satisfied to the satisfaction of each Investor,
then the Investors shall not be obligated to proceed with the purchase of the
Securities at the Closing.
(a) Representations and Warranties. The representations and warranties of
the Company under this Agreement shall be true on and as of the Closing date
with the same effect as though made on and as of the Closing date.
(b) Compliance with Agreement. The Company shall have performed and
complied with all agreements or conditions required by this Agreement to be
performed and complied with by it prior to or as of the Closing date.
(c) Certificate of Officers. The Company shall have delivered to the
Investors a certificate, dated the Closing date, executed by the Chief Executive
Officer and the Chief Financial Officer of the Company, and certifying to the
satisfaction of the conditions specified in Sections 5(a) and 5(b).
(d) Opinion of the Company's Counsel. The Investors shall have received
from Dorsey & Whitney LLP, counsel for the Company, an opinion, dated the
Closing date, in the form attached hereto as Exhibit D.
(e) Supporting Documents. The Investors shall have received the following:
(i) A copy of the resolutions of the Board of Directors of the Company
certified by the Secretary of the Company authorizing and approving the
execution, delivery and performance of this Agreement and issuance of the
Securities;
(ii) A certificate of incumbency executed by the Secretary of the
Company certifying the names, titles and signatures of the officers of the
Company authorized to
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execute this Agreement and further certifying that the Articles of
Incorporation and Bylaws of the Company delivered to the Investors at the
time of the execution of this Agreement have been validly adopted and have
not been amended or modified; and
(iii) A copy of the Articles of Incorporation and Bylaws of the
Company as of such date and such additional supporting documentation and
other information with respect to the transactions contemplated hereby as
the Investors may reasonably request.
(f) Qualification Under State Securities Laws. All registrations,
qualifications, permits and approvals required under applicable state securities
laws for the lawful execution and delivery of this Agreement and the offer,
sale, issuance and delivery of the Securities to the Investors at the Closing
shall have been obtained.
(g) Proceeding and Documents. All corporate and other proceedings and
actions taken in connection with the transactions contemplated hereby and all
certificates, opinions, agreements, instruments and documents mentioned herein
or incident to any such transaction shall be reasonably satisfactory in form and
substance to the Investors.
(h) File Certificate of Designation. It shall be a condition to the
Investors' obligation to close the transactions contemplated hereby that the
Company have filed the Certificate of Designation with the Secretary of State of
the State of Minnesota and that such certificate be accepted and duly filed by
such Secretary's office.
(i) Execution of Registration Rights Agreement. It shall be a condition to
the Investors' obligation to close the transactions contemplated hereby that the
Company execute and deliver to the Investors the Registration Rights Agreement
attached hereto as Exhibit E.
6. Affirmative Covenants of the Company. The Company covenants and agrees
as follows:
(a) Corporate Existence. The Company will maintain its corporate existence
in good standing.
(b) Books of Accounts. The Company will keep books of record and account in
which correct and complete entries are made of all of its respective dealings,
business and affairs, in accordance with generally accepted accounting
principles. The Company will employ certified public accountants who are
"independent" within the meaning of the accounting regulations of the
Commission.
(c) Patents and Other Intangible Rights. The Company will apply for, or
obtain assignments of, or licenses to use, all patents, trademarks, trade names
and copyrights which in the opinion of a prudent and experienced businessperson
operating in the industry in which the Company is operating are desirable or
necessary for the conduct and protection of the business of the Company.
(d) Fees of Counsel. At the Closing, the Company shall pay all reasonable
fees and expenses of legal counsel to
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the Investors as well as the fees and expenses of counsel to Miller, Johnson &
Kuehn, Incorporated ("MJK") incurred through the date of the Closing. In
addition, at the Closing, the Company shall pay MJK 8% of the Purchase Price and
shall issue MJK a warrant, in the form attached hereto as Exhibit F (the
"Agent's Warrant"), to purchase that number of shares of the Company's common
stock equal to 10% of the number of shares of the Company's common stock
issuable upon conversion of the Preferred Stock sold by the Company to the
Investors at the Closing, assuming the conversion of the Preferred Stock on the
date of Closing. The exercise price of MJK's warrant shall be 110% of the
average closing bid price of the Company's common stock for the 20 trading days
immediately prior to the date of Closing.
(e) Reservation of Shares. The Company will, at all times on and after the
Closing, reserve and keep available (i) authorized and unissued shares of
Preferred Stock sufficient for issuance pursuant to the terms of Section 4(c) of
Exhibit A attached hereto, and (ii) authorized and unissued shares of its common
stock sufficient for issuance upon conversion of the Preferred Stock and
exercise of each Warrant and the Agent's Warrant.
(f) Nasdaq Listing. The Company will use its best efforts to have its
common stock included on the Nasdaq Stock Market (either Nasdaq Small Cap Market
or Nasdaq National Market) on or before December 31, 1998.
7. Restriction on Transfer of Preferred Stock, Warrant and Shares.
(a) Legend. Each share of Preferred Stock, each Warrant, the Agent's
Warrant, and each certificate representing shares of the Company's common stock
issued pursuant to the transactions contemplated hereby shall be endorsed with a
legend in substantially the form which follows:
"The securities represented by this certificate may not be transferred
without (i) the opinion of counsel satisfactory to this corporation that
such transfer may lawfully be made without registration under the
Securities Act of 1933, as amended, and all applicable state securities
laws, or (ii) such registration."
(b) Removal of Legend. Any legend endorsed on a certificate evidencing a
security pursuant to Section 7(a) hereof shall be removed, and the Company
promptly shall issue a certificate without such legend to the holder of such
security, if such security is properly being transferred pursuant to a
registration under the Securities Act or pursuant to Rule 144 or any similar
rule then in effect or if such holder provides the Company with an opinion of
counsel satisfactory to the Company to the effect that a transfer of such
security may be made without registration. In addition, if the holder of such
security delivers to the Company an opinion of counsel satisfactory to the
Company to the effect that no subsequent transfer of such security will require
registration under the Securities Act, the Company will promptly upon such
contemplated transfer deliver new certificates evidencing such security that do
not bear the legend set forth in Section 7(a).
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<PAGE>
8. Miscellaneous.
(a) Changes, Waivers, Etc. Neither this Agreement nor any provisions hereof
may be changed, waived, discharged or terminated orally, but only by a statement
in writing, signed by the party against which enforcement of the change, waiver,
discharge or termination is sought.
(b) Notices. All notices, requests, consents and other communications
required or permitted hereunder shall be in writing and shall be delivered, or
mailed first-class postage prepaid, registered or certified mail or shall be
sent by facsimile transmission followed by mailed copy:
if to the Investors at their respective addresses set forth on
Schedule A, or at such other address or facsimile number as any Investor
may specify in writing to the Company; or
if to the Company at Global MAINTECH Corporation, 7578 Market Place
Drive, Eden Prairie, Minnesota 55344, Attention: CEO, facsimile number
(612) 944-0400; or at such other address or facsimile number as the Company
may specify by written notice to the Investors;
and such notices and other communications shall for all purposes of
this Agreement be treated as being effective or having been given if
delivered personally, if sent by mail, when received, or, if sent by
facsimile, upon the sender's receipt of confirmation from its facsimile
machine of transmission.
(c) Survival of Representations and Warranties. All representations and
warranties and agreements contained herein shall survive the execution and
delivery of this Agreement, any investigation at any time made by the Investors
or on their behalf and the sale and purchase of the Securities and payment
therefor. All statements contained in any certificate, instrument or other
writing delivered by or on behalf of the Company pursuant to this Agreement
(other than legal opinions) at the Closing shall constitute representations and
warranties by the Company hereunder.
(d) Headings. The headings of the sections of this Agreement have been
inserted for convenience of reference only and do not constitute a part of this
Agreement.
(e) Choice of Law. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of Minnesota without regard to
the principles of conflicts of law thereof.
(f) Counterparts. This Agreement may be executed at different times and in
two or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
(g) Parties in Interest. All the terms and provisions of this Agreement
shall be binding upon and inure to the benefit of and be enforceable by the
respective successors and
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assigns of the parties hereto, whether so expressed or not, and, in particular,
shall inure to the benefit of and be enforceable by the holder or holders from
time to time of any of the Securities.
(h) Entire Agreement. This Agreement, including and incorporating all
Exhibits and Schedules hereto, constitutes and contains the entire agreement and
understanding of the parties regarding the subject matter of this Agreement and
supersedes any and all prior negotiations, correspondence, understandings and
agreements, written or oral, among the parties with respect to the subject
matter hereof.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed personally or by their duly authorized representatives as of the date
indicated above.
GLOBAL MAINTECH CORPORATION
By:_________________________________
Its:_________________________________
INVESTOR:
[See Attached Acceptance on Schedule A]
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<PAGE>
EXHIBIT B TO PREFERRED STOCK
AND WARRANT PURCHASE AGREEMENT
THIS WARRANT REPRESENTS ALL WARRANTS ISSUED AS PART OF UNITS OFFERED TO
INVESTORS PURSUANT TO THE TERMS OF A PREFERRED STOCK AND WARRANT PURCHASE
AGREEMENT DATED ________ __, 1998 (THE "PURCHASE AGREEMENT"). EACH UNIT CONSISTS
OF ONE SHARE OF SERIES B PREFERRED STOCK OF THE COMPANY AND A WARRANT TO
PURCHASE COMMON STOCK. SUCH SERIES B PREFERRED STOCK AND THIS WARRANT CANNOT BE
TRANSFERRED SEPARATELY UNTIL THE DATE ON WHICH THE SERIES B PREFERRED STOCK
INCLUDED IN SUCH UNIT IS CONVERTED INTO COMMON STOCK OF THE COMPANY.
NEITHER THIS WARRANT NOR THE SECURITIES INTO WHICH THIS WARRANT IS
EXERCISABLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR
THE SECURITIES COMMISSION OF ANY STATE AND HAVE BEEN ISSUED IN RELIANCE UPON AN
EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT
TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO
AN AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS THEREUNDER AND IN
COMPLIANCE WITH APPLICABLE STATE SECURITIES LAWS.
GLOBAL MAINTECH CORPORATION
FORM OF WARRANT
Warrant No. _____________, 1998
GLOBAL MAINTECH CORPORATION, a Minnesota corporation (the "Company"),
hereby certifies that, for value received, , or his registered assigns
("Holder"), is entitled, subject to the terms set forth below, to purchase from
the Company a number of shares of common stock, no par value per share ("Common
Stock"), of the Company (each such share, a "Warrant Share" and all such shares,
the "Warrant Shares") equal to the number of shares of Common Stock into which
the shares of Series B Preferred Stock issued to the Holder concurrently with
this Warrant are converted, at an exercise price equal to $3.25 per Warrant
Share (as adjusted from time to time as provided in Section 8 hereof, the
"Exercise Price"), at any time and from time to time from and after the date
hereof and through and including , 2003 (the "Expiration Date"). If a Holder
converts less than all of such Holder's Series B Preferred Stock at any given
time, the Conversion Price for the Warrants associated with such
<PAGE>
converted shares will have been determined but the Conversion Price for the
remainder of the Warrants will not have been determined. Therefor, in such
event, the Warrants associated with such converted shares must be certificated
separately and, upon surrender of this Warrant by the Holder to the Company, two
new Warrants will be issued to the Holder, one of which will represent the
Warrants for which the Conversion Price has been determined and one of which
will represent the remainder of the Warrants.
1. Registration of Warrant. The Company shall register this Warrant, upon
records to be maintained by the Company for that purpose (the "Warrant
Register"), in the name of the record Holder hereof from time to time. The
Company may deem and treat the registered Holder of this Warrant as the absolute
owner hereof for the purpose of any exercise hereof or any distribution to the
Holder, and for all other purposes, and the Company shall not be affected by
notice to the contrary.
2. Registration of Transfers and Exchanges.
(a) Subject to the provisions of (b) below, the Company shall register the
transfer of any portion of this Warrant in the Warrant Register, upon surrender
of this Warrant, with the Form of Assignment attached hereto duly completed and
signed, to the Company at the office specified in or pursuant to the terms
hereof. Upon any such registration or transfer, a new warrant to purchase Common
Stock, in substantially the form of this Warrant (any such new warrant, a "New
Warrant"), evidencing the portion of this Warrant so transferred shall be issued
to the transferee and a New Warrant evidencing the remaining portion of this
Warrant not so transferred, if any, shall be issued to the transferring Holder.
The acceptance of the New Warrant by the transferee thereof shall be deemed the
acceptance by such transferee of all of the rights and obligations of a Holder
of this Warrant.
(b) This Warrant represents all Warrants issued as part of Units offered to
investors pursuant to the terms of a Preferred Stock and Warrant Purchase
Agreement dated , 1998 (the "Purchase Agreement"). Each Unit consists of one
share of Series B Preferred Stock of the Company and a Warrant to purchase
Common Stock. Such Series B Preferred Stock and this Warrant cannot be
transferred separately until the date on which the Series B Preferred Stock
included in such unit is converted into Common Stock of the Company. In the
event the Holder of this Warrant desires to transfer this Warrant, or any
Warrant Shares issued upon the exercise hereof prior to the registration thereof
pursuant to Section 4, the Holder shall provide the Company with a written
notice describing the manner of such transfer and an opinion of counsel
(reasonably acceptable to the Company) that the proposed transfer may be
effected without registration or qualification (under any applicable federal or
state law), whereupon such Holder shall be entitled to transfer this Warrant or
to dispose of any Warrant Shares in accordance with the notice delivered by such
Holder to the Company; provided, however, that an appropriate legend may be
endorsed on this Warrant or the certificates for such Warrant Shares respecting
restrictions upon transfer thereof necessary or advisable in the opinion of
counsel satisfactory to the Company to prevent further transfers which would be
in violation of Section 5 of the Securities Act or applicable state securities
laws.
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<PAGE>
(c) This Warrant is exchangeable, upon the surrender hereof by the Holder
to the office of the Company specified in or pursuant to the terms hereof for
one or more New Warrants, evidencing in the aggregate the right to purchase the
number of Warrant Shares which may then be purchased hereunder. Any such New
Warrants will be dated the date of such exchange.
3. Duration and Exercise of Warrants.
(a) This Warrant (or the applicable portion thereof if the Holder converts
less than all of such Holder's shares of Series B Preferred Stock) shall be
exercisable by the registered Holder on any business day before 5:00 P.M.,
Minneapolis, Minnesota time, at any time and from time to time on or after the
date the Holder converts all (or a portion, as applicable) of such Holder's
Series B Preferred Stock issued in connection with this Warrant, to and
including the Expiration Date. At 5:00 P.M., Minneapolis, Minnesota time on the
Expiration Date, the portion of this Warrant not exercised prior thereto shall
be and become void and of no value. Except as set forth in Section 13 hereof,
this Warrant may not be redeemed by the Company.
(b) Subject to provisions elsewhere contained in this Warrant, upon
surrender of this Warrant, with the Form of Election to Purchase attached hereto
duly completed and signed, to the Company at its address for notice as set forth
in Section 11 hereof, and upon payment of the Exercise Price multiplied by the
number of Warrant Shares that the Holder intends to purchase hereunder, in
lawful money of the United States of America, in cash or by certified or
official bank check or checks, all as specified by the Holder in the Form of
Election to Purchase, the Company shall promptly (but in no event later than
five business days after the Date of Exercise (as defined herein)) issue or
cause to be issued and cause to be delivered to the Holder and in such name or
names as the Holder may designate, a certificate for the Warrant Shares issuable
upon such exercise. Any person so designated by the Holder to receive Warrant
Shares shall be deemed to have become holder of record of such Warrant Shares as
of the Date of Exercise of this Warrant.
A "Date of Exercise" means the date on which the Company shall have
received (i) this Warrant (or any New Warrant, as applicable), with the
Form of Election to Purchase attached hereto (or attached to such New
Warrant) appropriately completed and duly signed, and (ii) payment of the
Exercise Price for the number of Warrant Shares so indicated by the Holder
hereof to be purchased.
(c) This Warrant shall be exercisable either in its entirety or for a
portion of the number of Warrant Shares. If this Warrant is exercised for a
number of Warrant Shares which is less than all of the Warrant Shares which may
be purchased under this Warrant, the Company shall issue or cause to be issued,
at its expense, a New Warrant evidencing the right to purchase the remaining
number of Warrant Shares for which no exercise has been evidenced by this
Warrant.
4. Registration Provisions. The shares of Common Stock underlying this
Warrant shall be registered by the Company under the Securities Act pursuant to
the terms of that
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Registration Rights Agreement, dated ________, 1998, by and between the Company,
Holder and certain other investors.
5. Payment of Taxes. The Company will pay all taxes attributable to the
transfer of this Warrant or the issuance of Warrant Shares upon the exercise of
this Warrant.
6. Replacement of Warrant. If this Warrant is mutilated, lost, stolen or
destroyed, the Company shall issue or cause to be issued in exchange and
substitution for and upon cancellation hereof, or in lieu of and substitution
for this Warrant, a New Warrant, but only upon receipt of evidence reasonably
satisfactory to the Company of such loss, theft or destruction and indemnity of
the Company by the Holder relating to such lost Warrant as the Company may
reasonably require. Applicants for a New Warrant under such circumstances shall
also comply with such other reasonable regulations and procedures and pay such
other reasonable charges as the Company may reasonably prescribe.
7. Reservation of Warrant Shares. The Company covenants that it will at all
times reserve and keep available out of the aggregate of its authorized but
unissued shares of Common Stock, solely for the purpose of enabling it to issue
Warrant Shares upon exercise of this Warrant as herein provided, the number of
Warrant Shares which are then issuable and deliverable upon the exercise of this
entire Warrant, free from preemptive rights or any other actual contingent
purchase rights of persons other than the Holder (taking into account the
adjustments and restrictions of Section 8). The Company covenants that all
Warrant Shares that shall be so issuable and deliverable shall, upon issuance
and the payment of the applicable Exercise Price in accordance with the terms
hereof, be duly authorized, validly issued, fully paid and nonassessable.
8. Certain Adjustments. Until the Holder converts such Holder's Series B
Preferred Stock issued in connection with this Warrant, the Exercise Price and
the number of Warrant Shares purchasable upon the exercise of this Warrant shall
not be subject to adjustment. Thereafter, the Exercise Price and the number of
Warrant Shares purchasable upon the exercise of this Warrant shall be subject to
adjustment from time to time upon the happening of any of the following events:
(a) In case the Company shall at any time hereafter subdivide or combine
its outstanding shares of Common Stock or declare a dividend payable in Common
Stock, the Exercise Price in effect immediately prior to the subdivision,
combination or record date for such dividend shall be proportionately increased,
in the case of a combination, or decreased, in the case of subdivision or
dividend payable in Common Stock. Upon each adjustment of the Exercise Price,
the Holder shall thereafter be entitled to purchase, at the Exercise Price
resulting from such adjustment, the number of shares obtained by multiplying the
Exercise Price immediately prior to such adjustment by the number of shares
purchasable pursuant hereto immediately prior to such adjustment and dividing
the product thereof by the Exercise Price resulting from such adjustment.
(b) No fractional shares of common stock are to be issued upon the exercise
of this Warrant, but the Company shall pay a cash adjustment in respect of any
fraction of a share
4
<PAGE>
which would otherwise be issuable in an amount equal to the same fraction of the
market price per share of common stock on the day of exercise as determined in
good faith by the Company.
(c) The Company shall provide the Holder with at least ten days prior
written notice of any capital reorganization or reclassification of the capital
stock of the Company, or consolidation or merger of the Company with another
corporation, or the sale of all or substantially all of the Company's assets to
another corporation. Further, if any of the foregoing events shall be effected
in such a way that holders of Common Stock shall be entitled to receive stock,
securities or assets with respect to or in exchange for Common Stock, then, as a
condition of such reorganization, reclassification, consolidation, merger or
sale, lawful and adequate provision shall be made whereby the Holder hereof
shall thereafter have the right to purchase and receive, upon the basis and upon
the terms and conditions specified in this Warrant and in lieu of the shares of
Common Stock of the Company immediately theretofore purchasable and receivable
upon the exercise of the rights represented hereby, such stock, securities or
assets as may be issued or payable with respect to or in exchange for a number
of outstanding shares of such Common Stock equal to the number of shares of such
stock immediately theretofore purchasable and receivable upon the exercise of
the rights represented hereby had such reorganization, reclassification,
consolidation, merger or sale not taken place, and in any such case appropriate
provisions shall be made with respect to the rights and interests of the Holder
of this Warrant to the end that the provisions hereof (including provisions for
adjustments of the Warrant purchase price and of the number of shares of Common
Stock purchasable upon the exercise of this Warrant) shall thereafter be
applicable, as nearly as may be, in relation to any shares of stock, securities
or assets thereafter deliverable upon the exercise hereof. The Company shall not
effect any such consolidation, merger or sale unless prior to the consummation
thereof the successor corporation (if other than the Company) resulting from
such consolidation or merger, or the corporation purchasing such assets, shall
assume by operation of law or written instrument, the obligation to deliver to
such Holder such shares of stock, securities or assets as, in accordance with
the foregoing provisions, such Holder may be entitled to purchase. Notice of
such assumption shall be promptly mailed to the registered Holder hereof at the
last address of such holder appearing on the books of the Company.
Notwithstanding any language to the contrary set forth in this
paragraph 8(c), if an occurrence or event described herein shall take place
in which the shareholders of the Company receive cash for their shares of
Common Stock of the Company and a successor corporation shall survive the
transaction then, at the election of the Holder hereof, such corporation
shall purchase this Warrant (or the unexercised part hereof) from the
Holder without requiring the Holder to exercise all or part of the Warrant.
If such corporation refuses to so purchase this Warrant then the Company
shall purchase the Warrant for cash. In either case the purchase price
shall be the amount per share that shareholders of the outstanding Common
Stock of the Company shall receive as a result of the transaction
multiplied by the number of shares covered by the Warrant, minus the
aggregate Exercise Price of the Warrant. Such purchase shall be closed
within 60 days following the election of the holder to sell this Warrant.
(d) Upon any adjustment of the Exercise Price, then, and in each such case,
the Company shall give written notice thereof, by first class mail, postage
prepaid, addressed to the registered holder of this Warrant at the address of
such holder as shown on the books of the
5
<PAGE>
Company, which notice shall state the Exercise Price resulting from such
adjustment and the increase or decrease, if any, in the number of shares
purchasable at such price upon the exercise of this Warrant, setting forth in
reasonable detail the method of calculation and the facts upon which such
calculation is based.
(e) If any event occurs as to which in the good faith determination of the
Board of Directors of the Company the other provisions of this paragraph 8 are
not strictly applicable or if strictly applicable would not fairly protect the
purchase rights of the holder of this Warrant in accordance with the essential
intent and principles of such provisions, then the Board of Directors shall make
an adjustment in the application of such provisions, in accordance with such
essential intent and principles, so as to protect such purchase rights as
aforesaid.
9. Payment of Exercise Price. The Holder must pay the Exercise Price in
cash or immediately available funds.
10. Notices. Any and all notices or other communications or deliveries
hereunder shall be in writing and shall be deemed given and effective on the
earliest of (i) the date of transmission, if such notice or communication is
delivered via facsimile at the facsimile telephone number specified in this
Section, (ii) the business day following the date of mailing, if sent by a
nationally recognized overnight courier service, or (iii) upon actual receipt by
the party to whom such notice is required to be given. The addresses for such
communications shall be: (1) if to the Company, to 7578 Market Place Drive, Eden
Prairie, Minnesota 55344, Attention: Chief Executive Officer, facsimile number
(612) 944-0400, or (ii) if to the Holder, to the Holder at the address or
facsimile number appearing on the Warrant Register or such other address or
facsimile number as the Holder may provide to the Company in accordance with
this Section 11.
11. Warrant Agent.
(a) The Company shall serve as warrant agent under this Warrant. Upon 30
days' notice to the Holder, Company may appoint a new warrant agent.
(b) Any corporation into which the Company or any new warrant agent may be
merged or any corporation resulting from any consolidation to which the Company
or any new warrant agent shall be a party or any corporation to which the
Company or any new warrant agent transfers substantially all of its corporate
trust or shareholders services business shall be a successor warrant agent under
this Warrant without any further act. Any such successor warrant agent shall
promptly cause notice of its succession as warrant agent to be mailed (by first
class mail, postage prepaid) to the Holder at the Holder's last address as shown
on the Warrant Register.
12. Call of Warrant. Subject to the conditions set forth below, the Company
shall be permitted to call this Warrant from the Holder in the event that the
Company's Common Stock has not traded below $4.375 per share for 20 consecutive
trading days prior to the Expiration Date of this Warrant. Notwithstanding the
foregoing, the Company may only exercise its right to call this Warrant from the
Holder if at the time of such call (i) all Warrant Shares may be sold pursuant
to an effective registration statement under the Securities Act, (ii) the Common
Stock is
6
<PAGE>
listed and trading on either the Nasdaq Small Cap Market or the Nasdaq National
Market, and (iii) the Company has reserved and available for issuance a number
of shares of its Common Stock sufficient to cover the exercise of this Warrant
in full. The Company must provide the Holder with at least 20 days advance
written notice (the "Warrant Notice") of its intent to call this Warrant
pursuant to the terms hereof and the Holder shall have 20 business days from the
date of receipt of the Warrant Notice to exercise this Warrant (the "Sale
Period"). If the Holder does not exercise this Warrant during the Sale Period,
the Holder shall surrender this Warrant to the Company at the end of the Sale
Period for cancellation by the Company, and the Company shall transfer to the
Holder, via wire transfer of immediately available funds or by Company check, an
amount equal to $.10 multiplied by the number of shares of Common Stock subject
to exercise of this Warrant. Notwithstanding the foregoing, the Sale Period
shall be extended by that number of days during such period for which the
registration, listing and reservation requirements set forth in clauses
(i)-(iii) of this Section 12 shall not be satisfied. In the event that the
Company calls this Warrant pursuant to this Section 12 before the number of
shares of Common Stock subject to this Warrant has been determined (because the
Series B Preferred Stock issued to Holders with this Warrant has not yet been
exercised), this Warrant shall be deemed to represent the right to purchase a
number of shares of Common Stock determined as if the Series B Preferred Stock
had been converted at the "Maximum Price," as defined in the Certificate of
Designation defining the rights and preferences of the Series B Preferred Stock.
13. Miscellaneous.
(a) This Warrant shall be binding on and inure to the benefit of the
parties hereto and their respective successors and permitted assigns. This
Warrant may be amended only in writing signed by the Company and the Holder.
(b) Subject to Section 13(a), above, nothing in this Warrant shall be
construed to give to any person or corporation other than the Company and the
Holder any legal or equitable right, remedy or cause under this Warrant; this
Warrant shall be for the sole and exclusive benefit of the Company and the
Holder.
(c) This Warrant shall be governed by and construed and enforced in
accordance with the internal laws of the State of Minnesota without regard to
the principles of conflicts of law thereof.
(d) The headings herein are for convenience only, do not constitute a part
of this Warrant and shall not be deemed to limit or affect any of the provisions
hereof.
(e) In case any one or more of the provisions of this Warrant shall be
invalid or unenforceable in any respect, the validity and enforceability of the
remaining terms and provisions of this Warrant shall not in any way be affected
or impaired thereby and the parties will attempt in good faith to agree upon a
valid and enforceable provision which shall be a commercially reasonable
substitute therefor, and upon so agreeing, shall incorporate such substitute
provision in this Warrant.
IN WITNESS WHEREOF, Global MAINTECH Corporation has caused this Warrant to
be executed by its duly authorized officer and this Warrant to be dated as of
________ __, 1998.
7
<PAGE>
GLOBAL MAINTECH CORPORATION
By ________________________________
Its: ________________________________
8
<PAGE>
FORM OF ELECTION TO PURCHASE
(To be executed by the Holder to exercise the right to purchase shares of Common
Stock under the foregoing Warrant)
To GLOBAL MAINTECH CORPORATION
In accordance with the Warrant enclosed with this Form of Election to
Purchase, the undersigned hereby irrevocably elects to purchase __________
shares of Common Stock, no par value per share, of Global MAINTECH Corporation
and encloses herewith $_________________ in cash or certified or official bank
check or checks, which sum represents the aggregate Exercise Price (as defined
in the Warrant) for the number of shares of Common Stock to which this Form of
Election to Purchase relates, together with any applicable taxes payable by the
undersigned pursuant to the Warrant.
The undersigned requests that certificates for the shares of Common Stock
issuable upon this exercise be issued in the name of
PLEASE INSERT SOCIAL SECURITY OR TAX
IDENTIFICATION NUMBER
------------------------------------
- --------------------------------------------------------------------------------
(Please print name and address)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
If the number of shares of Common Stock issuable upon this exercise shall
not be all of the shares of Common Stock which the undersigned is entitled to
purchase in accordance with the enclosed Warrant, the undersigned requests that
a New Warrant (as defined in the Warrant) evidencing the right to purchase the
shares of Common Stock not issuable pursuant to the exercise evidenced hereby be
issued in the name of and delivered to:
- --------------------------------------------------------------------------------
(Please print name and address)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Dated: ______________________ Name of Holder:
(Print)__________________________________
(By:)____________________________________
(Name:)__________________________________
(Title:)_________________________________
(Signature must conform in all respects to name of holder as
specified on the face of the Warrant)
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<PAGE>
FORM OF ASSIGNMENT
(To be completed and signed only upon transfer of Warrant)
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
unto ____________________________ the right represented by the within Warrant to
purchase ______ shares of Common Stock of Global MAINTECH Corporation to which
the within Warrant relates and appoints ________________ attorney to transfer
said right on the books of Global MAINTECH Corporation with full power of
substitution in the premises.
Dated:
- -------------------
-----------------------------------
(Signature must conform in all
respects to name of holder as
specified on the face of the Warrant)
-----------------------------------
Address of Transferee
-----------------------------------
-----------------------------------
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<PAGE>
EXHIBIT E TO PREFERRED STOCK AND
WARRANT PURCHASE AGREEMENT
REGISTRATION RIGHTS AGREEMENT
-----------------------------
This Registration Rights Agreement is made and entered into as of the ____
day of _________, 1998, by and among Global MAINTECH Corporation, a Minnesota
corporation (the "Company") and the Investors listed on Schedule A attached
hereto (individually, an "Investor" and collectively, the "Investors").
RECITALS
A. The Investors and the Company have entered into that certain Preferred
Stock and Warrant Purchase Agreement, dated _________ __, 1998 (the "Purchase
Agreement").
B. It is a condition to the transactions contemplated in the Purchase
Agreement that the Company provide the registration and other rights provided
herein and the parties hereto desire to provide for such rights on the terms and
conditions contained herein.
NOW, THEREFORE, in consideration of the premises and covenants contained
herein, the parties hereto agree as follows:
1. Defined Terms. Unless otherwise noted, all capitalized terms used
-------------
herein shall have the meanings afforded them in the Purchase Agreement and the
Exhibits attached thereto.
2. Required Registration. Within 30 days of the date hereof (the "File
---------------------
Date"), the Company shall file a Registration Statement under the Securities Act
of 1933, as amended (the "Securities Act"), in accordance with the provisions of
either Form SB-1, Form SB-2 or Form S-3, as required by the Securities and
Exchange Commission (the "Commission") covering the resale of the shares of the
Company's common stock (i) underlying the Preferred Stock, (ii) underlying the
Warrants issued by the Company to Investors of even date herewith (collectively,
the "Warrants"), and (iii) issuable by the Company in payment of the dividends
on the shares of the Preferred Stock (the "Dividends") and will use its best
efforts to have such Registration Statement become effective with the Commission
as soon as possible thereafter, and in any event, by December 31, 1998. The
shares of the Company's common stock underlying the Preferred Stock and the
Warrants and issuable in payment of the Dividends is referred to herein as the
"Registrable Stock."
3. Registration--General Provisions. In connection with the registration
--------------------------------
of the Registrable Stock under the Securities Act, the Company will:
(a) prepare and file with the Commission a registration statement with
respect to such securities, within 30 days of the date hereof, and use its best
efforts to cause such registration statement to become effective as soon as
possible after the date it is filed and keep
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<PAGE>
the prospectus which is a part of such Registration Statement current until the
earlier of the date on which: (i) all such shares have been sold, or (ii) five
years after the date it is declared effective by the Commission (the
"Effectiveness Period");
(b) prepare and file with the Commission such amendments to such
Registration Statement and supplements to the prospectus contained therein as
may be necessary to keep such Registration Statement effective for the
Effectiveness Period referred to in Section 3(a) above;
(c) at the request of an Investor, provide such Investor's counsel
(referred to herein as "Investor's Counsel") with reasonable opportunities to
review and comment on, and otherwise participate in, the preparation of such
Registration Statement;
(d) furnish to the Investors participating in such registration and to
the underwriters of the securities being registered, if any, such reasonable
number of copies of the Registration Statement, preliminary prospectus, final
prospectus and such other documents as the Investors and underwriters may
reasonably request in order to facilitate the public offering of such
securities;
(e) use its diligent, good-faith efforts to register or qualify the
securities covered by such Registration Statement under such state securities or
blue sky laws of such jurisdictions as the Investors may reasonably request in
writing within 30 days following the original filing of such Registration
Statement, except that the Company shall not for any purpose be required to
execute a general consent to service of process (which shall not include a
"Uniform Consent to Service of Process" or other similar consent to service of
process which relates only to actions or proceedings arising out of or in
connection with the sale of securities, or out of a violation of the laws of the
jurisdiction requesting such consent) or to qualify to do business as a foreign
corporation in any jurisdiction wherein it is not so qualified;
(f) notify the Investors, promptly after it shall receive notice
thereof, of the time when such Registration Statement has become effective or a
supplement to any prospectus forming a part of such Registration Statement has
been filed with the Commission;
(g) notify the Investors promptly of any request by the Commission for
the amending or supplementing of such Registration Statement or prospectus or
for additional information;
(h) prepare and file with the Commission, promptly upon the request of
the Investors, any amendments or supplements to such Registration Statement or
prospectus which, in the opinion of Investor's Counsel, if any (and concurred in
by counsel for the Company), is required under the Securities Act or the rules
and regulations promulgated thereunder in connection with the distribution of
the shares of the Company's common stock by the Investors;
(i) prepare and promptly file with the Commission and promptly notify
the Investors of the filing of such amendment or supplement to such Registration
Statement or
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<PAGE>
prospectus as may be necessary to correct any statements or omissions if, at the
time when a prospectus relating to such securities is required to be delivered
under the Securities Act, any event shall have occurred as the result of which
any such prospectus or any other prospectus as then in effect would include an
untrue statement of a material fact or omit to state any material fact necessary
to make the statements therein, in the light of the circumstances in which they
were made, not misleading;
(j) advise the Investors, and the Investor's Counsel, if any,
promptly after it shall receive notice or obtain knowledge thereof, of the
issuance of any stop order by the Commission suspending the effectiveness of
such Registration Statement or the initiation or threatening of any proceeding
for that purpose and promptly use its best efforts to prevent the issuance of
any stop order or to obtain its withdrawal if such stop order should be issued;
(k) not file any amendment or supplement to such Registration
Statement or prospectus to which the Investors shall have reasonably objected on
the grounds that such amendment or supplement does not comply in all material
respects with the requirements of the Securities Act or the rules and
regulations promulgated thereunder, after having been furnished with a copy
thereof at least five business days prior to the filing thereof, unless in the
opinion of counsel for the Company the filing of such amendment or supplement is
reasonably necessary to protect the Company from any liabilities under any
applicable federal or state law and such filing will not violate applicable law;
and
(l) at the request of the Investors, furnish on the effective date of
the Registration Statement and, if such registration includes an underwritten
public offering, at the closing provided for in the underwriting agreement: (i)
opinions, dated such respective dates, of the counsel representing the Company
for the purposes of such registration, addressed to the underwriters, if any,
and to the Investors making such request, covering such matters as such
underwriters or Investors may reasonably request, and (ii) letters, dated such
respective dates, from the independent certified public accountants of the
Company, addressed to the underwriters, if any, and to the Investors, covering
such matters as such underwriters or Investors may reasonably request.
(m) Notwithstanding the foregoing, following the effectiveness of
such Registration Statement, the Company may, at any time, suspend the
effectiveness of such Registration Statement for up to no longer than ninety
(90) days, as appropriate (a "Suspension Period"), by giving notice to the
Investors, if (i) the Company, with the advice of its counsel, shall have
determined that the Company may be required to disclose any material corporate
development or (ii) the Company shall be involved in an underwritten public
offering of its securities. The Company will use its best efforts to minimize
the length of any Suspension Period. Further, no more than one 90-day Suspension
Period or multiple Suspension Periods which do not exceed 90 days in the
aggregate may occur in any 12-month period and the Effectiveness Period referred
to in Section 3(a) shall be extended by the number of days such registration is
subject to any Suspension Period. Each Investor agrees that, upon receipt of
any notice from the Company of a Suspension Period, it will not sell (subject to
the limitations on the Company set forth above) any Registrable Stock pursuant
to such Registration Statement until (i)
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<PAGE>
such Investor is advised in writing by the Company that the use of the
applicable prospectus may be resumed, (ii) such Investor has received copies of
any additional or supplemental or amended prospectus, if applicable, and (iii)
such Investor has received copies of any additional or supplemental filings
which are incorporated or deemed to be incorporated by reference in such
prospectus.
4. Registration Expenses. The Company shall pay all Registration
---------------------
Expenses (as defined below) in connection with the inclusion of shares of the
Company's common stock in any Registration Statement, or application to register
or qualify such shares under state securities laws, filed by the Company
hereunder, other than as set forth herein. For purposes of this Agreement, the
term "Registration Expenses" means the filing fees payable to the Commission,
any state agency and the NASD; the fees and expenses of the Company's legal
counsel and independent certified public accountants in connection with the
preparation and filing of the Registration Statement (and all amendments and
supplements thereto) with the Commission; and all expenses relating to the
printing of the Registration Statement, prospectuses and various agreements
executed in connection with the Registration Statement. Notwithstanding the
foregoing, the Investors will pay the fees and expenses of any legal counsel the
Investors may engage, as well as the Investors' proportionate share of any
custodian fees or commission or discounts or transfer taxes which may be payable
to any underwriter and any other expenses incurred by the Investors not
expressly included herein.
5. Penalty Payments. In the event that the Registration Statement
----------------
relating to the resale of the Registrable Stock is not (i) filed with the
Commission by the Company on or before the File Date and/or the Company has not
exercised its best efforts to facilitate the Registration Statement being
declared effective within 90 days of the date hereof, or (ii) declared effective
by the Commission by December 31, 1998, then, the Company shall pay the
Investors the following amounts ("Penalty Payments"): (i) 1% of the purchase
price of the Preferred Stock and Warrants (the "Purchase Price") paid by the
Investors to the Company for the first 30-day period in which the Company is not
in compliance with any of the above provisions; (ii) an additional 1% of the
Purchase Price for the next 30-day period in which the Company is not in
compliance with any of the above provisions; and (iii) 3% of the Purchase Price
for each 30-day period thereafter in which the Registration Statement is not
declared effective by the Commission. Penalties for failure to file and/or to
obtain effectiveness shall be cumulative, but in no event shall the aggregate of
all such Penalty Payments paid hereunder exceed 100% of the Purchase Price . The
Company shall be liable to the Investor for a full 30-day period, determined in
accordance with the above schedule, regardless of by how many days it misses one
of the targeted filing or effective dates set forth above. All such Penalty
Payments shall be immediately payable by the Company to the Investors (on a pro
rata basis based on the number of shares of Preferred Stock purchased by each
under the Purchase Agreement) via wire transfer or Company check by the close of
business on last day of each respective period set forth above.
6. Indemnification. With respect to the registration of the resale of the
---------------
shares of Registrable Stock:
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<PAGE>
(a) to the extent permitted by law, the Company will indemnify and
hold harmless each Investor, the trustees, partners, officers and directors of
each Investor, any underwriter (as defined in the Securities Act) for such
Investor and each person, if any, who controls such Investor or underwriter
within the meaning of the Securities Act or the Securities Exchange Act of 1934,
as amended (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") by the Company: (i) any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement,
including any preliminary prospectus or final prospectus contained therein or
any amendments or supplements thereto, (ii) 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 (iii) any violation or alleged
violation by the Company 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 in connection with the offering
covered by the Registration Statement; and the Company will reimburse each such
Investor, trustee, partner, officer, director, 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 Section 6(a)
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
Company (which consent shall not be unreasonably withheld), nor shall the
Company 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 to
it expressly for use in connection with such registration by an Investor,
trustee, partner, officer, director, underwriter or controlling person of an
Investor.
(b) to the extent permitted by law, each Investor will indemnify and
hold harmless the Company, each of its directors, each of its officers, each
person, if any, who controls the Company within the meaning of the Securities
Act, any underwriter and any other Investor selling securities under the
Registration Statement or any of such other Investor's, trustees, partners,
directors or officers or any person who controls such Investor, against any
losses, claims, damages or liabilities (joint or several) to which the Company
or any such director, officer, controlling person, underwriter or other such
Investor, or trustee, partner, director, officer or controlling person of such
other Investor 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 such Investor and stated to be specifically for use in connection
with such registration; and each such Investor will reimburse any legal or other
expenses reasonably incurred by the Company or any such director, officer,
controlling person, underwriter or other Investor, or trustee, partner, officer,
director or controlling person of such other Investor in connection with
investigating or defending any such loss, claim, damage, liability or action if
it is judicially determined that there was such a Violation; provided,
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<PAGE>
however, that the indemnity agreement contained in this Section 6(b) 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 Investor,
which consent shall not be unreasonably withheld; provided further, that in no
event shall any indemnity under this Section 6 exceed the gross proceeds from
the offering received by such Investor unless the Violation is the result of
fraud on the part of such Investor.
(c) promptly after receipt by an indemnified party under this Section
of notice of the commencement of any action (including any governmental action),
such indemnified party shall, if a claim in respect thereof is to be made
against any indemnifying party under this Section, deliver to the indemnifying
party a written notice of the commencement thereof and the indemnifying party
shall have the right to participate in, and, to the extent the indemnifying
party so desires, jointly with any other indemnifying party similarly noticed,
to assume 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 reasonable fees and expenses to be paid by the
indemnifying party; and provided further, that if there is more than one
indemnified party, the indemnifying party shall pay for the reasonable fees and
expenses of one counsel for any and all indemnified parties to be mutually
agreed upon by such indemnified parties, unless representation of an indemnified
party by the counsel retained by the other indemnified parties would be
inappropriate due to actual or potential differing interests between such
indemnified parties. The failure to deliver written notice to the indemnifying
party within a reasonable time of the commencement of any such action, if
materially prejudicial to its ability to defend such action, shall relieve such
indemnifying party of any liability to the indemnified party under this Section,
but the omission so to deliver written notice to the indemnifying party will not
relieve it of any liability that it may have to any indemnified party other than
under this Section.
(d) if the indemnification provided for in this Section is held by a
court of competent jurisdiction to be unavailable to an indemnified party with
respect to any losses, claims, damages or liabilities referred to herein, the
indemnifying party, in lieu of indemnifying such indemnified party thereunder,
shall to the extent permitted by applicable law, contribute to the amount paid
or payable by such indemnified party as a result of such loss, claim, damage or
liability in such proportion as is appropriate to reflect the relative fault of
the indemnifying party on the one hand and of the indemnified party on the other
in connection with the Violation(s) that resulted in such loss, claim, damage or
liability, as well as any other relevant equitable considerations. The relative
fault of the indemnifying party and of the indemnified party shall be determined
by a court of law by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged omission
to state a material fact relates to information supplied by the indemnifying
party or by the indemnified party and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission. No person or entity guilty of fraudulent misrepresentation (within
the meaning of Section 11 of the Securities Act) shall be entitled to
contribution from any person or entity who shall not have been guilty of such
fraudulent misrepresentation.
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<PAGE>
(e) the obligation of the Company and the Investors under this
Section shall survive the completion of any offering for resale of shares of the
Registrable Stock in the Registration Statement, and otherwise.
7. Limitation on Subsequent Registration Rights. From and after the date
--------------------------------------------
of this Agreement and until all the Securities have been registered under the
Securities Act or become eligible for transfer under Rule 144(k) or similar rule
under the Securities Act, the Company shall not, without the prior written
consent of all of the Investors, enter into any agreement with any person or
persons providing for the granting to such holder of registration rights pari
passu or senior to those granted to Investors pursuant to this Agreement, or of
registration rights which might cause a reduction in the number of shares
includable by the Investors in any registration.
8. Miscellaneous.
-------------
(a) The Company shall not hereafter enter into any agreement with
respect to its securities that is inconsistent with the rights granted to the
Investors in this Agreement.
(b) Except as otherwise provided herein, the provisions of this
Agreement may not be amended, modified or supplemented, and waivers or consents
to or departures from the provisions hereof may not be given or made unless the
Company has obtained the written consent of the Investors.
(c) All notices and other communications provided for or permitted
hereunder shall be made by hand delivery, telex, facsimile, overnight courier or
registered first-class mail:
(i) if to an Investor, at the address set forth on Schedule A
attached hereto;
(ii) if to the Company, at the address set forth in the Purchase
Agreement.
All such notices and communications shall be deemed to have been duly given:
when delivered, if by hand, overnight courier or mail; when the appropriate
answer back is received, if by telex; when transmission is confirmed by the
sending unit, if by facsimile.
(d) This Agreement may be executed in any number of counterparts and
by the parties hereto in separate counterparts, each of which when so executed
shall be deemed to be an original and all of which taken together shall
constitute one and the same agreement.
(e) The headings to this Agreement are for convenience of reference
only and shall not limit or otherwise affect the meaning hereof.
(f) This Agreement shall be governed by and construed and enforced in
accordance with the laws of the State of Minnesota without giving effect to the
principles of conflicts of law thereof.
E-7
<PAGE>
(g) In the event that any one or more of the provisions contained
herein, or the application thereof in any circumstances, is held invalid,
illegal or unenforceable in any respect for any reason, the validity, legality
and enforceability of such provision in every other respect and of the remaining
provisions contained herein shall not be in any way impaired thereby, it being
intended that all of the rights and privileges of the Investors and the Company
shall be enforceable to the fullest extent permitted by law.
(h) The remedies provided for in this Agreement shall be cumulative
and in addition to all other remedies available, at law or in equity, and
nothing herein shall limit a holder's right to pursue actual damages for any
failure by the Company to comply with the terms of this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized representatives as of the date indicated
above.
GLOBAL MAINTECH CORPORATION
By:______________________________
Its:______________________________
E-8
<PAGE>
ENTITY INVESTOR INDIVIDUAL INVESTOR
- --------------- -------------------
__________________________ __________________________________
Name of Entity Signature
By _______________________ __________________________________
* Signature Signature of Joint Holder, if any
Its ______________________
Title
__________________________ __________________________________
Name Typed or Printed Name Typed or Printed
E-9
<PAGE>
EXHIBIT 4.7
PLEASE SEE RESTRICTIVE LEGENDS ON REVERSE SIDE HEREOF
INCORPORATED UNDER THE LAWS OF THE STATE OF MINNESOTA
NUMBER SHARES
SPECIMEN SPECIMEN
GLOBAL MAINTECH CORPORATION
This certifies that SPECIMEN is the owner and
_________________________________________
registered holder of --------------------------------------- Shares of
_______________________________________________
fully paid and nonassessable shares of Series B Convertible Preferred Stock,
no par value, of
Global MAINTECH Corporation
transferable only on the books of the corporation by the holder hereof in person
or by duly authorized attorney upon surrender of this certificate properly
endorsed.
IN WITNESS WHEREOF, the said corporation has caused this certificate to be
signed by its duly authorized officers and so be sealed with the seal of the
corporation this __________________ day of ______________________ , _____,
_________________________________ ____________________________________
Secretary President
<PAGE>
The shares represented by this certificate have not been registered or qualified
under the Securities Act of 1933, as amended, or any state securities laws. Such
shares of stock may not be sold, transferred or otherwise disposed of without
either (i) an opinion of counsel satisfactory to the corporation that such
transfer may lawfully be made without registration or qualification under the
federal Securities Act of 1933, as amended, and all applicable state securities
laws; or (ii) such registration or qualification.
A full statement of the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or series
thereof of the corporation and the qualifications, limitations or restrictions
of such preferences and/or rights will be furnished by said corporation to any
stockholder under request and without charge.
For Value Received _____________________ hereby sell, assign and transfer unto
______________________________________________________________________________
_______________________________________________________________________ Shares
represented by the within Certificate, and do hereby irrevocably constitute
and appoint
____________________________________________________________________ Attorney
to transfer the said shares on the Books of the within named Corporation with
full power of substitution in the premises.
Dated ____________________, 19____ _______________________________
IN PRESENCE OF _____________________________________________________________
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS
WRITTEN UPON THE FACE OF THIS CERTIFICATE IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
<PAGE>
Exhibit 4.8
SERIES C CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT
among
the Investors listed on Schedule A
and
Settondown Capital International Ltd.
and
Global Maintech Corporation
March 24, 1999
THE GOLDSTEIN LAW GROUP, P.C.
65 Broadway, 10/th/ Floor
New York, N.Y. 10006
Telephone: (212) 809-4220
Facsimile: (212) 809-4228
<PAGE>
SERIES C CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT
-------------------------------------------------------
THIS SERIES C CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT, dated as of
March 24, 1999 (the "Agreement"), among the entities listed on Schedule A
attached hereto (collectively referred to as the "Investors"), SETTONDOWN
CAPITAL INTERNATIONAL LTD. a corporation organized under the laws of Bahamas,
located at Charlotte House, Charlotte Street, P.O. Box N. 9204, Nassau, Bahamas,
(the "Placement Agent"), and GLOBAL MAINTECH CORPORATION, a corporation
organized and existing under the laws of the State of Minnesota (NASD OTC
Electronic Bulletin Board symbol "GLBM", the "Company").
WHEREAS, the parties desire that, upon the terms and subject to the
conditions contained herein, the Company shall issue and sell to the Investors,
and the Investors shall purchase up to (a) 1,600 shares of Preferred Stock (as
defined below), and (b) Warrants to purchase up to 100,000 Warrant Shares; and
WHEREAS, the Company shall issue to the Placement Agent (in addition to the
fees set forth in Section 12.7 below), in return for services rendered, an
aggregate of 75 shares of Preferred Stock, and a Warrant to purchase an
aggregate of 100,000 Warrant Shares; and
WHEREAS, such investments will be made in reliance upon the provisions of
Section 4(2) ("Section 4(2)") and Regulation D ("Regulation D") of the United
States Securities Act of 1933, as amended, and the regulations promulgated
thereunder (the "Securities Act"), and/or upon such other exemption from the
registration requirements of the Securities Act as may be available with respect
to any or all of the investments in Common Stock to be made hereunder.
NOW, THEREFORE, the parties hereto agree as follows:
ARTICLE I
---------
Certain Definitions
-------------------
Section 1.1 "Additional Shares" shall have that meaning set forth in
Section 2.5 below.
Section 1.2 "Bid Price" shall mean the closing bid price (as reported by
Bloomberg L.P.) of the Common Stock on the Principal Market.
Section 1.3 "Business Day" means any day except Saturday, Sunday and any
day which shall be a Federal legal holiday or a day on which banking
institutions in the State of New York are authorized or required by law or other
government actions to close.
Section 1.4 "Capital Shares" shall mean the Common Stock and any shares
of any other class of common stock whether now or hereafter authorized, having
the right to participate in the distribution of earnings and assets of the
Company.
<PAGE>
Section 1.5 "Capital Shares Equivalents" shall mean any securities,
rights, or obligations that are convertible into or exchangeable for, or giving
any right to subscribe for, any Capital Shares of the Company or any warrants,
options or other rights to subscribe for or purchase Capital Shares or any such
convertible or exchangeable securities.
Section 1.6 "Certificate of Designation" shall mean the Company's
Certificate of Designation setting forth all of the rights, privileges and
preferences of the Preferred Stock, as annexed hereto as Exhibit A and made a
part hereof.
Section 1.7 "Closing" shall mean the closing of a purchase and sale of
the Preferred Stock and Warrants pursuant to Article II below.
Section 1.8 "Closing Date" shall mean the Subscription Date.
Section 1.9 "Common Stock" shall mean the Company's common stock, no par
value per share.
Section 1.10 "Damages" shall mean any loss, claim, damage, liability,
costs and expenses which shall include, but not be limited to, reasonable
attorney's fees, disbursements, costs and expenses of expert witnesses and
investigation.
Section 1.11 "Effective Date" shall mean the date on which the SEC first
declares effective a Registration Statement registering the resale of the
following: (i) 200% of the Underlying Shares (as of the date the Registration
Statement is filed) and 100% of the Warrant Shares, and (ii) 200% of that number
of Underlying Shares (as of the date the Registration Statement is filed), and
100% of that number of Warrant Shares issued to the Placement Agent as set forth
in Section 12.7 below.
Section 1.12 "Escrow Agent" shall mean the law firm of The Goldstein Law
Group, P.C., pursuant to the terms of the Escrow Agreement attached as Exhibit
B.
Section 1.13 "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended, and the rules and regulations promulgated thereunder.
Section 1.14 "Legend" shall have the meaning set forth in Article VIII
below.
Section 1.15 "Material Adverse Effect" shall mean any effect on the
business, operations, properties, Bid Price, trading volume of the Common Stock,
prospects, or financial condition of the Company that is material and adverse to
the Company and its subsidiaries and affiliates, taken as a whole, and/or any
condition, circumstance, or situation that would prohibit or otherwise in any
material respect interfere with the ability of the Company to enter into and
perform any of its obligations under this Agreement, the Registration Rights
Agreement, the Escrow Agreement, the Certificate of Designation or the Warrants
in any material respect.
2
<PAGE>
Section 1.16 "NASD" shall mean the National Association of Securities
Dealers, Inc.
Section 1.17 "Outstanding" when used with reference to shares of Common
Stock, Preferred Stock, or Capital Shares (collectively the "Shares"), shall
mean, at any date as of which the number of such Shares is to be determined, all
issued and outstanding Shares, and shall include all such Shares issuable in
respect of outstanding scrip or any certificates representing fractional
interests in such Shares; provided, however, that Outstanding shall not mean any
such Shares then directly or indirectly owned or held by or for the account of
the Company.
Section 1.18 "Person" shall mean an individual, a corporation, a
partnership, an association, a limited liability company, a trust or other
entity or organization, including a government or political subdivision or an
agency or instrumentality thereof.
Section 1.19 "Preferred Stock" shall mean the Company's Series C
Preferred Stock with the rights, privileges and preferences, as set forth in the
Certificate of Designation.
Section 1.20 "Prime Rate" shall mean the rate of interest per annum
publicly announced from time to time by the principal New York City office of
the Chase Manhattan bank, or its successor, as its prime rate (which rate shall
change when and as such prime rate changes).
Section 1.21 "Principal Market" shall mean the NASD OTC Electronic
Bulletin Board, the Nasdaq National Market, the Nasdaq Small Cap Market, the
American Stock Exchange, or the New York Stock Exchange, whichever is at the
time the principal trading exchange or market for the Common Stock.
Section 1.22 "Purchase Price" shall mean $1,600,000.
Section 1.23 "Registrable Securities" shall mean the Underlying Shares,
the Additional Shares, the Warrant Shares (i) in respect of which the
Registration Statement (covering these securities) has not been declared
effective by the SEC, (ii) which have not been sold under circumstances under
which all of the applicable conditions of Rule 144 (or any similar provision
then in force) under the Securities Act ("Rule 144") are met, (iii) which have
not been otherwise transferred to holders who may trade such shares without
restriction under the Securities Act, or (iv) the sales of which, in the opinion
of counsel to the Company, are subject to any time, volume or manner limitations
pursuant to Rule 144(k) (or any similar provision then in effect) under the
Securities Act.
3
<PAGE>
Section 1.24 "Registration Rights Agreement" shall mean the agreement
regarding the filing of the Registration Statement for the resale of the
Registrable Securities, entered into between the Company, the Placement Agent,
and the Investors on the Subscription Date annexed hereto as Exhibit C.
Section 1.25 "Registration Statement" shall mean a registration statement
on Form S-3 or such other appropriate registration statement, for the
registration of the resale by the Investors and the Placement Agent of the
Registrable Securities under the Securities Act.
Section 1.26 "Regulation D" shall have the meaning set forth in the
recitals of this Agreement.
Section 1.27 "SEC" shall mean the Securities and Exchange Commission.
Section 1.28 "Section 4(2)" shall have the meaning set forth in the
recitals of this Agreement.
Section 1.29 "Securities" shall mean the Underlying Shares, the
Additional Shares, the Warrant Shares.
Section 1.30 "Securities Act" shall have the meaning set forth in the
recitals of this Agreement.
Section 1.31 "SEC Documents" shall mean the Company's latest Form 10-KSB
(and all amendments thereto) as of the time in question, all Form 10-QSBs and
Form 8-Ks filed thereafter, and the Proxy Statement for its latest fiscal year
as of the time in question until such time as the Company no longer has an
obligation to maintain the effectiveness of a Registration Statement as set
forth in the Registration Rights Agreement.
Section 1.32 "Subscription Date" shall mean the date on which this
Agreement and all Exhibits and attachments hereto are executed and delivered by
the parties hereto and all of the conditions relating to the issuance of the
Preferred Stock and Warrants shall have been fulfilled.
Section 1.33 "Trading Day" shall mean any day during which the Principal
Market shall be open for business.
Section 1.34 "Underlying Shares" shall mean all shares of Common Stock or
other securities issued or issuable pursuant to conversion of the Preferred
Stock.
Section 1.35 "Warrants" shall mean Common Stock Purchase Warrant annexed
hereto as Exhibit D.
Section 1.36 "Warrant Shares" shall mean all shares of Common Stock or
other securities issued or issuable pursuant to the exercise of the Warrants.
4
<PAGE>
ARTICLE II
----------
Purchase and Sale of the Preferred Stock and Warrants
-----------------------------------------------------
Section 2.1 Closing. On the Closing Date, the Company will sell, and
the Investors will buy, and pursuant to the terms and conditions of this
Agreement (including the satisfaction or waiver in writing of the conditions set
forth in Section 2.6 below) an aggregate of up to 1,600 shares of Preferred
Stock based on U.S.$1,000 per share, and Warrants to purchase that number of
Warrant Shares as set forth in Section 2.4 below for the Purchase Price.
Section 2.2 Form of Payment. The Investors shall pay the Purchase Price
by delivering good funds in United States Dollars by wire transfer to the Escrow
Agent, against delivery of the original Preferred Stock and Warrants. The
parties have entered into an Escrow Agreement annexed hereto as Exhibit B.
Section 2.3 [Intentionally Omitted]
Section 2.4 Warrants. The Company will issue to the Investors (pro rata
in proportion to the number of shares of Preferred Stock purchased) on the
Closing Date Warrants exercisable beginning on the Closing Date and then
exercisable any time over the five year period there following, to purchase an
aggregate of up to 100,000 Warrant Shares per $1,600,000 funded to the Company
pursuant to the terms hereunder (pro rata amongst the Investors based upon each
Investor's portion of the Purchase Price). On the Subscription Date the Company
shall issue to the Placement Agent a Warrant to purchase up to 100,000 Warrant
Shares exercisable beginning on the Closing Date and then exercisable any time
over the five year period there following. The Warrants shall be delivered by
the Company to the Escrow Agent, and delivered to the Investors and Placement
Agent pursuant to the terms of this Agreement and the Escrow Agreement. All of
the aforementioned Warrant Shares shall be registered for resale pursuant to the
Registration Rights Agreement.
Section 2.5 Additional Shares. In the event that a "blackout period"
occurs which is defined as any period in which the effectiveness of the
Registration Statement is suspended for a reason other than a suspension of the
registration Statement arising in the event the Company possesses material non-
public information, and the Bid Price on the Trading Day immediately preceding
such "blackout period" (the "Old Bid Price") is greater than the Bid Price on
the first Trading Day following such "blackout period" (the "New Bid Price"),
the Company shall issue to the Investors and/or the Placement Agent the number
of additional shares of Common Stock equal to the difference between (y) the
product of (i) the number of Securities held by the Investors and/or the
Placement Agent during such "blackout period" that are or were not otherwise
freely tradable and (ii) the Old Bid Price, divided by the New Bid Price and (z)
the number of Securities held by the Investors and/or the Placement Agent during
such "blackout period" that were not otherwise freely tradable during such
Blackout Period.
Section 2.6 Liquidated Damages. In addition to any other provisions for
liquidated
5
<PAGE>
damages in this Agreement or any Exhibit annexed hereto, in the event
that the Company does not deliver unlegended, freely tradable Common Stock in
connection with the sale of such Common Stock by the Investor(s) and/or the
Placement Agent as set forth in Article VIII below within six (6) Business Days
of surrender by the Investor(s) of the Common Stock certificate in accordance
with the terms and conditions set forth in Article VIII below (such date of
receipt is referred to as the "Receipt Date"), the Company shall pay to the
Investor(s), in immediately available funds, upon demand, as liquidated damages
for such failure and not as a penalty, for every day thereafter for the first
ten days, one percent of the product of (i) the number of shares of Common Stock
undelivered and (ii) the Bid Price on the Receipt Date, and two percent of the
product of (i) the number of shares of Common Stock undelivered and (ii) the Bid
Price on the Receipt Date, for every day thereafter that the unlegended shares
of Common Stock are not delivered, which liquidated damages shall accrue from
the fourth Business Day after the Receipt Date. The parties hereto acknowledge
and agree that the sums payable pursuant to the Registration Rights Agreement
and as set forth above, and the obligation to issue Registrable Securities under
Section 2.5 above, shall constitute liquidated damages and not penalties. The
parties further acknowledge that the amount of loss or damages likely to be
incurred in the event of a failure to deliver unlegended, freely tradable shares
of Common Stock cannot be precisely estimated, and the parties are sophisticated
business parties and have been represented by sophisticated and able legal and
financial counsel and negotiated this Agreement at arm's length.
Notwithstanding the above, in the event that the Company does not deliver
unlegended Common Stock in connection with the sale of such Common Stock by the
Investor(s) and/or the Placement Agent as set forth in Article VIII below within
six Business Days of the Receipt Date), the Company shall also pay to the
Investor(s), in immediately available funds, interest (at the then current Prime
Rate), based upon the product of (i) the number of undelivered unlegended freely
tradable shares, and (ii) the Bid Price of the Common Stock on the Receipt
Date, undelivered for every day thereafter that the unlegended shares of Common
Stock are not delivered. Any and all payments required pursuant to this
paragraph shall be payable only in cash, and any payment hereunder shall not
relieve the Company of its delivery obligations under this Section.
Section 2.7 Conditions to Closing.
(a) Conditions to the Company's Obligation to Sell. Each of the
Investors understands that the Company's obligation to sell the Preferred Stock
and Warrants is subject to the satisfaction (or written waiver) on the Closing
Date, of each of the following conditions:
delivery by each Investor of a copy of this Agreement and each
Exhibit annexed hereto to which it is a party (substantially
in the form annexed hereto), in each case executed by a duly
authorized signatory of such Investor;
delivery into escrow by the Investors of clear funds for the
Purchase Price (as more fully set forth in the Escrow
Agreement attached hereto as Exhibit B);
all representations and warranties of the Investors contained
herein shall remain true and correct in all material
respects as of the Closing Date;
(b) Conditions to Investors' Obligation to Purchase. The Company
understands that the Investors' obligation to purchase the Preferred Stock, and
Warrant is subject to the satisfaction
6
<PAGE>
(or written waiver) on the Closing Date, of each of the following conditions:
delivery by the Company of a copy of this Agreement and each
Exhibit annexed hereto to which it is a party (substantially
in the form annexed hereto), in each case executed by a duly
authorized officer of the Company;
all representations and warranties of the Company contained
herein shall remain true and correct in all material
respects as of the Closing Date;
the Company shall have obtained all permits and qualifications
required by any state for the offer and sale of the
Preferred Stock and the Warrants, or shall have the
availability of exemptions therefrom;
the sale and issuance of the Preferred Stock, and the proposed
issuance of the Additional Shares, Underlying Shares,
Warrants and Warrant Shares shall be legally permitted by
all laws and regulations to which the Investors and the
Company are subject; and all duly executed Exhibits hereto
for the sale of the Securities;
delivery of the original Preferred Stock and Warrants as
described herein;
(vi) receipt by the Investors of an opinion of counsel of the
Company as set forth in Exhibit E attached hereto;
(vii) receipt by the Investors of executed instructions to the
Transfer Agent as set forth in Exhibit F annexed hereto;
(viii) written proof that the Certificate of Designation has been
filed with the Secretary of State of the State of Minnesota,
and remains in full force and effect as of the Closing Date;
(ix) the Company shall not be in default of any material
covenant, representation, and/or warranty contained in
this Agreement or any Exhibit annexed hereto; and
(x) payment of all fees by the Company as set forth in Section
12.7 below and the Escrow Agreement.
7
<PAGE>
ARTICLE III
-----------
Representations and Warranties of the Investors
-----------------------------------------------
Each of the Investors severally (as to itself) and not jointly represents
and warrants to the Company that:
Section 3.1 Intent. Without limiting its ability to resell the
Securities pursuant to an effective registration statement or an exemption from
registration each of the Investors is entering into this Agreement for its own
account and has no present arrangement (whether or not legally binding) at any
time to sell the Securities to or through any person or entity; provided,
however, that by making the representations herein, the Investors do not agree
to hold the Securities for any minimum or other specific term and reserves the
right to dispose of the Securities at any time in accordance with federal and
state securities laws applicable to such disposition.
Section 3.2 Sophisticated Investors. Each of the Investors is a
sophisticated investor (as described in Rule 506(b)(2)(ii) of Regulation D) and
an accredited investor (as defined in Rule 501 of Regulation D), and each of the
Investors has such experience in business and financial matters that it is
capable of evaluating the merits and risks of an investment in the Preferred
Stock and Securities. Each of the Investors acknowledges that an investment in
the Common Stock is speculative and involves a high degree of risk and can
afford the complete loss of their investment.
Section 3.3 Authority. This Agreement has been duly authorized and
validly executed and delivered by each of the Investors and is a valid and
binding agreement of the Investors enforceable against each of them in
accordance with its terms, subject to applicable bankruptcy, insolvency, or
similar laws relating to, or affecting generally the enforcement of, creditors'
rights and remedies or by other equitable principles of general application.
The decision to invest and the execution and delivery of this Agreement by the
Investors, the performance by the Investors of their obligations hereunder and
the consummation by the Investors of the transactions contemplated hereby have
been duly authorized and requires no other proceedings on the part of the
Investors. The undersigned signatory has all right, power and authority to
execute and deliver this Agreement on behalf of each Investor. This Agreement
has been duly executed and delivered by the Investors and, assuming the due
execution and delivery hereof and acceptance thereof by the Company, will
constitute the legal, valid and binding obligations of the Investors,
enforceable against the Investors in accordance with its terms.
Section 3.4 Not an Affiliate. None of the Investors is an officer,
director or "affiliate" (as that term is defined in Rule 405 of the Securities
Act) of the Company.
Section 3.5 Organization and Standing. Each of the Investors is duly
organized, validly existing, and in good standing under the laws of the
countries and/or states of their incorporation or organization and has all
requisite power and authority to purchase the Securities.
Section 3.6 Absence of Conflicts. The execution and delivery of this
Agreement and any
8
<PAGE>
other document or instrument executed in connection herewith, and the
consummation of the transactions contemplated hereby and thereby, and compliance
with the requirements thereof, will not violate any law, rule, regulation,
order, writ, judgment, injunction, decree or award binding on Investors, or, to
the Investors knowledge, (a) violate any provision of any indenture, instrument
or agreement to which any of the Investors are a party or are subject, or by
which any of the Investors or any of their assets is bound; (b) conflict with or
constitute a material default thereunder; (c) result in the creation or
imposition of any lien pursuant to the terms of any such indenture, instrument
or agreement, or constitute a breach of any fiduciary duty owed by Investors to
any third party; or (d) require the approval of any third-party (which has not
been obtained) pursuant to any material contract, agreement, instrument,
relationship or legal obligation to which any of the Investors is subject or to
which any of their assets, operations or management may be subject.
Section 3.7 Disclosure; Access to Information. Each of the Investors
has received all documents, records, books and other information pertaining to
Investor's investment in the Company that have been requested by Investors,
including the opportunity to ask questions of, and receive answers from, the
Company. The Company is subject to the periodic reporting requirements of the
Exchange Act, and each of the Investors has reviewed or received copies of any
such reports that have been requested by it. Each of the Investors represents
that it has reviewed the Company's, Form 10-KSB for the year ended December 31,
1997, Form 10-QSB's, and Form 8-K's filed for the twelve months prior to the
Subscription Date.
Section 3.8 Manner of Sale. At no time were any of the Investors
presented with or solicited by or through any leaflet, public promotional
meeting, television advertisement or any other form of general solicitation or
advertising in connection with the offer and sale of the Preferred Stock and
Securities.
Section 3.9 Registration or Exemption Requirements. Each of the
Investors acknowledge and understand that the limited private offering and sale
of Preferred Stock and Securities pursuant to this Agreement has not been
reviewed or approved by the SEC or by any state securities commission, authority
or agency, and is not registered under the Securities Act or under the
securities or "blue sky" laws, rules or regulations of any state. Each of the
Investors acknowledges, understands and agrees that the Preferred Stock and
Securities are being offered and sold hereunder pursuant to (i) a private
placement exemption to the registration provisions of the Securities Act
pursuant to Section 4(2) of such Securities Act and Regulation D promulgated
under such Securities Act, and (ii) a similar exemption from the registration
provisions of applicable state securities laws.
Section 3.10 No Legal, Tax or Investment Advice. Each of the Investors
understands that nothing in this Agreement or any other materials presented to
the Investors in connection with the purchase and sale of the Preferred Stock
and Warrants constitutes legal, tax or investment advice. The Investors have
relied on, and have consulted with, such legal, tax and investment advisors as
they, in their sole discretion, have deemed necessary or appropriate in
connection with their purchase of the Preferred Stock and Warrants.
Section 3.11 No Violation. Each of the Investors, and the Placement
Agent (including all
9
<PAGE>
affiliates) agree that it will not enter into any position in the Common Stock
that in any manner would violate any provision of the Exchange Act. Each of the
Investors, and the Placement Agent further agree that as of the Closing Date it
does not maintain a short position in the Common Stock, and does not have any
current intention of entering into any short position in connection with the
Common Stock.
ARTICLE IV
----------
Representations and Warranties of the Company
---------------------------------------------
The Company represents and warrants to the Investors and the Placement
Agent that:
Section 4.1 Organization of the Company. The Company is a corporation
duly incorporated and existing in good standing under the laws of the State of
Minnesota and has all requisite corporate authority to own its properties and to
carry on its business as now being conducted except as described in the SEC
Documents. The Company is duly qualified as a foreign corporation to do
business and is in good standing in every jurisdiction in which the nature of
the business conducted or property owned by it makes such qualification
necessary, other than those (individually or in the aggregate) in which the
failure so to qualify would not reasonably be expected to have a Material
Adverse Effect. The Company is not in violation of any material terms of its
Articles of Incorporation (as defined below) or Bylaws (as defined below).
Section 4.2 Authority. (i) The Company has the requisite corporate power
and authority to enter into and perform its obligations under this Agreement,
and all Exhibits annexed hereto, and to issue the Preferred Stock, Warrants,
Underlying Shares, Additional Shares, and the Warrant Shares, (ii) the
execution, issuance and delivery of this Agreement, and all Exhibits annexed
hereto, by the Company and the consummation by it of the transactions
contemplated hereby and thereby have been duly authorized by all necessary
corporate action and no further consent or authorization of the Company or its
Board of Directors is necessary, and (iii) this Agreement, and all Exhibits
annexed hereto, have been duly executed and delivered by the Company and
constitute valid and binding obligations of the Company enforceable against the
Company in accordance with their terms, except as such enforceability may be
limited by applicable bankruptcy, insolvency, or similar laws relating to, or
affecting generally the enforcement of, creditors' rights and remedies or by
other equitable principles of general application. Upon their issuance and
delivery pursuant to this Agreement, the aforementioned securities issuable will
be validly issued, fully paid and nonassessable and will be free of any liens or
encumbrances other than those created hereunder or by the actions of the
Investors and/or the Placement Agent; provided, however, that the aforementioned
securities are subject to restrictions on transfer under state and/or federal
securities laws. The issuance and sale of the securities hereunder will not
give rise to any preemptive right or right of first refusal or right of
participation on behalf of any person.
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Section 4.3 Capitalization. As of March 8, 1998, the authorized capital
stock of the Company consists of 50,000,000 shares, no par value, of which
887,980 shares are designated as Series A Convertible Preferred Stock (the
"Series A Stock"), 615,385 shares are designated as Series B Convertible
Preferred Stock (the "Series B Stock") and 48,496,635 shares are divisible into
such other classes and series as the Board of Directors may from time to time
designate. As of March 8, 1998, there were 18,542,091 shares of Common Stock
issued and outstanding; 129,176 shares of Series A Stock issued and outstanding;
and 335,961 shares of Series B Stock issued and outstanding. All of the
outstanding shares of the Company's capital stock have been duly and validly
authorized and issued and are fully paid and nonassessable. No shares of Common
Stock are entitled to preemptive or similar rights. Except as specifically
disclosed in the SEC Documents, there are no outstanding options, warrants,
rights to subscribe to, calls or commitments of any character whatsoever
relating to, or, except as a result of the purchase and sale of the Preferred
Stock and the Warrants, securities, rights or obligations convertible into or
exchangeable for, or giving any Person any right to subscribe for or acquire,
any shares of Common Stock, or contracts, commitments, understandings, or
arrangements by which the Company or any subsidiary is or may become bound to
issue additional shares of Common Stock or securities or rights convertible or
exchangeable into shares of Common Stock. To the knowledge of the Company, no
Person or group of Persons beneficially owns (as determined pursuant to Rule
13d-3 promulgated under the Exchange Act) or has the right to acquire by
agreement with or by obligation binding upon the Company beneficial ownership of
in excess of five percent of the Common Stock.
Section 4.4 Common Stock. The Company has registered its Common Stock
pursuant to Section 12(g) of the Exchange Act and is in full compliance with all
reporting requirements of the Exchange Act, and such Common Stock is currently
listed or quoted on the NASD OTC Electronic Bulletin Board.
Section 4.5 SEC Documents. The Company has delivered or made available
to the Investors true and complete copies of the SEC Documents filed by the
Company with the SEC during the twelve (12) months immediately preceding the
Subscription Date (including, without limitation, proxy information and
solicitation materials). The Company has not provided to any of the Investors
any information that, according to applicable law, rule or regulation, should
have been disclosed publicly prior to the date hereof by the Company, but which
has not been so disclosed. The SEC Documents comply in all material respects
with the requirements of the Securities Act or the Exchange Act, as the case may
be, and rules and regulations of the SEC promulgated thereunder and none of the
SEC Documents contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading. The financial statements of the Company included in the SEC
Documents comply as to form in all material respects with applicable accounting
requirements and the published rules and regulations of the SEC or other
applicable rules and regulations with respect thereto. Such financial
statements have been prepared in accordance with generally accepted accounting
principles applied on a consistent basis during the periods involved (except (i)
as may be otherwise indicated in such financial statements or the notes thereto
or (ii) in the case of unaudited interim statements, to the extent they may not
include
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footnotes or may be condensed or summary statements) and fairly present in all
material respects the financial position of the Company as of the dates thereof
and the results of operations and cash flows for the periods then ended
(subject, in the case of unaudited statements, to normal year-end audit
adjustments).
Section 4.6 Valid Issuances. When issued and paid for in accordance
with the terms hereof, the Preferred Stock, Underlying Shares, Warrants, Warrant
Shares, and Additional Shares, will be duly and validly issued, fully paid, and
nonassessable. Neither the issuance of the Preferred Stock, Underlying Shares,
Warrants, Warrant Shares, or Additional Shares, nor the Company's performance of
its obligations under this Agreement, and all Exhibits annexed hereto, will (i)
result in the creation or imposition by the Company of any liens, charges,
claims or other encumbrances upon the Warrants, Preferred Stock, Warrant Shares,
Additional Shares, or Underlying Shares, issued or issuable hereunder, or any of
the assets of the Company, or (ii) entitle the holders of Outstanding Capital
Shares to preemptive or other rights to subscribe to or acquire any Capital
Shares or other securities of the Company.
Section 4.7 No General Solicitation or Advertising in Regard to this
Transaction. Neither the Company nor any of its affiliates nor any distributor
or any person acting on its or their behalf (i) has conducted or will conduct
any general solicitation (as that term is used in Rule 502(c) of Regulation D)
or general advertising in connection with the offer and sale of the Preferred
Stock, Additional Shares, Underlying Shares, Warrants, or Warrant Shares, or
(ii) has made any offers or sales of any security or solicited any offers to buy
any security under any circumstances that would require registration of the
Preferred Stock, Additional Shares, Underlying Shares, Warrants, or Warrant
Shares under the Securities Act.
Section 4.8 Corporate Documents. The Company has furnished or made
available to each of the Investors true and correct copies of the Company's
articles of incorporation, as amended and in effect on the date hereof (the
"Articles of Incorporation"), and the Company's by-laws, as amended and in
effect on the date hereof (the "By-Laws").
Section 4.9 No Conflicts. The execution, delivery and performance of
this Agreement (including all Exhibits annexed hereto) by the Company and the
consummation by the Company of the transactions contemplated hereby and thereby,
including without limitation the issuance of the Preferred Stock, Underlying
Shares, Warrants, Warrant Shares, and Additional Shares, do not and will not (i)
result in a violation of the Company's Articles of Incorporation or By-Laws or
(ii) conflict with, or constitute a material default (or an event that with
notice or lapse of time or both would become a default) under, or give to others
any rights of termination, amendment, acceleration or cancellation of, any
agreement, patent, patent license, indenture, instrument or any "lock-up" or
similar provision of any underwriting or similar agreement to which the Company
is a party, or (iii) result in a violation of any federal, state or local law,
rule, regulation, order, judgment or decree (including federal and state
securities laws and regulations) applicable to the Company or by which any
property or asset of the Company is bound or affected, nor is the Company
otherwise in violation of, in conflict with, or in default under, any of the
foregoing except as would not reasonably be expected to have, individually or in
the aggregate, a Material Adverse Effect. The business of the
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Company is not being conducted in violation of any law, ordinance or regulation
of any governmental entity, except for possible violations that either singly or
in the aggregate would not reasonably be expected to have a Material Adverse
Effect. Except for the filing of a Form D within 15 days after the Closing Date
(which the Company agrees it will file), the Company is not required under
federal, state or local law, rule or regulation to obtain any consent,
authorization or order of, or make any filing or registration with, any court or
governmental agency in order for it to execute, deliver or perform any of its
obligations under this Agreement or issue and sell the Preferred Stock, or
Warrants, in accordance with the terms hereof; provided that, for purposes of
the representation made in this sentence, the Company is assuming and relying
upon the accuracy of the relevant representations and agreements of the
Investors herein.
Section 4.10 No Material Adverse Change. Since January 1, 1998, no
Material Adverse Effect has occurred or exists with respect to the Company,
except as disclosed in the SEC Documents, or as publicly announced.
Section 4.11 No Undisclosed Liabilities. The Company has no liabilities
or obligations, known or unknown, absolute or otherwise, which are not disclosed
in the SEC Documents or otherwise publicly announced, other than those set forth
in the Company's financial statements or as incurred in the ordinary course of
the Company's businesses since January 1, 1998, and which, individually or in
the aggregate, would not reasonably be expected to have a Material Adverse
Effect.
Section 4.12 No Undisclosed Events or Circumstances. Since January 1,
1998, no event or circumstance has occurred or exists with respect to the
Company or its businesses, properties, prospects, operations or financial
condition, that, under applicable law, rule or regulation, requires public
disclosure or announcement prior to the date hereof by the Company, but which
has not been so publicly announced or disclosed in the SEC Documents.
Section 4.13 No Integrated Offering. Neither the Company, nor any of its
affiliates, nor any person acting on its or their behalf has, directly or
indirectly, made any offers or sales of any security or solicited any offers to
buy any security, other than pursuant to this Agreement, under circumstances
that would require registration of the Common Stock under the Securities Act, or
cause the offering of the Preferred Stock and Warrants pursuant to this
Agreement to be integrated with future offerings by the Company for purposes of
the Securities Act, the Nasdaq Stock Market, Inc. marketplace rules, or any
applicable stockholder approval provisions, except as set forth in the SEC
Documents, and except for the Company's proposed transaction with Breece Hill
Technologies, Inc.
Section 4.14 Litigation and Other Proceedings. Except as may be set
forth in the SEC Documents, there are no lawsuits or proceedings pending or to
the knowledge of the Company threatened, against the Company, nor has the
Company received any written or oral notice of any such action, suit, proceeding
or investigation, which would reasonably be expected to have a Material Adverse
Effect. Except as set forth in the SEC Documents, no judgment, order, writ,
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injunction or decree or award has been issued by or, so far as is known by the
Company, requested of any court, arbitrator or governmental agency which would
be reasonably expected to result in a Material Adverse Effect.
Section 4.15 Accuracy of Reports and Information. The Company is in
compliance, to the extent applicable, with all reporting obligations under
either Section 12(b), 12(g) or 15(d) of the Exchange Act. The Company has
registered its Common Stock pursuant to Section 12 of the Exchange Act and the
Common Stock is listed and trades on the NASD OTC Electronic Bulletin Board.
The Company has complied in all material respects and to the extent applicable
with all reporting obligations, under either Section 13(a) or 15(d) of the
Exchange Act for a period of at least twelve (12) months immediately preceding
the offer and sale of the Preferred Stock and Warrants.
Section 4.16 Acknowledgment of Dilution. The Company is aware and
acknowledges that issuance of Common Stock upon the conversion of the Preferred
Stock and/or exercise of the Warrants, may result in dilution of the outstanding
shares of Common Stock, which dilution may be substantial under certain market
conditions. The Company further acknowledges that its obligation to issue
Additional Shares in accordance with the terms herein, Underlying Shares in
accordance with the Certificate of Designation, and Warrant Shares in accordance
with the Warrants is unconditional and absolute regardless of the effect of any
such dilution.
Section 4.17 Employee Relations. The Company is not involved in any
labor dispute, nor, to the knowledge of the Company, is any such dispute
threatened which could reasonably be expected to have a Material Adverse Effect.
None of the Company's employees is a member of a union and the Company believes
that its relations with its employees are good.
Section 4.18 Environmental Laws. The Company is (i) in compliance with
any and all foreign, federal, state and local laws and regulations relating to
the protection of human health and safety, the environment or hazardous or toxic
substances or wastes, pollutants or contaminants and which the Company know is
applicable to them ("Environmental Laws"), (ii) has received all material
permits, licenses or other approvals required under applicable Environmental
Laws to conduct its business, and (iii) is in compliance with all terms and
conditions of any such permit, license or approval.
Section 4.19 Insurance. The Company is insured by insurers of recognized
financial responsibility against such losses and risks and in such amounts as
management of the Company believes to be prudent and customary in the businesses
in which the Company is engaged. The Company has no notice to believe that it
will not be able to renew its existing insurance coverage as and when such
coverage expires, or obtain similar coverage from similar insurers as may be
necessary to continue its business at a cost that would not materially and
adversely affect the condition, financial or otherwise, or the earnings,
business or operation, of the Company.
Section 4.20 Board Approval. The board of directors of the Company has
concluded, in its good faith business judgment, that the issuances of the
securities of the Company in connection with this Agreement are in the best
interests of the Company.
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Section 4.21 Integration. Except in connection with the Company's
transaction with Breece Hill Technologies, Inc., the Company shall not and shall
use its best efforts to ensure that no affiliate shall sell, offer for sale or
solicit offers to buy or otherwise negotiate in respect of any security of the
Company that would be integrated with the offer or sale of the Preferred Stock
and Warrants in a manner that would require the registration under the
Securities Act of the issue, offer or sale of the Preferred Stock and Warrants
to the Investors. The Preferred Stock and Warrants are being offered and sold
pursuant to the terms hereunder, are not being offered and sold as part of a
previously commenced private placement of securities.
Section 4.22 Patents and Trademarks. The Company has, or has rights to
use, all patents, patent applications, trademarks, trademark applications,
service marks, trade names, copyrights, licenses, trade secrets and other
intellectual property rights which are necessary for use in connection with its
business or which the failure to so have would have a Material Adverse Effect
(collectively, the "Intellectual Property Rights"). To the best knowledge of
the Company, none of the Intellectual Property Rights infringe on any rights of
any other Person, and the Company either owns or has duly licensed or otherwise
acquired all necessary rights with respect to the Intellectual Property Rights.
The Company has not received any notice from any third party of any claim of
infringement by the Company of any of the Intellectual Property Rights, and has
no reason to believe there is any basis for any such claim. To the best
knowledge of the Company, there is no existing infringement by another Person on
any of the Intellectual Property Rights.
Section 4.23 Use of Proceeds. The net proceeds from this offering will
be used for working capital purposes, and not for the repayment of any judgment.
Section 4.24 Subsidiaries. Except as disclosed in the SEC Documents, the
Company does not presently own or control, directly or indirectly, any interest
in any other corporation, partnership, association or other business entity.
Section 4.25 No Private Placements. Except as set forth on Schedule 4.25
annexed hereto, the Company has not conducted a private placement of its Common
Stock or of any debt or equity instrument convertible into Common Stock within
one year prior to the Closing Date. Except as set forth on Schedule 4.25 there
are no outstanding securities issued by the Company that are entitled to
registration rights under the Securities Act. Except as set forth on Schedule
4.25 there are no outstanding securities issued by the Company that are directly
or indirectly convertible into, exercisable into, or exchangeable for, shares of
Common Stock, that have anti-dilution or similar rights that would be affected
by the issuance of the Preferred Stock, the Underlying Shares, the Additional
Shares, the Warrants, or the Warrant Shares.
Section 4.26 No Brokers. Except for its arrangement with the Placement
Agent, the Company has taken no action which would give rise to any claim by any
person for brokerage commissions, finder's fees or similar payments by the
Company or any Investor relating to this Agreement or the transactions
contemplated hereby.
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Section 4.27 Permits; Compliance. The Company and each of its
subsidiaries is in possession of all franchises, grants, authorizations,
licenses, permits, easements, variances, exemptions, consents, certificates,
approvals and orders necessary to own, lease and operate its properties and to
carry on its business as it is now being conducted (collectively, the "Company
Permits"), and there is no action pending or, to the knowledge of the Company,
threatened regarding the suspension or cancellation of any of the Company
Permits except for such Company Permits, the failure of which to possess, or the
cancellation, or suspension of which, would not, individually or in the
aggregate, have a Material Adverse Effect. To the Company's knowledge, neither
the Company nor any of its subsidiaries is in material conflict with, or in
material default or material violation of, any of the Company Permits. Since
January 1, 1998 neither the Company nor any of its subsidiaries has received any
notification with respect to possible material conflicts, material defaults or
material violations of applicable laws.
Section 4.28 Taxes. All federal, state, city and other tax returns,
reports and declarations required to be filed by or on behalf of the Company
have been filed and such returns are complete and accurate and disclose all
taxes (whether based upon income, operations, purchases, sales, payroll,
licenses, compensation, business, capital, properties or assets or otherwise)
required to be paid in the periods covered thereby.
ARTICLE V
---------
Covenants of the Investors
--------------------------
Section 5.1 4.99% Limitation. The number of shares of Common Stock
which may be acquired by any of the Investors pursuant to the terms of this
Agreement shall not exceed the number of such shares which, when aggregated with
all other shares of Common Stock then owned by any of the Investors, would
result in any of the Investors owning more than 4.99% of the then issued and
outstanding Common Stock at any one time.
The preceding paragraph shall not interfere with any Investor's right to
convert Preferred Stock over time which in the aggregate totals more than 4.99%
of the then outstanding shares of Common Stock so long as such Investor does not
own more than 4.99% of the then outstanding Common Stock at any given time. The
foregoing limitation shall not apply to the Automatic Conversion provision
contained in the Certificate of Designation.
ARTICLE VI
----------
Covenants of the Company
------------------------
Section 6.1 Registration Rights. The Company shall cause the
Registration Rights Agreement to remain in full force and effect so long as any
Registrable Securities remain outstanding and the Company shall comply in all
material respects with the terms thereof.
Section 6.2 Reservation of Common Stock. As of the date hereof, the
Company has
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authorized and reserved and the Company shall continue to reserve and keep
available at all times, free of preemptive rights, shares of Common Stock for
the purpose of enabling the Company to satisfy any obligation to issue the
Additional Shares, Underlying Shares, and Warrant Shares; such amount of shares
of Common Stock to be reserved shall be calculated based upon the Purchase Price
therefor under the terms of this Agreement, the Certificate of Designation, and
Warrants. The number of shares so reserved shall be increased or decreased to
reflect potential increases or decreases in the Common Stock that the Company
may thereafter be so obligated to issue by reason of adjustments to the
Preferred Stock and the Warrants.
Section 6.3 Listing of Common Stock. If the Principal Market requires
the Company to file a listing application or an additional shares listing
application for the Common Stock listed on such Principal Market (the date the
Company becomes subject to such requirement is hereinafter referred to as the
"Requirement Date"), the Company shall (a) not later than the fifth Business Day
following the Requirement Date prepare and file with the Principal Market (as
well as any other national securities exchange, market or trading facility on
which the Common Stock is then listed) an additional shares listing application
covering at least the sum of (i) two times the number of Underlying Shares as
would be issuable upon a conversion in full of (and as payment of dividends in
respect of) the shares of Preferred Stock, assuming such conversion occurred on
the Closing Date, and (ii) the Warrant Shares issuable upon exercise in full of
the Warrants, (b) take all steps necessary to cause such shares to be approved
for listing on the Principal Market (as well as on any other national securities
exchange, market or trading facility on which the Common Stock is then listed)
as soon as possible thereafter, and (c) provide to the Investors and the
Placement Agent evidence of such listing, and the Company shall maintain the
listing of its Common Stock on such exchange or market for so long as the
Registrable Securities, Preferred Stock and/or Warrants are owned by the
Investors and/or Placement Agent. In addition, if at any time the number of
shares of Common Stock issuable on conversion of all then outstanding shares of
Preferred Stock, on account of accrued and unpaid dividends thereon and upon
exercise in full of the Warrants is greater than the number of shares of Common
Stock theretofore listed with the Principal Market (and any such other national
securities exchange, market or trading facility), the Company shall promptly
take such action (including the actions described in the preceding sentence), if
required pursuant to the rules and regulations of the Principal Market, to file
an additional shares listing application with the Principal Market(and any such
other national securities exchange, market or trading facility) covering at
least a number of shares equal to the sum of (x) 200% of (A) the number of
Underlying Shares as would then be issuable upon a conversion in full of the
shares of Preferred Stock, and (B) the number of Underlying Shares as would be
issuable as payment of dividends on the Preferred Stock, and (y) the number of
Warrant Shares as would be issuable upon exercise in full of the Warrants. The
Company warrants that it (i) has not received any notice, oral or written,
affecting its continued listing on the NASD OTC Electronic Bulletin Board, and
(ii) is in full compliance with the requirements for continued listing on the
NASD OTC Electronic Bulletin Board. The Company will take no action which would
impact its continued listing or the eligibility of the Company for such listing.
The Company will comply with the listing and trading requirements of its Common
Stock on the NASD OTC Electronic Bulletin Board (and of any then Principal
Market) and will comply in all respects with the Company's reporting, filing and
other obligations under the bylaws or rules of the Principal Market. In the
event the Company receives notification from Nasdaq or any other controlling
entity
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stating that the Company is not in compliance with the listing qualifications of
such Principal Market, the Company will immediately thereafter give written
notice to each Investor and the Placement Agent and take all action necessary to
bring the Company within compliance with all applicable listing standards of the
Principal Market.
Section 6.4 Exchange Act Registration. The Company will maintain the
registration of its Common Stock under Section 12 of the Exchange Act, will
comply in all respects with its reporting and filing obligations under the
Exchange Act, and will not take any action or file any document (whether or not
permitted by Exchange Act or the rules thereunder) to terminate or suspend such
registration or to terminate or suspend its reporting and filing obligations
under said Act.
Section 6.5 Legends. The securities to be sold by the Company pursuant
to this Agreement shall be free of legends, except as set forth in Article VIII.
Section 6.6 Corporate Existence. The Company will take all steps
necessary to preserve and continue the corporate existence of the Company.
Section 6.7 Notice of Certain Events Affecting Registration. The
Company will immediately notify each of the Investors and the Placement Agent
upon the occurrence of any of the following events in respect of a registration
statement or related prospectus in respect of an offering of Registrable
Securities: (i) receipt of any request for additional information by the SEC or
any other federal or state governmental authority during the period of
effectiveness of the Registration Statement for amendments or supplements to the
Registration Statement or related prospectus; (ii) the issuance by the SEC or
any other federal or state governmental authority of any stop order suspending
the effectiveness of the Registration Statement or the initiation of any
proceedings for that purpose; (iii) receipt of any notification with respect to
the suspension of the qualification or exemption from qualification of any of
the Registrable Securities for sale in any jurisdiction or the initiation or
threatening of any proceeding for such purpose; (iv) the happening of any event
that makes any statement made in the Registration Statement or related
prospectus or any document incorporated or deemed to be incorporated therein by
reference untrue in any material respect or that requires the making of any
changes in the Registration Statement, related prospectus or documents so that,
in the case of the Registration Statement, it will not contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein not misleading, and
that in the case of the related prospectus, it will not contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; and (v) the Company's
reasonable determination that a post-effective amendment to the Registration
Statement would be appropriate. The Company will promptly make available to the
Investors and the Placement Agent any such supplement or amendment to the
related prospectus.
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Section 6.8 Consolidation; Merger. For so long as the Preferred Stock,
Warrants, and/or Registrable Securities are owned by any Investor and/or the
Placement Agent, the Company shall not, at any time after the date hereof,
effect any merger or consolidation of the Company with or into, or a transfer of
all or substantially all of the assets of the Company to, another entity (a
"Consolidation Event") unless the resulting successor or acquiring entity (if
not the Company) assumes by written instrument the obligation to deliver to the
Investors and the Placement Agent such shares of stock and/or securities as the
Investors and the Placement Agent are entitled to receive pursuant to this
Agreement.
Section 6.9 Issuance of Underlying Shares and Warrant Shares. The
issuance of the Underlying Shares and the Warrant Shares pursuant to exercise of
the Warrants, and the conversion of the Preferred Stock, shall be made in
accordance with the provisions and requirements of Section 4(2) of the
Securities Act or Regulation D and any applicable state securities law.
Section 6.10 Legal Opinion. The Company's independent counsel shall
deliver to the Investors upon execution of this Agreement, an opinion in the
form of Exhibit E annexed hereto. The Company will obtain for the Investors and
the Placement Agent, at the Company's expense, any and all opinions of counsel
which may be reasonably required in order to convert the Preferred Stock and/or
exercise the Warrants, including, but not limited to, obtaining for the
Investors and the Placement Agent an opinion of counsel, subject only to receipt
of a notice of conversion (the "Notice of Conversion") in the form of Exhibit G,
and/or subject only to a receipt of a notice of exercise in the form annexed to
the Warrant, directing the Transfer Agent to remove the legend from the
certificate.
Section 6.11 20% Rule Limitation. If and when required by Principal
Market or otherwise on the market or exchange on which the Company's Common
Stock is then listed, the Company shall call a meeting of its shareholders, to
be held no later than 60 calendar days after becoming subject to such
requirement, seeking shareholder approval of the below market issuances of
shares of Common Stock (and securities convertible into and exercisable for
Common Stock) to the Investors and the Placement Agent of 20% or more of the
number of shares of Common Stock outstanding as of the Subscription Date. In
the event that the aforementioned proposal is not so approved with such 60
calendar day period, the Company shall seek a waiver from the Principal Market
for such below market issuances. In the event the Company does not receive
such waiver within the earlier of ten calendar days after the aforementioned
shareholders meeting, or 70 calendar days after becoming subject to such
requirement, the Company will pay to the Investors and the Placement Agent the
Redemption Price (as defined in the Certificate of Designation) for that number
of shares of Preferred Stock which would result in the Company issuing, in the
aggregate, 20% or more of the outstanding Common Stock as of the Subscription
Date.
Section 6.12 Restrictions on Future Financings. The Company agrees that
it will not, without the prior written consent of all of the Investors, enter
into any subsequent or further offer or sale of Common Stock, or any securities
or other instruments convertible into shares of Common Stock, with any party
that is not a party to this Agreement, until the Registration Statement has been
effective for 60 calendar days. This restriction shall not apply to: (a) the
issuance of securities (other
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than for cash) in connection with a merger, consolidation, sale of assets, or
other disposition, (b) the exchange of Capital Shares for assets, stock, or
joint venture interest, (c) an offering of any of the Company's securities at
then current market prices with no repricing or reset provisions, (d) any
employee benefit plan, or (e) one offering of any of the Company's securities
for a total consideration of less than $5,000,000; provided, however, that any
action contemplated under this Section is subject to the condition that
registration rights, if any, in connection with such action shall not require
the filing by the Company of a registration statement of such shares prior to 60
calendar days after the Effective Date.
Section 6.13 Conversion of Preferred Stock. The Company will permit the
Investors and the Placement Agent to exercise their right to convert the
Preferred Stock by telecopying an executed and completed Notice of Conversion to
the Company as is set forth in the Certificate of Designation.
Section 6.14 Exercise of Warrants. The Company will permit the Investors
and the Placement Agent to exercise their right to purchase shares of Common
Stock upon exercise of the Warrants as is set forth in the Warrants.
Section 6.15 Restriction on Future Issuances of Preferred Stock. The
Company agrees that except as provided for in this Agreement, it will not issue
any additional share or shares of the Preferred Stock.
Section 6.16 Increase in Authorized Shares. At such time as the Company
would be, if a notice of conversion or exercise (as the case may be) were to be
delivered on such date, precluded from (a) converting in full all of the shares
of Preferred Stock that remain unconverted at such date (and paying any accrued
but unpaid dividends in respect thereof in shares of Common Stock), or (b)
honoring the exercise in full of the Warrants, due to the unavailability of a
sufficient number of shares of authorized but unissued or re-acquired Common
Stock, the Board of Directors of the Company shall promptly (and in any case
within 60 calendar days from such date) hold a shareholders meeting in which the
shareholders would vote for authorization to amend the Company's Articles of
Incorporation to increase the number of shares of Common Stock which the Company
is authorized to issue to at least a number of shares equal to the sum of (i)
all shares of Common Stock then outstanding, (ii) the number of shares of Common
Stock issuable on account of all outstanding warrants, options and convertible
securities (other than the Preferred Stock and the Warrants) and on account of
all shares reserved under any stock option, stock purchase, warrant or similar
plan, (iii) 200% of the number of Underlying Shares as would then be issuable
upon a conversion in full of the then outstanding shares of Preferred Stock and
as payment of all future dividends thereon in shares of Common Stock in
accordance with the terms of this Agreement and the Certificate of Designation,
and (iv) such number of Warrant Shares as would then be issuable upon the
exercise in full of the Warrants. In connection therewith, the Board of
Directors shall (x) adopt proper resolutions authorizing such increase, (y)
recommend to its shareholders, and otherwise use its best efforts to promptly
and duly obtain shareholder approval to carry out such resolutions and (z)
within five Business Days of obtaining such shareholder authorization, file an
appropriate amendment to the Company's Articles of Incorporation to evidence
such increase.
20
<PAGE>
Section 6.17 Notice of Breaches. Each of the Company on the one hand,
and the Investors on the other, shall give prompt written notice to the other of
any breach by it of any representation, covenant, warranty or other agreement
contained in this Agreement or any Exhibit annexed hereto, as well as any events
or occurrences arising after the date hereof, which would reasonably be likely
to cause any representation, covenant, or warranty or other agreement of such
party, as the case may be, contained in this Agreement or any Exhibit annexed
hereto, to be incorrect or breached as of such Closing Date. However, no
disclosure by either party pursuant to this Section shall be deemed to cure any
breach of any representation, warranty or other agreement contained in this
Agreement or any Exhibit annexed hereto. Notwithstanding the generality of the
foregoing, the Company shall promptly notify each Investor and the Placement
Agent of any notice or claim (written or oral) that it receives from any lender
of the Company to the effect that the consummation of the transactions
contemplated by this Agreement or any Exhibit annexed hereto, violates or would
violate any written agreement or understanding between such lender and the
Company, and the Company shall promptly furnish by facsimile to each Investor
and the Placement Agent a copy of any written statement in support of or
relating to such claim or notice.
Section 6.18 Transfer of Intellectual Property Rights. Except in the
ordinary course of the Company's business consistent with past practice or in
connection with the sale of all or substantially all of the assets of the
Company, the Company shall not transfer, sell or otherwise dispose of, any
Intellectual Property Rights, or allow the Intellectual Property Rights to
become subject to any Liens, or fail to renew such Intellectual Property Rights
(if renewable and would otherwise expire).
Section 6.19 Notices. The Company agrees to provide all holders of
Preferred Stock and Warrants with copies of all notices and information,
including without limitation notices and proxy statements in connection with any
meetings, that are provided to the holders of shares of Common Stock,
contemporaneously with the delivery of such notices or information to such
Common Stock holders.
ARTICLE VII
-----------
Due Diligence Review; Non-Disclosure of Non-Public Information
--------------------------------------------------------------
Section 7.1 Due Diligence Review. The Company shall make available for
inspection and review by the Investors, advisors to and representatives of the
Investors (who may or may not be affiliated with the Investors), and any
underwriter participating in any disposition of the Registrable Securities on
behalf of the Investors pursuant to the Registration Statement, any such
registration statement or amendment or supplement thereto or any blue sky, NASD
or other filing, all financial and other records, all SEC Documents and other
filings with the SEC, and all other corporate documents and properties of the
Company as may be reasonably necessary for the purpose of such review, and cause
the Company's officers, directors and employees to supply all such information
reasonably requested by any of the Investors or any such representative, advisor
or underwriter in connection with such Registration Statement (including,
without limitation, in response to all questions and other inquiries reasonably
made or submitted by any of them), prior to and from time to time after the
filing and effectiveness of the Registration Statement for the sole purpose of
21
<PAGE>
enabling the Investors and such representatives, advisors and underwriters and
their respective accountants and attorneys to conduct initial and ongoing due
diligence with respect to the Company and the accuracy of the Registration
Statement.
Section 7.2 Non-Disclosure of Non-Public Information.
(a) The Company shall not disclose non-public information to the
Investors, or advisors to or representatives of, the Investors unless prior to
disclosure of such information the Company identifies such information as being
non-public information and provides each Investor, and its advisors and
representatives with the opportunity to accept or refuse to accept such non-
public information for review. The Company may, as a condition to disclosing
any non-public information hereunder, require each of the Investors advisors and
representatives to enter into a confidentiality agreement in form reasonably
satisfactory to the Company and the Investors.
(b) Nothing herein shall require the Company to disclose non-public
information to any of the Investors or their advisors or representatives, and
the Company represents that it does not disseminate non-public information to
any investors who purchase stock in the Company in a public offering, to money
managers or to securities analysts, provided, however, that notwithstanding
anything herein to the contrary, the Company will, as hereinabove provided,
immediately notify the advisors and representatives of the Investors and, if
any, underwriters, of any event or the existence of any circumstance (without
any obligation to disclose the specific event or circumstance) of which it
becomes aware, constituting non-public information (whether or not requested of
the Company specifically or generally during the course of due diligence by such
persons or entities), which, if not disclosed in the prospectus included in the
Registration Statement would cause such prospectus to include a material
misstatement or to omit a material fact required to be stated therein in order
to make the statements, therein, in light of the circumstances in which they
were made, not misleading. Nothing contained in this Section shall be construed
to mean that such persons or entities other than the Investors (without the
written consent of the Investors prior to disclosure of such information) may
not obtain non-public information in the course of conducting due diligence in
accordance with the terms of this Agreement and nothing herein shall prevent any
such persons or entities from notifying the Company of their opinion that based
on such due diligence by such persons or entities, that the Registration
Statement contains an untrue statement of a material fact or omits a material
fact required to be stated in the Registration Statement or necessary to make
the statements contained therein, in light of the circumstances in which they
were made, not misleading.
22
<PAGE>
ARTICLE VIII
------------
Legends
-------
Section 8.1 Legends. The Investors and the Placement Agent agree to
the imprinting, so long as is required by this Section, of the following legend
(or such substantially similar legend as is acceptable to the Investors and
their counsel, the parties agreeing that any unacceptable legended securities
shall be replaced promptly by and at the Company's cost) on the securities:
[FOR PREFERRED STOCK AND WARRANTS] NEITHER THESE SECURITIES NOR THE
SECURITIES INTO WHICH THESE SECURITIES ARE [CONVERTIBLE] [EXERCISABLE] HAVE
BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES
COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND,
ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE
EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE
SECURITIES LAWS.
[ONLY FOR UNDERLYING SHARES, ADDITIONAL SHARES AND WARRANT SHARES TO THE
EXTENT THE RESALE THEREOF IS NOT COVERED BY AN EFFECTIVE REGISTRATION
STATEMENT AT THE TIME OF CONVERSION, ISSUANCE OR EXERCISE] THE SHARES
REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED WITH THE SECURITIES
AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE
UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD
EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES
ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT
SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN
ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS.
The Underlying Shares, Additional Shares, and/or Warrant Shares shall not
contain the legend set forth above or any other restrictive legend (other than
as pursuant to the Registration Statement) if the conversion of the Preferred
Stock, exercise of Warrants or other issuances of Underlying Shares, Additional
Shares, and/or Warrant Shares, as the case may be, occurs at any time while a
Registration Statement is effective under the Securities Act or, in the event
there is not an effective Registration Statement at such time, if in the opinion
of counsel to the Company such legend is not required under applicable
requirements of the Securities Act (including judicial interpretations and
pronouncements issued by the staff of the SEC). The Company agrees that it will
23
<PAGE>
provide the Investors, upon request, with a certificate or certificates
representing Underlying Shares, Additional Shares, and/or Warrant Shares, free
from such legend at such time as such legend is no longer required hereunder.
The Company may not take any action or make any notation on its records or give
instructions to any transfer agent of the Company which enlarge the restrictions
of transfer set forth in this Section.
Upon the execution and delivery hereof, the Company is issuing to the
transfer agent for its Common Stock (and to any substitute or replacement
transfer agent for its Common Stock upon the Company's appointment of any such
substitute or replacement transfer agent) instructions in substantially the form
of Exhibit F hereto. Such instructions shall be irrevocable by the Company from
and after the date hereof or from and after the issuance thereof to any such
substitute or replacement transfer agent, as the case may be, except as
otherwise expressly provided in the Registration Rights Agreement. It is the
intent and purpose of such instructions, as provided therein, to require the
transfer agent for the Common Stock from time to time upon transfer of
Registrable Securities by the Investors or the Placement Agent to issue
certificates evidencing such Registrable Securities free of the Legend during
the following periods and under the following circumstances and except as
provided below, without consultation by the transfer agent with the Company or
its counsel and without the need for any further advice or instruction or
documentation to the transfer agent by or from the Company or its counsel or the
Investors:
(a) at any time after the Effective Date, upon surrender of one or
more certificates evidencing the Warrants, Preferred Stock, Underlying Shares or
Warrant Shares that bear the aforementioned Legend, to the extent accompanied by
a notice requesting the issuance of new certificates free of the aforementioned
legend to replace those surrendered; provided that (i) the Registration
Statement shall then be effective; (ii) the Investor(s) and/or the Placement
Agent confirm to the transfer agent that it has sold, pledged or otherwise
transferred or agreed to sell, pledge or otherwise transfer such Common Stock in
a bona fide transaction to a third party that is not an affiliate of the
Company; and (iii) the Investor(s) and/or Placement Agent confirm to the
transfer agent that the Investor(s) and/or Placement Agent have complied with
the prospectus delivery requirement; or
(b) at any time upon any surrender of one or more certificates
evidencing Registrable Securities, that bear the aforementioned legend, to the
extent accompanied by a notice requesting the issuance of new certificates free
of such legend to replace those surrendered and containing representations that
(i) the Investor(s) and/or the Placement Agent is permitted to dispose of such
Registrable Securities, without limitation as to amount or manner of sale
pursuant to Rule 144(k) under the Securities Act (or any other similar exemption
as may then be in effect), or (ii) the Investor(s) and/or Placement Agent has
sold, pledged or otherwise transferred or agreed to sell, pledge or otherwise
transfer such Registrable Securities, in a manner other than pursuant to an
effective registration statement, to a transferee who will upon such transfer be
entitled to freely tradable securities. The Company shall have counsel provide
any and all opinions necessary for the sale under Rule 144 (or such other
applicable exemption).
Any of the notices referred to above in this Section may be sent by
facsimile to the Company's transfer agent.
24
<PAGE>
Section 8.2 No Other Legend or Stock Transfer Restrictions. No legend
other than the one specified in this Article (or pursuant to the Registration
Statement) has been or shall be placed on the share certificates representing
the Common Stock, and no instructions or "stop transfer orders," so called,
"stock transfer restrictions," or other restrictions have been or shall be given
to the Company's transfer agent with respect thereto other than as expressly set
forth in this Article.
Section 8.3 Investor's Compliance. Nothing in this Article shall affect
in any way any of the Investors' obligations under any agreement to comply with
all applicable securities laws upon resale of the Common Stock.
ARTICLE IX
----------
Choice of Law
-------------
Section 9.1 Choice of Law; Venue; Jurisdiction. This Agreement will
be construed and enforced in accordance with and governed exclusively by the
laws of the State of New York, except for matters arising under the Securities
Act, without reference to principles of conflicts of law. Each of the parties
consents to the exclusive jurisdiction of the U.S. District Court sitting in the
Southern District of the State of New York sitting in Manhattan in connection
with any dispute arising under this Agreement and hereby waives, to the maximum
extent permitted by law, any objection, including any objection based on forum
non conveniens, to the bringing of any such proceeding in such jurisdictions.
Each party hereby agrees that if another party to this Agreement obtains a
judgment against it in such a proceeding, the party which obtained such judgment
may enforce same by summary judgment in the courts of any country having
jurisdiction over the party against whom such judgment was obtained, and each
party hereby waives any defenses available to it under local law and agrees to
the enforcement of such a judgment. Each party to this Agreement irrevocably
consents to the service of process in any such proceeding by the mailing of
copies thereof by registered or certified mail, postage prepaid, to such party
at its address set forth herein. Nothing herein shall affect the right of any
party to serve process in any other manner permitted by law. Each party waives
its right to a trial by jury. In the event that any Investor and/or the
Placement Agent, or any person claimed to be affiliated or associated with such
Investor and/or the Placement Agent becomes involved in any capacity in any
action, proceeding or investigation brought by or against any such person,
including shareholders of the Company, in connection with or as a result of any
matter referred to in this Agreement or any exhibit annexed hereto, the Company
shall reimburse such Investor and/or the Placement Agent and/or those claimed to
be affiliated or associated with such Investor and/or the Placement Agent for
its legal fees and expenses and other expenses (including the cost of any
investigation and preparation) incurred in connection therewith, as those fees
and expenses are incurred, provided, however, that if at the conclusion of such
action, proceeding or investigation it shall be finally judicially determined by
a court of competent jurisdiction that indemnity for such fees and expenses is
contrary to law, or that such Investor and/or the Placement Agent is not the
prevailing party then in that event, such Investor and/or the Placement Agent
and/or any other person having received such advances of fees and/or expenses
shall reimburse the Company in full for the sums advanced.
25
<PAGE>
ARTICLE X
---------
Assignment; Entire Agreement, Amendment; Termination
----------------------------------------------------
Section 10.1 Assignment. The Investor's interest in this Agreement and
its ownership of Preferred Stock and Warrants may be assigned or transferred at
any time, in whole or in part, to any other person or entity (including any
affiliate of the Investors) who agrees to, and truthfully can, make the
representations and warranties contained in Article III, and who agrees to be
bound by the covenants of Article V. The provisions of this Agreement shall
inure to the benefit of, and be enforceable by, any transferee of any of the
shares of Preferred Stock and/or Warrants purchased or acquired by the Investors
hereunder with respect to the Common Stock held by such person.
Section 10.2 Termination. This Agreement shall terminate upon the
earliest of (i) the date that all the Registrable Securities have been sold by
the Investors pursuant to the Registration Statement; or (ii) five years after
the Closing Date; provided, however, that the provisions of Articles III, IV, V,
VI, VII, VIII, IX, X, XI, and XII herein, and the registration rights provisions
for the Registrable Securities held by the Investors and the Placement Agent set
forth in this Agreement, and the Registration Rights Agreement, shall survive
the termination of this Agreement.
ARTICLE XI
----------
Notices
-------
Section 11.1 Notices. All notices, demands, requests, consents,
approvals, and other communications required or permitted hereunder shall be in
writing and, unless otherwise specified herein, shall be (i) personally served,
(ii) deposited in the mail, registered or certified, return receipt requested,
postage prepaid, (iii) delivered by reputable air courier service with charges
prepaid, or (iv) transmitted by hand delivery, telegram, or facsimile, addressed
as set forth below or to such other address as such party shall have specified
most recently by written notice. Any notice or other communication required or
permitted to be given hereunder shall be deemed effective (a) upon hand delivery
or delivery by facsimile, with accurate confirmation generated by the
transmitting facsimile machine, at the address or number designated below (if
delivered on a Business Day during normal business hours where such notice is to
be received), or the first Business Day following such delivery (if delivered
other than on a Business Day during normal business hours where such notice is
to be received) or (b) on the second Business
26
<PAGE>
Day following the date of mailing by reputable courier service, fully prepaid,
addressed to such address, or upon actual receipt of such mailing, whichever
shall first occur. The addresses for such communications shall be:
If to the Company:
Global Maintech Corporation
7578 Market Place Drive
Eden Prairie, MN 55344
Attention: Chief Executive Officer
Facsimile: (612) 944-0400
Telephone: (612) 944-3311
If to the Investors, at the addresses listed on Schedule A.
If to the Placement Agent, at the address listed on the first page of this
Agreement.
with a copy to:
The Goldstein Law Group, P.C.
65 Broadway, 10/th/ Floor
New York, NY 10006
Attention: Scott H. Goldstein, Esq.
Telephone: (212) 809-4220
Facsimile: (212) 809-4228
Either party hereto may from time to time change its address or facsimile
number for notices under this Section 11.1 by giving at least ten calendar days'
prior written notice of such changed address or facsimile number to the other
party hereto.
Section 11.2 Indemnification. The Company agrees to indemnify and hold
harmless each of the Investors and each officer, director of the Investors or
person, if any, who controls the Investors within the meaning of the Securities
Act against any losses, claims, damages or liabilities, joint or several (which
shall, for all purposes of this Agreement, include, but not be limited to, all
costs of defense and investigation and all attorneys' fees), to which the
Investors may become subject, under the Securities Act or otherwise, insofar as
such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon the breach by the Company of any term of this
Agreement. This indemnity agreement will be in addition to any liability which
the Company may otherwise have.
Each Investor severally (and not jointly) agrees that it will indemnify and
hold harmless the Company, and each officer, director of the Company or person,
if any, who controls the Company within the meaning of the Securities Act,
against any losses, claims, damages or liabilities (which shall, for all
purposes of this Agreement, include, but not be limited to, all costs of defense
and
27
<PAGE>
investigation and all attorneys' fees) to which the Company or any such
officer, director or controlling person may become subject under the Securities
Act or otherwise, insofar as such losses claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon the breach by such
Person of any term of this Agreement. This indemnity agreement will be in
addition to any liability which the Investors or any subsequent assignee may
otherwise have.
Promptly after receipt by an indemnified party under this Section of notice
of the commencement of any action, such indemnified party will, if a claim in
respect thereof is to be made against the indemnifying party under this Section,
notify the indemnifying party of the commencement thereof; but the omission so
to notify the indemnifying party will not relieve the indemnifying party from
any liability which it may have to any indemnified party otherwise than as to
the particular item as to which indemnification is then being sought solely
pursuant to this Section. In case any such action is brought against any
indemnified party, and it notifies the indemnifying party of the commencement
thereof, the indemnifying party will be entitled to participate in, and, to the
extent that it may wish, jointly with any other indemnifying party similarly
notified, assume the defense thereof, subject to the provisions herein stated
and after notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof, the indemnifying party will not be
liable to such indemnified party under this Section for any legal or other
expenses subsequently incurred by such indemnified party in connection with the
defense thereof other than reasonable costs of investigation, unless the
indemnifying party shall not pursue the action to its final conclusion. The
indemnified party shall have the right to employ separate counsel in any such
action and to participate in the defense thereof, but the fees and expenses of
such counsel shall not be at the expense of the indemnifying party if the
indemnifying party has assumed the defense of the action with counsel reasonably
satisfactory to the indemnified party; provided that if the indemnified party is
one of the Investors, the fees and expenses of such counsel shall be at the
expense of the indemnifying party if (i) the employment of such counsel has been
specifically authorized in writing by the indemnifying party, or (ii) the named
parties to any such action (including any impleaded parties) include both the
Investors and the indemnifying party and the Investors shall have been advised
by such counsel that there may be one or more legal defenses available to the
indemnifying party different from or in conflict with any legal defenses which
may be available to the Investors (in which case the indemnifying party shall
not have the right to assume the defense of such action on behalf of the
Investors, it being understood, however, that the indemnifying party shall, in
connection with any one such action or separate but substantially similar or
related actions in the same jurisdiction arising out of the same general
allegations or circumstances, be liable only for the reasonable fees and
expenses of one separate firm of attorneys for the Investor(s), which firm shall
be designated in writing by the Investor(s)). No settlement of any action
against an indemnified party shall be made without the prior written consent of
the indemnified party, which consent shall not be unreasonably withheld.
Section 11.3 Contribution. In order to provide for just and equitable
contribution under the Securities Act in any case in which (i) the indemnified
party makes a claim for indemnification pursuant to Section 11.2 hereof but is
judicially determined (by the entry of a final judgment or decree by a court of
competent jurisdiction and the expiration of time to appeal or the denial of the
last right of appeal) that such indemnification may not be enforced in such case
notwithstanding the
28
<PAGE>
fact that the express provisions of Section 11.2 hereof provide for
indemnification in such case, or (ii) contribution under the Securities Act may
be required on the part of any indemnified party, then the Company and the
applicable Investor shall contribute to the aggregate losses, claims, damages or
liabilities to which they may be subject (which shall, for all purposes of this
Agreement, include, but not be limited to, all costs of defense and
investigation and all attorneys' fees), in either such case (after contribution
from others) on the basis of relative fault as well as any other relevant
equitable considerations. The amount paid or payable by an indemnified party as
a result of the losses, claims, damages or liabilities (or actions in respect
thereof) referred to above in Section 11.2 shall be deemed to include any legal
or other expenses reasonably incurred by such indemnified party in connection
with investigating or defending any such action or claim. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contributions from any person who was not
guilty of such fraudulent misrepresentation.
ARTICLE XII
-----------
Miscellaneous
-------------
Section 12.1 Counterparts; Facsimile; Amendments. This Agreement may be
executed in multiple counterparts, each of which may be executed by less than
all of the parties and shall be deemed to be an original instrument which shall
be enforceable against the parties actually executing such counterparts and all
of which together shall constitute one and the same instrument. Except as
otherwise stated herein, in lieu of the original documents, a facsimile
transmission or copy of the original documents shall be as effective and
enforceable as the original. This Agreement may be amended only by a writing
executed by the Company on the one hand, and all of the Investors, and the
Placement Agent, on the other hand.
Section 12.2 Entire Agreement. This Agreement, the Exhibits or
Attachments hereto, which include, but are not limited to the Certificate of
Designation, the Warrant, the Escrow Agreement, and the Registration Rights
Agreement, set forth the entire agreement and understanding of the parties
relating to the subject matter hereof and supersedes all prior and
contemporaneous agreements, negotiations and understandings between the parties,
both oral and written relating to the subject matter hereof. The terms and
conditions of all Exhibits and Attachments to this Agreement are incorporated
herein by this reference and shall constitute part of this Agreement as is fully
set forth herein.
Section 12.3 Survival; Severability. The representations, warranties,
covenants and agreements of the parties hereto shall survive each Closing
hereunder. In the event that any provision of this Agreement becomes or is
declared by a court of competent jurisdiction to be illegal, unenforceable or
void, this Agreement shall continue in full force and effect without said
provision; provided that such severability shall be ineffective if it materially
changes the economic benefit of this Agreement to any party.
29
<PAGE>
Section 12.4 Title and Subtitles. The titles and subtitles used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
Section 12.5 Reporting Entity for the Common Stock. The reporting entity
relied upon for the determination of the trading price or trading volume of the
Common Stock on any given Trading Day for the purposes of this Agreement and all
Exhibits shall be Bloomberg, L.P. or any successor thereto. The written mutual
consent of the Investors and the Company shall be required to employ any other
reporting entity.
Section 12.6 Replacement of Certificates. Upon (i) receipt of evidence
reasonably satisfactory to the Company of the loss, theft, destruction or
mutilation of a certificate representing the Preferred Stock, Warrants,
Underlying Shares, Additional Shares, or Warrant Shares, and (ii) in the case of
any such loss, theft or destruction of such certificate, upon delivery of an
indemnity agreement or security reasonably satisfactory in form and amount to
the Company or (iii) in the case of any such mutilation, on surrender and
cancellation of such certificate, the Company at its expense will execute and
deliver, in lieu thereof, a new certificate of like tenor.
Section 12.7 Fees and Expenses. Each of the parties shall pay its own
fees and expenses (including the fees of any attorneys, accountants, appraisers
or others engaged by such party) in connection with this Agreement and the
transactions contemplated hereby, except that the Company shall pay on the
Subscription Date (i) the sum of one percent of the Purchase Price, in cash, out
of escrow, to The Goldstein Law Group, P.C. for legal, administrative, and
escrow fees, and (ii) to the Placement Agent (A) the sum equal to five percent
of the Purchase Price payable in cash out of escrow, (B) 75 shares of Preferred
Stock, and (C) Warrants to purchase 100,000 Warrant Shares, for Placement Agent
fees.
Section 12.8 Noncircumvention. The Company and the Investors agree that
they shall not circumvent this Agreement and the Company's obligation to pay
fees to the Placement Agent, and the Company, the Investors and the Placement
Agent agree that they will not circumvent the provisions of this Agreement or
the Escrow Agreement and the Company's obligation for the payment of fees to the
Escrow Agent.
Section 12.9 Publicity. The Company and the Investors shall consult with
each other in issuing any press releases or otherwise making public statements
with respect to the transactions contemplated hereby and no party shall issue
any such press release or otherwise make any such public statement without the
prior written consent of the other parties, which consent shall not be
unreasonably withheld or delayed, except that no prior consent shall be required
if such disclosure is required by law, in which such case the disclosing party
shall provide the other parties with prior notice of such public statement.
Notwithstanding the foregoing, the Company shall not publicly disclose the name
of the Investors without the prior written consent of the Investors, except to
the extent required by law, in which case the Company shall provide the
Investors with prior written notice of such public disclosure.
Section 12.10 No Group. It is hereby agreed and acknowledged by the
parties hereto that
30
<PAGE>
each Investor is acting individually and for its own account in purchasing the
Preferred Stock and Warrants, with no agreement to act together for the purpose
of acquiring, holding, voting or disposing of any equity securities or
otherwise.
SCHEDULES:
- ---------
A: List of Investors
4.25: Private Placements
EXHIBITS:
- --------
A: Certificate of Designation
B: Escrow Agreement
C: Registration Rights Agreement
D: Common Stock Purchase Warrant
E: Opinion of Counsel
F: Instruction Letter to Transfer Agent
G: Notice of Conversion
[Remainder of page intentionally left blank]
[Signature page follows]
31
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Series C
Convertible Preferred Stock Purchase Agreement to be executed by the
undersigned, thereunto duly authorized, as of the date first set forth above.
GLOBAL MAINTECH CORPORATION
By: ____________________________
James Geiser
Chief Financial Officer and
Secretary
ESQUIRE TRADE & FINANCE INC.
By:____________________________
Roland Winiger, Director
AUSTINVEST ANSTALT BALZERS
By: ____________________________
Dr. Walter Grill, Director
HEADWATERS CAPITAL, a California General
Partnership
By: ____________________________
NESHER INC.
By: ____________________________
SETTONDOWN CAPITAL INTER-
-NATIONAL LTD., Placement Agent
By: _____________________________
<PAGE>
SCHEDULE A
----------
INVESTORS:
- ----------
1. Esquire Trade & Finance Inc.
Trident Chambers
P.O. Box 2154
6342 Baar, Switzerland
Facsimile: 41-41-760-1031
Attention: Roland Winiger, Director
Initial Investment Amount: $500,000
No. of Shares of Preferred Stock: 500
2. Austinvest Anstalt Balzers
Landstrasse 938
9494 Furstentums
Balzers, Liechtenstein
Attention: Dr. Walter Grill
Facsimile: 431-534-532-895
Initial Investment Amount: $500,000
No. of Shares of Preferred Stock: 500
3. Nesher, Inc.
18 Peel Road
Douglas, Isle of Man
1M1-4L2 United Kingdom
Attention: David Grin
Facsimile: 01197236050756
Initial Investment Amount: $100,000
No. of Shares of Preferred Stock: 100
4. Headwaters Capital
220 Montgomery Street, Suite 500
San Francisco, CA 94101
Phone: (415) 397-5041
Attention: Timothy J. Keating
Facsimile: (415) 398-8204
Initial Investment Amount: $500,000
No. of Shares of Preferred Stock: 500
<PAGE>
EXHIBIT C
FORM OF REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT, dated the 24/th/ day of March,
1999, between the entities listed on Schedule A attached hereto (referred to as
a the "Investors"), SETTONDOWN CAPITAL INTERNATIONAL LTD. ") a corporation
organized under the laws of Bahamas, located at Charlotte House, Charlotte
Street, P.O. Box N. 9204, Nassau, Bahamas, (the "Placement Agent", and together
with the Investors is also hereinafter referred to as the "Holder" or "Holders")
and GLOBAL MAINTECH CORPORATION, a corporation incorporated under the laws of
the State of Minnesota, and having its principle place of business at 7578
Market Place Drive, Eden Prairie, MN 55344 (the "Company").
WHEREAS, simultaneously with the execution and delivery of this
Agreement, the Investors are purchasing from the Company, pursuant to the Series
C Convertible Preferred Stock Purchase Agreement dated the date hereof (the
"Purchase Agreement"), shares of Preferred Stock and Warrants (hereinafter
collectively referred to as the "Securities" of the Company); All capitalized
terms not hereinafter defined shall have that meaning assigned to them in the
Purchase Agreement; and
WHEREAS, simultaneously with the execution and delivery of this
Agreement, the Company shall issue Securities to the Placement Agent, in return
for services rendered, as provided in the Purchase Agreement; and
WHEREAS, the Company desires to grant to the Holders the registration
rights set forth herein with respect to the securities set forth in the Purchase
Agreement.
NOW, THEREFORE, the parties hereto mutually agree as follows:
Section 1. Registrable Securities. As used herein the term
"Registrable Security" means the Underlying Shares, the Additional Shares, and
the Warrant Shares; provided, however, that with respect to any particular
Registrable Security, such security shall cease to be a Registrable Security
when, as of the date of determination, (i) it has been effectively registered
under the Securities Act of 1933, as amended (the "1933 Act") and disposed of
pursuant thereto, (ii) registration under the 1933 Act is no longer required for
the immediate public distribution of such security as a result of the provisions
of Rule 144 promulgated under the 1933 Act, or (iii) it has ceased to be
outstanding. The term "Registrable Securities" means any and/or all of the
securities falling within the foregoing definition of a Registrable Security.
In the event of any merger, reorganization, consolidation, recapitalization or
other change in corporate structure affecting the Common Stock, such adjustment
shall be made in the definition of Registrable Security as is appropriate in
order to prevent any dilution or enlargement of the rights granted pursuant to
this Section.
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Section 2. Restrictions on Transfer. The Holders acknowledge and
understand that prior to the registration of the Registrable Securities as
provided herein, the Registrable Securities and the Securities are "restricted
securities" as defined in Rule 144 promulgated under the Act. The Holders
understand that no disposition or transfer of the Registrable Securities or the
Securities may be made by the Holders in the absence of (i) an opinion of
counsel to the Holders that such transfer may be made without registration under
the 1933 Act or (ii) such registration.
Section 3. Registration Rights.
(a) The Company agrees that it will prepare and file with the
Securities and Exchange Commission ("SEC"), as soon as possible after the
Closing Date but not later than 90 calendar days after the Closing Date, a
registration statement under the 1933 Act (the "Registration Statement"), at the
sole expense of the Company (except as provided in Section 3(c) hereof), in
respect of all holders of Registrable Securities, so as to permit a public
offering and sale of the Registrable Securities under the Act. The Company
shall use its best efforts to cause the Registration Statement to become
effective within 120 calendar days from the Closing Date. The number of shares
of Common Stock designated in the Registration Statement to be registered shall
be (i) 200% of the number of Underlying Shares that would be required if the
Preferred Stock were converted on the Trading Day immediately preceding the
filing of the Registration Statement, plus (ii) 100% of the number of Warrant
Shares.
In the event the number of shares of Common Stock included in the
registration Statement shall be insufficient to cover the number of Registrable
Securities due to the Holders via conversion and/or exercise the Company agrees
that it shall file either a new Registration Statement including such additional
shares or amend the then existing Registration Statement. The Company agrees
that it such event it will file with the SEC either an amendment to the then
existing registration Statement or a new Registration Statement within 60 days
of when required hereunder, and use its best efforts to cause either the
amendment or such Registration Statement to become effective within 90 calendar
days from when required. If such amendment or new Registration Statement is not
filed and/or declared effective in a timely manner as set forth herein, the
Company shall be subject to liquidated damages as pursuant to the provisions of
Section 3(e) below.
(b) The Company will maintain the Registration Statement, or post-
effective amendment filed under this Section 3 hereof current under the 1933 Act
until the earlier of (i) the date that all of the Registrable Securities have
been sold pursuant to the applicable Registration Statement, (ii) the date the
holders thereof receive an opinion of counsel that the Registrable Securities
may be sold under the provisions of Rule 144, or other similar exemption
(without volume limitation) or (iii) five years after the Closing Date.
(c) All fees, disbursements and out-of-pocket expenses and costs
incurred by the Company in connection with the preparation and filing of the
Registration Statement under subparagraph 3(a) and in complying with applicable
securities and blue sky laws (including, without
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limitation, all attorneys' fees) shall be borne by the Company. The Holders
shall bear the cost, pro rata, of underwriting discounts and commissions, if
any, applicable to the Registrable Securities being registered and the fees and
expenses of its counsel. The Company shall qualify any of the Registrable
Securities for sale in such states as such Holder reasonably designates and
shall furnish indemnification in the manner provided in Section 6 hereof.
However, the Company shall not be required to qualify in any state which will
require an escrow or other restriction relating to the Company and/or the
sellers. The Company at its expense will supply the Holders with copies of the
Registration Statement and the prospectus or offering circular included therein
and other related documents in such quantities as may be reasonably requested by
the Holders.
(d) The Company shall not be required by this Section 3 to include a
Holder's Registrable Securities in any Registration Statement which is to be
filed if, in the opinion of counsel for both the Holder and the Company (or,
should they not agree, in the opinion of another counsel experienced in
securities law matters acceptable to counsel for the Holder and the Company) the
proposed offering or other transfer as to which such registration is requested
is exempt from applicable federal and state securities laws and would result in
all purchasers or transferees obtaining securities which are not "restricted
securities", as defined in Rule 144 under the 1933 Act.
(e) In the event the Registration Statement to be filed by the Company
pursuant to Section 3(a) above is not filed with the SEC on or before the 90/th/
calendar day after the Closing Date and/or the Registration Statement is not
declared effective by the SEC within 120 calendar days from the Closing Date,
then the Company will pay the Holders (pro rated on a daily basis), as
liquidated damages for such failure and not as a penalty, two percent (2%) of
the Purchase Price of the then outstanding shares of Preferred Stock for the
first 30 calendar day period until the Registration Statement has been filed
and/or declared effective and 3% of the Purchase Price of the then outstanding
shares of Preferred Stock for each additional 30 day period thereafter until the
Registration Statement is filed and/or declared effective. Such payment of the
liquidated damages shall be made to the Holders in cash, immediately upon
demand, provided, however, that the payment of such liquidated damages shall not
relieve the Company from its obligations to register the Registrable Securities
pursuant to this Section. Such demand must be made by the Holders within 90
calendar days after the date in which the Company becomes liable for liquidated
damages. If the Company does not remit the damages to the Holders as set forth
above, the Company will pay the Holders' reasonable costs of collection,
including attorneys fees, in addition to the liquidated damages. The
registration of the Registrable Securities pursuant to this provision shall not
affect or limit a Holder's other rights or remedies as set forth in this
Agreement. The aforementioned liquidated damages shall be limited to a maximum
amount of 100% of the Purchase Price (as defined in the Purchase Agreement).
(f) No provision contained herein shall preclude the Company from
selling securities pursuant to any registration statement in which it is
required to include Registrable Securities pursuant to this Section 3.
(g) The Company agrees that within five calendar days after receipt of
a
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<PAGE>
no review letter from the SEC it will take all appropriate measures necessary
to cause the Registration Statement to be declared effective. The Company also
agrees that it shall respond to any questions and/or comments from the SEC which
relate to the Registration Statement within five Business Days of receipt of
such question or comment.
Section 4. Cooperation with Company. Each of the Holders will
cooperate with the Company in all respects in connection with this Agreement,
including timely supplying all information reasonably requested by the Company
and executing and returning all documents reasonably requested in connection
with the registration and sale of the Registrable Securities.
Section 5. Registration Procedures. Whenever the Company is required
by any of the provisions of this Agreement to effect the registration of any of
the Registrable Securities under the Act, the Company shall (except as otherwise
provided in this Agreement), as expeditiously as possible:
(a) prepare and file with the SEC such amendments and supplements to
the registration statements and the prospectus used in connection therewith as
may be necessary to keep such registration statement effective and to comply
with the provisions of the Act with respect to the sale or other disposition of
all securities covered by such registration statement whenever the Holder of
such securities shall desire to sell or otherwise dispose of the same (including
prospectus supplements with respect to the sales of securities from time to time
in connection with a registration statement pursuant to Rule 415 promulgated
under the Act);
(b) furnish to each Holder such numbers of copies of a summary
prospectus or other prospectus, including a preliminary prospectus or any
amendment or supplement to any prospectus, in conformity with the requirements
of the Act, and such other documents, as such Holder may reasonably request in
order to facilitate the public sale or other disposition of the securities owned
by such Holder;
(c) register and qualify the securities covered by the Registration
Statement under such other securities or blue sky laws of such jurisdictions as
the Holders shall reasonably request, and do any and all other acts and things
which may be necessary or advisable to enable each Holder to consummate the
public sale or other disposition in such jurisdiction of the securities owned by
such Holder, except that the Company shall not for any such purpose be required
to qualify to do business as a foreign corporation in any jurisdiction wherein
it is not so qualified or to file therein any general consent to service of
process;
(d) list such securities on the NASD OTC Electronic Bulletin Board or
other national securities exchange on which any securities of the Company are
then listed, if the listing of such securities is then permitted under the rules
of such market or exchange;
(e) enter into and perform its obligations under an underwriting
agreement, if the offering is an underwritten offering, in usual and customary
form, with the
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<PAGE>
managing underwriter or underwriters of such underwritten offering;
(f) notify each Holder of Registrable Securities covered by the
Registration Statement any time when a prospectus relating thereto covered by
the Registration Statement is required to be delivered under the Act, of the
happening of any event of which it has knowledge as a result of which the
prospectus included in the Registration Statement, as then in effect, includes
an untrue statement of a material fact or omits to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading in the light of the circumstances then existing.
Section 6. Information by Holder. Each Holder of Registrable
Securities included in any registration statement shall furnished to the Company
such information regarding such Holder and the distribution proposed by such
Holder as the Company may request in writing and as shall be required in
connection with any registration, qualification or compliance referred to in
this Section.
Section 7. Assignment. The rights granted the Holders under this
Agreement shall not be assigned without the written consent of the Company,
which consent shall not be unreasonably withheld. This Agreement is binding
upon and inures to the benefit of the parties hereto and their respective heirs,
successors and permitted assigns.
Section 8. Termination of Registration Rights. The rights granted
pursuant to this Agreement shall terminate as to each Holder (and permitted
transferee under Section 7 above) upon the occurrence of any of the following:
(a) all such Holder's securities subject to this Agreement have
been registered;
(b) all of such Holder's securities subject to this Agreement may be
sold without such registration pursuant to Rule 144 without volume limitation
promulgated by the SEC pursuant to the Securities Act;
(c) all of such Holder's securities subject to this Agreement can be
sold pursuant to Rule 144(k) without volume limitation; or
five years from the issuance of the Registrable Securities.
Section 9. Indemnification.
(a) In the event of the filing of any Registration Statement with
respect to Registrable Securities pursuant to Section 3 hereof, the Company
agrees to indemnify and hold harmless the Holders and each officer, and/or
director of each of the Holders, and each person, if any, who controls the
Holders within the meaning of the Securities Act ("Distributing Holders")
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<PAGE>
against any losses, claims, damages or liabilities, joint or several (which
shall, for all purposes of this Agreement, include, but not be limited to, all
costs of defense and investigation and all attorneys' fees), to which the
Distributing Holders may become subject, under the Securities Act or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in any such Registration Statement or
any related preliminary prospectus, final prospectus, offering circular,
notification or amendment or supplement thereto, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading;
provided, however, that the Company will not be liable in any such case to the
extent that any such loss, claim, damage or liability arises out of or is based
upon an untrue statement or alleged untrue statement or omission or alleged
omission made in such Registration Statement, preliminary prospectus, final
prospectus, offering circular, notification or amendment or supplement thereto
in reliance upon, and in conformity with, written information furnished to the
Company by the Distributing Holders, specifically for use in the preparation
thereof. This indemnity agreement will be in addition to any liability which the
Company may otherwise have.
(b) Each Distributing Holder severally (and not jointly) agrees that
it will indemnify and hold harmless the Company, and each officer, director of
the Company, or person, if any, who controls the Company within the meaning of
the Securities Act, against any losses, claims, damages or liabilities (which
shall, for all purposes of this Agreement, include, but not be limited to, all
costs of defense and investigation and all attorneys' fees) to which the Company
or any such officer, director or controlling person may become subject under the
Securities Act or otherwise, insofar as such losses claims, damages or
liabilities (or actions in respect thereof, arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in a
Registration Statement, requested by such Distributing Holder, or any related
preliminary prospectus, final prospectus, offering circular, notification or
amendment or supplement thereto, or arise out of or are based upon the omission
or the alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, but in each
case only to the extent that such untrue statement or alleged untrue statement
or omission or alleged omission was made in such Registration Statement,
preliminary prospectus, final prospectus, offering circular, notification or
amendment or supplement thereto in reliance upon, and in conformity with,
written information furnished to the Company by such Distributing Holder,
specifically for use in the preparation thereof. This indemnity agreement will
be in addition to any liability which the Distributing Holders may otherwise
have.
(c) Promptly after receipt by an indemnified party under this Section
of notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against the indemnifying party under this
Section, notify the indemnifying party of the commencement thereof; but the
omission so to notify the indemnifying party will not relieve the indemnifying
party from any liability which it may have to any indemnified party otherwise
than as to the particular item as to which indemnification is then being sought
solely pursuant to this Section. In case any such action is brought against any
indemnified party, and it notifies the indemnifying
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<PAGE>
party of the commencement thereof, the indemnifying party will be entitled to
participate in, and, to the extent that it may wish, jointly with any other
indemnifying party similarly notified, assume the defense thereof, subject to
the provisions herein stated and after notice from the indemnifying party to
such indemnified party of its election so to assume the defense thereof, the
indemnifying party will not be liable to such indemnified party under this
Section for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof other than reasonable
costs of investigation, unless the indemnifying party shall not pursue the
action to its final conclusion. The indemnified party shall have the right to
employ separate counsel in any such action and to participate in the defense
thereof, but the fees and expenses of such counsel shall not be at the expense
of the indemnifying party if the indemnifying party has assumed the defense of
the action with counsel reasonably satisfactory to the indemnified party;
provided that if the indemnified party is the Distributing Holder, the fees and
expenses of such counsel shall be at the expense of the indemnifying party if
(i) the employment of such counsel has been specifically authorized in writing
by the indemnifying party, or (ii) the named parties to any such action
(including any impleaded parties) include both the Distributing Holder and the
indemnifying party and the Distributing Holder shall have been advised by such
counsel that there may be one or more legal defenses available to the
indemnifying party different from or in conflict with any legal defenses which
may be available to the Distributing Holder (in which case the indemnifying
party shall not have the right to assume the defense of such action on behalf of
the Distributing Holder, it being understood, however, that the indemnifying
party shall, in connection with any one such action or separate but
substantially similar or related actions in the same jurisdiction arising out of
the same general allegations or circumstances, be liable only for the reasonable
fees and expenses of one separate firm of attorneys for the Distributing Holder,
which firm shall be designated in writing by the Distributing Holder). No
settlement of any action against an indemnified party shall be made without the
prior written consent of the indemnified party, which consent shall not be
unreasonably withheld.
Section 10. Contribution. In order to provide for just and equitable
contribution under the Securities Act in any case in which (i) the Distributing
Holder makes a claim for indemnification pursuant to Section 9 hereof but is
judicially determined (by the entry of a final judgment or decree by a court of
competent jurisdiction and the expiration of time to appeal or the denial of the
last right of appeal) that such indemnification may not be enforced in such case
notwithstanding the fact that the express provisions of Section 9 hereof provide
for indemnification in such case, or (ii) contribution under the Securities Act
may be required on the part of any Distributing Holder, then the Company and the
applicable Distributing Holder shall contribute to the aggregate losses, claims,
damages or liabilities to which they may be subject (which shall, for all
purposes of this Agreement, include, but not be limited to, all costs of defense
and investigation and all attorneys' fees), in either such case (after
contribution from others) on the basis of relative fault as well as any other
relevant equitable considerations. The relative fault shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company on the one hand or the applicable
Distributing Holder, on the other hand, and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The Company and the Distributing Holder agree that it
would not be just and
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<PAGE>
equitable if contribution pursuant to this Section were determined by pro rata
allocation or by any other method of allocation which does not take account of
the equitable considerations referred to in this Section. The amount paid or
payable by an indemnified party as a result of the losses, claims, damages or
liabilities (or actions in respect thereof) referred to above in this Section
shall be deemed to include any legal or other expenses reasonably incurred by
such indemnified party in connection with investigating or defending any such
action or claim. No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation.
Section 11. Notices. Any notice pursuant to this Agreement by the
Company or by the Holder shall be in writing and shall be deemed to have been
duly given if delivered by (i)
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hand, (ii) by facsimile and followed by mail delivery or (iii) if mailed by
certified mail, return receipt requested, postage prepaid, addressed as follows:
(a) If to the Company:
Global Maintech Corporation
7578 Market Place Drive
Eden Prairie, MN 55344
Attention: CEO
Facsimile: (612) 944-3311
Telephone: (612) 944-0400
(b) If to the Placement Agent:
Settondown Capital International Ltd.
Charlotte House, Charlotte Street
P.O. Box N. 9204
Nassau, Bahamas
Attention: Anthony L. M. Inder Riden
Telephone: (242) 325-1033
Facsimile: (242) 323-7918
(c) If to the Investors, to their address set forth on Schedule A
annexed to the Purchase Agreement.
Notices shall be deemed given at the time they are delivered personally or
five calendar days after they are mailed in the manner set forth above. If
notice is delivered by facsimile to the Company and followed by mail, delivery
shall be deemed given two calendar days after such facsimile is sent.
Section 12. Counterparts. This Agreement may be executed in
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
Section 13. Headings. The headings in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
Section 14. Choice of Law; Venue; Jurisdiction. This Agreement will
be construed and enforced in accordance with and governed by the laws of the
State of New York, except for matters arising under
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the Securities Act, without reference to principles of conflicts of law. Each of
the parties consents to the exclusive jurisdiction of the U.S. District Court
sitting in the Southern District of the State of New York sitting in Manhattan
in connection with any dispute arising under this Agreement and hereby waives,
to the maximum extent permitted by law, any objection, including any objection
based on forum non conveniens, to the bringing of any such proceeding in such
jurisdictions. Each party hereby agrees that if another party to this Agreement
obtains a judgment against it in such a proceeding, the party which obtained
such judgment may enforce same by summary judgment in the courts of any country
having jurisdiction over the party against whom such judgment was obtained, and
each party hereby waives any defenses available to it under local law and agrees
to the enforcement of such a judgment. Each party to this Agreement irrevocably
consents to the service of process in any such proceeding by the mailing of
copies thereof by registered or certified mail, postage prepaid, to such party
at its address set forth herein. Nothing herein shall affect the right of any
party to serve process in any other manner permitted by law. Each party waives
its right to a trial by jury.
Section 15. Severability. If any provision of this Agreement shall
for any reason be held invalid or unenforceable, such invalidity or
unenforceability shall not affect any other provision hereof and this Agreement
shall be construed as if such invalid or unenforceable provision had never been
contained herein.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Registration Rights
Agreement to be duly executed, on the day and year first above written.
GLOBAL MAINTECH CORPORATION
By:____________________________
Name: James Geiser
Title: Chief Financial Officer and Secretary
ESQUIRE TRADE & FINANCE INC.
By:____________________________
Roland Winiger, Director
AUSTINVEST ANSTALT BALZERS
By: ____________________________
Dr. Walter Grill, Director
HEADWATERS CAPITAL, a California General
Partnership
By: ____________________________
NESHER INC.
By: ____________________________
SETTONDOWN CAPITAL INTER-
NATIONAL LTD., Placement Agent
By: _____________________________
<PAGE>
EXHIBIT D
THESE SECURITIES HAVE NOT BEEN REGISTERED WITH THE UNITED STATES SECURITIES AND
EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE PURSUANT TO AN
EXEMPTION FROM REGISTRATION UNDER REGULATION D PROMULGATED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "ACT"). THIS WARRANT SHALL NOT CONSTITUTE AN OFFER
TO SELL NOR A SOLICITATION OF AN OFFER TO BUY THE SECURITIES IN ANY JURISDICTION
IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. THE SECURITIES ARE
"RESTRICTED" AND MAY NOT BE RESOLD OR TRANSFERRED EXCEPT AS PERMITTED UNDER THE
ACT PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM.
FORM OF COMMON STOCK PURCHASE WARRANT
No. __
To Purchase ______ Shares of Common Stock of
GLOBAL MAINTECH CORPORATION
THIS CERTIFIES that, for value received, ___________________ (the
"Investor"), is entitled, upon the terms and subject to the conditions
hereinafter set forth, at any time on or after the date hereof and on or prior
to ____________ (the "Termination Date") but not thereafter, to subscribe for
and purchase from GLOBAL MAINTECH CORPORATION, a Minnesota corporation (the
"Company"), ( ) shares of Common Stock (the "Warrant Shares").
The purchase price of one share of Common Stock (the "Exercise Price") under
this Warrant shall be _____ (which shall be equal to 110% of the closing bid
price of the Common Stock on the Principal Market, on the Trading Day
immediately preceding the Subscription Date, as defined in the Series C
Convertible Preferred Stock Purchase Agreement). The Exercise Price and the
number of shares for which the Warrant is exercisable shall be subject to
adjustment as provided herein. This Warrant is being issued in connection with
the Series C Convertible Preferred Stock Purchase Agreement dated March , 1999
(the "Agreement") entered into between the Company, the Investor and other
entities not a party to this Warrant. In the event of any conflict between the
terms of this Warrant and the Agreement, the Agreement shall control.
1. Title of Warrant. Prior to the expiration hereof and subject to
compliance with applicable laws, this Warrant and all rights hereunder are
transferable, in whole or in part, at the office or agency of the Company by the
holder hereof in person or by duly authorized attorney, upon surrender of this
Warrant together with the Assignment Form annexed hereto properly endorsed.
<PAGE>
2. Authorization of Shares. The Company covenants that all shares
of Common Stock which may be issued upon the exercise of rights represented by
this Warrant will, upon exercise of the rights represented by this Warrant, be
duly authorized, validly issued, fully paid and nonassessable and free from all
taxes, liens and charges in respect of the issue thereof (other than taxes in
respect of any transfer occurring contemporaneously with such issue).
3. Exercise of Warrant. Exercise of the purchase rights represented
by this Warrant may be made at any time or times, in whole or in part, before
the close of business on the Termination Date, or such earlier date on which
this Warrant may terminate as provided in paragraph 11 below, by the surrender
of this Warrant and the Subscription Form annexed hereto duly executed, to the
office of the Company (or such other office or agency of the Company as it may
designate by notice in writing to the registered holder hereof at the address of
such holder appearing on the books of the Company) and upon payment of the
Exercise Price of the shares thereby purchased; whereupon the holder of this
Warrant shall be entitled to receive a certificate for the number of shares of
Common Stock so purchased. Certificates for shares purchased hereunder shall be
delivered to the holder hereof within three Business Days after the date on
which this Warrant shall have been exercised as aforesaid. Payment of the
Exercise Price of the shares may be by certified check or cashier's check or by
wire transfer (of same day funds) to the Company in an amount equal to the
Exercise Price multiplied by the number of shares being purchased.
4. No Fractional Shares or Scrip. No fractional shares or scrip
representing fractional shares shall be issued upon the exercise of this
Warrant. In lieu of issuing fractional shares, the Company shall round up to the
nearest whole share the number of Warrant Shares due upon exercise of this
Warrant.
5. Charges, Taxes and Expenses. Issuance of certificates for shares
of Common Stock upon the exercise of this Warrant shall be made without charge
to the holder hereof for any issue or transfer tax or other incidental expense
in respect of the issuance of such certificate, all of which taxes and expenses
shall be paid by the Company, and such certificates shall be issued in the name
of the holder of this Warrant or in such name or names as may be directed by the
holder of this Warrant; provided, however, that in the event certificates for
shares of Common Stock are to be issued in a name other than the name of the
holder of this Warrant, this Warrant when surrendered for exercise shall be
accompanied by the Assignment Form attached hereto duly executed by the holder
hereof; and provided further, that upon any transfer involved in the issuance or
delivery of any certificates for shares of Common Stock, the Company may
require, as a condition thereto, the payment of a sum sufficient to reimburse it
for any transfer tax incidental thereto.
6. Closing of Books. The Company will at no time close its
shareholder books or records in any manner which interferes with the timely
exercise of this Warrant.
7. No Rights as Shareholder until Exercise. This Warrant does not
entitle the holder hereof to any voting rights or other rights as a shareholder
of the Company prior to the exercise thereof. If, however, at the time of the
surrender of this Warrant and purchase the holder hereof shall be entitled to
exercise this Warrant, the shares so purchased shall be and be deemed to
2
<PAGE>
be issued to such holder as the record owner of such shares as of the close of
business on the date on which this Warrant shall have been exercised.
8. Assignment and Transfer of Warrant. This Warrant may be assigned
by the surrender of this Warrant and the Assignment Form annexed hereto duly
executed at the office of the Company (or such other office or agency of the
Company as it may designate by notice in writing to the registered holder hereof
at the address of such holder appearing on the books of the Company); provided,
however, that this Warrant may not be resold or otherwise transferred except (i)
in a transaction registered under the Securities Act, or (ii) in a transaction
pursuant to an exemption, if available, from such registration and whereby, if
requested by the Company, an opinion of counsel reasonably satisfactory to the
Company is obtained by the holder of this Warrant to the effect that the
transaction is so exempt.
9. Loss, Theft, Destruction or Mutilation of Warrant. The Company
represents and warrants that upon receipt by the Company of evidence reasonably
satisfactory to it of the loss, theft, destruction or mutilation of any Warrant
or stock certificate, and in case of loss, theft or destruction, of indemnity or
security reasonably satisfactory to it, and upon reimbursement to the Company of
all reasonable expenses incidental thereto, and upon surrender and cancellation
of such Warrant or stock certificate, if mutilated, the Company will make and
deliver a new Warrant or stock certificate of like tenor and dated as of such
cancellation, in lieu of this Warrant or stock certificate.
10. Saturdays, Sundays, Holidays, etc. If the last or appointed day
for the taking of any action or the expiration of any right required or granted
herein shall be a Saturday, Sunday or a legal holiday, then such action may be
taken or such right may be exercised on the next succeeding day not a legal
holiday.
11. Effect of Certain Events. If at any time the Company proposes
(i) to sell or otherwise convey all or substantially all of its assets or (ii)
to effect a transaction (by merger or otherwise) in which more than 50% of the
voting power of the Company is disposed of (collectively, a "Sale or Merger
Transaction"), in which the consideration to be received by the Company or its
shareholders consists solely of cash, and in case the Company shall at any time
effect a Sale or Merger Transaction in which the consideration to be received by
the Company or its shareholders consists in part of consideration other than
cash, the holder of this Warrant shall have the right thereafter to purchase, by
exercise of this Warrant and payment of the aggregate Exercise Price in effect
immediately prior to such action, the kind and amount of shares and other
securities and property which it would have owned or have been entitled to
receive after the happening of such transaction had this Warrant been exercised
immediately prior thereto.
12. Adjustments of Exercise Price and Number of Warrant Shares. The
number and kind of securities purchasable upon the exercise of this Warrant and
the Exercise Price shall be subject to adjustment from time to time upon the
happening of any of the following.
In case the Company shall (i) declare or pay a dividend in shares of
Common Stock or make a distribution in shares of Common Stock to holders of its
outstanding Common Stock, (ii)
3
<PAGE>
subdivide its outstanding shares of Common Stock, (iii) combine its outstanding
shares of Common Stock into a smaller number of shares of Common Stock, or (iv)
issue any shares of its capital stock in a reclassification of the Common Stock,
the number of Warrant Shares purchasable upon exercise of this Warrant
immediately prior thereto shall be adjusted so that the holder of this Warrant
shall be entitled to receive the kind and number of Warrant Shares or other
securities of the Company which he would have owned or have been entitled to
receive had such Warrant been exercised in advance thereof. An adjustment made
pursuant to this paragraph shall become effective immediately after the
effective date of such event retroactive to the record date, if any, for such
event.
13. Voluntary Adjustment by the Company. The Company may at its
option, at any time during the term of this Warrant, reduce the then current
Exercise Price to any amount and for any period of time deemed appropriate by
the Board of Directors of the Company.
14. Notice of Adjustment. Whenever the number of Warrant Shares or
number or kind of securities or other property purchasable upon the exercise of
this Warrant or the Exercise Price is adjusted, as herein provided, the Company
shall promptly mail by registered or certified mail, return receipt requested,
to the holder of this Warrant notice of such adjustment or adjustments setting
forth the number of Warrant Shares (and other securities or property)
purchasable upon the exercise of this Warrant and the Exercise Price of such
Warrant Shares after such adjustment, setting forth a brief statement of the
facts requiring such adjustment and setting forth computation by which such
adjustment was made. Such notice, in absence of manifest error, shall be
conclusive evidence of the correctness of such adjustment.
15. Authorized Shares. The Company covenants that during the period
the Warrant is outstanding, it will reserve from its authorized and unissued
Common Stock a sufficient number of shares to provide for the issuance of Common
Stock upon the exercise of any purchase rights under this Warrant. The Company
further covenants that its issuance of this Warrant shall constitute full
authority to its officers who are charged with the duty of executing stock
certificates to execute and issue the necessary certificates for shares of the
Company's Common Stock upon the exercise of the purchase rights under this
Warrant. The Company will take all such reasonable action as may be necessary
to assure that such shares of Common Stock may be issued as provided herein
without violation of any applicable law or regulation, or of any requirements of
the domestic securities exchange or market upon which the Common Stock may be
listed.
16. 4.99% Limitation. The number of shares of Common Stock which may
be acquired by the Investor pursuant to the terms herein shall not exceed the
number of such shares which, when aggregated with all other shares of Common
Stock then owned by the Investor, would result in the Investor owning more than
4.99% of the then issued and outstanding Common Stock at any one time. The
preceding shall not interfere with the Investor's right to this Warrant over
time which in the aggregate totals more than 4.99% of the then outstanding
shares of Common Stock so long as the Investor does not own more than 4.99% of
the then outstanding Common Stock at any given time.
4
<PAGE>
17. Miscellaneous.
(a) Issue Date; Choice of Law; Venue; Jurisdiction. The provisions of
this Warrant shall be construed and shall be given effect in all respects as if
it had been issued and delivered by the Company on the date hereof. This
Warrant shall be binding upon any successors or assigns of the Company. This
Warrant will be construed and enforced in accordance with and governed by the
laws of the State of New York, except for matters arising under the Securities
Act, without reference to principles of conflicts of law. The parties consent
to the exclusive jurisdiction of the U.S. District Court sitting in the Southern
District of the State of New York in connection with any dispute arising under
this Warrant and hereby waives, to the maximum extent permitted by law, any
objection, including any objection based on forum non conveniens, to the
bringing of any such proceeding in such jurisdictions. Each party hereby agrees
that if the other party to this Warrant obtains a judgment against it in such a
proceeding, the party which obtained such judgment may enforce same by summary
judgment in the courts of any country having jurisdiction over the party against
whom such judgment was obtained, and each party hereby waives any defenses
available to it under local law and agrees to the enforcement of such a
judgment. Each party to this Warrant irrevocably consents to the service of
process in any such proceeding by the mailing of copies thereof by registered or
certified mail, postage prepaid, to such party at its address set forth herein.
Nothing herein shall affect the right of any party to serve process in any other
manner permitted by law. Each party waives its right to a trial by jury.
(b) Restrictions. The holder hereof acknowledges that the Warrant
Shares acquired upon the exercise of this Warrant, if not registered (or if no
exemption from registration exists), will have restrictions upon resale imposed
by state and federal securities laws. Each certificate representing the Warrant
Shares issued to the Holder upon exercise (if not registered or if no exemption
from registration exists) will bear the following legend:
"THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"),
OR ANY OTHER APPLICABLE SECURITIES LAWS AND HAVE BEEN ISSUED IN RELIANCE
UPON AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT
AND SUCH OTHER SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR
PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED,
PLEDGED, ENCUMBERED, HYPOTHECATED OR OTHERWISE DISPOSED OF, EXCEPT PURSUANT
TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT
TO A TRANSACTION THAT IS EXEMPT FROM, OR NOT SUBJECT TO, SUCH
REGISTRATION".
(c) Modification and Waiver. This Warrant and any provisions hereof
may be changed, waived, discharged or terminated only by an instrument in
writing signed by the party against which enforcement of the same is sought.
5
<PAGE>
(d) Notices. Any notice, request or other document required or
permitted to be given or delivered to the holders hereof of the Company shall be
delivered or shall be sent by certified or registered mail, postage prepaid, to
each such holder at its address as shown on the books of the Company or to the
Company at the address set forth in the Agreement.
IN WITNESS WHEREOF, the Company has caused this Warrant to be executed
by its officer thereunto duly authorized.
Dated:
GLOBAL MAINTECH CORPORATION
By: ______________________________
Name:
Title:
<PAGE>
NOTICE OF EXERCISE
------------------
To: GLOBAL MAINTECH CORPORATION
(1) The undersigned hereby elects to purchase ________ shares of Common Stock
of GLOBAL MAINTECH CORPORATION pursuant to the terms of the attached
Warrant, and tenders herewith payment of the purchase price in full,
together with all applicable transfer taxes, if any.
(2) Please issue a certificate or certificates representing said shares of
Common Stock in the name of the undersigned or in such other name as is
specified below:
_______________________________
(Name)
_______________________________
(Address)
_______________________________
Dated:
______________________________
Signature
<PAGE>
ASSIGNMENT FORM
(To assign the foregoing warrant, execute
this form and supply required information.
Do not use this form to exercise the warrant.)
FOR VALUE RECEIVED, the foregoing Warrant and all rights evidenced
thereby are hereby assigned to
_______________________________________________ whose address is
_______________________________________________________________.
_______________________________________________________________
Dated: ______________,
Holder's Signature: _____________________________
Holder's Address: _____________________________
_____________________________
Signature Guaranteed: ___________________________________________
NOTE: The signature to this Assignment Form must correspond with the name as it
appears on the face of the Warrant, without alteration or enlargement or any
change whatsoever, and must be guaranteed by a bank or trust company. Officers
of corporations and those acting in an fiduciary or other representative
capacity should file proper evidence of authority to assign the foregoing
Warrant.
<PAGE>
EXHIBIT 4.9
PLEASE SEE RESTRICTIVE LEGENDS ON REVERSE SIDE HEREOF
INCORPORATED UNDER THE LAWS OF THE STATE OF MINNESOTA
NUMBER SHARES
SPECIMEN SPECIMEN
GLOBAL MAINTECH CORPORATION
This certifies that SPECIMEN is the owner and
_________________________________________
registered holder of --------------------------------------- Shares of
_______________________________________________
fully paid and nonassessable shares of Series C Convertible Preferred Stock,
no par value, of
Global MAINTECH Corporation
transferable only on the books of the corporation by the holder hereof in person
or by duly authorized attorney upon surrender of this certificate properly
endorsed.
IN WITNESS WHEREOF, the said corporation has caused this certificate to be
signed by its duly authorized officers and so be sealed with the seal of the
corporation this __________________ day of ______________________ , _____,
_________________________________ ____________________________________
Secretary President
<PAGE>
The shares represented by this certificate have not been registered or qualified
under the Securities Act of 1933, as amended, or any state securities laws. Such
shares of stock may not be sold, transferred or otherwise disposed of without
either (i) an opinion of counsel satisfactory to the corporation that such
transfer may lawfully be made without registration or qualification under the
federal Securities Act of 1933, as amended, and all applicable state securities
laws; or (ii) such registration or qualification.
A full statement of the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or series
thereof of the corporation and the qualifications, limitations or restrictions
of such preferences and/or rights will be furnished by said corporation to any
stockholder under request and without charge.
For Value Received _____________________ hereby sell, assign and transfer unto
______________________________________________________________________________
_______________________________________________________________________ Shares
represented by the within Certificate, and do hereby irrevocably constitute
and appoint
____________________________________________________________________ Attorney
to transfer the said shares on the Books of the within named Corporation with
full power of substitution in the premises.
Dated ____________________, 19____ _______________________________
IN PRESENCE OF _____________________________________________________________
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS
WRITTEN UPON THE FACE OF THIS CERTIFICATE IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
<PAGE>
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Global MAINTECH Corporation:
We consent to incorporation by reference in the registration statement (No.
33-33576) on Form S-8 of Global MAINTECH Corporation of our report dated March
29, 1999, relating to the consolidated balance sheets of Global MAINTECH
Corporation and subsidiaries as of December 31, 1998 and 1997 and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years then ended, which report appears in the December 31, 1998 annual
report on Form 10-KSB of Global MAINTECH Corporation.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Minneapolis, Minnesota
March 31,1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-KSB
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> DEC-31-1998 DEC-31-1997
<CASH> 664 1,727
<SECURITIES> 0 0
<RECEIVABLES> 2,596 618
<ALLOWANCES> 300 15
<INVENTORY> 996 797
<CURRENT-ASSETS> 4,057 3,566
<PP&E> 1,042 308
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 9,133 5,863
<CURRENT-LIABILITIES> 1,990 683
<BONDS> 1,700 1,900
0 0
2,244 114
<COMMON> 7,068 5,001
<OTHER-SE> (3,869) (1,835)
<TOTAL-LIABILITY-AND-EQUITY> 9,133 5,863
<SALES> 6,209 3,003
<TOTAL-REVENUES> 6,209 3,003
<CGS> 2,323 762
<TOTAL-COSTS> 5,705 1,969
<OTHER-EXPENSES> (103) (70)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 286 183
<INCOME-PRETAX> (2,003) 158
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (2,003) 158
<DISCONTINUED> 0 70
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,003) 228
<EPS-PRIMARY> (0.11) 0.014
<EPS-DILUTED> (0.11) 0.012
</TABLE>
<PAGE>
Exhibit 99
CAUTIONARY STATEMENT
The Company, or persons acting on behalf of the Company, or outside
reviewers retained by the Company making statements on behalf of the Company, or
underwriters, from time to time, may make, in writing or orally,
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. When used in conjunction with an identified forward-looking
statement, this Cautionary Statement is for the purpose of qualifying for the
"safe harbor" provisions of such sections and is intended to be a readily
available written document that contains factors which could cause results to
differ materially from such forward-looking statements. These factors are in
addition to any other cautionary statements, written or oral, which may be made
or referred to in connection with any such forward-looking statement.
The following matters, among others, may have a material adverse effect on
the business, financial condition, liquidity, results of operations or
prospects, financial or otherwise, of the Company. Reference to this Cautionary
Statement in the context of a forward-looking statement or statements shall be
deemed to be a statement that any or more of the following factors may cause
actual results to differ materially from those in such forward-looking statement
or statements:
Competition
Our industry is characterized by rapidly evolving technology and intense
competition. We know of several other competitors that have much greater
resources and experience in research and development and marketing than we do.
These companies may represent significant competition for us. However, none of
these companies produces as complete an enterprise computing system as we do,
but rather they only produce components that could be combined to form such a
system. We believe that we have a competitive advantage because we can produce
an integrated system. Nevertheless, we cannot predict whether our competitors
will develop or market technologies and products that are more effective than
ours or that would make our technology and products obsolete or noncompetitive.
New Product with Uncertain Demand
Recently the Company revised aspects of the external control and monitoring
systems to enhance its remote capabilities. Our VCC product provides customers
with an economically feasible method of controlling and monitoring
geographically dispersed computers and systems, particularly for systems that
consist of many different locations with as few as one server per location, such
as a retail organization. In such organizations, the local servers often upload
data regarding product sales and inventory levels to a centralized data center.
Our product allows the centralized data center to control these local servers
(shutting down, starting-up, etc.) and operating systems for a price per server
ranging from $3,000 to $8,000. The concept of an external monitor and control
system for computer hardware is relatively new, and we do not yet know what the
continued demand for the product will be. It is difficult to project the overall
size of the future market for this product. We estimate that the current market
size for internal systems is several billion dollars per year. We believe the
market for external control systems could expand because external control
systems could soon be used to solve networking problems with enterprise
computing. Based on recent feedback we have received from current and potential
customers, we believe the demand for the VCC is significant. However, to date,
we have sold the VCC to only 14 customers and we cannot assure you that
additional customers will buy our products.
<PAGE>
Dependence on Limited Product Offerings and Customer Base
We currently offer a limited number of products, primarily consisting of a
base VCC unit and related software and accessories. Our existing customers are
not required to buy additional hardware products or to renew their software
license and maintenance agreements with us when such license and agreements
expire. Therefore, a significant portion of our revenue is derived from
non-recurring revenue sources. To succeed, we will need to develop a sustained
demand for our current products and to develop and sell additional products. We
cannot assure you that we will be successful in developing and maintaining
demand or in developing and selling additional products.
Product Under Development
We are currently developing a set of software products that monitors
networking and communication devices primarily for networks, Microsoft NT,
midrange and mainframes. These products will perform capacity tests to measure
systems activity and hardware utilization and will correlate measured trends
with specific events or expected benchmarks. Although preliminary tests indicate
that these products will perform as intended and can be integrated with the VCC,
we cannot assure you that they will do so or, even if they do, that the market
will demand such products.
Newly Acquired Businesses; Integration of Operations
We purchased three new product lines during 1998. Effective November 1,
1998, we purchased substantially all of the assets of Enterprise Solutions,
Inc., an Ohio corporation ("ESI"). As a result of this acquisition, we obtained
substantially all of the assets and assumed certain liabilities of ESI,
including a suite of software products that notify the proper person(s) by
telephone, pager or the Internet of critical data center events. In addition, we
obtained ESI's short-term consulting business, which assists companies to
optimize their existing systems management and network management tools.
Effective October 1, 1998, we purchased substantialy all of the assets of Asset
Sentinel, Inc., a Minnesota Corporation ("ASI"). The primary assets acquired
were a suite of software products that provide updated mapping of network, cable
and telephone lines in buildings and computer centers. On February 27, 1998, we
licensed certain software and purchased certain assets relating to the system
software business of Infinite Graphics Incorporated, a Minnesota corporation
("IGI"). We will use such software and assets to design, assemble and market
computer-aided design and manufacturing software systems that operate on a
variety of mid-range and personal computer platforms. Although we believe we
will be able to successfully integrate the employees we hired from IGI, ASI and
ESI into our own workforce and that we will be able to market and sell the
product lines purchased from ESI, ASI and IGI on a profitable basis for the next
several years, we cannot assure you that this will happen.
Fluctuations in Operating Results
Our future operating results may vary substantially from quarter to
quarter. At our current stage of operations, the timing of the development and
market acceptance of our products may materially affect our quarterly revenues
and results of operations. Generally, our operating expenses are higher when we
are developing and marketing a product. For these reasons, the market price of
our stock may be highly volatile. The price of our stock may also be affected
by:
the general state of the country's economy
the conditions in the stock market
the development of new products by us and our competitors
public announcements by us or our competitors
<PAGE>
Future Capital Requirements; No Assurance Future Capital Will Be Available
We expect that the proceeds of our recent equity and debt offerings will be
enough to fund our operations through at least June 1999. Within the next 60
days, we expect to obtain an asset-based line of credit to finance our growth in
receivables and to meet short-term working capital requirements. Thereafter, we
may need additional funds to continue the marketing of our products and to meet
our long-term growth needs. To meet our needs, we may have to obtain additional
funding through public or private financings, including equity and debt
financings. Any additional equity financings may be dilutive to our
shareholders, and debt financing, if available, may have restrictive covenants.
We are uncertain as to whether we will be able to obtain financing and, if we
do, whether the financing will be available at reasonable rates and terms. Our
business could be adversely affected if we do not secure such additional
financing.
Reliance on Key Personnel
We rely heavily on three technicians, Jeff Jensen, Steve Vranyes and Norm
Freedman, to further develop the VCC. In addition, we rely heavily on Trent Wong
and Desmond DosSantos for technical or business development for products of
Singlepoint Systems, Inc. Even though these five employees have incentive stock
options and are subject to standard rules of confidentiality, we cannot
guarantee that they will stay with the Company. If any of these individuals
leave the Company, we would need to hire a comparable employee. We cannot assure
you that we would be able to hire someone quickly and at an affordable salary.
Intellectual Property
We protect our intellectual property rights through a combination of
statutory and common law patent, copyright, trademark and trade secret laws,
customer licensing agreements, employee and third-party non-disclosure
agreements and other methods.
Although we do not own any patents, we believe the VCC will be protected by
two patents that are being reviewed by the U.S. Patent and Trademark Office and
by a patent for hardware that Circle Corporation, a Japanese corporation,
applied for on December 28, 1993. We license the hardware from Circle
Corporation and use it in the VCC. Under our license, we can distribute the
hardware worldwide, except in Japan. The initial term of this license expires on
December 20, 2004.
Although we have taken these precautions to protect our intellectual
property rights, a third party may copy or otherwise obtain or use our products
or technology without our authorization, or develop similar products or
technology independently. Our business would be adversely affected if someone
used or copied our products to any substantial degree. We cannot assure you that
the protection for our intellectual property rights is adequate or that our
competitors will not independently develop similar products.
We require our consultants and developers to assign to us their rights in
any materials they provide to or make for us. We also ask their assurance that
if we use any of their materials in our products we will not violate the rights
of third parties. Based on these assurances and our relationships with our
consultants and developers, we have no reason to believe that our products
infringe on the proprietary rights of third parties. However, we have not
commissioned an independent investigation to reaffirm the basis for our belief,
and we cannot guarantee that our current or future products will infringe on
their rights. We believe that developers of control systems increasingly may be
subject to such claims as the number of products and competitors in the industry
grows and the functionality of such products in the industry overlaps. Any such
claim, with or without merit, could result in expensive litigation and could
have a material adverse effect on our business.
<PAGE>
Lack of Product Liability Insurance
We may be liable for product liability claims if someone claims that our
products injured a person or business. We do not have product liability
insurance. We cannot assure you we could obtain insurance on commercially
reasonable terms, or at all, or that even if we obtained insurance it would
adequately cover a product liability claim. We are not aware of any pending or
threatened product liability or other legal claim against us. Our business could
be adversely affected if someone brings a product liability or other legal claim
against us.
Year 2000 Issue
Many currently installed computer systems and software are coded to accept
only two-digit entries in the date code fields. These date code fields will need
to accept four-digit entries to distinguish 21st century dates from 20th century
dates. This problem could result in system failures or miscalculations causing
disruptions of business operations (including, among other things, a temporary
inability to process transactions, send invoices or engage in other similar
business activities). As a result, many companies' computer systems and software
will need to be upgraded or replaced in order to comply with year 2000
requirements. The potential global impact of the year 2000 problem is not known,
and, if not corrected in a timely manner, could affect the Company and the U.S.
and world economies generally.
Based on our assessments to date, we believe we will not experience any
material disruption as a result of year 2000 problems with respect to our
products and the third-party systems we use for our internal functions, and, in
any event, we do not anticipate the year 2000 issues we will encounter will be
significantly different than those encountered by other computer hardware and
software manufacturers, including our competitors. For example, if certain
critical third-party providers, such as those providers supplying electricity,
water or telephone service, experience difficulties resulting in disruption of
service to the Company, a shutdown of our operations at individual facilities
could occur for the duration of the disruption. Assuming no major disruption in
service from utility companies or other critical third-party providers, we
believe that we will be able to manage our total year 2000 transition without
any material effect on our results of operations or financial condition. For
additional information, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations-Year 2000 Issue."
