UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 1998 Commission File No. 00019678
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ETS INTERNATIONAL, INC.
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(Exact name of registrant as specified in its charter)
Virginia 54-1414643
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State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
7400 Beaufont Springs Drive, Suite 415, Richmond, VA 23225
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(Address) (Zip Code)
Registrant's telephone number, including area code (804) 272-6600
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(Former name, former address and former fiscal year if
changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months and (2) has been subject to the filing
requirements for the past 90 days.
Yes x No
Indicate the number of shares outstanding of each of the issuer's classes of
stock, as of the close of the period covered by this report.
Class Number of Shares Outstanding
- ------------------------------- --------------------------------
Common Stock 16,492,043
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<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ETS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
June 30, 1998 March 31, 1998
------------- --------------
ASSETS (unaudited) (audited)
- ------
<S> <C> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 224,404 $ 206,750
Accounts receivable:
Trade (net of allowance of $50,000 at June 30, 1998
and March 31, 1998) 2,890,289 2,540,810
Other 14,726 78,936
Costs and estimated earnings in excess of billings
on uncompleted contracts 535,005 563,924
Notes receivable - current 0 200,000
Inventories 777,479 931,590
Prepaid expenses 115,628 143,174
---------- -----------
Total current assets 4,557,531 4,665,184
Property, plant and equipment:
Furniture and fixtures 360,344 345,857
Machinery, tools and equipment 3,921,760 4,027,556
Vehicles 1,323,482 1,373,657
Leasehold improvements 356,572 340,282
---------- -----------
5,962,158 6,087,352
Less accumulated depreciation 3,469,135 3,475,318
---------- -----------
Total property, plant and equipment, net 2,493,023 2,612,034
Other assets:
Restricted cash 600,000 600,000
Franchise agreements 49,291 50,916
Notes receivable from officers 151,040 151,040
Note receivable from sale of ETS, Inc. 99,878 100,000
Cash surrender value of life insurance, net 6,693 6,693
Other assets 15,148 97,338
---------- -----------
Total other assets 922,050 1,005,987
Assets of business transferred under
contractual agreements 244,599 267,666
---------- -----------
Total assets $ 8,217,203 $ 8,550,871
========== ===========
</TABLE>
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<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
June 30, 1998 March 31, 1998
------------- --------------
(unaudited) (audited)
<S> <C> <C> <C> <C> <C> <C>
Current liabilities:
Bank overdraft $ 0 $ 173,493
Notes payable to bank 89,062 89,062
Notes payable to stockholders 510,000 3,410,000
Notes payable to affiliates 522,498 966,159
Current portion of long-term debt 480,543 480,543
Accounts payable 2,151,457 1,846,539
Accrued expenses and other current liabilities 622,019 768,638
---------- -----------
Total current liabilities 4,375,579 7,734,434
Long-term liabilities:
Long-term debt 732,808 907,896
Deferred gain on sale/leaseback 405,744 481,821
Notes payable to stockholders refinanced July 30, 1998 3,250,000 0
Liabilities of business transferred under contractual
arrangements 140,339 140,339
---------- -----------
Total liabilities 8,904,470 9,264,490
Stockholders' equity (deficit):
Preferred stock, no par value, authorized 5,000,000
shares, none issued and outstanding 0 0
Common stock, no par value; authorized 30,000,000
shares; issued and outstanding 16,492,043 shares 6,126,338 6,126,338
Retained earnings (accumulated deficit) (6,620,493) (6,646,845)
Less notes receivable from officers (193,112) (193,112)
---------- -----------
Total stockholders' equity (deficit) (687,267) (713,619)
---------- -----------
Total liabilities and stockholders' equity (deficit) $ 8,217,203 $ 8,550,871
========== ===========
</TABLE>
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<TABLE>
<CAPTION>
ETS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Three months ended
June 30, 1998 June 30, 1997
1998 1997
---- ----
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Contract revenues - commercial $ 4,290,922 $ 5,654,407
Cost of goods and services 3,627,537 4,524,474
----------- -----------
Gross profits 663,385 1,129,933
Selling, general and administrative expenses 833,206 559,724
----------- -----------
Operating income (loss) (169,821) 570,209
Interest income 11,042 4,788
Interest expense (144,347) (259,347)
Gain on sale of Service Division 329,478 0
----------- -----------
Income from continuing operations $ 26,352 $ 315,650
Income from discontinued operations 0 129,641
----------- -----------
Net income $ 26,352 $ 445,291
=========== ===========
Income from continuing operations per common share:
Basic $ .00 $ .02
Diluted $ .00 $ .02
Income from discontinued operations per
common share
Basic $ .00 $ .01
Diluted $ .00 $ .01
Net income per common share:
Basic $ .00 $ .03
Diluted $ .00 $ .03
Average shares of common stock used for above computation:
Basic 16,492,043 13,232,108
Diluted 16,492,043 13,279,039
</TABLE>
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<TABLE>
<CAPTION>
ETS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
THREE MONTHS ENDED JUNE 30, 1998
Retained Notes
Earnings Receivable
Common Stock (Accumulated from
Shares Amount Deficit) Officer Total
------ ------ -------- ------- -----
(unaudited) (unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Balances at March 31, 1998 16,492,043 $ 6,126,338 $ (6,646,845) $ (193,112) $ (713,619)
Net income 26,352 26,352
---------- ---------- ------------ ------------ ------------
Balances at June 30, 1998 16,492,043 $ 6,126,338 $ (6,620,493) $ (193,112) $ (687,267)
========== ========== ============ ============ ============
</TABLE>
5
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<TABLE>
<CAPTION>
ETS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
Three months ended
June 30, 1998 June 30, 1997
------------- -------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income $ 26,352 $ 445,291
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 138,705 457,506
Amortization of convertible debentures discount 0 134,894
Professional services received in exchange for
common stock 0 133,444
Amortization of deferred gain on sale/leaseback (76,077) (76,077)
Gain on sale of Service Division (329,478) 0
Increase/decrease in operating assets and liabilities:
Accounts receivable (185,269) (108,603)
Costs and estimated earnings in excess of billings
on uncompleted contracts 28,919 80,090
Inventories 79,111 133,369
Prepaid expenses 27,546 (408,852)
Accounts payable 304,918 (679,853)
Accrued expenses and other current liabilities (146,619) 355,781
Cash surrender value of life insurance, net 0 (10,999)
Other assets 83,937 (373,013)
----------- -----------
Net cash provided by (used in) operating activities (47,955) 82,978
----------- -----------
Cash flow from investing activities:
Purchases of property, plant and equipment (165,216) (671,069)
Proceeds from sale of Service Division 350,000 0
Notes receivable decrease 200,000 0
Decrease in assets of business transferred under
contractual agreements 23,067 0
----------- -----------
Net cash provided by (used in) investing activities 407,851 (671,069)
----------- -----------
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Cash flows from financing activities:
Bank overdraft (173,493) 0
Principal payments on long-term debt (175,088) (1,306,228)
Notes payable to affiliates decrease (143,661) 0
Proceeds from exercise of stock options 0 51,836
Proceeds from notes payable to stockholder 150,000 1,600,000
----------- -----------
Net cash provided by (used in) financing activities (342,242) 345,608
----------- -----------
Increase (decrease) in cash and cash equivalents 17,654 (242,483)
Cash and cash equivalents at beginning of year 206,750 377,313
----------- -----------
Cash and cash equivalents at end of period $ 224,404 $ 134,830
=========== ===========
</TABLE>
Supplemental disclosures of cash flow information and noncash investing
activities: Interest paid on notes payable and long-term debt was $54,347 and
$60,347 for the three months ended June 30, 1998 and June 30, 1997 respectively.
7
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ETS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A--BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
as set forth in Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
necessary adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
three months ended June 30, 1998 are not necessarily indicative of the results
that may be expected for the fiscal year ending March 31, 1999. On April 6,
1998, the Company changed its year end from May 31 to March 31.
The accompanying financial statements have been prepared on a going-concern
basis which contemplates the realization of assets and the satisfaction of
liabilities and commitments in the normal course of business. For the three
month period ended June 30, 1998, the Company had cash used in operating
activities of $47,955, and at June 30, 1998, the Company had an accumulated
deficit of $6,620,493 from operations and a stockholders' deficit of $687,267.
These factors, plus significant losses and cash flow deficits from operations in
prior years, indicate that the Company may not be able to continue as a going
concern for a reasonable period of time. The Company's working capital
requirements for the first quarter of fiscal 1999 were met principally through
the proceeds of $350,000 from the sale of the ETSW Service Division, $200,000
payment on notes receivable and $150,000 loan from a shareholder.
Management's plans to continue as a going concern include the following efforts
to generate necessary cash flow to meet the Company's working capital needs: (i)
raising additional capital, (ii) obtaining a line of credit, (iii) increasing
sales of its infrastructure products, systems and services and (iv) continuing
to evaluate and manage costs and expenses and utilizing resources effectively to
increase gross profit and reduce selling and general administrative expenses.
Management has negotiated with certain note holders to convert their debt
to preferred stock (see Note H of Notes to Consolidated Financial Statements)
and is currently in negotiation with lenders to obtain a line of credit to
provide working capital. Management believes it can return the Company to
profitable operations in fiscal 1999. There can be no assurance that
management's negotiations with lenders will be successful or the Company will
have profitable operations in fiscal 1999.
The consolidated financial statements do not include any adjustments related to
the recoverability and classification of recorded asset amounts or the amounts
and classifications of liabilities that might be necessary should the Company be
unable to continue as a going concern.
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NOTE B--PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of ETS
International, Inc. and its wholly-owned subsidiaries, IC Subsidiary, Inc.
(formerly ETS, Inc.) ("ETS"), ETS Analytical Services, Inc. and InfraCorps of
Virginia, Inc. (formerly ETS Water and Waste Management, Inc.) ("ETSW") and its
subsidiary InfraCorps of Florida, Inc. (formerly ETS Liner, Inc.). Significant
intercompany accounts and transactions have been eliminated in consolidation.
NOTE C--EARNINGS PER SHARE
Basic earnings per share have been computed on the basis of weighted-average
number of shares outstanding. Diluted earnings per share included 46,931 shares
related to stock options and warrants for the quarter ended June 30, 1997, due
to their dilutive effect. Diluted earnings per share did not include shares
related to stock options and warrants for the quarter ended June 30, 1998 as
their effect was antidilutive.
NOTE D-RESTRICTED CASH
Restricted cash of $600,000 is included in other assets as it is restricted for
a performance bond relating to the Company's contract with China Steel
Corporation (the "China Steel Contract"). Potential issues have been brought to
current management's attention regarding the budget to meet certain of the
performance specifications of the China Steel Contract and the overall viability
of the LEC technology for wide-scale commercialization. If the limestone
emission control ("LEC") technology does not meet contract specifications, China
Steel Corporation may seek to impose financial penalties or attempt to recover
damages or obtain other relief under the contract, including drawing down on the
$600,000 performance bond posted by the Company. See note E of Notes to
Consolidated Financial Statements for additional information.
NOTE E--DISPOSAL OF ENVIRONMENTAL OPERATIONS SEGMENT
On October 31, 1997, ETS Analytical Services, Inc. ("ETSAS"), a wholly owned
subsidiary of the Company, sold substantially all of its assets in return for a
ten-year 8.5% promissory note in the amount of $1,000,000, which exceeded the
net book value of the assets and liabilities sold. Also, since the risks of
ownership were not transferred to the purchaser, no sale was recognized for
accounting purposes. Accordingly, the assets and liabilities transferred to the
purchaser remain in the noncurrent sections of the balance sheet and are
designated as "assets of business transferred under contractual arrangements"
and "liabilities of business transferred under
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contractual arrangements." At March 31 and June 30, 1998, "assets of business
transferred under contractual arrangements" was stated net of a valuation
allowance of $858,000.
On March 12, 1998, substantially all of the assets and certain liabilities of
ETS, a wholly owned subsidiary of the Company, were sold to ETS Acquisition,
Inc., a newly formed firm based in Roanoke, Virginia. In connection with this
sale, the Company sold a portion of its assets and business relating to the LEC
technology, including patents and licenses, to Christel Clear Technologies, Inc.
("CCTI"), a newly formed firm based in Roanoke, Virginia. The total purchase
price was $1,896,124 for all of the aforementioned. The purchase price was paid
in cash, stock of the Company, assumption of certain liabilities of ETS,
delivery of a $200,000 thirty-day note bearing 8 1/2% interest and delivery of a
ten-year $100,000 note bearing 8 1/2% interest. Also, the Company will receive
50% of all royalties received by CCTI in connection with the license of the LEC
technology. While there is no indication that the LEC will be resold by CCTI,
the agreement further provides that the Company will receive 50% of the net
sales price from a resale of the LEC technology on or before March 12, 1999, and
25% of the net sales price from a resale after March 12, 1999 but on or before
March 12, 2000.
In connection with the foregoing transaction, the Company entered into a
Management Agreement with Air Technologies, Inc. ("ATI"), a newly formed firm
based in Roanoke, Virginia, to provide management services with respect to the
Company's China Steel Contract. ATI and CCTI agreed to accept responsibility for
any potential liabilities associated with the China Steel Contract and to
provide its best effort to have the contract transferred from the Company to
ATI. ETS Acquisition, Inc., CCTI and ATI are owned by three former executive
officers of the Company and former members of the Company's Board of Directors.
If the LEC technology does not meet contract specifications China Steel
Corporation may seek to impose financial penalties or attempt to recover damages
or obtain other relief under the contract, including drawing down on the
$600,000 performance bond posted by the Company. See note D of Notes to
Consolidated Financial Statements above for additional information. See note G
of Notes to Consolidated Financial Statements for additional information.
In connection with the Company's disposal of its environmental operations in
October 1997 and March 1998, income from these discontinued operations has been
reclassified in the consolidated statements of income for the three-month period
ended June 30, 1997. Revenues of $1,865,431 for the quarter ended June 30, 1997
related to the discontinued environmental operations.
NOTE F-- SALE OF SERVICE DIVISION OF ETSW
On April 29, 1998, the Company sold the Service Division of ETSW (e.g., septic
system installation and repair, plumbing, jacuzzi service contracts and
incidental concrete manufacturing/concrete products) to a new corporation formed
by Coleman S. Lyttle, a director of the Company and President of ETSW, for a
total purchase price of $550,000, payable as
10
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follows: $350,000 cash at closing, assumption of certain indebtedness of
the Company and notes payable to the Company in the aggregate amount of
$200,000. Mr. Lyttle will continue to serve as a director of the Company and as
President of ETSW. A gain of $329,478 was recognized on this sale.
NOTE G--CONTINGENT LIABILITIES AND OTHER MATTERS
Management believes that the existing potential liabilities under the China
Steel Contract will make obtaining significant outside capital difficult.
Management is negotiating to obtain a line of credit from a bank. Management
believes that it can return the Company to positive cash flow from operations in
fiscal 1999. There can be no assurance of the extent to which management's
negotiations will be successful or that the Company will generate positive cash
flow from operations in fiscal 1999. See notes D and E of Notes to Consolidated
Financial Statements for additional information.
NOTE H--NOTES PAYABLE TO STOCKHOLDERS REFINANCE JULY 30, 1998
On July 30, 1998, the Company issued 3,250,000 shares of Series A Convertible
Preferred Stock, no par value (the "Series A Convertible Preferred Stock"), to
convert and retire an aggregate of $3,250,000 of Company debt evidenced by
promissory notes of the Company held by certain shareholders. The Company sold
shares of Series A Convertible Preferred Stock to each shareholder, at a price
of $1.00 per share, which was paid by the shareholder's delivery and surrender
to the Company of his promissory note and any security agreements, guarantees or
liens executed by the Company or any of its affiliates in relation to the
promissory note. The details of the transaction and the rights, limitations and
preferences of the holders of the Series A Convertible Preferred Stock are
described in more detail in Item 5 of Part II of this Report.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Forward Looking Statements
From time to time, the Company may publish forward-looking statements
relating to such matters as anticipated financial performance, business
prospects, technological developments, new products, research and development
activities and similar matters. The Private Securities Litigation Reform Act of
1995 provides a safe harbor for forward-looking statements. In order to comply
with the terms of the safe harbor, the Company notes that a variety of factors
could cause the Company's actual results and experience to differ materially
from the anticipated results or other expectations expressed in the Company's
forward-looking statements. The risks and uncertainties that could significantly
affect the operations, performance, development and results of the Company's
business include, but are not limited to, the following: (i) changes in
11
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legislative enforcement and direction, (ii) unusually bad or extreme weather
conditions, (iii) unanticipated delays in contract execution, (iv) project
delays or changes in project costs; (v) unanticipated changes in operating
expenses and capital expenditures, (vi) sudden loss of key personnel, (vii)
abrupt changes in competition or the political or economic climate, and (viii)
abrupt changes in market opportunities.
Going Concern
The accompanying financial statements have been prepared on a going-concern
basis which contemplates the realization of assets and the satisfaction of
liabilities and commitments in the normal course of business. For the three
month period ended June 30, 1998, the Company had cash used in operating
activities of $47,955, and at June 30, 1998, the Company had an accumulated
deficit of $6,620,493 from operations and a stockholders' deficit of $687,267.
These factors, plus significant losses and cash flow deficits from
operations in prior years, indicate that the Company may not be able to continue
as a going concern for a reasonable period of time. The Company's working
capital requirements for the first quarter of fiscal 1999 were met principally
through the proceeds of $350,000 from the sale of the ETSW Service Division,
$200,000 payment on notes receivable and $150,000 loan from a shareholder.
Management's plans to continue as a going concern include the following
efforts to generate necessary cash flow to meet the Company's working capital
needs: (i) raising additional capital, (ii) obtaining a line of credit, (iii)
increasing sales of its infrastructure products, systems and services and (iv)
continuing to evaluate and manage costs and expenses and utilizing resources
effectively to increase gross profit and reduce selling and general
administrative expenses.
Management has negotiated with certain note holders to convert their debt
to preferred stock (see Note H of Notes to the Consolidated Financial
Statements) and is currently in negotiation with lenders to obtain a line of
credit to provide working capital. Management believes it can return the Company
to profitable operations in fiscal 1999. There can be no assurance that
management's negotiations with lenders will be successful or the Company will
have profitable operations in fiscal 1999.
The consolidated financial statements do not include any adjustments
related to the recoverability and classification of recorded asset amounts or
the amounts and classifications of liabilities that might be necessary should
the Company be unable to continue as a going concern.
Recent Events
On March 12, 1998, substantially all of the assets of ETS, a wholly owned
subsidiary of the Company, were sold to ETS Acquisition, Inc., a newly formed
firm based in Roanoke, Virginia. In connection with this sale, the Company sold
a portion of its assets and business
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relating to the LEC technology, including patents and licenses, to CCTI, a newly
formed firm based in Roanoke, Virginia. In connection with the foregoing
transaction, the Company entered into a Management Agreement with ATI, a newly
formed firm based in Roanoke, Virginia, to provide management services with
respect to the Company's contract with China Steel Corporation. ATI and CCTI
agreed to accept responsibility for any potential liabilities associated with
the China Steel Contract and to provide its best effort to have the contract
transferred from the Company to ATI. ETS Acquisition, Inc., CCTI and ATI are
owned by three former executive officers of the Company or ETS and former
members of the Company's Board of Directors.
The Board of Directors of the Company is continuing to review the financial
and other aspects of the LEC technology that is being developed for the China
Steel Contract. This review was undertaken after potential issues were brought
to current management's attention regarding the budget to meet certain of the
performance specifications of the China Steel Contract and the overall viability
of the LEC technology for wide-scale commercialization. If the LEC technology
does not meet contract specifications, China Steel Corporation may seek to
impose financial penalties or attempt to recover damages or obtain other relief
under the contract, including drawing down on the $600,000 performance bond
posted by the Company.
The Company has continued to undertake cost cutting measures and is
continuing to seek additional capital. On April 29, 1998, the Company sold the
Service Division of ETSW (e.g., septic system installation and repair, plumbing,
jacuzzi service contracts and incidental concrete manufacturing/concrete
products) to a new corporation formed by Coleman S. Lyttle, a director of the
Company and President of ETSW, for a total purchase price of $550,000, payable
as follows: $350,000 cash at closing, assumption of certain indebtedness of the
Company and notes payable to the Company in the aggregate amount of $200,000.
Mr. Lyttle continues to serve as a director of the Company and as President of
ETSW. A gain of $329,478 was recognized on this sale.
On July 30, 1998, the Company issued 3,250,000 shares of Series A
Convertible Preferred Stock to convert and retire an aggregate of $3,250,000 of
Company debt evidenced by promissory notes of the Company held by certain
shareholders. The Company sold shares of Series A Convertible Preferred Stock to
each shareholder, at a price of $1.00 per share, which was paid by the
shareholder's delivery and surrender to the Company of his promissory note and
any security agreements, guarantees or liens executed by the Company or any of
its affiliates in relation to the promissory note. The details of the
transaction and the rights, limitations and preferences of the holders of the
Series A Convertible Preferred Stock are described in more detail in Item 5 of
Part II of this Report.
13
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Results of Operations
Three months ended June 30, 1998 compared to three months ended June 30, 1997
Substantially all of the assets and certain liabilities relating to the
Company's environmental operations have been sold and revenues from
environmental operations have been removed from continuing operations for the
three-month period ended June 30, 1997. Revenues for the three-month period
ended June 30, 1998 (the "first quarter of fiscal 1999") were $4,290,922
compared to $5,654,407 for the three-month period ended June 30, 1997, resulting
in a 24% decrease in revenues. This decrease largely was the result of slowness
in new orders in previous quarters, inclement weather and the sale of the
Service Division of ETSW.
Cost of goods and services for the first quarter of fiscal 1999 was
$3,627,537 or 85% of sales compared to $4,524,474 or 80% of sales for the
three-month period ended June 30, 1997. Gross profits for the first quarter of
fiscal 1999 were $663,385 or 15% of sales compared to $1,129,933 or 20% of sales
for the three-month period ended June 30, 1997. These decreases in gross profits
were due to the decreases in sales and margins for the period. Selling, general
and administrative expenses were $833,206 for the first quarter of fiscal 1999
or 19.4% of net sales compared to $559,724 or 9.9% of net sales for the
three-month period ended June 30, 1997. The general and administrative expense
increased in the first quarter was due to costs associated with the management
reorganization, as well as the timing of professional services for year-end
reporting.
Gain on sale of $329,478 for the first quarter of fiscal 1999 reflected the
sale of the Service Division of ETSW. Interest expense for the first quarter of
1999 was $144,347 compared to $259,347 for the three-month period ended June 30,
1997. Interest expense reflects interest paid on notes payable and long-term
debt, including credit lines, amortization of discount associated with the
convertible debentures and capital leases.
Income from continuing operations for the first quarter of fiscal 1999 was
$26,352 compared to income of $315,650 for the three-month period ended June 30,
1997. Discontinued operations include environmental operations which were sold
in October 1997 and March 1998. Income from discontinued operations was $129,641
for the three-month period ended June 30, 1997. Revenues of $1,865,431 for the
quarter ended June 30, 1997 related to the discontinued environmental
operations.
Net income for the first quarter of fiscal 1999 was $26,352 compared to net
income of $445,291 for the three-month period ended June 30, 1997.
14
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Liquidity And Capital Resources As Of June 30, 1998
The Company continues to be cash deficient. For the three-month period
ended June 30, 1998, the Company had cash used in operating activities of
$47,955, and at June 30, 1998, the Company had an accumulated deficit of
$6,620,493 from operations and a stockholders' deficit of $687,267. See
discussion under "Going Concern" above.
During fiscal 1998, ETSI concluded that it was in the Company's best
interest to de-emphasize its environmental products and services and to focus on
its construction operations, particularly with respect to the installation and
rehabilitation of subsurface pipelines for the transmission of water, waste and
natural gas. Management currently is negotiating to obtain a line of credit.
Management's success in this regards will, to a large extent, depend upon
whether ETSI is able to accomplish the assignment without recourse of the China
Steel Contract to ATI. While negotiations with China Steel Corporation are
on-going, there can be no assurance that such negotiations will be successful or
that the Company will find sufficient sources of outside capital to support its
future operations. See Note E of Notes to Consolidated Financial Statements.
Effective May 1, 1998, the Company restructured its credit facility with
Thomas W. Marmon, a former director and a large shareholder of the Company. The
new note for the credit facility, which in part is a renewal of the previous
note, permitted total aggregate borrowings by ETSI of up to $3.5 million. The
new note provided for monthly interest payments at a rate of 10% until the
credit facility's maturity at May 1, 1999 and 12% thereafter and was subject to
call by the holder upon sixty days written notice. The new note was secured by
the assets of ETSI and its subsidiaries. Subsequent to the end of the first
quarter of fiscal 1999, Mr. Marmon's debt was retired through the issuance of
2,500,000 shares of Series A Convertible Preferred Stock of the Company and a
cash payment of $696,655. The Company financed the cash payment through an
existing shareholder by delivery of a promissory note secured by the assets of
the Company. The note, which pays interest monthly at 12%, matures on October
31, 1998.
On April 28, 1998, ETSI sold the Service Division of ETSW (e.g., septic
system installation and repair, irrigation, plumbing, jacuzzi service contracts
and incidental concrete manufacturing/concrete products) to a new corporation
formed by Coleman S. Lyttle, a director of ETSI and President of ETSW, for a
total purchase price of $550,000, payable as follows: $350,000 cash at closing,
assumption of certain indebtedness of ETSW and notes payable to ETSW in the
aggregate amount of $200,000. A gain of $329,478 was recognized on the sale.
Major components of cash flows used in operating activities include an
increase in accounts payable of $304,918, an increase in accounts receivable of
$185,269 and a decrease in accrued expenses and other current liabilities of
$146,619. Adjustments to net cash flows are gain on the sale of the Service
Division of $329,478, depreciation and amortization of $138,705 and amortization
of deferred gain on sale/leaseback of $76,077.
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Net cash provided by investing activities of $407,851 consisted mainly of
purchase of property, plant and equipment in the amount of $165,216, proceeds
from sale of Service Division of $350,000 and decrease in notes receivable of
$200,000. The net cash used in financing activities of $342,242 includes in part
proceeds from notes payable to stockholder of $150,000, payment of debt
principal of $175,088, decrease in notes payable to affiliates of $143,661 and
decrease in bank overdraft of $173,493. The cash and cash equivalents at June
30, 1998 were $224,404.
New orders received for the first quarter of fiscal 1999 were $13,110,273
compared to $6,439,162 for the three months ended June 30, 1997. New orders were
up in the first quarter as a result of strong construction activity during this
period. Backlog at June 30, 1998 was $14,317,556 compared to $5,586,611 at June
30, 1997.
Year 2000
ETSI has contacted its software vendors about upgrading its computer
systems and applications to be Year 2000 compliant. ETSI expects conversion and
testing to be completed during fiscal 1999. There were no expenditures during
the three-month period ended June 30, 1998 related to the Year 2000 upgrades
and, based on estimates provided by software vendors, the cost of making the
systems and applications Year 2000 compliant are not currently expected to be
significant to the consolidated financial statements.
See discussion under "Recent Events" regarding retirement of debt and
issuance of Series A Convertible Preferred Stock.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
A lawsuit was served on ETS Analytical Services, Inc. ("ETSAS") on or about
March 18, 1998 and filed in the Circuit Court for Chesterfield County under the
caption, Steven R. Pond v. ETS Analytical Services, Inc., Case No.
041CL98000254-00 (Circuit Court for Chesterfield County). In this lawsuit,
Steven R. Pond ("Pond"), a former employee of ETSAS and the owner of premises
leased to ETSAS, has asserted that ETSAS has breached its obligations under the
lease by failing to make certain monthly payments, including late fees and
interest, as well as by causing or permitting "physical damages and waste upon
the premises." Pond is seeking judgment against ETSAS "in the sum of $129,189.85
for accelerated rent, together with accrued late fees in the amount of
$4,579.79; compensatory damages in the amount of $1,000.00, plus the costs of
remediation and all damages, costs, liability or expense arising from or related
to environmental contamination or environmental degradation of the [p]remises;
prejudgment interest at the rate of 1.00%; together with the costs of this
action and award of attorney's fees and costs." On April 8, 1998, ETSAS filed a
Special Plea, Grounds of Defense, and
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Counterclaim, in which ETSAS asserted that it is entitled to a set-off of any
monies allegedly due and owing under the lease by virtue of Pond's indebtedness
to ETSAS, in the amount of approximately $60,000, under a promissory note. ETSAS
intends to defend the lawsuit vigorously. It is not possible at this stage,
however, to determine the likelihood of an unfavorable outcome in the case or an
estimate of the range of potential loss.
Item 2. Changes in Securities.
On July 30, 1998, the Company issued 3,250,00 shares of Series A
Convertible Stock to five shareholders to convert and retire an aggregate of
$3,250,000 of Company debt. The Series A Convertible Preferred Stock generally
is senior to the common stock of the Company with respect to the payment of
dividends and upon liquidation. The shares of Series A Convertible Preferred
Stock were issued pursuant to a private placement exempt under Section 4(2) of
the Securities Act of 1933. See discussion under Item 5 below for a description
of the offering and of the rights, limitations and preferences of Series A
Preferred Stock.
Item 3. Defaults upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security-Holders.
None
Item 5. Other Information.
The following summary is unqualified in its entirety by reference to the
Agreement for the Purchase of Series A Convertible Preferred Stock and for the
Conversion of Certain Promissory Notes dated July 30, 1998, a copy of which is
attached to this Report as Exhibit 10.
On July 30, 1998, the Company issued 3,250,000 shares of Series A
Convertible Preferred Stock to convert and retire an aggregate of $3,250,000 of
Company debt evidenced by promissory notes of the Company held by certain
shareholders (the "Purchasers"). The Purchasers purchased, at a price of $1.00
per share, shares of Series A Convertible Preferred Stock as follows: (i)
500,000 shares purchased by Dr. Allen Kahn for delivery of promissory notes
dated September 5, 1997 and October 30, 1997 and other obligations, having an
aggregate outstanding balance of $500,000; (ii) 100,000 shares purchased by
Coleman S. Lyttle for delivery of promissory note dated January 1, 1998, having
an outstanding balance of $100,000; (iii) 2,500,000 shares purchased by Thomas
W. Marmon Trust for delivery of promissory notes dated May 1, 1998, having a
combined outstanding balance of $2,500,000; (iv) 50,000 shares purchased by Lee
A. Raver for delivery of promissory note dated December 16, 1997, having an
outstanding balance of $50,000; and (v) 100,000 shares purchased by Navin D.
Sheth for delivery of promissory note dated November 5, 1997, having an
outstanding balance of $100,000. Each Purchaser delivered and surrendered his or
its original promissory note and released the Company from any obligation, claim
or liability referenced or evidenced by the
17
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promissory note and any security agreement, guarantee or lien executed by the
Company or any affiliate in relation to the obligation, claim or liability
evidenced by the promissory note.
The Series A Convertible Preferred Stock will vote together with all other
classes and series of stock of the Company, as a single class, on all actions to
be taken by shareholders of the Company, including, but not limited to, actions
amending the Articles of Incorporation to increase the number of authorized
shares of common stock. Each share of Series A Convertible Preferred Stock
entitles the holder to such number of votes per share equal to the number of
shares of common stock into which each share of Series A Convertible Preferred
Stock is then convertible. The Company may not, without the approval of the
holders of at least two-thirds of the Series A Convertible Preferred Stock,
increase the maximum number of directors constituting the Board of Directors to
a number in excess of ten. The holders of the Series A Convertible Preferred
Stock are entitled to elect, as directors to the Company, the holders of the two
largest amounts of shares of Series A Convertible Preferred Stock outstanding at
the time of the election, or their designated representative. A vacancy in any
directorship elected by the holders of Series A Convertible Preferred Stock can
be filled only by the holders of the Series A Convertible Preferred Stock. The
holders of Series A Convertible Preferred Stock are entitled to receive, when
and if declared by the Board of Directors, quarterly dividends at a rate per
annum of $.04 per share, as adjusted for stock splits dividends and
recapitalizations (the "Series A Accruing Dividends"). The Series A Accruing
Dividends shall accrue from day to day, whether or not earned or declared, and
shall be cumulative, and shall be payable (i) on the day, if, as and when
determined by the Board of Directors or (ii) on the liquidation, distribution or
winding up of the Company.
Upon any liquidation, dissolution or winding up of the Company, whether
voluntary or involuntary, the holders of the shares of Series A Convertible
Preferred Stock will be entitled, before any distribution or payment is made
upon the common stock or any other stock ranking on liquidation junior to the
Series A Convertible Preferred Stock, to be paid in an amount equal to the
greater of (i) $1.00 per share, plus, in the case of each share, an amount equal
to all Series A Accruing Dividends unpaid thereon and any other dividends
declared but unpaid thereon, or (ii) such amount per share as would have been
payable had each such share been converted to common stock immediately prior to
such liquidation, dissolution or winding up. If upon such liquidation,
dissolution or winding up of the Company, the assets to be distributed among the
holders of Series A Convertible Preferred Stock are insufficient to permit
payment to the holders of the Series A Convertible Preferred Stock of the amount
distributable as described above, then the entire assets of the Company to be so
distributed shall be distributed among the holders of the Series A Convertible
Preferred Stock. Upon any such liquidation, dissolution or winding up of the
Company, after the holders of the Series A Convertible Preferred Stock have been
paid in full the amounts to which they are entitled, the remaining net assets of
the Company may be distributed to the holders of common stock and other stock
ranking on liquidation junior to the Series A Convertible Preferred Stock.
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<PAGE>
At any time when shares of Series A Convertible Preferred Stock are
outstanding, the Company cannot, without approval of the holders of at least
two-thirds of the then outstanding shares of Series A Convertible Preferred
Stock, (i) consent to any liquidation, dissolution or winding up of the Company
or sell, lease, abandon, transfer or otherwise dispose of all or substantially
all of its assets; (ii) consent to the consolidation or merger of the Company
with any entity in which the Company is not the surviving entity; (iii) with
certain exceptions, purchase or set aside any sums for the purchase of, or pay
any dividend or make any distribution on, any shares of stock other than the
Series A Convertible Preferred Stock; (iv) redeem or otherwise acquire any
shares of Series A Convertible Preferred Stock, except as otherwise authorized
or pursuant to a purchase offer made pro rata to all holders of shares of Series
A Convertible Preferred Stock.
The holder of any shares of Series A Convertible Preferred Stock has the
right, at its option at any time, to convert any such shares of Series A
Convertible Preferred Stock (except that upon liquidation of the Company the
right of conversion shall terminate at the close of business on the business day
fixed for the payment of the amount distributable on the Series A Convertible
Preferred Stock) into such number of fully paid and nonassessable shares of
common stock as is obtained by (i) multiplying the number of shares of Series A
Convertible Preferred Stock to be converted by $1.00 and (ii) dividing the
result by the conversion price of $1.00 per share or, in case an adjustment of
the price has taken place, then by the conversion price as last adjusted and in
effect at the date the shares are surrendered for conversion (the "Series A
Conversion Price").
If at any time the Company effects a firm commitment underwritten public
offering of shares of common stock in which (i) the price paid by the public for
such shares is at least two times the Series A Conversion Price per share and
(ii) the aggregate value of the shares of common stock issuable upon conversion
of each share of Series A Convertible Preferred Stock is at least $5,000,000,
then effective upon closing of the sale of such shares by the Company pursuant
to the public offering, all outstanding shares of Series A Convertible Preferred
Stock will automatically convert into shares of common stock.
If on July 29, 2003, any shares of Series A Convertible Preferred Stock are
outstanding, the Company has the right to redeem (unless other prevented by law)
all, but not less than all, of such outstanding shares at a redemption price per
share equal to the greater of (i) $1.00 per share plus, in the case of each
share, an amount equal to all unpaid dividends (including Series A Accruing
Dividends), or (ii) the fair market value of the Series A Convertible Preferred
Stock as determined by a qualified organization selected by the holders of at
least two-thirds of the outstanding Series A Convertible Preferred Stock and
approved and retained by the Company. Any shares of Series A Convertible
Preferred Stock redeemed pursuant to these provisions or otherwise acquired by
the Company in any manner will be canceled and will not in any circumstances be
reissued.
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Item 6. Exhibits and Reports on Form 8-K.
(A) Exhibits
10 Agreement for the Purchase of Series A Convertible
Preferred Stock and for the Conversion of Certain
Promissory Notes dated July 30, 1998
27 Financial Data Schedule
(B) Reports on Form 8-K
Report on Form 8-K dated April 6, 1998 reporting a change in
the Company's fiscal year-end.
20
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SIGNATURES
Pursuant to the requirements 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.
ETS INTERNATIONAL, INC.
DATE August 14, 1998 BY: s/James B. Quarles
---------------------------
James B. Quarles
Chairman and President
DATE August 14, 1998 BY: s/Warren E. Beam, Jr.
---------------------------
Warren E. Beam, Jr.
Secretary and Controller
21
Exhibit 10
ETS INTERNATIONAL, INC.
D/B/A INFRACORPS, INC.
-------------------------------------------
AGREEMENT
FOR THE PURCHASE OF
SERIES A CONVERTIBLE PREFERRED STOCK
AND FOR THE
CONVERSION OF CERTAIN PROMISSORY NOTES
-------------------------------------------
July 30, 1998
<PAGE>
AGREEMENT FOR THE
PURCHASE OF SERIES A CONVERTIBLE PREFERRED STOCK
AND FOR THE
CONVERSION OF CERTAIN PROMISSORY NOTES
This AGREEMENT FOR THE PURCHASE OF SERIES A CONVERTIBLE
PREFERRED STOCK AND THE CONVERSION OF CERTAIN PROMISSORY NOTES
(the "Agreement") is entered into as of the 30th day of July, 1998 by and among
ETS INTERNATIONAL, INC., a Virginia corporation (the "Company"), and DR. ALLEN
KAHN TRUST, DR. ALLEN KAHN, TRUSTEE, a resident of the State of Illinois,
COLEMAN S. LYTTLE, a resident of the Commonwealth of Virginia, THOMAS W. MARMON
TRUST, THOMAS W. MARMON, TRUSTEE, a Trust domiciled in the State of Michigan,
LEE A. RAVER, a resident of the Commonwealth of Virginia, and NAVIN D. SHETH, a
resident of the Commonwealth of Virginia (hereinafter collectively referred to
as the "Purchasers" and each individually as a "Purchaser").
WHEREAS, the Company desires to enter into this Agreement with the
Purchasers to convert certain Promissory Notes of the Company held by the
Purchasers, as described below, and to issue upon the conversion of such
Promissory Notes shares of its Series A Convertible Preferred Stock (as
hereinafter defined) to the Purchasers; and
WHEREAS, the Purchasers desire to enter into this Agreement to convert
their Promissory Notes into shares of Series A Convertible Preferred Stock of
the Company on the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the mutual promises, representations,
warranties, covenants and conditions set forth in this Agreement, the parties to
this Agreement mutually agree as follows:
1. Authorization and Sale.
1.1 Authorization. The Company has authorized, or will, prior to the
closing hereunder, authorize, the issuance and sale of up to an aggregate of
3,250,000 shares (the "Shares") of its Series A Convertible Preferred Stock, no
par value (the "Series A Convertible Preferred Stock"), having substantially the
rights, preferences, privileges and restrictions set forth in the Company's
Articles of Amendment to Articles of Incorporation, in substantially the form
attached hereto as Exhibit A (the "Articles").
1.2 Sale. Subject to the terms and conditions of this Agreement,
each of the Purchasers agrees to purchase from the Company and the Company
agrees to sell and issue to each of the Purchasers the number of Shares
specified opposite such Purchaser's name on the Schedule of Purchasers attached
hereto as Schedule 1.2 at the purchase price of $1.00 per share and the parties
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<PAGE>
hereto agree that the fair market value of the Shares is $1.00 per share. The
sale of the Shares to each Purchaser will constitute a separate sale hereunder.
2. Purchase and Delivery.
2.1 Purchase. Each Purchaser shall deliver and surrender his or its
original Promissory Note(s) and shall release the Corporation from any
obligation, claim or liability referenced or evidenced by the Promissory Note
and any security agreement, guarantee or lien executed by the Corporation or any
affiliate thereof in relation to the obligation, claim or liability evidenced by
such promissory note. Upon delivery of the Promissory Note(s) by each Purchaser,
the outstanding principal balance and any accrued but unpaid interest as of the
date of this Agreement shall be deemed paid in full and fully satisfied. Each
Purchaser shall purchase his or its shares of the Shares as follows:
(a) Dr. Allen Kahn shall deliver the original certain
promissory note dated October 30, 1997 in the original principal amount of
$100,000 marked "Paid in Full"; that certain promissory note dated September 5,
1997 in the original principal amount of $300,000, and that certain outstanding
obligation in the original principal amount of $100,000 marked "Paid in Full";
(b) Coleman S. Lyttle shall deliver the original certain
promissory note dated January 1, 1998 in the original principal amount of
$100,000 marked "Paid in Full";
(c) Thomas W. Marmon Trust, Thomas W. Marmon, Trustee, shall
deliver (i) the original certain promissory note dated May 1, 1998 marked "Paid
in Full" in the original principal amount of 3,500,000, (ii) the original
certain promissory note dated May 1, 1998 marked "Paid in Full" in the original
principal amount of 364,346.30, and (iii) the original certain promissory note
dated May 1, 1998 marked "Paid in Full" in the original principal amount of
203,241.64 with a combined current outstanding principal balance of $2,180,346
and accrued interest of $319,654 for a total amount due under such promissory
note of $2,500,000, the delivery of such promissory note shall be contingent
upon the payment by the Corporation of the amount due to the Thomas W. Marmon
Trust under Section 5.1 hereof;
(d) Lee A. Raver shall deliver the original certain promissory
note dated December 16, 1997 in the original principal amount of $50,000 marked
"Paid in Full" ; and,
(e) Navin D. Sheth shall deliver that certain promissory note
dated November 5, 1997 in the original principal amount of $100,000 marked "Paid
in Full".
2.2 Delivery. At the Closing, subject to the terms and conditions
hereof, the Company will deliver to the Purchasers purchasing Shares
certificates, in such denominations and registered in such name or names as
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<PAGE>
such Purchasers may designate by notice to the Company (provided that no
such designation shall result in any person or entity other than a Purchaser
being a beneficial owner of Shares), representing the Shares to be purchased by
such Purchasers from the Company at the Closing.
3. Representations and Warranties of the Company. The Company hereby
represents and warrants to each Purchaser as follows:
3.1 Organization and Standing. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the
Commonwealth of Virginia, has all requisite corporate power and authority to own
and operate its properties and assets and to carry on its business as now
conducted and as currently proposed to be conducted. The Company is duly
qualified and authorized to do business, and is in good standing as a foreign
corporation, in each jurisdiction where the failure to be so qualified could
reasonably be expected to have a material adverse effect on the business, any
material asset or financial condition of the Company.
3.2 Capitalization. The authorized capital of the Company,
immediately prior to the initial Closing, will consist of:
(a) Preferred Stock: 5,000,000 shares of Preferred Stock, no
par value, 3,250,000 of which have been designated Series A Convertible
Preferred Stock, none of which are issued and outstanding.
(b) Common Stock: 30,000,000 shares of Common Stock, no par
value, of which 16,492,043 shares are issued and outstanding. All of the
outstanding shares of Common Stock have been duly authorized and validly issued,
are fully paid and nonassessable and were issued in compliance with all
applicable federal and state securities laws. As of the date of the Closing, the
Company shall have duly and validly reserved (i) the Shares for issuance
hereunder, (ii) 3,250,000 shares of Common Stock for issuance upon conversion of
the Shares, (iii) 1,000,000 additional shares of Common Stock for issuance under
the Company's 1997 Non-Statutory Stock Option Plan, such reservation shall be in
addition to the outstanding options for 3,475,200 shares of Common Stock under
the Company's various stock option plans (collectively, the "Common Options")
outstanding and, (iv) and 1,770,875 shares of Common Stock for issuance upon the
exercise of certain warrants issued by the Company (the "Warrants"). Except for
the Common Options, the Warrant, and the conversion rights of the Series A
Preferred Stock created under this Agreement and the Rights Agreement, there are
no outstanding rights of first refusal, preemptive rights or other rights,
options, warrants, conversion rights or other agreements, either directly or
indirectly, for the purchase or acquisition from the Company of any shares of
its capital stock.
3.3 Authorization. All corporate action on the part of the Company
and its officers, directors and stockholders necessary for the authorization,
execution and delivery of this Agreement, the Registration Rights Agreement in
substantially the form attached hereto as Exhibit B (the "Rights Agreement")
4
<PAGE>
and the Investor Rights Agreement in substantially the form attached hereto
as Exhibit C (the "Investor Agreement"), the performance of all the Company's
obligations hereunder and thereunder, and the authorization, issuance, sale and
delivery of the Shares and the Common Stock issuable upon conversion thereof
(the "Underlying Common Stock") has been taken or will be taken prior to the
Closing. This Agreement, the Rights Agreement and the Investor Agreement, when
executed and delivered by the Company and the parties hereto and thereto shall
constitute valid and legally binding obligations of the Company enforceable in
accordance with their terms, subject to laws of general application relating to
bankruptcy, insolvency and the relief of debtors, rules and laws governing
specific performance, injunctive relief and other equitable remedies and, with
respect to the indemnification agreements set forth in the Rights Agreement and
this Agreement, principles of public policy.
3.5 Validity of the Shares. The sale of the Shares and the
subsequent conversion of the Shares into the Underlying Common Stock are not and
will not be subject to any preemptive rights, rights of first refusal or other
preferential rights that have not been waived, and the Shares when issued, sold
and delivered in accordance with the terms of this Agreement and the Underlying
Common Stock when issued upon conversion of the Shares in accordance with the
Articles will be validly issued, fully paid and nonassessable and will be free
of any liens or encumbrances not caused by action of the Purchasers; provided,
however, that the Shares and the Underlying Common Stock may be subject to
restrictions on transfer under state and/or federal securities laws as set forth
herein or in the Rights Agreement or the Investor Agreement.
3.6 Offering. Assuming the accuracy of the representations and
warranties of the Purchasers contained in Section 4 hereof, the offer, issuance
and sale of the Shares are and will be exempt from the registration and
prospectus delivery requirements of the Securities Act of 1933, as amended (the
"1933 Act"), and have been registered or qualified (or are exempt from
registration and qualification) under the registration, permit or qualification
requirements of all applicable state securities laws.
3.7 Finders' Fees. The Company (a) represents and warrants that it
has retained no finder or broker in connection with the transactions
contemplated by this Agreement, and (b) hereby agrees to indemnify and to hold
each Purchaser harmless of and from any liability for any commission or
compensation in the nature of a finder's fee to any broker or other person or
firm (and the costs and expenses of defending against such liability or asserted
liability) for which the Company or any of its employees or representatives is
responsible.
4. Representations and Warranties of the Purchasers. Each Purchaser,
severally, but not jointly, hereby represents and warrants to the Company as
follows:
4.1 Power and Authority. It has the requisite power and authority to
enter into this Agreement, the Rights Agreement and the Investor Agreement and
to purchase the Shares and to carry out and perform its obligations under the
terms of this Agreement, the Rights Agreement and the Investor Agreement.
5
<PAGE>
4.2 Due Execution. This Agreement has been duly authorized, executed
and delivered by it, and, upon due execution and delivery by the Company, this
Agreement, the Rights Agreement and the Investor Agreement will each be a valid
and binding agreement of it, subject to laws of general application relating to
bankruptcy, insolvency and the relief of debtors, rules and laws governing
specific performance, injunctive relief and other equitable remedies and, with
respect to the indemnification agreements set forth in this Agreement or the
Rights Agreement and this Agreement, principles of public policy.
4.3 Investment Representations.
(a) This Agreement is made with the Purchaser in reliance upon
the Purchaser's representation to the Company, which by his or its acceptance
hereof the Purchaser hereby confirms, that the Shares to be received by him or
it will be acquired for investment for his or its own account, not as a nominee
or agent, and not with a view to the sale or distribution of any part thereof,
and that he or it has no present intention of selling, granting participation
in, or otherwise distributing the same, but subject nevertheless to any
requirement of law that the disposition of his or its property shall at all
times be within his or its control. By executing this Agreement, the Purchaser
further represents that he or it does not have any contract, undertaking,
agreement, or arrangement with any person to sell, transfer or grant
participations to such person, or to any third person, with respect to any of
the Shares or any Underlying Common Stock.
(b) The Purchaser understands that the Shares have not been
registered under the 1933 Act on the grounds that the sale provided for in this
Agreement and the issuance of securities hereunder is exempt from registration
under the 1933 Act, and that the Company's reliance on such exemption is
predicated in part upon the Purchaser's representations and warranties set forth
herein. The Purchaser realizes that the basis for such exemption may not be
present in the event that, notwithstanding such representations and warranties,
the Purchaser has in mind merely acquiring the Shares for a fixed or determined
period in the future, or for a market rise, or for sale if the market does not
rise. The Purchaser does not have any such intention.
(c) The Purchaser represents that he or it is experienced in
such transactions and is able to fend for himself or itself in the transactions
contemplated by this Agreement, has such knowledge and experience in financial
and business matters as to be capable of evaluating the merits and risks of his
or its investment, and has the ability to bear the economic risks of his or its
investment. The Purchaser further represents that he or it has had access,
during the course of the transactions and prior to his or its purchase of
Shares, to all such information as he or it deemed necessary or appropriate (to
the extent the Company possessed such information or could acquire it without
unreasonable effort or expense) and that he or it has had, during the course of
the transactions and prior to its purchase of Shares, the opportunity to ask
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<PAGE>
ask questions of, and receive answers from, the Company concerning the
terms and conditions of the offering and to obtain additional information (to
the extent the Company possessed such information or could acquire it without
unreasonable effort or expense) necessary to verify the accuracy of any
information furnished to him or it or to which he or it had access.
(d) The Purchaser understands that the Shares may not be sold,
transferred or otherwise disposed of without registration under the 1933 Act and
any applicable state law or regulation requiring the registration or
qualification of securities ("Blue Sky Laws") or an exemption therefrom, and
that in the absence of an effective registration statement covering the Shares
or an available exemption from registration under the 1933 Act and the Blue Sky
Laws, the Shares must be held indefinitely. In particular, the Purchaser is
aware that the Shares may not be sold pursuant to Rule 144 promulgated under the
1933 Act unless all of the conditions of that Rule are met. Among the conditions
for use of Rule 144, with respect to certain sales, is the availability to the
public of current information about the Company. Such information is not now
available to the public and the Company has no present plans to make such
information available to the public. The Purchaser represents that, in the
absence of an effective registration statement covering the it will sell,
transfer or otherwise dispose of the Shares only in a manner consistent with its
representations set forth herein and then only in accordance with the provisions
of the Rights Agreement, the Stockholders Agreement, the Bylaws of the Company
and this Agreement.
(e) The Purchaser agrees that in no event will he or it make a
transfer or disposition of any of the Shares or the Underlying Common Stock
(other than pursuant to an effective registration statement under the 1933 Act),
unless and until (i) the Purchaser shall have notified the Company of the
proposed disposition and shall have furnished the Company with a statement of
the circumstances surrounding the disposition, and (ii) if requested by the
Company, at the expense of the Purchaser or transferee, he or it shall have
furnished to the Company an opinion of counsel, reasonably satisfactory to the
Company, to the effect that such transfer may be made without registration under
the 1933 Act or the Blue Sky Laws.
(f) The Purchaser understands that each stock certificate
representing the Shares will be endorsed with a restrictive legend substantially
as follows:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT"), OR
APPLICABLE STATE SECURITIES LAWS. THESE SECURITIES HAVE BEEN ACQUIRED FOR
INVESTMENT AND NOT WITH A VIEW TO DISTRIBUTION OR RESALE, AND MAY NOT BE
SOLD, MORTGAGED, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED WITHOUT AN
EFFECTIVE REGISTRATION STATEMENT FOR SUCH SECURITIES UNDER THE 1933 ACT
AND ANY APPLICABLE STATE SECURITIES LAWS, OR THE AVAILABILITY OF AN
EXEMPTION FROM THE REGISTRATION PROVISIONS OF THE 1933 ACT AND
APPLICABLE STATE SECURITIES LAWS.
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(g) The Purchaser is an accredited investor, as such term is
defined in Rule 501 promulgated under the 1933 Act. An accredited investor has
individual net worth, or his spouse and he have a combined net worth, in excess
of $1,000,000 or he had individual income (exclusive of any income attributable
to his spouse) of more than $200,000 for each of the past two years or joint
income with his spouse in excess of $300,000 in each of those years. A Trust is
an accredited investor because it has total assets in excess of $5,000,000, was
not formed for the specific purpose of investing in the Shares and its purchase
is directed by a sophisticated person. As used in the foregoing sentence, a
"sophisticated person" is one who has such knowledge and experience in financial
and business matters that he is capable of evaluating the merits and risks of
the prospective investment. Also, a Trust is an accredited investor because it
is a revocable trust which may be amended or revoked at any time by the grantors
thereof, and all of the grantors are accredited investors because they meet the
net worth or income requirements set forth above.
4.4 No Public Market. The Purchaser understands that no public
market now exists for the Shares issued by the Company and that there is no
assurance that a public market will ever exist for the Shares.
4.5 Government Consents. No consent, approval or authorization of or
designation, declaration or filing with any state, federal or foreign
governmental authority on the part of the Purchaser because of any special
characteristic of such Purchaser is required in connection with the valid
execution and delivery of this Agreement, the Rights Agreement, and the
Investors Agreement by the Purchaser, and the consummation by the Purchaser of
the transactions contemplated hereby and thereby; provided, however, that the
Purchaser makes no representations as to compliance with applicable state
securities laws.
4.6 Finders' Fees. The Purchaser (a) represents and warrants that it
has retained no finder or broker in connection with the transactions
contemplated by this Agreement, and (b) hereby agrees to indemnify and to hold
the Company and the other Purchasers harmless of and from any liability for any
commission or compensation in the nature of a finder's fee to any broker or
other person or firm (and the costs and expenses of defending against such
liability or asserted liability) for which such Purchaser or any of its
employees or representatives are responsible.
5. Conditions to Purchasers' Obligations at Closing. The obligations of
the Purchasers to purchase the Shares at a Closing are subject to the
fulfillment on or before such Closing of each of the following conditions:
5.1 Payment of Marmon Obligation. Simultaneously with the
Closing, the Corporation shall pay $696,655.00 to the Thomas W. Marmon Trust,
Thomas W. Marmon Trustee, in full satisfaction of part of the outstanding
obligation of principal due under the promissory note described in Section 2(c).
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5.2 Representations and Warranties. The representations and
warranties of the Company contained in Section 3 shall be true in all material
respects on and as of the Closing.
5.3 Qualifications. All authorizations, approvals or permits, if
any, of any governmental authority or regulatory body of the United States or of
any state that are required prior to and in connection with the lawful issuance
and sale of the Shares pursuant to this Agreement shall have been duly obtained
and shall be effective on and as of the Closing.
5.4 Articles. The Company shall have duly filed with the Clerk of
the State Corporation Commission of the Commonwealth of Virginia the Articles,
which shall be in full force and effect at the Closing.
5.5 Proceedings and Documents. All corporate and other proceedings
in connection with the transactions contemplated at the Closing hereby and all
documents and instruments incident to such transactions shall be reasonably
satisfactory in substance and form to the Purchasers and their counsel, and the
Purchasers and their counsel shall have received all such counterpart originals
or certified or other copies of such documents as they may reasonably request.
5.6 Investors Agreement. The Purchasers and the Company shall have
executed and delivered the Investor Agreement.
5.7 Certificate of Good Standing. There shall have been delivered to
the Purchasers a Certificate of Good Standing for the Company from Clerk of the
State Corporation Commission of the Commonwealth of Virginia, dated within 30
days of the Closing.
5.8 Key Man Insurance. The Company shall purchase and maintain
during the term of his employment a policy of insurance on the life of Mr. James
B. Quarles in the aggregate face amount of $1,000,000 as evidenced by Exhibit E.
5.9 Amended Bylaws. The Bylaws of the Company shall be amended, in
substantially the form attached hereto as Exhibit F.
6. Conditions to the Company's Obligations at Closing. The obligations of
the Company to issue and sell Shares at a Closing are subject to the fulfillment
on or before such Closing of each of the following conditions:
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6.1 Representations and Warranties. The representations and
warranties made by each Purchaser in Section 4 shall be true in all material
respects on and as of the Closing.
6.2 Performance. The Purchasers shall have performed and complied in
all material respects with all agreements and conditions contained in this
Agreement required to be performed or complied with by them on or before the
Closing.
6.3 Qualifications. All authorizations, approvals or permits, if
any, to be obtained from any governmental authority or regulatory body of the
United States or of any state that are required prior to and in connection with
the lawful issuance and sale of the Shares pursuant to this Agreement shall have
been duly obtained and shall be effective on and as of the Closing.
6.4 Legal Investment. At the time of the Closing, the purchase of
the Shares by the Purchasers hereunder shall be legally permitted by all laws
and regulations to which they or the Company are subject.
6.5 Securities Exemptions. Legal counsel for the Company shall have
identified appropriate exemptions and qualifications for all appropriate federal
and state securities laws.
6.6 Articles. The Clerk of the State Corporation Commission of the
Commonwealth of Virginia shall have accepted the Articles for filing, and they
shall be in full force and effect at the Closing.
6.7 Rights Agreement. Each of the Purchasers and Investors shall
have executed and delivered the Rights Agreement.
6.8 Investors Agreement. The Purchasers and the Company shall have
executed and delivered the Investor Agreement.
6.9 Key Man Insurance. The Company shall purchase and maintain
during the term of his employment a policy of insurance on the life of Mr. James
B. Quarles in the aggregate face amount of $1,000,000, evidence of which is
attached hereto as Exhibit E.
6.10 Release of Security Interests. Each of the Purchases shall have
delivered to the Company any and all release and termination agreements,
declarations, or UCC filing statements deemed necessary and appropriate by
counsel to the Company to release and terminate any security interests granted
by the Company to such Purchaser in any assets of the Company.
6.11 Promissory Notes. Each of the Purchasers shall have delivered
to the Company the original promissory notes marked "Paid in Full", such
promissory notes as described in Section 2.1, evidencing the obligation of the
Company to pay such Purchaser certain funds.
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7. Miscellaneous.
7.1 Entire Agreement. This Agreement and the documents referred to
herein constitute the entire agreement among the parties, and no party shall be
liable or bound to any other party in any manner by any warranties,
representations or covenants except as specifically set forth herein or therein.
The terms and conditions of this Agreement shall inure to the benefit of and be
binding upon the successors and assigns of the parties. Nothing in this
Agreement, express or implied, is intended to confer upon any third party any
rights, remedies, obligations or liabilities under or by reason of this
Agreement, except as expressly provided in this Agreement.
7.2 Governing Law. This Agreement shall be governed by and construed
under the laws of the Commonwealth of Virginia as applied to agreements among
Virginia residents, made and to be performed entirely within the Commonwealth of
Virginia.
7.3 Counterparts. This Agreement may be executed 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.
7.4 Headings. The headings used in this Agreement are used for
convenience only and are not to be considered in construing or interpreting this
Agreement.
7.5 Notices. Any notice required or permitted under this Agreement
shall be given in writing and shall be deemed effectively given upon personal
delivery or upon deposit with the United States Post Office, by registered or
certified mail, postage prepaid, or sent by confirmed telecopy, addressed (a) if
to the Company, at
ETS, International, Inc. d/b/a Infracorps, Inc.
7400 Beaufont Springs Drive, Suite 415
Richmond, Virginia 23225
Attention: James B. Quarles
With a copy to:
LeClair Ryan, A Professional Corporation
707 East Main Street, 11th Floor
Richmond, Virginia 23219
Attention: Gary D. LeClair, Esq.
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or at such other address as the Company shall have furnished to the Purchasers
in writing, and (b) if to a Purchaser, at such Purchaser's address as is set
forth on Schedule 1.2 hereto, or at such other address as such Purchaser shall
have furnished to the Company in writing.
7.6 Attorneys' Fees. Should any litigation or arbitration be
commenced between the parties hereto concerning this Agreement, the party
prevailing in such litigation or arbitration shall be entitled, in addition to
such other relief as may be granted, to a reasonable sum for attorneys' fees and
costs in such litigation or arbitration, which fees and costs shall be
determined by the court or arbitrator, as the case may be.
7.7 Survival. The representations and warranties made herein shall
survive any investigation made by any Purchaser and the Closing. All statements
as to factual matters contained in any certificate or other instrument delivered
by or on behalf of the Company pursuant hereto or in connection with the
transactions contemplated hereby shall be deemed to be representations and
warranties made by the Company hereunder as of the date of such certificate or
instrument.
7.8 Severability. Any invalidity, illegality or limitation of the
enforceability with respect to any Purchaser of any one or more of the
provisions of this Agreement, or any part thereof, whether arising by reason of
the law of any such Purchaser's domicile or otherwise, shall in no way affect or
impair the validity, legality or enforceability of this Agreement with respect
to other Purchasers. In case any provision of this Agreement shall be invalid,
illegal or unenforceable, it shall to the extent practicable, be modified so as
to make it valid, legal and enforceable and to retain as nearly as practicable
the intent of the parties, and the validity, legality and enforceability of the
remaining provisions shall not in any way be affected or impaired thereby.
7.9 Delays or Omissions. No delay or omission to exercise any right,
power or remedy accruing to the Company or any Purchaser or any subsequent
holder of any Shares upon any breach, default or noncompliance of any Purchaser,
any subsequent holder of any Shares or the Company under this Agreement or under
the Articles, shall impair any such right, power or remedy, nor shall it be
construed to be a waiver of any such breach, default or noncompliance, or any
acquiescence therein, or of any similar breach, default or noncompliance
thereafter occurring. It is further agreed that any waiver, permit, consent or
approval of any kind or character on the part of the Company or the Purchasers
of any breach, default or noncompliance under this Agreement or under the
Articles or any waiver on the Company's or the Purchasers' part of any
provisions or conditions of this Agreement must be in writing and shall be
effective only to the extent specifically set forth in such writing and that all
remedies, either under this Agreement or the Articles, by law, or otherwise
afforded to the Company and the Purchasers, shall be cumulative and not
alternative.
7.10 Information Confidential. Each Purchaser acknowledges that this
Agreement and all attachments hereto are confidential and for such Purchaser's
use only, and it will refrain from using such information or reproducing,
disclosing or disseminating such information to any other person (other
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than its employees, affiliates, agents or partners having a need to know
the contents of such information and its attorneys), except in connection with
the enforcement of rights under this Agreement, unless the Company has made such
information available to the public generally or it is required by a
governmental body to disclose such information.
7.11 Amendments and Waivers. Any term of this Agreement may be
amended and the observance of any term of this Agreement may be waived (either
generally or in a particular instance, either retroactively or prospectively and
either for a specified period of time or indefinitely) with the written consent
of the Company and Purchasers (or their transferees) holding 66-2/3% of the
outstanding Shares having the rights sought to be amended or waived, voting
together as a single group (treated as if converted at the conversion rate then
in effect and including, for such purposes, shares of Underlying Common Stock
into which any Shares shall have been converted). Any amendment or waiver
effected in accordance with this Section shall be binding upon each Purchaser
and each transferee of the Shares. Upon the effectuation of each such amendment
or waiver, the Company shall promptly give written notice thereof to the
Purchasers (or their transferees) who have not previously consented thereto in
writing.
7.12 Expenses. The Company shall bear the reasonable fees and
expenses of legal counsel of both the Company and each Purchaser with respect to
this Agreement, the Investor Agreement, and the Rights Agreement.
[The remainder of this page intentionally left blank.]
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IN WITNESS WHEREOF, the parties have executed this Series A Convertible
Preferred Stock Purchase Agreement as of the date first above written.
ETS INTERNATIONAL, INC. d/b/a
INFRACORPS, INC.
By: ___________________________________
James B. Quarles, President
PURCHASERS
--------------------------
Dr. Allen Kahn Trust
Dr. Allen Kahn, Trustee
--------------------------
Coleman S. Lyttle
--------------------------
Thomas W. Marmon Trust
Thomas W. Marmon, Trustee
--------------------------
Lee A. Raver
--------------------------
Navin D. Sheth
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SCHEDULE 1.2
List of Purchasers
Dr. Allen Kahn 500,000
Coleman S. Lyttle 100,000
Thomas W. Marmon Trust 2,500,000
Lee A. Raver 50,000
Navin D. Sheth 100,000
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EXHIBIT A
FORM OF ARTICLES OF AMENDMENT TO ARTICLES OF INCORPORATION
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ARTICLES OF AMENDMENT
OF
ETS INTERNATIONAL, INC.
The undersigned corporation hereby submits these Articles of Amendment for
the purpose of amending its Articles of Incorporation to fix the preferences,
limitations and relative rights of a series of its shares:
1. The name of the corporation is ETS International, Inc.
2. The amendment to the Articles of Incorporation of the corporation
attached hereto as Exhibit A was duly adopted by the Board of Directors of the
corporation effective the 30th of July 1998. No Shareholder action was required
for this amendment.
3. These Articles of Amendment will be effective upon filing.
This the 30th day of July 1998.
ETS INTERNATIONAL, INC.
By:______________________________
James B. Quarles, President
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(f). SERIES A CONVERTIBLE PREFERRED STOCK
1. Number of Shares. The series of Preferred Stock designated and known as
"Series A Convertible Preferred Stock" shall consist of 3,250,000 shares.
2. Voting.
2A. General. Except as may be otherwise provided in these terms of
the Series A Convertible Preferred Stock or by law, the Series A Convertible
Preferred Stock shall vote together with all other classes and series of stock
of the Corporation as a single class on all actions to be taken by the
stockholders of the Corporation, including, but not limited to actions amending
the Articles of Incorporation of the Corporation to increase the number of
authorized shares of Common Stock. Each share of Series A Convertible Preferred
Stock shall entitle the holder thereof to such number of votes per share on each
such action as shall equal the number of shares of Common Stock (including
fractions of a share) into which each share of Series A Convertible Preferred
Stock is then convertible.
2B. Board Size. The Corporation shall not, without the written
consent or affirmative vote of the holders of at least two-thirds of the then
outstanding shares of Series A Convertible Preferred Stock given in writing or
by vote at a meeting, consenting or voting (as the case may be) separately as a
series, increase the maximum number of directors constituting the Board of
Directors to a number in excess of ten.
2C. Board Seats.
(i) The holders of the Series A Convertible Preferred Stock,
voting as a separate series, shall be entitled to elect two directors of the
Corporation, subject to the provisions of Article III(c), such directors shall
include the holders of the two largest amounts of shares of Series A Convertible
Preferred Stock, outstanding at the time of the election, or their designated
representative. The holders of a majority of the then outstanding shares of the
Common Stock, voting as a separate class, shall be entitled to elect seven of
the directors of the Corporation, one of whom will be the President of the
Corporation.
(ii) A vacancy in any directorship elected by the holders of
the Series A Convertible Preferred Stock shall be filled only vote or written
consent of the holders of the Series A Convertible Preferred Stock. A vacancy in
any directorship elected by the holders of the Common Stock shall be filled only
by vote or written consent of the holders of the Common Stock.
3. Dividends. Subject to subparagraph 6C, the holders of the Series A
Convertible Preferred Stock shall be entitled to receive, out of funds legally
available therefor, when and if declared by the Board of Directors, quarterly
dividends at the rate per annum of $0.04 per share as adjusted for stock splits,
dividends and recapitalizations (the "Series A Accruing Dividends"). The
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Series A Accruing Dividends shall accrue from day to day, whether or not
earned or declared, and shall be cumulative, and shall payable (i) on the date
if, as and when determined by the Board of Directors or (ii) on the liquidation,
distribution or winding up of the Corporation.
4. Liquidation. Upon any liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, the holders of the shares of
Series A Convertible Preferred Stock shall be entitled, before any distribution
or payment is made upon any stock ranking on liquidation junior to the Series A
Convertible Preferred Stock, to be paid in an amount equal to the greater of (i)
$1.00 per share (as adjusted for stock splits, dividends and recapitalizations,
the "Series A Base Amount") plus, in the case of each share, an amount equal to
all Series A Accruing Dividends unpaid thereon (whether or not declared) and any
other dividends declared but unpaid thereon, computed to the date payment
thereof is made available, or (ii) such amount per share as would have been
payable had each such share been converted to Common Stock pursuant to paragraph
6 immediately prior to such liquidation, dissolution or winding up, and the
holders of Series A Convertible Preferred Stock shall not be entitled to any
further payment (such amount payable with respect to one share of Series A
Convertible Preferred Stock being sometimes referred to as the "Series A
Liquidation Preference Payment" and with respect to all shares of Series A
Convertible Preferred Stock being sometimes referred to as the "Series A
Liquidation Preference Payments"). If upon such liquidation, dissolution or
winding up of the Corporation, whether voluntary or involuntary, the assets to
be distributed among the holders of Series A Convertible Preferred Stock shall
be insufficient to permit payment to the holders of Series A Convertible
Preferred Stock of the amount distributable as aforesaid, then the entire assets
of the Corporation to be so distributed shall be distributed among the holders
of Series A Convertible Preferred Stock. Upon any such liquidation, dissolution
or winding up of the Corporation, after the holders of Series A Convertible
Preferred Stock shall have been paid in full the amounts to which they shall be
entitled, the remaining net assets of the Corporation may be distributed to the
holders of stock ranking on liquidation junior to the Series A Convertible
Preferred Stock. Written notice of such liquidation, dissolution or winding up,
stating a payment date, the amount of the Series A Liquidation Preference
Payments and the place where said Liquidation Preference Payments shall be
payable, shall be delivered in person, mailed by certified or registered mail,
return receipt requested, or sent by facsimile or telex, not less than 20 days
prior to the payment date stated therein, to the holders of record of Series A
Convertible Preferred Stock, such notice to be addressed to each such holder at
its address as shown by the records of the Corporation. The consolidation or
merger of the Corporation into or with any other entity or entities (in which
the Corporation is not the surviving corporation or a merger to reincorporate
the Corporation in a different jurisdiction), and the sale, lease, abandonment,
transfer or other disposition by the Corporation of all or substantially all of
its assets, shall be deemed to be a liquidation, dissolution or winding up of
the Corporation within the meaning of the provisions of this paragraph 4 unless
otherwise agreed to by the holders of at least two-thirds of the issued and
outstanding Series A Convertible Preferred Stock. For purposes hereof, the
Common Stock shall rank on liquidation junior to the Series A Convertible
Preferred Stock.
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5. Restrictions. At any time when shares of Series A Convertible Preferred
Stock are outstanding, except where the vote or written consent of the holders
of a greater number of shares of the Corporation is required by law or by the
Articles of Incorporation, and in addition to any other vote required by law or
the Articles of Incorporation, without the approval of the holders of at least
two-thirds of the then outstanding shares of Series A Convertible Preferred
Stock, given in writing or by vote at a meeting, consenting or voting (as the
case may be) together as a single class, the Corporation will not:
5A. Consent to any liquidation, dissolution or winding up of the
Corporation or sell, lease, abandon, transfer or otherwise dispose of all or
substantially all its assets;
5B. Consent to the consolidation or merger of the Corporation with
any entity in which the Corporation is not the surviving entity;
5C. Purchase or set aside any sums for the purchase of, or pay any
dividend or make any distribution on, any shares of stock other than the Series
A Convertible Preferred Stock, except for dividends or other distributions
payable on the Common Stock solely in the form of additional shares of Common
Stock and except for the purchase of Common Stock from former employees of the
Corporation who acquired such shares directly from the Corporation, if each such
purchase is made pursuant to contractual rights held by the Corporation relating
to the termination of employment of such former employee and the purchase price
does not exceed the original issue price paid by such former employee to the
Corporation for such shares; or
5D. Redeem or otherwise acquire any shares of Series A Convertible
Preferred Stock except as expressly authorized in paragraph 7 hereof or pursuant
to a purchase offer made pro rata to all holders of the shares of Series A
Convertible Preferred Stock on the basis of the aggregate number of outstanding
shares of Series A Convertible Preferred Stock then held by each such holder.
6. Conversion. The holders of shares of Series A Convertible Preferred
Stock shall have the following conversion rights:
6A. Right to Convert. Subject to the terms and conditions of this
paragraph 6, the holder of any share or shares of Series A Convertible Preferred
Stock shall have the right, at its option at any time, to convert any such
shares of Series A Convertible Preferred Stock (except that upon any liquidation
of the Corporation the right of conversion shall terminate at the close of
business on the business day fixed for payment of the amount distributable on
the Series A Convertible Preferred Stock) into such number of fully paid and
nonassessable shares of Common Stock as is obtained by (i) multiplying the
number of shares of Series A Convertible Preferred Stock so to be converted by
$1.00 and (ii) dividing the result by the conversion price of $1.00 per share
or, in case an adjustment of such price has taken place pursuant to the further
provisions of this paragraph 6, then by the conversion price as last adjusted
and in effect at the date any share or shares of Series A Convertible Preferred
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Stock are surrendered for conversion (such price, or such price as last
adjusted, being referred to as the "Series A Conversion Price"). Such rights of
conversion shall be exercised by the holder thereof by giving written notice
that the holder elects to convert a stated number of shares of Series A
Convertible Preferred Stock into Common Stock and by surrender of a certificate
or certificates for the shares so to be converted to the Corporation at its
principal office (or such other office or agency of the Corporation as the
Corporation may designate by notice in writing to the holders of the Series A
Convertible Preferred Stock) at any time during its usual business hours on the
date set forth in such notice, together with a statement of the name or names
(with address or addresses) in which the certificate or certificates for shares
of Common Stock shall be issued.
6B. Issuance of Certificates; Time Conversion Effected. Promptly
after the receipt of the written notice referred to in subparagraph 6A and
surrender of the certificate or certificates for the share or shares of Series A
Convertible Preferred Stock to be converted, the Corporation shall issue and
deliver, or cause to be issued and delivered, to the holder, registered in such
name or names as such holder may direct, a certificate or certificates for the
number of whole shares of Common Stock issuable upon the conversion of such
share or shares of Series A Convertible Preferred Stock. To the extent permitted
by law, such conversion shall be deemed to have been effected and the applicable
Conversion Price shall be determined as of the close of business on the dates on
which such written notice shall have been received by the Corporation and the
certificate or certificates for such share or shares shall have been surrendered
as aforesaid, and at such time the rights of the holder of such share or shares
of Series A Convertible Preferred Stock shall cease, and the person or persons
in whose name or names any certificate or certificates for shares of Common
Stock shall be issuable upon such conversion shall be deemed to have become the
holder or holders of record of the shares represented thereby.
6C. Fractional Shares: Dividends Partial Conversion. No fractional
shares shall be issued upon conversion of Series A Convertible Preferred Stock
into Common Stock and no payment or adjustment shall be made upon any conversion
on account of any cash dividends on the Common Stock issued upon such
conversion. At the time of each conversion, the Corporation shall pay in cash an
amount equal to all dividends, excluding Accruing Dividends, if any, accrued and
unpaid on the shares of Series A Convertible Preferred Stock surrendered for
conversion to the date upon which such conversion is deemed to take place as
provided in subparagraph 6B. At the time of each conversion, all Accruing
Dividends accrued and unpaid on the shares of Series A Convertible Preferred
Stock surrendered for conversion to the date upon which such conversion is
deemed to take place, as provided in subparagraph 6B, shall be canceled. In case
the number of shares of Series A Convertible Preferred Stock represented by the
certificate or certificates surrendered pursuant to subparagraph 6A exceeds the
number of shares converted, the Corporation shall, upon such conversion, execute
and deliver to the holder, at the expense of the Corporation, a new certificate
or certificates for the number of shares of Series A Convertible Preferred Stock
represented by the certificate or certificates surrendered which are not to be
converted. If any fractional share of Common Stock would, except for the
provisions of the first sentence of this subparagraph 6C, be delivered upon
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such conversion, the Corporation in lieu of delivering such fractional
share, shall pay to the holder surrendering the Series A Convertible Preferred
Stock for conversion an amount in cash equal to the current market price of such
fractional share as determined in good faith by the Board of Directors of the
Corporation.
6D. Adjustment of Price Upon Issuance of Common Stock. Except as
provided in subparagraph 6E, if and whenever the Corporation shall issue or
sell, or is, in accordance with subparagraphs 6D(1) through 6D(7), deemed to
have issued or sold, any shares of Common Stock for a consideration per share
less than the Series A Conversion Price then in effect immediately prior to the
time of such issue or sale, then, forthwith upon such issue or sale, the Series
A Conversion Price shall be reduced to the price determined by dividing (i) an
amount equal to the sum of (a) the number of shares of Common Stock outstanding
immediately prior to such issue or sale multiplied by the then existing Series A
Conversion Price and (b) the consideration, if any, received by the Corporation
upon such issue or sale, by (ii) the total number of shares of Common Stock
outstanding immediately after such issue or sale.
For purposes of this subparagraph 6D, the following subparagraphs
6D(1) to 6D(7) shall also be applicable:
6D(1) Issuance of Rights or Options. In case at any time the
Corporation shall in any manner grant (whether directly or by assumption in a
merger or otherwise) any warrants or other rights to subscribe for or to
purchase, or any options for the purchase of, Common Stock or any stock or
security convertible into or exchangeable for Common Stock (such warrants,
rights or options being called "Options" and such convertible or exchangeable
stock or securities being called "Convertible Securities") whether or not such
Options or the right to convert or exchange any such Convertible Securities are
immediately exercisable, and the price per share for which Common Stock is
issuable upon the exercise of such Options or upon the conversion or exchange of
such Convertible Securities (determined by dividing (i) the total amount, if
any, received or receivable by the Corporation as consideration for the granting
of such Options, plus the minimum aggregate amount of additional consideration
payable to the Corporation upon the exercise of all such Options, plus, in the
case of such Options which relate to Convertible Securities, the minimum
aggregate amount of additional consideration if any, payable upon the issue or
sale of such Convertible Securities and upon the conversion or exchange thereof,
by (ii) the total maximum number of shares of Common Stock issuable upon the
exercise of such Options or upon the conversion or exchange of all such
Convertible Securities issuable upon the exercise of such Options) shall be less
than the Series A Conversion Price in effect immediately prior to the time of
the granting of such Options, then the total maximum number of shares of Common
Stock issuable upon the exercise of such Options or upon conversion or exchange
of the total maximum amount of such Convertible Securities issuable upon the
exercise of such Options shall be deemed to have been issued for such price per
share as of the date of granting of such Options or the issuance of such
Convertible Securities and thereafter shall be deemed to be outstanding. Except
as otherwise provided in subparagraph 6D(3), no adjustment of the Series A
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Conversion Price, shall be made upon the actual issuance of such Common
Stock or of such Convertible Securities upon exercise of such Options or upon
the actual issuance of such Common Stock upon conversion or exchange of such
Convertible Securities.
6D(2) Issuance of Convertible Securities. In case the
Corporation shall in any manner issue (whether directly or by assumption in a
merger or otherwise) or sell any Convertible Securities, whether or not the
rights to exchange or convert any such Convertible Securities are immediately
exercisable, and the price per share for which Common Stock is issuable upon
such conversion or exchange (determined by dividing (i) the total amount
received or receivable by the Corporation as consideration for the issuance or
sale of such Convertible Securities, plus the minimum aggregate amount of
additional consideration, if any, payable to the Corporation upon the conversion
or exchange thereof, by (ii) the total maximum number of shares of Common Stock
issuable upon the conversion or exchange of all such Convertible Securities)
shall be less than the Series A Conversion Price in effect immediately prior to
the time of such issuance or sale, then the total maximum number of shares of
Common Stock issuable upon conversion or exchange of all such Convertible
Securities shall be deemed to have been issued for such price per share as of
the date of the issuance or sale of such Convertible Securities and thereafter
shall be deemed to be outstanding, provided that (a) except as otherwise
provided in subparagraph 6D(3), no adjustment of the Series A Conversion Price,
shall be made upon the actual issuance of such Common Stock upon conversion or
exchange of such Convertible Securities and (b) if any such issuance or sale of
such Convertible Securities is made upon exercise of any Options to purchase any
such Convertible Securities for which adjustments of the Series A Conversion
Price have been or are to be made pursuant to other provisions of this
subparagraph 6D, no further adjustment of the Series A Conversion Price shall be
made by reason of such issuance or sale.
6D(3) Change in Option Price or Conversion Rate. Upon the
happening of any of the following events, namely, if the purchase price provided
for in any Option referred to in subparagraph 6D(1), the additional
consideration, if any, payable upon the conversion or exchange of any
Convertible Securities referred to in subparagraph 6D(1) or 6D(2), or the rate
at which Convertible Securities referred to in subparagraph 6D(1) or 6D(2) are
convertible into or exchangeable for Common Stock shall change at any time
(including, but not limited to, changes under or by reason of provisions
designed to protect against dilution), the Series A Conversion Price in effect
at the time of such event shall forthwith be readjusted to the Series A
Conversion Price which would have been in effect at such time had such Options
or Convertible Securities still outstanding provided for such changed purchase
price, additional consideration or conversion rate, as the case may be, at the
time initially granted, issued or sold, but only if as a result of such
adjustment the Series A Conversion Price then in effect hereunder is thereby
reduced; and on the termination of any such Option or any such right to convert
or exchange such Convertible Securities, the Series A Conversion Price then in
effect hereunder shall forthwith be increased to the Series A Conversion Price
which would have been in effect at the time of such termination had such
Options, or Convertible Securities, to the extent outstanding immediately prior
to such termination, never been issued.
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6D(4) Stock Dividends. In case the Corporation shall declare a
dividend or make any other distribution upon any stock of the Corporation
payable in Common Stock (except for dividends or distributions upon the Common
Stock), Options or Convertible Securities, any Common Stock, Options or
Convertible Securities, as the case may be, issuable in payment of such dividend
or distribution shall be deemed to have been issued or sold without
consideration.
6D(5) Consideration for Stock. In case any shares of Common
Stock, Options or Convertible Securities shall be issued or sold for cash, the
consideration received therefor shall be deemed to be the amount received by the
Corporation therefor, without deduction therefrom of any expenses incurred or
any underwriting commissions or concessions paid or allowed by the Corporation
in connection therewith. In case any shares of Common Stock, Options or
Convertible Securities shall be issued or sold for consideration other than
cash, the amount of the consideration other than cash received by the
Corporation shall be deemed to be the fair value of such consideration as
determined in good faith by the Board of Directors of the Corporation, without
deduction of any expenses incurred or any underwriting commissions or
concessions paid or allowed by the Corporation in connection therewith. In case
any Options shall be issued in connection with the issue and sale of other
securities of the Corporation, together comprising one integral transaction in
which no specific consideration is allocated to such Options by the parties
thereto, such Options shall be deemed to have been issued for such consideration
as determined in good faith by the Board of Directors of the Corporation.
6D(6) Record Date. In case the Corporation shall take a record
of the holders of its Common Stock for the purpose of entitling them (i) to
receive a dividend or other distribution payable in Common Stock, Options or
Convertible Securities or (ii) to subscribe for or purchase Common Stock,
Options or Convertible Securities, then such record date shall be deemed to be
the date of the issuance or sale of the shares of Common Stock deemed to have
been issued or sold upon the declaration of such dividend or the making of such
other distribution or the date of the granting of such right of subscription or
purchase, as the case may be.
6D(7) Treasury Shares. The number of shares of Common Stock
outstanding at any given time shall not include shares owned or held by or for
the account of the Corporation, and the disposition of any such shares shall be
considered an issue or sale of Common Stock for the purpose of this subparagraph
6D.
6E. Certain Issuances of Common Stock Excepted. Anything herein to
the contrary notwithstanding, the Corporation shall not be required to make any
adjustment of the Series A Conversion Price in the case of:
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(i) the issuance from and after the date of filing of these
terms of the Series A Convertible Preferred Stock of up to an aggregate of
1,000,000 shares (appropriately adjusted to reflect the occurrence of any event
described in subparagraph 6F) of Common Stock to directors, officers, employees
or consultants of the Corporation in connection with their service as directors
of the Corporation, their employment by the Corporation or their retention as
consultants by the Corporation, plus such number of shares of Common Stock which
are repurchased by the Corporation from such persons after such date pursuant to
contractual rights held by the Corporation and at repurchase prices not
exceeding the respective original purchase prices paid by such persons to the
Corporation therefor;
(ii) the Series A Preferred Stock;
(iii) securities issuable upon conversion of or with respect
to Series A Preferred Stock;
(iv) securities issued pursuant to the acquisition of another
corporation by the Company by merger, purchase of substantially all the assets
or other reorganization whereby the Company owns more than 50% of the voting
power of such corporation;
(v) capital stock or securities exercisable for or convertible
into such capital stock issued in connection with any equipment leases or
borrowings, direct or indirect, from financial or other institutions regularly
engaged in such business;
(vi) shares of Common Stock, and options, warrants or rights
convertible into such Common Stock (and any shares of Common Stock issuable
pursuant to such options, warrants or rights), issued to existing, former or
future employees, consultants or directors of the Company pursuant to any
agreement or arrangement approved by the Board of Directors of the Company;
(vii) any shares of Common Stock issued upon exercise of
options or warrants outstanding on the date hereof;
(viii) securities issued pursuant to any stock dividend, stock
split, combination or other reclassification by the Company of any of its
capital stock;
(ix) securities issued to a third party in connection with a
transaction in which the Company licenses any intellectual property to be used
in the business of the Company from the third party or an affiliate thereof; or
(x) securities issued in connection with a strategic joint
venture or alliance between the Company and the party to which the securities
are issued, or an affiliate thereof.
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6F. Subdivision or Combination of Common Stock. In case the
Corporation shall at any time subdivide (by any stock split, stock dividend or
otherwise) its outstanding shares of Common Stock into a greater number of
shares, the Series A Conversion Price in effect immediately prior to such
subdivision shall be proportionately reduced, and, conversely, in case the
outstanding shares of Common Stock shall be combined into a smaller number of
shares, the Series A Conversion Price in effect immediately prior to such
combination shall be proportionately increased. In the case of any such
subdivision, no further adjustment shall be made pursuant to subparagraph 6D(4)
by reason thereof.
6G. Reorganization or Reclassification. If any capital
reorganization or reclassification of the capital stock of the Corporation 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 or reclassification, lawful
and adequate provision shall be made whereby each holder of a share or shares of
Series A Convertible Preferred Stock shall thereupon have the right to receive,
upon the basis and upon the terms and conditions specified herein and in lieu of
the shares of Common Stock immediately theretofore receivable upon the
conversion of such share or shares of Series A Convertible Preferred Stock, such
shares of 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 Common Stock immediately theretofore receivable
upon such conversion had such reorganization or reclassification not taken
place, and in any such case appropriate provisions shall be made with respect to
the rights and interests of such holder to the end that the provisions hereof
(including, without limitation, provisions for adjustments of the Series A
Conversion Price) shall thereafter be applicable, as nearly as may be, in
relation to any shares of stock, securities or assets thereafter deliverable
upon the exercise of such conversion rights.
6H. Notice of Adjustment. Upon any adjustment of the Series A
Conversion Price, then, and in each such case the Corporation shall give written
notice thereof, by delivery in person, certified or registered mail, return
receipt requested, facsimile or telex, addressed to each holder of shares of
Series A Convertible Preferred Stock at the address of such holder as shown on
the books of the Corporation, which notice shall state the Series A Conversion
Price resulting from such adjustment, setting forth in reasonable detail the
method upon which such calculation is based.
6I. Other Notices. In case at any time:
(i) the Corporation shall declare any dividend upon its Common
Stock payable in cash or stock or make any other distribution to the holders of
its Common Stock;
(ii) the Corporation shall offer for subscription pro rata to
the holders of its Common Stock any additional shares of stock of any class or
other rights;
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(iii) there shall be any capital reorganization or
reclassification of the capital stock of the Corporation, or a consolidation or
merger of the Corporation with or into another entity or entities in which the
Corporation is not the surviving entity, or a sale, lease, abandonment, transfer
or other disposition of all or substantially all its assets; or
(iv) there shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Corporation;
then, in each of such cases, the Corporation shall give, by delivery in person,
certified or registered mail, return receipt requested, facsimile or telex,
addressed to each holder of any shares of Series A Convertible Preferred Stock
at the address of such holder as shown on the books of the Corporation, (a) at
least 20 days' prior written notice of the date on which the books of the
Corporation shall close or a record shall be taken for such dividend,
distribution or subscription rights or for determining rights to vote in respect
of any such reorganization, reclassification, consolidation, merger,
disposition, dissolution, liquidation or winding up and (b) in the case of any
such reorganization, reclassification, consolidation, merger (in which the
Corporation is not the surviving entity), disposition, dissolution, liquidation
or winding up, of at least 20 days' prior written notice of the date when the
same shall take place. Such notice in accordance with the foregoing clause (a)
shall also specify, in the case of any such dividend, distribution or
subscription rights, the date on which the holders of Common Stock shall be
entitled thereto and such notice in accordance with the foregoing clause (b)
shall also specify the date on which the holders of Common Stock shall be
entitled to exchange their Common Stock for securities or other property
deliverable upon such reorganization, reclassification, consolidation, merger
(in which the Corporation is not the surviving entity), disposition,
dissolution, liquidation or winding up, as the case may be.
6J. Stock to be Reserved. The Corporation will at all times reserve
and keep available out of its authorized Common Stock solely for the purpose of
issuance upon the conversion of Series A Convertible Preferred Stock as herein
provided, such number of shares of Common Stock as shall then be issuable upon
the conversion of all outstanding shares of Series A Convertible Preferred
Stock. The Corporation covenants that all shares of Common Stock which shall be
so issued shall be duly and validly issued and fully paid and nonassessable and
free from all taxes, liens and charges with respect to the issue thereof, and,
without limiting the generality of the foregoing, the Corporation covenants that
it will from time to time take all such actions as may be requisite to assure
that the par value per share of the Common Stock is at all times equal to or
less than the Series A Conversion Price in effect at the time. The Corporation
will take all such action as may be necessary to assure that all such shares of
Common Stock may be so issued without violation of any applicable law or
regulation, or of any requirement of any national securities exchange upon which
the Common Stock may be listed. The Corporation will not take any action which
results in any adjustments of the Series A Conversion Price if the total number
of shares of Common Stock issued and issuable after such action upon conversion
of the Series A Convertible Preferred Stock would exceed the total number of
shares of Common Stock then authorized by the Articles of Incorporation.
A-12
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6K. No Reissuance of Series A Convertible Preferred Stock. Shares of
Series A Convertible Preferred Stock, which are converted into shares of Common
Stock as provided herein shall not be reissued.
6L. Issue Tax. The issuance of certificates for shares of Common
Stock upon conversion of Series A Convertible Preferred Stock shall be made
without charge to the holders thereof for any issuance tax in respect thereof,
provided that the Corporation shall not be required to pay any tax which may be
payable in respect of any transfer involved in the issuance and delivery of any
certificate in a name other than that of the holder of the Series A Convertible
Preferred Stock which is being converted.
6M. Closing of Books. The Corporation will at no time close its
transfer books against the transfer of any Series A Convertible Preferred Stock
or of any shares of Common Stock issued or issuable upon the conversion of any
shares of Series A Convertible Preferred Stock in any manner which interferes
with the timely conversion of such Series A Convertible Preferred Stock, except
as may otherwise be required to comply with applicable securities laws.
6N. Definition of Common Stock. As used in this paragraph 6, the
term "Common Stock" shall mean and include the Corporation's authorized Common
Stock, no par value, as constituted on the date of filing of these terms of the
Series A Convertible Preferred Stock, and shall also include any capital stock
of any class of the Corporation thereafter authorized which shall not be limited
to a fixed sum or percentage in respect of the rights of the holders thereof to
participate in dividends or in the distribution of assets upon the voluntary or
involuntary liquidation, dissolution or winding up of the Corporation; provided
that the shares of Common Stock receivable upon conversion of shares of Series A
Convertible Preferred Stock shall include only shares designated as Common Stock
of the Corporation on the date of filing of this instrument, or in case of any
reorganization or reclassification of the outstanding shares thereof, in stock,
securities or assets provided for in subparagraph 6G.
6O. Mandatory Conversion. If at any time the Corporation shall
effect a firm commitment underwritten public offering of shares of Common Stock
in which (i) the price paid by the public for such shares shall be at least two
times the Series A Conversion Price per share and (as adjusted from time to
time) and (ii) the aggregate value of the shares of Common Stock issuable upon
conversion of each share of Series A Convertible Preferred Stock (utilizing the
offering price in such underwriting) is at least $5,000,000 (appropriately
adjusted to reflect the occurrence of any event described in subparagraph 6F),
then effective upon the closing of the sale of such shares by the Corporation
pursuant to such public offering, all outstanding shares of Series A Convertible
Preferred Stock shall automatically convert to shares of Common Stock on the
basis set forth in this paragraph 6. Holders of shares of Series A Convertible
Preferred Stock so converted may deliver to the Corporation at its principal
office (or such other office or agency of the Corporation as the Corporation may
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designate by notice in writing to such holders) during its usual business hours,
the certificate or certificates for the shares so converted. As promptly as
practicable thereafter, the Corporation shall issue and deliver to such holder a
certificate or certificates for the number of whole shares of Common Stock to
which such holder is entitled, together with any cash dividends and payment in
lieu of fractional shares to which such holder may be entitled pursuant to
subparagraph 6C. Until such time as a holder of shares of Series A Convertible
Preferred Stock shall surrender his or its certificates therefor as provided
above, such certificates shall be deemed to represent the shares of Common Stock
which such holder shall be entitled upon the surrender thereof.
7. Redemption. The shares of Series A Convertible Preferred Stock shall be
redeemed as follows:
7A. Optional Redemption.
(a) If on July 29, 2003, any shares of Series A Convertible
Preferred Stock shall be then outstanding, the Corporation shall have the right
to redeem (unless otherwise prevented by law) all (but not less than all) such
outstanding shares at an amount per share as determined in paragraph 7B(a).
(b) If the Corporation chooses to redeem shares of the Series
A Convertible Preferred Stock, the Corporation shall deliver written notice (the
"Redemption Notice") stating the date of such redemption (the "Redemption Date")
to all holders of Series A Convertible Preferred Stock by delivery in person,
certified or registered mail, return receipt requested, facsimile or telex,
indicating the receipt by the operation of such request. All holders of Series A
Convertible Preferred Stock shall have the right to have their shares of Series
A Convertible Preferred Stock redeemed, in accordance with the provisions of
this paragraph 7, on the same date as set forth in the Redemption Notice upon
written notice to the Corporation.
7B. Redemption Price and Payment.
(a) The Series A Convertible Preferred Stock to be redeemed on
any Redemption Date shall be redeemed by paying for each share an amount (such
amount being referred to as the "Series A Redemption Price") equal to the
greater of (A) $1.00 per share (as adjusted for stock splits, dividends and
recapitalizations) plus, in the case of each share, an amount equal to all
dividends (including Series A Accruing Dividends) undeclared or declared but
unpaid thereon, computed to the Redemption Date, or (B) the fair market value of
the Series A Convertible Preferred Stock as determined by a qualified
organization selected by the holders of at least two-thirds of the outstanding
Series A Convertible Preferred Stock and approved and retained by the
Corporation acting through its Board of Directors. Such fair market value shall
be determined within 45 days of the date of the redemption notice and shall be
based on the value of the Corporation as a going concern (without giving any
effect to the impact of the redemption of the outstanding Series A Convertible
Preferred Stock) based principally on comparisons to the valuations of
comparable privately-traded companies.
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In the event that all of the holders of Series A Convertible Preferred Stock
elect to be redeemed, pursuant to the provisions of this paragraph 7, then the
fair market value determination of the Series A Convertible Preferred Stock
shall be on the same basis as set forth in clause (B) above, except that the
qualified organization making such determination shall be selected by holders of
two-thirds of the issued and outstanding shares of Series A Convertible
Preferred Stock, voting together as a single class.
(b) Procedures at Closing(s). On each Redemption Date
(including any subsequent purchase closing date if multiple purchases result
from the application of subparagraph 7C), the redemption closing shall occur at
the Corporation's principal office. At the redemption closing, to the extent
applicable, each holder whose shares are to be redeemed shall deliver the shares
of Series A Convertible Preferred Stock being redeemed, duly endorsed in blank,
accompanied by such supporting documents as may be necessary to pass to the
Corporation good title to such securities, free and clear of all liens (other
than restrictions under applicable securities laws and/or any security holder
agreement). In consideration therefor, the Corporation shall deliver to such
holder immediately available funds equal to the aggregate applicable Redemption
Price, based upon the number of shares of Series A Convertible Preferred Stock
being redeemed by each holder.
7C. Redemption Mechanics. At least 20 but not more than 30 days
prior to any Redemption Date, written notice (the "Corporation Redemption
Notice") shall be given by the Corporation by delivery in person, certified or
registered mail, return receipt requested, facsimile or telex, to each holder of
record (at the close of business on the business day preceding the date on which
the Corporation Redemption Notice is given) of shares of Series A Convertible
Preferred Stock notifying such holder of the redemption and specifying the
Redemption Price, the Redemption Date, the consideration to be paid and the
place said redemption shall be payable. The Corporation Redemption Notice shall
be addressed to each holder at his, her or its address as shown by the records
of the Corporation. From and after the close of business on the Redemption Date,
unless there shall have been a default in the payment of the Redemption Price,
all rights of holders of shares of Series A Convertible Preferred Stock redeemed
on such Redemption Date (except the right to receive the applicable Redemption
Price) shall cease with respect to such shares, and such shares shall not
thereafter be transferred on the books of the Corporation or be deemed to be
outstanding for any purpose whatsoever. If the funds of the Corporation legally
available for redemption of shares of Series A Convertible Preferred Stock on
the Redemption Date are insufficient to redeem the total number of outstanding
shares of Series A Convertible Preferred Stock to be redeemed, the holders of
shares of Series A Convertible Preferred Stock to be redeemed shall share
ratably in any funds legally available for redemption of such shares according
to the respective amounts which would be payable with respect to the full number
of shares owned by them if all such outstanding shares were redeemed in full.
The shares of Series A Convertible Preferred Stock not redeemed shall remain
outstanding and entitled to all rights and preferences provided herein. At any
time thereafter when additional funds of the Corporation are legally available
for the redemption of such shares of Series A Convertible Preferred Stock, such
funds will be used, at the end of the next succeeding fiscal quarter, to
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redeem the balance of such shares, or such portion thereof for which fiends are
then legally available on the basis set forth above.
7D. Redeemed or Otherwise Acquired Shares to be Retired. Any shares
of Series A Convertible Preferred Stock redeemed pursuant to this paragraph 7 or
otherwise acquired by the Corporation in any manner whatsoever shall be canceled
and shall not under any circumstances be reissued; and, the Corporation may from
time to time make such appropriate corporate action as may be necessary to
reduce accordingly the number of authorized shares of Series A Convertible
Preferred Stock.
8. Amendments. No provision of these terms of the Series A Convertible
Preferred Stock may be amended, modified or waived without the written consent
or affirmative vote of the holders of at least (a) two-thirds of the then
outstanding shares of Series A Convertible Preferred Stock.
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EXHIBIT B
FORM OF REGISTRATION RIGHTS AGREEMENT
B-1
<PAGE>
REGISTRATION RIGHTS AGREEMENT
July __, 1998
To the Purchasers named in Schedule I to the Series A Convertible Preferred
Stock Purchase and Promissory Note Conversion Agreement, of even date herewith
Dear Sirs:
This will confirm that in consideration of your agreement on the date
hereof to purchase an aggregate of 3,250,000 shares (the "Preferred Shares") of
Series A Convertible Preferred Stock ("Preferred Stock"), of ETS International,
Inc., a Virginia corporation doing business as InfraCorps, Inc. (the "Company"),
pursuant to the Agreement for the Purchase of Series A Convertible Preferred
Stock and the Conversion of Certain Promissory Notes of even date herewith (the
"Series A Agreement") between the Company and you, and as an inducement to you
to consummate the transactions contemplated by the Series A Agreement, the
Company covenants and agrees with each of you as follows:
1. Certain Definitions. As used in this Agreement, the following terms
shall have the following respective meanings:
"Commission" shall mean the Securities and Exchange Commission, or
any other federal agency at the time administering the Securities Act.
"Common Stock" shall mean the Common Stock, no par value, of the
Company, as constituted as of the date of this Agreement.
"Conversion Shares" shall mean shares of Common Stock issued upon
conversion of the Preferred Shares.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, or any similar federal statute, and the rules and regulations of the
Commission thereunder, all as the same shall be in effect at the time.
"Registration Expenses" shall mean the expenses so described in Section 8.
"Restricted Stock" shall mean the Conversion Shares, excluding
Conversion Shares which have been (a) registered under the Securities Act
pursuant to an effective registration statement filed thereunder and disposed of
in accordance with the registration statement covering them or (b) publicly sold
pursuant to Rule 144 under the Securities Act.
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"Securities Act" shall mean the Securities Act of 1933, as amended,
or any similar federal statute, and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
"Selling Expenses" shall mean the expenses so described in Section 8.
2. Restrictive Legend. Each certificate representing Preferred Shares or
Conversion Shares shall, except as otherwise provided in this Section 2 or in
Section 3, be stamped or otherwise imprinted with a legend substantially in the
following form:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT"), OR APPLICABLE STATE
SECURITIES LAWS. THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH
A VIEW TO DISTRIBUTION OR RESALE, AND MAY NOT BE SOLD, MORTGAGED, PLEDGED,
HYPOTHECATED OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION
STATEMENT FOR SUCH SECURITIES UNDER THE 1933 ACT AND ANY APPLICABLE STATE
SECURITIES LAWS, OR THE AVAILABILITY OF AN EXEMPTION FROM THE REGISTRATION
PROVISIONS OF THE 1933 ACT AND APPLICABLE STATE SECURITIES LAWS.
A certificate shall not bear such legend if in the opinion of counsel
satisfactory to the Company the securities represented thereby may be publicly
sold without registration under the Securities Act and any applicable state
securities laws.
3. Notice of Proposed Transfer. Prior to any proposed transfer of any
Preferred Shares or Conversion Shares (other than under the circumstances
described in Sections 4, 5 or 6), the holder thereof shall give written notice
to the Company of its intention to effect such transfer. Each such notice shall
describe the manner of the proposed transfer and, if requested by the Company,
shall be accompanied by an opinion of counsel satisfactory to the Company to the
effect that the proposed transfer may be effected without registration under the
Securities Act and any applicable state securities laws, whereupon the holder of
such stock shall be entitled to transfer such stock in accordance with the terms
of its notice; provided, however, that no such opinion of counsel shall be
required for a transfer to one or more partners of the transferor (in the case
of a transferor that is a partnership) or to an affiliated corporation (in the
case of a transferor that is a corporation). Each certificate for Preferred
Shares or Conversion Shares transferred as above provided shall bear the legend
set forth in Section 2, except that such certificate shall not bear such legend
if (i) such transfer is in accordance with the provisions of Rule 144 (or any
other rule permitting public sale without registration under the Securities Act)
or (ii) the opinion of counsel referred to above is to the further effect that
the transferee and any subsequent transferee (other than an affiliate of the
Company) would be entitled to transfer such securities in a public sale without
registration under the Securities Act. The restrictions provided for in this
Section 3 shall not apply to securities which are not required to bear the
legend prescribed by Section 2 in accordance with the provisions of that
Section.
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4. Required Registration. At any time after a holder thereof converts
shares of Preferred Stock or the third anniversary of the date of this
Agreement, the holders of Restricted Stock constituting at least 40% of the
total shares of Restricted Stock then outstanding may request the Company to
register under the Securities Act all or any portion of the shares of Restricted
Stock held by such requesting holder or holders for sale in the manner specified
in such notice, provided that the shares of Restricted Stock for which
registration has been requested shall constitute at least 20% of the total
shares of Restricted Stock originally issued if such holder or holders shall
request the registration of less than all shares of Restricted Stock then held
by such holder or holders (or any lesser percentage if the reasonably
anticipated aggregate price to the public of such public offering would exceed
$5,000,000). For purposes of this Section 4 and Sections 5, 6, 13(a) and 13(d),
the term "Restricted Stock" shall be deemed to include the number of shares of
Restricted Stock which would be issuable to a holder of Preferred Shares upon
conversion of all Preferred Shares held by such holder at such time; provided,
however, that the only securities which the Company shall be required to
register pursuant hereto shall be shares of Common Stock; and provided, further,
however, that, in any underwritten public offering contemplated by this Section
4 or Sections 5 and 6, the holders of Preferred Shares shall be entitled to sell
such Preferred Shares to the underwriters for conversion and sale of the shares
of Common Stock issued upon conversion thereof. Notwithstanding anything to the
contrary contained herein, no request may be made under this Section 4 within
120 days after the effective date of a registration statement filed by the
Company covering a firm commitment underwritten public offering in which the
holders of Restricted Stock shall have been entitled to join pursuant to
Sections 5 or 6 and in which there shall have been effectively registered all
shares of Restricted Stock as to which registration shall have been requested.
(b) Following receipt of any notice under this Section 4, the
Company shall immediately notify all holders of Restricted Stock from whom
notice has not been received and shall use its best efforts to register under
the Securities Act, for public sale in accordance with the method of disposition
specified in such notice from requesting holders, the number of shares of
Restricted Stock specified in such notice (and in all notices received by the
Company from other holders within 30 days after the giving of such notice by the
Company). If such method of disposition shall be an underwritten public
offering, the holders of a majority of the shares of Restricted Stock to be sold
in such offering may designate the managing underwriter of such offering,
subject to the approval of the Company, which approval shall not be unreasonably
withheld or delayed. The Company shall be obligated to register Restricted Stock
pursuant to this Section 4 on two occasions only; provided, however, that such
obligation shall be deemed satisfied only when a registration statement covering
all shares of Restricted Stock specified in notices received as aforesaid, for
sale in accordance with the method of disposition specified by the requesting
holders, shall have become effective and, if such method of disposition is a
firm commitment underwritten public offering, all such shares shall have been
sold pursuant thereto.
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(c) The Company shall be entitled to include in any registration
statement referred to in this Section 4, for sale in accordance with the method
of disposition specified by the requesting holders, shares of Common Stock to be
sold by the Company for its own account, except as and to the extent that, in
the opinion of the managing underwriter (if such method of disposition shall be
an underwritten public offering), such inclusion would adversely affect the
marketing of the Restricted Stock to be sold. Except for registration statements
on Form S-4, S-8 or any successor thereto, the Company will not file with the
Commission any other registration statement with respect to its Common Stock,
whether for its own account or that of other stockholders, from the date of
receipt of a notice from requesting holders pursuant to this Section 4 until the
completion of the period of distribution of the registration contemplated
thereby.
5. Incidental Registration. If the Company, after the date of this
Agreement, proposes to register any of its securities under the Securities Act,
based upon a firm commitment underwritten public offering (other than pursuant
to Section 4 or Section 6), whether for its own account or for the account of
other security holders or both (except with respect to registration statements
on Forms S-4, S-8 or another form not available for registering the Restricted
Stock for sale to the public), each such time it will give written notice to all
holders of outstanding Restricted Stock of its intention so to do. Upon the
written request of any such holder, received by the Company within 30 days after
the giving of any such notice by the Company, to register any of its Restricted
Stock, the Company will use its best efforts to cause the Restricted Stock as to
which registration shall have been so requested to be included in the securities
to be covered by the registration statement proposed to be filed by the Company,
all to the extent requisite to permit the sale or other disposition by the
holder of such Restricted Stock so registered. In the event that any
registration pursuant to this Section 5 shall be, in whole or in part, an
underwritten public offering of Common Stock, the number of shares of Restricted
Stock to be included in such an underwriting may be reduced (pro rata among the
requesting holders based upon the number of shares of Restricted Stock owned by
such holders) if and to the extent that the managing underwriter shall be of the
opinion that such inclusion would adversely affect the marketing of the
securities to be sold by the Company therein; provided, however, that such
number of shares of Restricted Stock shall not be reduced to less than one-third
of the total shares to be included in such underwriting. Notwithstanding the
foregoing provisions, the Company may withdraw any registration statement
referred to in this Section 5 without thereby incurring any liability to the
holders of Restricted Stock.
6. Registration on Form S-3. If at any time (i) a holder or holders of
Preferred Shares or Restricted Stock request that the Company file a
registration statement on Form S-3 or any successor thereto for a public
offering of all or any portion of the shares of Restricted Stock held by such
requesting holder or holders, the reasonably anticipated aggregate price to the
public of which would exceed $1,000,000, and (ii) the Company is a registrant
entitled to use Form S-3 or any successor thereto to register such shares, then
the Company shall use its best efforts to register under the Securities Act on
Form S-3 or any successor thereto, for public sale in accordance with the method
of disposition specified in such notice, the number of shares of Restricted
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Stock specified in such notice. Whenever the Company is required by this
Section 6 to use its best efforts to effect the registration of Restricted
Stock, each of the procedures and requirements of Section 4 (including but not
limited to the requirement that the Company notify all holders of Restricted
Stock from whom notice has not been received and provide them with the
opportunity to participate in the offering) shall apply to such registration;
provided, however, that there shall be no limitation on the number of
registrations on Form S-3 which may be requested and obtained under this Section
6; and provided, further, however, that the requirements contained in the first
sentence of Section 4(a) shall not apply to any registration on Form S-3 which
may be requested and obtained under this Section 6.
7. Registration Procedures. If and whenever the Company is required by the
provisions of Sections 4, 5 or 6 to use its best efforts to effect the
registration of any shares of Restricted Stock under the Securities Act, the
Company will, as expeditiously as possible:
(a) prepare and file with the Commission a registration statement
(which, in the case of an underwritten public offering pursuant to Section 4,
shall be on Form S- I or other form of general applicability satisfactory to the
managing underwriter selected as therein provided) with respect to such
securities and use its best efforts to cause such registration statement to
become and remain effective for the period of the distribution contemplated
thereby (determined as hereinafter provided);
(b) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in connection
therewith as may be necessary to keep such registration statement effective for
the period specified in paragraph (a) above and comply with the provisions of
the Securities Act with respect to the disposition of all Restricted Stock
covered by such registration statement in accordance with the sellers' intended
method of disposition set forth in such registration statement for such period;
(c) furnish to each seller of Restricted Stock and to each
underwriter such number of copies of the registration statement and the
prospectus included therein (including each preliminary prospectus) as such
persons reasonably may request in order to facilitate the public sale or other
disposition of the Restricted Stock covered by such registration statement;
(d) use its best efforts to register or qualify the Restricted Stock
covered by such registration statement under the securities or "blue sky" laws
of such jurisdictions as the sellers of Restricted Stock or, in the case of an
underwritten public offering, the managing underwriter reasonably shall request;
provided, however, that the Company shall not for any such purpose be required
to qualify generally to transact business as a foreign corporation in any
jurisdiction where it is not so qualified or to consent to general service of
process in any such jurisdiction;
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(e) use its best efforts to list the Restricted Stock covered by
such registration statement with any securities exchange on which the Common
Stock of the Company is then listed;
(f) immediately notify each seller of Restricted Stock and each
underwriter under such registration statement, at any time when a prospectus
relating thereto is required to be delivered under the Securities Act, of the
happening of any event of which the Company has knowledge as a result of which
the prospectus contained in such 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 light of the circumstances then existing;
(g) if the offering is underwritten and at the request of any seller
of Restricted Stock, use its best efforts to furnish on the date that Restricted
Stock is delivered to the underwriters for sale pursuant to such registration:
(i) an opinion dated such date of counsel representing the Company for the
purposes of such registration, addressed to the underwriters and to such seller,
stating that such registration statement has become effective under the
Securities Act and that (A) to the best knowledge of such counsel, no stop order
suspending the effectiveness thereof has been issued and no proceedings for that
purpose have been instituted or are pending or contemplated under the Securities
Act, (B) the registration statement, the related prospectus and each amendment
or supplement thereof comply as to form in all material respects with the
requirements of the Securities Act (except that such counsel need not express
any opinion as to financial statements contained therein) and (C) to such other
effects as reasonably may be requested by counsel for the underwriters or by
such seller or its counsel and (ii) a letter dated such date from the
independent public accountants retained by the Company, addressed to the
underwriters and to such seller, stating that they are independent public
accountants within the meaning of the Securities Act and that, in the opinion of
such accountants, the financial statements of the Company included in the
registration statement or the prospectus, or any amendment or supplement
thereof, comply as to form in all material respects with the applicable
accounting requirements of the Securities Act, and such letter shall
additionally cover such other financial matters (including information as to the
period ending no more than five business days prior to the date of such letter)
with respect to such registration as such underwriters reasonably may request;
and
(h) make available for inspection by each seller of Restricted
Stock, any underwriter participating in any distribution pursuant to such
registration statement, and any attorney, accountant or other agent retained by
such seller or underwriter, all financial and other records, pertinent corporate
documents and properties of the Company, and cause the Company's officers,
directors and employees to supply all information reasonably requested by any
such seller, underwriter, attorney, accountant or agent in connection with such
registration statement.
For purposes of Section 7(a) and 7(b) and of Section 4(c), the period of
distribution of Restricted Stock in a firm commitment underwritten public
offering shall be deemed to extend until each underwriter has completed the
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the distribution of all securities purchased by it, and the period of
distribution of Restricted Stock in any other registration shall be deemed to
extend until the earlier of the sale of all Restricted Stock covered thereby and
180 days after the effective date thereof.
In connection with each registration hereunder, the sellers of Restricted
Stock will furnish to the Company in writing such information with respect to
themselves and the proposed distribution by them as reasonably shall be
necessary in order to assure compliance with federal and applicable state
securities laws.
In connection with each registration pursuant to Sections 4, 5 or 6
covering an underwritten public offering, the Company and each seller agree to
enter into a written agreement with the managing underwriter selected in the
manner herein provided in such form and containing such provisions as are
customary in the securities business for such an arrangement between such
underwriter and companies of the Company's size and investment stature.
8. Expenses. All expenses incurred by the Company in complying with
Sections 4, 5 and 6, including, without limitation, all registration and filing
fees, printing expenses, fees and disbursements of counsel and independent
public accountants for the Company, fees and expenses (including counsel fees)
incurred in connection with complying with state securities or "blue sky" laws,
fees of the National Association of Securities Dealers, Inc., transfer taxes,
fees of transfer agents and registrars, costs of insurance and fees and
disbursements of one counsel for the sellers of Restricted Stock, but excluding
any Selling Expenses, are called "Registration Expenses". All underwriting
discounts and selling commissions applicable to the sale of Restricted Stock are
called "Selling Expenses".
The Company will pay all Registration Expenses in connection with each
registration statement under Sections 4, 5 or 6. All Selling Expenses in
connection with each registration statement under Sections 4, 5 or 6 shall be
borne by the participating sellers in proportion to the number of shares sold by
each, or by such participating sellers other than the Company (except to the
extent the Company shall be a seller) as they may agree.
9. Indemnification and Contribution. (a) In the event of a registration of
any of the Restricted Stock under the Securities Act pursuant to Sections 4, 5
or 6, the Company will indemnify and hold harmless each seller of such
Restricted Stock thereunder, each underwriter of such Restricted Stock
thereunder and each other person, if any, who controls such seller or
underwriter within the meaning of the Securities Act, against any losses,
claims, damages or liabilities, joint or several, to which such seller,
underwriter 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 any registration statement
under which such Restricted Stock was registered under the Securities Act
pursuant to Sections 4, 5 or 6, any preliminary prospectus or final prospectus
contained therein, or any amendment or supplement thereof, or arise out of or
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are based upon the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements therein
not misleading, and will reimburse each such seller, each such underwriter and
each such 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 Company will not be
liable in any such case if and 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 so made in conformity with
information furnished by any such seller, any such underwriter or any such
controlling person in writing specifically for use in such registration
statement or prospectus.
(b) In the event of a registration of any of the Restricted Stock
under the Securities Act pursuant to Sections 4, 5 or 6, each seller of such
Restricted Stock thereunder, severally and not jointly, will indemnify and hold
harmless the Company, each person, if any, who controls the Company within the
meaning of the Securities Act, each officer of the Company who signs the
registration statement, each director of the Company, each underwriter and each
person who controls any underwriter within the meaning of the Securities Act,
against all losses, claims, damages or liabilities, joint or several, to which
the Company or such officer, director, underwriter 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 the registration statement under which such Restricted Stock
was registered under the Securities Act pursuant to Sections 4, 5 or 6, any
preliminary prospectus or final prospectus contained therein, or any amendment
or supplement thereof, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and will reimburse the
Company and each such officer, director, underwriter and 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 such seller will be liable hereunder in any such case if
and only to the extent that any such loss, claim, damage or liability arises out
of or is based upon an untrue statement or alleged untrue statement or omission
or alleged omission made in reliance upon and in conformity with information
pertaining to such seller, as such, furnished in writing to the Company by such
seller specifically for use in such registration statement or prospectus; and
provided, further, however, that the liability of each seller hereunder shall be
limited to the proportion of any such loss, claim, damage, liability or expense
which is equal to the proportion that the public offering price of the shares
sold by such seller under such registration statement bears to the total public
offering price of all securities sold thereunder, but not in any event to exceed
the proceeds received by such seller from the sale of Restricted Stock covered
by such registration statement.
(c) Promptly after receipt by an indemnified party hereunder of
notice of the commencement of any action, such indemnified party shall, if a
claim in respect thereof is to be made against the indemnifying party hereunder,
notify the indemnifying party in writing thereof, but the omission so to
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to notify the indemnifying party shall not relieve it from any liability
which it may have to such indemnified party other than under this Section 9 and
shall only relieve it from any liability which it may have to such indemnified
party under this Section 9 if and to the extent the indemnifying party is
prejudiced by such omission. In case any such action shall be brought against
any indemnified party and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to participate in
and, to the extent it shall wish, to assume and undertake the defense thereof
with counsel satisfactory to such indemnified party, and, after notice from the
indemnifying party to such indemnified party of its election so to assume and
undertake the defense thereof, the indemnifying party shall not be liable to
such indemnified party under this Section 9 for any legal expenses subsequently
incurred by such indemnified party in connection with the defense thereof other
than reasonable costs of investigation and of liaison with counsel so selected;
provided, however, that, if the defendants in any such action include both the
indemnified party and the indemnifying party and the indemnified party shall
have reasonably concluded that there may be reasonable defenses available to it
which are different from or additional to those available to the indemnifying
party or if the interests of the indemnified party reasonably may be deemed to
conflict with the interests of the indemnifying party, the indemnified party
shall have the right to select a separate counsel and to assume such legal
defenses and otherwise to participate in the defense of such action, with the
expenses and fees of such separate counsel and other expenses related to such
participation to be reimbursed by the indemnifying party as incurred.
(d) In order to provide for just and equitable contribution to joint
liability under the Securities Act in any case in which either (i) any holder of
Restricted Stock exercising rights under this Agreement, or any controlling
person of any such holder, makes a claim for indemnification pursuant to this
Section 9 but it is judicially determined (by the entry of a final judgment or
decree by a court of competent jurisdiction and the expiration of time to appeal
or the denial of the last right of appeal) that such indemnification may not be
enforced in such case notwithstanding the fact that this Section 9 provides for
indemnification in such case, or (ii) contribution under the Securities Act may
be required on the part of any such selling holder or any such controlling
person in circumstances for which indemnification is provided under this Section
9; then, and in each such case, the Company and such holder will contribute to
the aggregate losses, claims, damages or liabilities to which they may be
subject (after contribution from others) in such proportion so that such holder
is responsible for the portion represented by the percentage that the public
offering price of its Restricted Stock offered by the registration statement
bears to the public offering price of all securities offered by such
registration statement, and the Company is responsible for the remaining
portion; provided, however, that, in any such case, (A) no such holder will be
required to contribute any amount in excess of the public offering price of all
such Restricted Stock offered by it pursuant to such registration statement; and
(B) no person or entity guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) will be entitled to contribution
from any person or entity who was not guilty of such fraudulent
misrepresentation.
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10. Changes in Common Stock or Preferred Stock. If, and as often as, there
is any change in the Common Stock or the Preferred Stock by way of a stock
split, stock dividend, combination or reclassification, or through a merger,
consolidation, reorganization or recapitalization, or by any other means,
appropriate adjustment shall be made in the provisions hereof so that the rights
and privileges granted hereby shall continue with respect to the Common Stock or
the Preferred Stock as so changed.
11. Rule 144 Reporting. With a view to making available the benefits of
certain rules and regulations of the Commission which may at any time permit the
sale of the Restricted Stock to the public without registration, at all times
after 90 days after any registration statement covering a public offering of
securities of the Company under the Securities Act shall have become effective,
the Company agrees to:
(a) make and keep public information available, as those terms are
understood and defined in Rule 144 under the Securities Act;
(b) use its best efforts to file with the Commission in a timely
manner all reports and other documents required of the Company under the
Securities Act and the Exchange Act; and
(c) furnish to each holder of Restricted Stock forthwith upon
request a written statement by the Company as to its compliance with the
reporting requirements of such Rule 144 and of the Securities Act and the
Exchange Act, a copy of the most recent annual or quarterly report of the
Company, and such other reports and documents so filed by the Company as such
holder may reasonably request in availing itself of any rule or regulation of
the Commission allowing such holder to sell any Restricted Stock without
registration.
12. Representations and Warranties of the Company. The Company represents
and warrants to you as follows:
(a) The execution, delivery and performance of this Agreement by the
Company have been duly authorized by all requisite corporate action and will not
violate any provision of law, any order of any court or other agency of
government, the Charter or Bylaws of the Company or any provision of any
indenture, agreement or other instrument to which it or any or its properties or
assets is bound, conflict with, result in a breach of or constitute (with due
notice or lapse of time or both) a default under any such indenture, agreement
or other instrument or result in the creation or imposition of any lien, charge
or encumbrance of any nature whatsoever upon any of the properties or assets of
the Company.
(b) This Agreement has been duly executed and delivered by the
Company and constitutes the legal, valid and binding obligation of the Company,
enforceable in accordance with its terms.
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13. Miscellaneous.
(a) All covenants and agreements contained in this Agreement by or
on behalf of any of the parties hereto shall bind and inure to the benefit of
the respective successors and assigns of the parties hereto (including without
limitation transferees of any Preferred Shares or Restricted Stock), whether so
expressed or not, provided, however, that registration rights conferred herein
on the holders of Preferred Shares or Restricted Stock shall only inure to the
benefit of a transferee of Preferred Shares or Restricted Stock if there is
transferred to such transferee at least 20% of the total shares of Restricted
Stock originally issued pursuant to the Series A Agreement to the direct or
indirect transferor of such transferee.
(b) All notices, requests, consents and other communications
hereunder shall be in writing and shall be delivered in person, mailed by
certified or registered mail, return receipt requested, or sent by facsimile or
telex, addressed as follows:
if to the Company or any other party hereto, at the address of
such party set forth in the Series A Agreement;
if to any subsequent holder of Preferred Shares or Restricted
Stock, to it at such address as may have been furnished to the Company in
writing by such holder;
or, in any case, at such other address or addresses as shall
have been famished in writing to the Company (in the case of a holder of
Preferred Shares or Restricted Stock) or to the holders of Preferred Shares or
Restricted Stock (in the case of the Company) in accordance with the provisions
of this paragraph.
(c) This Agreement shall be governed by and construed in accordance
with the laws of the Commonwealth of Virginia.
(d) This Agreement may not be amended or modified, and no provision
hereof may be waived, without the written consent of the Company and the holders
of at least two-thirds of the outstanding shares of Restricted Stock.
(e) This Agreement may be executed 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.
(f) The obligations of the Company to register shares of Restricted
Stock under Sections 4, 5 or 6 shall terminate on the tenth anniversary of the
date of this Agreement.
(g) If requested in writing by the underwriters for the initial
underwritten public offering of securities of the Company, each holder of
Restricted Stock who is a party to this Agreement shall agree not to sell
publicly any shares of Restricted Stock or any other shares of Common Stock
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(other than shares of Restricted Stock or other shares of Common Stock
being registered in such offering), without the consent of such underwriters,
for a period of not more than 180 days following the effective date of the
registration statement relating to such offering; provided, however, that all
persons entitled to registration rights with respect to shares of Common Stock
who are not parties to this Agreement, all other persons selling shares of
Common Stock in such offering, all persons holding in excess of 1% of the
capital stock of the Company on a fully diluted basis and all executive officers
and directors of the Company shall also have agreed not to sell publicly their
Common Stock under the circumstances and pursuant to the terms set forth in this
Section 13(g).
(h) Notwithstanding the provisions of Section 7(a), the Company's
obligation to file a registration statement, or cause such registration
statement to become and remain effective, shall be suspended for a period not to
exceed 90 days in any 24-month period if there exists at the time material
non-public information relating to the Company which, in the reasonable opinion
of the Company, should not be disclosed.
(i) The Company shall not grant to any third party any registration
rights more favorable than or inconsistent with any of those contained herein,
so long as any of the registration rights under this Agreement remains in
effect.
(j) If any provision of this Agreement shall be held to be illegal,
invalid or unenforceable, such illegality, invalidity or unenforceability shall
attach only to such provision and shall not in any manner affect or render
illegal, invalid or unenforceable any other provision of this Agreement, and
this Agreement shall be carried out as if any such illegal, invalid or
unenforceable provision were not contained herein.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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Please indicate your acceptance of the foregoing by signing and returning
the enclosed counterpart of this Registration Rights Agreement letter, whereupon
this Agreement shall be a binding agreement between the Company and you.
Very truly yours,
ETS INTERNATIONAL, INC.
------------------------------
James B. Quarles, President
[Corporate Seal]
Attest:
- ----------------------------
Secretary
AGREED TO AND ACCEPTED as of the date first above written.
- ---------------------------------
Dr. Allen Kahn Trust
Dr. Allen Kahn, Trustee
- ---------------------------------
Coleman S. Lyttle
- --------------------------------
Thomas W. Marmon Trust
Thomas, W. Marmon, Trustee
- ---------------------------------
Lee A. Raver
- ---------------------------------
Navin D. Sheth
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EXHIBIT C
FORM OF INVESTOR RIGHTS AGREEMENT
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INVESTOR RIGHTS AGREEMENT
This Investor Rights Agreement is dated this ____ day of July 1998 by and
among ETS INTERNATIONAL, INC., a Virginia corporation (the "Company"), DR. ALLEN
KAHN TRUST, DR. ALLEN KAHN, TRUSTEE, COLEMAN S. LYTTLE, THOMAS W. MARMON TRUST,
THOMAS W. MARMON, TRUSTEE, LEE A. RAVER, and NAVIN D. SHETH (hereinafter
collectively referred to as the "Investors" and each individually as an
"Investor").
WHEREAS, the Company desires to sell to the Investors shares of its Series
A Preferred Stock (the "Series A Preferred Stock") for aggregate consideration
of up to $3,250,000.00 pursuant to the Agreement for the Purchase of Series A
Preferred Stock and the Conversion of Certain Promissory Notes of even date
herewith (the "Series A Agreement"); and
WHEREAS, the Company and the Investors desire to set forth certain
obligations and rights as set forth herein;
NOW, THEREFORE, in consideration of the mutual premises, representations,
warranties, covenants and conditions set forth in this Agreement, the parties to
this Agreement mutually agree as follows:
1. RIGHT OF FIRST REFUSAL.
1.1 Pro Rata Right of First Refusal. The Company hereby grants to
each Investor holding shares and/or underlying Common Stock issued upon
conversion thereof, (such Preferred Stock and underlying Common Stock (the
"Underlying Common Stock") being sometimes referred to herein as "Shares"),
subject to the terms and conditions specified in this Section 1, the right of
first refusal to purchase up to its pro rata share of all New Securities (as
defined in Section 1.2 hereof) that the Company may, from time to time, propose
to sell. An Investor's pro rata share, for purposes of this right of first
refusal, is the ratio (a) the numerator of which is the number of shares of
Underlying Common Stock issued or issuable to such Investor on the date of the
Company's written notice pursuant to Section 1.3 hereof, and (b) the denominator
of which is the number of shares of Common Stock outstanding, assuming for this
purpose conversion or exercise of all securities convertible into or exercisable
for Common Stock of the Company.
1.2 New Securities. "New Securities" shall mean any capital stock of
the Company, whether now authorized or not, and rights, options or warrants to
purchase capital stock, and securities of any type whatsoever that are, or may
become, convertible into capital stock, provided that the term "New Securities"
does not include: (a) the Series A Preferred Stock; (b) securities issuable upon
conversion of or with respect to Series A Preferred Stock; (c) securities issued
pursuant to the acquisition of another corporation by the Company by merger,
purchase of substantially all the assets or other reorganization whereby the
Company owns more than 50% of the voting power of such corporation; (d) capital
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stock or securities exercisable for or convertible into such capital stock
issued in connection with any equipment leases or borrowings, direct or
indirect, from financial or other institutions regularly engaged in such
business; (e) shares of Common Stock, and options, warrants or rights
convertible into such Common Stock (and any shares of Common Stock issuable
pursuant to such options, warrants or rights), issued to existing, former or
future employees, consultants or directors of the Company pursuant to any
agreement or arrangement approved by the Board of Directors of the Company; (f)
any shares of Common Stock issued upon exercise of options or warrants
outstanding on the date hereof; (g) securities issued pursuant to any stock
dividend, stock split, combination or other reclassification by the Company of
any of its capital stock; (h) securities issued to a third party in connection
with a transaction in which the Company licenses any intellectual property to be
used in the business of the Company from the third party or an affiliate
thereof; or (i) securities issued in connection with a strategic joint venture
or alliance between the Company and the party to which the securities are
issued, or an affiliate thereof.
1.3 Required Notices. In the event that the Company proposes to
undertake an issuance of New Securities, it shall give each Investor with rights
hereunder written notice of its intention, describing the type of New
Securities, the price and the general terms upon which the Company proposes to
issue the same. Each Investor shall have 15 days from the date of receipt of any
such notice to agree to purchase the Investor's pro rata share of such New
Securities for the price and upon the general terms specified in the notice by
giving written notice to the Company and stating therein the quantity of New
Securities to be purchased.
1.4 Effect of Investor's Failure to Participate. In the event that
Investors fail to exercise their rights of first refusal as to all New
Securities offered to them hereunder within said 15-day period, the Company
shall have 90 days thereafter to sell all such New Securities, at a price and
upon general terms no more favorable in any material respect to the purchasers
thereof than specified in the Company's notice. In the event the Company has not
sold all such New Securities within said 90-day period, the Company shall not
thereafter issue or sell any New Securities, without first offering such
securities to the Investors retaining rights hereunder in the manner provided
herein.
1.5 Expiration of Right. The rights of first refusal granted under
this Section 1 shall not apply to, and shall expire upon, (a) the effectiveness
of the Company's next registration statement for the sale of its shares of
Common Stock in a firm commitment underwritten public offering registered under
the 1933 Act (other than a registration relating solely to employee benefit
plans of not less than $5,000,000 (a "Qualified Public Offering"); (b) on the
fifth anniversary of the execution of this Agreement; or (c) if the Series A
Convertible Preferred Stock is no longer outstanding.
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2. COMPANY FINANCIAL RECORDS.
2.1 Financial Information. So long as an Investor shall owns Shares,
the Company will furnish such Investor the following reports:
(a) as soon as practicable after the end of each Company fiscal
year, and in any event within 120 days thereafter, audited consolidated balance
sheets of the Company and its subsidiaries, if any, as at the end of such fiscal
year, and audited consolidated statements of income and losses, shareholders'
equity and cash flows of the Company and its subsidiaries, if any, for such
fiscal year, prepared in accordance with generally accepted accounting
principles by a regionally recognized accounting firm and setting forth in each
case in comparative form the figures for the previous fiscal year, if any, all
in reasonable detail and accompanied by a report and opinion thereon by
independent auditors selected by the Company's Board of Directors;
(b) as soon as practicable after the end of each of the first three
quarters of the Company's fiscal year, but in any event within 60 days after the
end of each such quarter, the unaudited consolidated balance sheets of the
Company and its subsidiaries, if any, as of the end of such quarter, and its
unaudited consolidated statements of income and losses, shareholders' equity and
cash flows for such quarter, setting forth in each case in comparative form the
figures for the corresponding period of the preceding fiscal year, all in
reasonable detail and prepared in accordance with generally accepted accounting
principles, except that such financial statements may not contain notes and will
be subject to year-end adjustment, and certified by the principal financial or
accounting officer of the Company; and
(c) as soon as practicable after the adoption thereof, an annual
operating plan for the Company for each or its fiscal years, and, as soon as
practicable after the adoption thereof, copies of any revisions to such annual
operating plan.
The Company may refuse the rights granted pursuant to this Section to any
transferee of any such rights if the proposed transferee is reasonably believed
by the Company to be a competitor of the Company.
2.2 Expiration of Covenants. The covenants set forth in this Section
2 shall expire and be of no further force or effect upon: (a) the effectiveness
of the Company's next registration statement for the sale of its shares of
Common Stock in a firm commitment underwritten public offering registered under
the 1933 Act (other than a registration relating solely to employee benefit
plans of not less than $5,000,000 (a "Qualified Public Offering"); (b) on the
fifth anniversary of the execution of this Agreement; or (c) if the Series A
Convertible Preferred Stock is no longer outstanding.
C-4
<PAGE>
3. MISCELLANEOUS.
3.1 Entire Agreement. This Agreement and the documents referred to
herein constitute the entire agreement between the parties, and no party shall
be liable or bound to any other party in any manner by any warranties,
representations or covenants except as specifically set forth herein or therein.
The terms and conditions of this Agreement shall inure to the benefit of and be
binding upon the respective successors and assigns of the parties provided that
with respect to the Investors the rights hereunder shall only inure to the
benefit of and be binding upon a successor and assigns of an Investor if,
simultaneously with the transfer of the rights under this Agreement, a
transferor transfers at least 20% of the total shares of Series A originally
issued and outstanding pursuant to the Conversion Agreement to the direct or
indirect transferor of such transferee and the original Investor provides to the
Company written notice of such transfer. Nothing in this Agreement, express or
implied, is intended to confer upon any third party any rights, remedies,
obligations or liabilities under or by reason of this Agreement, except as
expressly provided in this Agreement.
3.2 Governing Law. This Agreement shall be governed by and construed
under the laws of the State of Virginia as applied to agreements among Virginia
residents made and to be performed entirely within the State of Virginia.
3.3 Counterparts. This Agreement may be executed 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.
3.4 Headings. The headings used in this Agreement are used for
convenience only and are not to be considered in construing or interpreting this
Agreement.
3.5 Notices. Any notice required or permitted under this Agreement
shall be given in writing and shall be deemed effectively given upon personal
delivery or delivery by telecopier or five days after deposit with the United
States postal authorities, by first-class mail, postage prepaid, addressed (a)
if to the Company, at:
ETS International, Inc., d/b/a Infracorps, Inc.
7400 Beaufont Springs Drive, Suite 415
Richmond, Virginia 23225
Attn: James B. Quarles
With a copy to:
LeClair Ryan, A Professional Corporation 707 East Main Street,
11th Floor Richmond, Virginia 23219 Attention: Gary D.
LeClair, Esq.
804.783.2003
C-5
<PAGE>
or at such other address as the Company shall have furnished to the Investors in
writing, and (b) if to a Investor, at such Investor's address as is set forth on
the books and records of the Company.
3.6 Severability. Any invalidity, illegality or limitation of the
enforceability with respect to any Investor of any one or more of the provisions
of this Agreement, or any part thereof, whether arising by reason of the law of
any such Investor's domicile or otherwise, shall in no way affect or impair the
validity, legality or enforceability of this Agreement with respect to other
Investors. In case any provision of this Agreement shall be invalid, illegal or
unenforceable, it shall to the extent practicable, be modified so as to make it
valid, legal and enforceable and to retain as nearly as practicable the intent
of the parties, and the validity, legality, and enforceability of the remaining
provisions shall not in any way be affected or impaired thereby.
3.7 Delays or Omissions. No delay or omission to exercise any right,
power or remedy accruing to the Company or any Investor upon any breach, default
or noncompliance of any Investor, or the Company under this Agreement, shall
impair any such right, power or remedy, nor shall it be construed to be a waiver
of any such breach, default or noncompliance, or any acquiescence therein, or of
any similar breach, default or noncompliance thereafter occurring. It is further
agreed that any waiver, permit, consent or approval of any kind or character on
the part of the Company or the Investors of any breach, default or noncompliance
under this Agreement or any waiver on the Company's or the Investors' part of
any provisions or conditions of this Agreement must be in writing and shall be
effective only to the extent specifically set forth in such writing and that all
remedies, either under this Agreement, by law, or otherwise afforded to the
Company and the Investors, shall be cumulative and not alternative.
3.8 Remedies. Without limiting the remedies available to any of the
parties hereto, each of the parties hereto stipulates and agrees that damages at
law will be an insufficient remedy in the event that any party violates the
terms of this Agreement, and each of the parties hereto further agrees that each
of the other parties hereto may apply for and have injunctive or other equitable
relief in any court of competent jurisdiction to restrain the breach or
threatened breach of, or otherwise specifically to enforce, the terms of this
Agreement.
3.9 Legal Counsel. This Agreement has been prepared by LeClair Ryan,
A Professional Corporation, as counsel to the Company, after full disclosure of
its representation of the Company and with the consent and direction of the
Investors. Each Investor has reviewed the contents of this Agreement and fully
understands its terms. Each Investor acknowledges that he or it is fully aware
of his right to the advice of counsel independent from that of the Company, that
LeClair Ryan, A Professional Corporation, has advised him or it of such right
and disclosed to him or it the risks in not seeking such independent advice, and
that he or it understands the potentially adverse interests of the parties with
respect to this Agreement. Each Investor further acknowledges that no
representations have been made with respect to the income or estate tax or
C-6
<PAGE>
other consequences of this Agreement to him or it and that he or it has
been advised of the importance of seeking independent advice of counsel with
respect to such consequences.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK.]
C-7
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Investor Rights
Agreement as of the date first above written.
COMPANY ETS INTERNATIONAL, INC.
By: _______________________________
James B. Quarles, President
INVESTORS
-----------------------------
Dr. Allen Kahn Trust
Dr. Allen Kahn, Trustee
-----------------------------
Coleman S. Lyttle
-----------------------------
Thomas W. Marmon Trust,
Thomas W. Marmon, Trustee
-----------------------------
Lee A. Raver
-----------------------------
Navin D. Sheth
C-8
<PAGE>
EXHIBIT F
FORM OF AMENDMENTS TO THE BYLAWS
F-1
<PAGE>
Amendment to the Bylaws
of
ETS International, Inc.
The following provisions of the Bylaws of ETS International, Inc. shall be
amended in their entirety or as otherwise noted, as follows:
1. ARTICLE III. BOARD OF DIRECTORS
SECTION 4. Special Meetings. Special meetings of the Board of Directors
may be called by (i) any two Directors, (ii) a director elected by holders of
Series A Convertible Preferred Stock upon the request of the holders of at least
25% of the issued and outstanding Series A Convertible Preferred Stock, or (iii)
at the request of the of the President of the corporation. The person or persons
authorized to call special meetings of the Board of Directors may fix the place
for holding any special meeting of the Board of Directors called by him or them.
SECTION 8. Compensation Committee, Option Committee, and Audit
Committee,.
(a) Compensation Committee. The Board of Directors, in its sole
discretion, shall designate a Compensation Committee which shall consist of one
or more Directors, and shall include the Directors elected by the holders of the
Series A Convertible Preferred Stock. In addition, the Board may at any time
designate one or more alternate members of such committee who shall be Directors
who may act in place of any absent regular member upon invitation by the
Chairman or Secretary of the Committee.
With respect to bonuses, the Compensation Committee shall have and
may exercise the powers to determine the amounts annually available for bonuses
pursuant to any bonus plan or formula approved by the Board, to determine bonus
awards to executive officers and to exercise such further powers with respect to
bonuses as may from time to time be conferred by the Board of Directors.
With respect to salaries, the Compensation Committee shall have and
may exercise the power to fix and determine from time to time all salaries of
the executive officers of the Corporation and non-officer employees whose annual
salary exceeds $100,000 and such further powers with respect to salaries as may
from time to time be conferred by the Board of Directors.
F-2
<PAGE>
Vacancies in the Compensation Committee shall be filled by the Board
of Directors, and members shall be subject to removal by the Board at any
time.
The Compensation Committee shall fix its own rules of procedure. A
majority of the number of regular members then serving shall constitute a
quorum; and regular and alternate members present shall be counted to determine
whether there is a quorum. The Compensation Committee shall keep minutes of its
meetings, and all action taken by it shall be reported to the Board of
Directors.
(b) Stock Option Committee. The Board of Directors, in its sole
discretion, shall designate a Stock Option Committee which shall consist of one
or more Directors, who shall not be employees of the Corporation and shall
include the Directors elected by the holders of the Series A Convertible
Preferred Stock. In addition, the Board may at any time designate one or more
alternate members of such committee who shall be Directors who may act in place
of any absent regular member upon invitation by the Chairman or Secretary of the
Committee.
The Stock Option Committee shall administer the Corporation's various
Stock Option Plans, including the 1997 Non-Statutory Stock Option Plan (the
"Plan") and from time to time may grant, consistent with the Plan, stock
options, stock appreciation rights and shares of restricted stock.
Vacancies in the Stock Option Committee shall be filled by the Board
of Directors, and members shall be subject to removal by the Board at any
time.
The Stock Option Committee shall fix its own rules of procedure. A
majority of the number of regular members then serving shall constitute a
quorum; and regular and alternate members present shall be counted to determine
whether there is a quorum. The Stock Option Committee shall keep minutes of its
meetings, and all action taken by it shall be reported to the Board of
Directors.
(c) Audit Committee. The Board of Directors, in its sole discretion, shall
designate an Audit Committee which shall consist of one or more Directors and
shall include the Directors elected by the holders of the Series A Convertible
Preferred Stock. Vacancies in the Committee shall be filled by the Board of
Directors with Directors, giving consideration to continuity of the
F-3
<PAGE>
Committee, and members shall be subject to removal by the Board at any time. The
Committee shall fix its own rules of procedures and a majority of the members
serving shall constitute a quorum. The Committee shall meet at least twice a
year with both the internal and the Corporation's outside auditors present at
each meeting and shall keep minutes of its meetings and all action taken shall
be reported to the Board of Directors. The Committee shall review the reports
and minutes of any audit committees of the Corporation's subsidiaries. The
Committee shall review the Corporation's financial reporting process, including
accounting policies and procedures. The Committee shall examine the report of
the Corporation's outside auditors, consult with them with respect to their
report and the standards and procedures employed by them in their audit, report
to the Board the results of its study and recommend the selection of auditors,
who shall be at least a regionally recognized accounting firm, for each fiscal
year.
SECTION 10. Vacancies. In the first sentence, insert "or the
Articles of Incorporation" after "unless otherwise provided by the law."
ARTICLE IV. OFFICERS
SECTION 9. Salaries. In the first sentence, insert "Compensation
Committee of the" after "from time to time by the."
ARTICLE XI. AMENDMENTS.
These by-laws may be altered, amended or repealed by the affirmative
vote of all of the Board of Directors then in office at any regular
meeting of the Board, or by a majority of the Board of Directors at
any regular or special meeting of the Board if notice of the
proposed amendment shall have been given to all of the members of
the Board of Directors; provided, however, no alteration, amendment
or repeal of Article 3 Section 8 shall be effective unless the
members of the Board of Directors elected by the holders of the
Series A Convertible Preferred Stock shall have voted for such
alteration, amendment or repeal.
F-4
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
FINANCIAL STATEMENTS FOR THE THREE MONTH PERIOD ENDED JUNE 30, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> JUN-30-1998
<CASH> 224,404
<SECURITIES> 0
<RECEIVABLES> 2,890,289
<ALLOWANCES> 50,000
<INVENTORY> 777,479
<CURRENT-ASSETS> 4,557,531
<PP&E> 5,962,158
<DEPRECIATION> (3,469,135)
<TOTAL-ASSETS> 8,217,203
<CURRENT-LIABILITIES> 4,375,579
<BONDS> 732,808
0
0
<COMMON> 6,126,338
<OTHER-SE> (6,813,605)
<TOTAL-LIABILITY-AND-EQUITY> 8,217,203
<SALES> 0
<TOTAL-REVENUES> 4,290,922
<CGS> 0
<TOTAL-COSTS> 3,627,537
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (144,347)
<INCOME-PRETAX> 26,352
<INCOME-TAX> 0
<INCOME-CONTINUING> 26,352
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 26,352
<EPS-PRIMARY> .00
<EPS-DILUTED> .00
</TABLE>
