SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended: December 31, 1998
Commission File Number:33-385-11-FW
CHEQUEMATE INTERNATIONAL, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Utah 76-0279816
--------------------------------------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
57 West 200 South, Suite 350; Salt Lake City, Utah 84101
--------------------------------------------------------
(Address of principal executive offices)
(801) 322-1111
---------------------------
(Issuer's Telephone Number)
Check whether the Issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirement for the
past 90 days . YES X NO
----- -----
State the number of shares outstanding of each of the issuer's common equity, as
of the latest practicable date:
February 9, 1999: 18,326,951
Transitional Small Business Format: YES NO X
----- -----
<PAGE>
TABLE OF CONTENTS
-----------------
PART I-Financial Statements
------
Item 1. Financial Statements
ACCOUNTANTS' REPORT 5
UNAUDITED CONSOLIDATED BALANCE SHEETS 6-7
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS 8
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS 9-10
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 11-19
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation.
GENERAL INFORMATION 20
RESULTS OF OPERATIONS 21-22
LIQUIDITY AND CAPITAL RESOURCES 23
YEAR 2000 COMPLIANCE 23
PART II-Other Information
-------
Item 2. Changes in Securities and Use of Proceeds 24-26
Item 5. Other Information 26
Item 6. Exhibits and Reports on Form 8-K 27
Exhibit 10.1 29
Exhibit 10.2 49
Exhibit 10.3 59
<PAGE>
CHEQUEMATE INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and March 31, 1998
3
<PAGE>
C O N T E N T S
Independent Accountants' Report.............................................. 5
Consolidated Balance Sheets.................................................. 6
Consolidated Statements of Operations........................................ 8
Consolidated Statements of Cash Flows........................................ 9
Notes to Consolidated Financial Statements................................... 11
4
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
-------------------------------
To the Board of Directors and Stockholders
Chequemate International, Inc.
Salt Lake City, Utah 84101
The accompanying consolidated balance sheets of Chequemate International, Inc.,
and its subsidiaries as of December 31, 1998 and the related consolidated
statements of operations and cash flows for the three months and nine months
ended December 31, 1998 and 1997 were not audited by us and, accordingly, we do
not express an opinion on them.
The accompanying balance sheet as of March 31, 1998 was audited by us and we
expressed an unqualified opinion on it in our report dated June 23, 1998.
The financial statements presented were prepared in compliance with regulation
S-X for form 10-QSB for the Securities and Exchange Commission and contain
selected footnote disclosures. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
Jones, Jensen & Company
Salt Lake City, Utah
February 1, 1999
5
<PAGE>
CHEQUEMATE INTERNATIONAL, INC.
Consolidated Balance Sheets
ASSETS
------
December 31, March 31,
1998 1998
---------- ----------
(Unaudited)
CURRENT ASSETS
Cash $ 739,901 $ 220,840
Accounts receivable - net of allowances of $153,446
and $115,000 244,633 24,305
Prepaid expenses 52,561 11,259
Inventory (Note 2) 3,056,630 2,684,378
---------- ----------
Total Current Assets 4,093,725 2,940,782
---------- ----------
PROPERTY AND EQUIPMENT (Note 3) 528,098 200,335
---------- ----------
OTHER ASSETS
Organization costs and product rights (Note 1) 2,499,703 2,657,296
Refundable deposits 290,704 8,053
Investments in subsidiaries 3,000 3,000
---------- ----------
Total Other Assets 2,793,407 2,668,349
---------- ----------
TOTAL ASSETS $7,415,230 $5,809,466
========== ==========
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
CHEQUEMATE INTERNATIONAL, INC.
Consolidated Balance Sheets
<TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<CAPTION>
December 31, March 31,
1998 1998
------------ ------------
(Unaudited)
CURRENT LIABILITIES
<S> <C> <C>
Accounts payable $ 1,112,652 $ 1,584,576
Related party accounts payable (Note 15) 42,034 42,034
Customer deposits -- 54,724
Accrued expenses 86,439 43,339
Income tax payable (Note 1) 500 500
Accrued interest - related party (Note 5) 65,903 65,903
Current portion related party (Note 5) 150,000 156,802
Current portion long-term debt (Note 6) 260,074 50,080
Current portion capital lease (Note 7) 25,845 4,989
------------ ------------
Total Current Liabilities 1,743,447 2,002,947
------------ ------------
LONG-TERM LIABILITIES
Long-term debt (Note 6) 1,190,000 11,976
Capital lease obligations (Note 7) -- 2,788
------------ ------------
Total Long-Term Liabilities 1,190,000 14,764
------------ ------------
Total Liabilities 2,933,447 2,017,711
------------ ------------
STOCKHOLDERS' EQUITY
Common stock, $0.0001 par value 500,000,000 shares
authorized, 17,630,163 and 14,088,650 shares
outstanding, respectively 1,763 1,409
Subscribed stock (Note 4) 2,064,874 4,022,970
Capital in excess of par 19,496,379 14,960,783
Accumulated deficit (17,081,233) (15,193,407)
------------ ------------
Total Stockholders' Equity 4,481,783 3,791,755
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,415,230 $ 5,809,466
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
CHEQUEMATE INTERNATIONAL, INC.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
December 31, December 31,
---------------------------- ----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES $ 275,937 $ 351,405 $ 443,313 $ 945,498
COST OF SALES 144,330 226,458 250,575 425,277
------------ ------------ ------------ ------------
GROSS PROFIT 131,607 124,947 192,738 520,221
------------ ------------ ------------ ------------
EXPENSES
Selling expenses 84,448 726,109 299,957 1,412,955
General and administrative 606,811 652,565 1,599,581 2,315,829
------------ ------------ ------------ ------------
Total Expenses 691,259 1,378,674 1,899,538 3,728,784
------------ ------------ ------------ ------------
Loss from Operations (559,652) (1,253,727) (1,706,800) (3,208,563)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE)
Loss on sale of assets -- -- (165,167) --
Other income -- 136,981 -- 136,981
Interest income 782 -- 782 12,913
Interest expense (9,258) (3,388) (16,641) (14,912)
------------ ------------ ------------ ------------
Total Other Income
(Expense) (8,476) 133,593 (181,026) 134,982
------------ ------------ ------------ ------------
NET LOSS BEFORE INCOME
TAXES (568,128) (1,120,134) (1,887,826) (3,073,581)
INCOME TAX PROVISION -- 300 -- 300
------------ ------------ ------------ ------------
NET LOSS $ (568,128) $ (1,120,434) $ (1,887,826) $ (3,073,881)
============ ============ ============ ============
BASIC LOSS PER SHARE $ (0.03) $ (0.08) $ (0.12) $ (0.23)
============ ============ ============ ============
BASIC AVERAGE NUMBER
OF SHARES OUTSTANDING 16,333,630 13,463,717 16,333,630 13,463,717
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
<TABLE>
CHEQUEMATE INTERNATIONAL, INC.
Consolidated Statements of Cash Flows
<CAPTION>
For the Three Months Ended For the Nine Months Ended
December 31, December 31,
-------------------------- --------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
CASH FLOWS FROM OPERATING
ACTIVITIES:
<S> <C> <C> <C> <C>
Net (loss) $ (568,128) $(1,120,434) $(1,887,826) $(3,073,881)
Adjustments to reconcile net loss to
net cash provided by operating
activities:
Depreciation and amortization 54,732 96,158 209,296 369,894
(Increase) decrease in accounts
receivable (159,132) (111,481) (258,774) (105,678)
(Increase) decrease in inventory (608,928) 45,983 (372,252) (2,679,991)
(Increase) decrease in prepaid expense (41,753) 58,860 (41,302) (63,186)
(Increase) decrease in deposits (282,651) -- (282,651) --
Increase (decrease) in accounts payable (405,902) 136,135 (260,930) 1,357,962
Increase (decrease) in short-term debt 57,724 (225,000) -- (300,000)
Increase (decrease) in accrued expenses 879 (78,833) 43,100 (51,754)
Increase (decrease) in customer deposits (54,724) -- (54,724) --
Increase (decrease) in income taxes
payable -- -- -- (400)
----------- ----------- ----------- -----------
Net Cash (Used) by Operating
Activities (2,007,883) (1,198,612) (2,906,063) (4,547,034)
----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Sale of software -- 446,058 -- 446,058
Equipment purchase (315,898) -- (315,898) (74,326)
Investment in subsidiary -- (100,000) -- (100,000)
----------- ----------- ----------- -----------
Net Cash (Used) by Investing
Activities (315,898) 346,058 (315,898) 271,732
----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from common stock 1,818,104 742,121 2,578,926 1,009,929
Proceeds from subscribed stock -- -- -- 3,203,000
Payments of capital leases (5,604) (1,143) (7,054) (6,034)
Proceeds from notes 1,190,000 -- 1,190,000 --
Payments of long-term debt (19,778) (25,172) (20,850) (68,341)
----------- ----------- ----------- -----------
Net Cash Provided by Financing
Activities $ 2,982,722 $ 715,806 $ 3,741,022 $ 4,138,554
----------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
9
<PAGE>
<TABLE>
CHEQUEMATE INTERNATIONAL, INC.
Consolidated Statements of Cash Flows (Continued)
<CAPTION>
For the Three Months Ended For the Nine Months Ended
December 31, December 31,
----------------------- -----------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
NET INCREASE (DECREASE) IN CASH $ 658,941 $(136,748) $ 519,061 $(136,748)
CASH AT BEGINNING PERIOD 80,960 165,536 220,840 165,536
--------- --------- --------- ---------
CASH AT END OF PERIOD $ 739,901 $ 28,788 $ 739,901 $ 28,788
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
10
<PAGE>
CHEQUEMATE INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
December 31, 1998 and March 31, 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company's accounting policies reflect practices of the
software sales, 3D electronic device sales and services industries
and conform to generally accepted accounting principles. Certain
prior year amounts have been reclassified to be consistent with
the March 31, 1998 presentation. The following policies are
considered to be significant:
Principles of consolidation
---------------------------
The consolidated financial statements include the accounts of the
Company and its subsidiaries, Families in Focus, Inc., AC&T
Direct, Chequemate Third Dimension, Inc. and Chequemate
Tele-Services, Inc. All significant intercompany accounts and
transactions have been eliminated.
Revenue recognition
-------------------
Revenue is recognized on an accrual basis upon deliver of the
software or product. Revenue consists of software sales, product
sales, license fees, and monthly service fees.
Organization costs and product rights
-------------------------------------
Organization and production costs have been capitalized and
amortized over five years using a straight line method. The total
amortization of organizational and production costs for the nine
months ended December 31, 1998 and for the year ended March 31,
1998 amounted to $121,754 and $427,575 , respectively.
Property and equipment
----------------------
Property and equipment are stated at cost with depreciation and
amortization computed on the straight line method. Property and
equipment are depreciated over the following estimated useful
lives:
Years
-----
Office equipment 5
Office furniture 5-7
Machinery and equipment 5
Leasehold improvements 3-5
Capital leases 3-5
<TABLE>
<CAPTION>
Organization costs and product rights Net Book Value
------------------------------------- -----------------------
March 31, Dec. 31,
Term Cost Amortization 1998 1998
------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Product rights 5 years $2,972,167 $ 472,464 $2,580,574 $2,499,703
Training video 5 years -- -- 76,722 --
Organization cost 5 years 17,261 17,261 -- --
------- ---------- ---------- ---------- ----------
$2,989,428 $ 489,725 $2,657,296 $2,499,703
========== ========== ========== ==========
</TABLE>
11
<PAGE>
CHEQUEMATE INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
December 31, 1998 and March 31, 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Basic loss per share
--------------------
Basic loss per share is calculated using a weighted average for
common stock and common stock equivalents.
Cash flows
----------
For purposes of reporting cash flows, cash and cash equivalents
include cash on hand and cash on deposit with banks.
Income taxes
------------
The Company's tax basis is the same as the Company's financial
statement basis. The Company has net operating loss carryforwards
of approximately $17,000,000 available to offset future federal
and state income tax through 2013. The Company has not recorded a
tax benefit attributable to the carryforwards because realization
of such benefit cannot be assured.
Computer software costs
-----------------------
The Company classifies the costs of planing, designing and
establishing the technological feasibility of computer software
product as software development costs and charges those costs to
expense when incurred. Costs incurred for duplicating computer
software from product masters, documentation and training
materials and packaging costs are capitalized as inventory and
charged to cost of sales when revenue is recognized. Costs of
maintenance and customer support are charged to expense when costs
are incurred.
Estimates
---------
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Unaudited financial statements
------------------------------
The accompanying unaudited financial statements include all of the
adjustments which, in the opinion of management, are necessary for
a fair presentation. Such adjustments are of a normal, recurring
nature.
12
<PAGE>
CHEQUEMATE INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
December 31, 1998 and March 31, 1998
<TABLE>
NOTE 2 - INVENTORY
<CAPTION>
December 31, March 31,
1998 1998
----------------- ---------------
(Unaudited)
<S> <C> <C>
Finished goods $ 1,610,510 $ 1,238,258
WIP 124,243 124,243
Raw goods 1,321,877 1,321,877
----------------- ---------------
$ 3,056,630 $ 2,684,378
================= ===============
</TABLE>
The Company inventories are stated at the lower of cost or market,
using the first-in, first-out (FIFO) method.
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment as of December 31, 1998 and March 31, 1998
are detailed in the following summary:
<TABLE>
<CAPTION>
Net Book Value
-------------------------
Accumulated December 31, March 31,
Cost Depreciation 1998 1998
-------- -------- -------- --------
(Unaudited)
<S> <C> <C> <C> <C>
Office furniture and fixtures $ 61,147 $ 36,262 $ 24,885 $ 33,237
Machinery and equipment 594,975 113,270 481,705 161,464
Capital leases 26,877 25,603 1,274 2,707
Leasehold improvements 24,581 4,347 20,234 2,927
-------- -------- -------- --------
Total $707,580 $179,482 $528,098 $200,335
======== ======== ======== ========
</TABLE>
Depreciation expense is computed principally on the straight line
method in amounts sufficient to write off the cost of depreciable
assets over their estimated useful lives. Depreciation expense for
the nine months ended December 31, 1998 and the year ended March
31, 1998 amounted to $87,542 and $70,209, respectively.
NOTE 4 - STOCKHOLDERS' EQUITY
The Company is authorized to issue 500,000,000 shares of common
stock, par value $.0001. Currently the Company has issued
17,630,163 shares of common stock.
During the period from April 1993 through March 1998, the Company
issued 2,913,961 shares of common stock pursuant to a private
placement. These shares were offered under Regulation S to non
U.S. persons.
13
<PAGE>
CHEQUEMATE INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
December 31, 1998 and March 31, 1998
NOTE 4 - STOCKHOLDERS' EQUITY (Continued)
The Company continued the subscription of Regulation S stock in
the current period. The Company's plans are to continue placing
stock through private placements to fund the growth requirements
of the Company. As part of the private placement, the Company
received $2,064,874 for the sale of approximately 2,200,000 shares
of common stock. The Company has accounted for the transaction as
subscribed stock until the stock could be issued.
NOTE 5 - RELATED PARTIES
<TABLE>
Notes payable to related parties as of December 31, 1998 and March
31, 1998 are detailed in the following summary:
<CAPTION>
December 31, March 31,
1998 1998
----------------- -----------------
(Unaudited)
Note payable to Chairman; due on demand, with an
<S> <C> <C>
interest rate of 10.4%. $ 150,000 $ 135,000
Note payable to Chairman; due in monthly interest installments of
$930 with an interest rate of 12%; due December 31, 1998;
unsecured;
accrued interest of $71,602 is due. -- 21,802
----------------- -----------------
Total related party notes payable 150,000 156,802
Less: current portion (150,000) (156,802)
----------------- -----------------
Long-term portion $ -- $ --
================= =================
Maturities of the related party notes payable are as follows:
Period ending December 31, 1998 $ 150,000
1999 --
-----------------
Total $ 150,000
=================
</TABLE>
14
<PAGE>
CHEQUEMATE INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
December 31, 1998 and March 31, 1998
NOTE 6 - LONG-TERM DEBT
Notes payable as of December 31, 1998 and March 31, 1998 are
detailed in the following summary:
<TABLE>
<CAPTION>
December 31, March 31,
1998 1998
----------------- -----------------
(Unaudited)
Note payable to a company; due in monthly
payments of $19,000, which includes interest
<S> <C> <C>
at 6%, unsecured. $ 210,994 $ --
Note payable to a company; due May 1, 2000,
option to convert to common stock, interest at 10%,
unsecured. 440,000 --
Convertible 8% debenture; due December 21, 2001.
Interest due quarterly, unsecured. 750,000 --
Note payable to a company; due in monthly
installments of $3,244 which includes
interest at 8%; due July, 1999, unsecured. 49,080 62,056
----------------- -----------------
Total long-term debt 1,450,074 62,056
Less: current portion (260,074) (50,080)
----------------- -----------------
Long-term portion $ 1,190,000 $ 11,976
================= =================
Maturities of long-term debt are summarized below:
Period ending December 31 1999, $ 260,074
2000 440,000
2001 750,000
2002 --
2003 --
-----------------
Total $ 1,450,074
=================
NOTE 7 - LEASES
All noncancelable leases with an initial term greater than one
year have been categorized as capital or operating leases in
conformity with the definitions in Financial Accounting Standards
Board Statement No. 13, "Accounting for Leases".
The following analysis represents property under capital lease at
December 31, 1998 and March 31, 1998:
December 31, March 31,
1998 1998
----------------- -----------------
(Unaudited)
Equipment $ 26,877 $ 26,877
Less: accumulated depreciation (25,603) (24,170)
----------------- -----------------
Net property under capital lease $ 1,274 $ 2,707
================= =================
</TABLE>
15
<PAGE>
CHEQUEMATE INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
December 31, 1998 and March 31, 1998
NOTE 7 - LEASES (Continued)
At December 31, 1998, the Company is liable under the terms of
non-cancelable leases for the following minimum lease commitments:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
----------------- -----------------
Period ended December 31,
<S> <C> <C> <C>
1999 $ 4,070 $ 184,649
2000 3,561 166,941
2001 -- 146,169
2002 -- 31,368
later years -- --
----------------- -----------------
Total minimum lease payments 7,631 529,127
Less: interest (1,304)
-----------------
Present value of net minimum lease payment 6,327
Less: current portion (6,327)
-----------------
Capital lease obligations payable long-term $ --
=================
Rental expense for the years ended December 31, 1998 amounted to $95,262.
NOTE 8 - CASH FLOW AND NON CASH INVESTING AND FINANCING ACTIVITIES
Cash flow information
December 31, March 31,
1998 1998
----------------- -----------------
(Unaudited)
Interest paid $ 16,641 $ 18,478
Interest received $ -- $ 24,152
Income taxes paid $ -- $ 400
Non-cash investing and financing activities
For the nine months ending December 31, 1998 and March 31, 1998,
the Company incurred the following non-cash investing and
financing activities.
December 31, March 31,
1998 1998
----------------- -----------------
(Unaudited)
Capital lease obligations incurred $ -- $ --
Issuance of stock and options for
services rendered $ -- $ 651,517
</TABLE>
16
<PAGE>
CHEQUEMATE INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
December 31, 1998 and March 31, 1998
NOTE 9 - FINANCIAL INSTRUMENTS
Concentrations of credit risk
-----------------------------
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of trade
receivables. The Company provides credit to its customers in the
normal course of business. However, the Company performs ongoing
credit evaluations of its customers and maintains allowances for
potential credit losses. The Company places its temporary cash
investments with high quality financial institutions. At times
such investments may be in excess of the FDIC insurance limit.
NOTE 10 - RIGHTS TO SOFTWARE PRODUCT
The Company obtained all the rights associated with the sexual
harassment and OSHA compliance software through assuming third
party debt associated with development of the product. In May of
1997, the Company obtained exclusive rights to an intellectual
property from Advance Technology Group (See Note 14).
NOTE 11 - ACQUISITIONS
On February 27, 1997, the Company established Chequemate
Tele-Services, Inc. (CTS) along with another individual and
received fifty-one percent (51%) of the company. CTS then entered
into an asset purchase agreement to acquire all of the assets of
Quality Products Distribution, Inc. The assets consisted mainly of
credit card processing software and certain intangibles. In
November of 1997, the Company sold the processing software and
related intangibles.
On December 8, 1998, the Company entered into an asset purchase
agreement to acquire certain of the assets of Alpha Broadcasting
Communications. The assets consist mainly of inventory and
equipment.
NOTE 12 - GOING CONCERN
The Company's financial statements are prepared using generally
accepted accounting principles applicable to a going concern which
contemplates the realization of assets and liquidation of
liabilities in the normal course of business. The Company has
incurred losses from its inception through December 31, 1998. The
Company does not have an established source of revenues sufficient
to cover its operating costs and to allow it to continue as a
going concern. It is the intent of the Company to seek additional
financing through private placements of its common stock.
Management has formulated a plan to seek additional financing from
outside investors and through Reg. S offerings to non U.S.
persons. Management is proceeding with a merger with a U.S.
company to better enhance marketing of its '3-D' product. In
addition, the Company is seeking a joint venture with a national
hotel chain to use its '3-D' technology.
17
<PAGE>
CHEQUEMATE INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
December 31, 1998 and March 31, 1998
NOTE 13 - COMMON STOCK OPTIONS
Effective May 17, 1995, the stockholders approved an Incentive
Stock Option Plan granting to key employees options to purchase
Company common stock over a ten year period, at the fair market
value at time of grant. The aggregate number of common shares of
the Company which may be granted under the plan is 800,000 shares.
The plan expires on March 23, 2004.
Activity regarding stock options is summarized as follows:
<TABLE>
<CAPTION>
Number of Shares
---------------------------------------
December 31, March 31,
1998 1998
----------------- -----------------
(Unaudited)
Options Granted:
<S> <C> <C>
Beginning of year 354,800 354,800
Additional granted -- --
----------------- -----------------
End of year 354,800 354,800
================= =================
Options Exercised:
Beginning of year 100 100
Additional exercised -- --
Expired -- --
----------------- -----------------
End of year 100 100
================= =================
Options Outstanding at End of Year -- --
================= =================
</TABLE>
Option prices range from $6.25 to $7.00 per share. Options price
for regional directors and executive officers is $3.50 per share.
The Company granted several stock options to various individuals
for service performed or for future services. The option price for
the services performed was stated at $5.00 per share on 14,000
shares. The option price granted on future services was the lower
of the bid price or $7.50 per share on 100,000 shares. In the
current year the option price was $0.01 per share.
NOTE 14 - ACQUISITION OF TECHNOLOGY
In May of 1997, the Company formed the wholly-owned subsidiary,
Chequemate Third Dimension, Inc, (CTD). CTD then entered into an
agreement to acquire technology relating to certain intellectual
property from Advanced Technology Group, LLC. The agreement called
for CMI to contribute to CTD three million dollars within sixty
(60) days of signing. In addition, the agreement requires the
Company to establish a non-qualified stock option for certain
members of the LLC. The non-qualified stock option plan provides
various individuals the option to acquire 2,000,000 shares of
stock at a grant price of $0.01 per share.
18
<PAGE>
CHEQUEMATE INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
December 31, 1998 and March 31, 1998
NOTE 15 - RELATED PARTY TRANSACTIONS
The Company owes certain officers and directors royalties from
the revenue of book sales. In addition, the Company owes a major
shareholder royalties on active users of the Chequemate product.
The total amount owing to these individuals as of December 31,
1998 and March 31, 1998 was $42,034 and $42,034, respectively.
NOTE 16 - SALE OF ASSETS - RELATED PARTY
The Company entered into an agreement with TFL, L.L.C. to sell
all of the assets of the Company's financial services business
during the three months period ended September 30, 1998. The
selling price of these assets was $50,000. The terms of the
repayment are 25% of the TFL, L.L.C. profits until the $50,000 is
repaid. The $50,000 must be repaid by October 31, 2001.
19
<PAGE>
Item 2: Management's Discussion and Analysis of Financial condition and Results
of Operation
General
For more detailed information, please refer to the Unaudited
Financial Statements for the nine month period ending December 31, 1998. A copy
of these Financial Statements are included in Item 1 of this report.
The Company's business strategy is based on leveraging its
patented 3D technology. In 1997 the Company acquired the exclusive rights to a
digital imaging system that allows the creation of 3D images on any television.
The system is capable of displaying pre-processed stereoscopic imagery, or
converting two-dimensional media into three-dimensional images in real time. The
3D Imaging System accepts NTSC or PAL compatible signals from network
broadcasts, video game consoles, satellite transmissions, video input from a
signal source, VCR's or any video component. After receiving a composite input
from a signal source, the system digitally processes the images and displays
them in real time on any standard television.
The Company is now launching the first television network to
exclusively offer 3D programming to satellite dish owners, cable TV subscribers
and hotel guests through a pay-per- view delivery system. The Company's 3D
network was launched by SpaceNet to the C-Band satellite market in January of
1999. C-Band satellite subscribers utilize the large satellite dishes, whereas
Direct to Home or "DTH" subscribers utilize much smaller dishes. The 3D channel
will be both a subscriber and advertiser supported television network. The
Company's strategy is to become a premier niche television channel utilizing its
proprietary technology. 3D programming will be geared toward television viewers
who are looking for a new level of entertainment. Content for the channel will
be a combination of modified two-dimensional material, and original and acquired
3D material. The 3D channel should prove attractive to cable stations and DTH
carriers since they share in the monthly subscription fee. As the number of
subscribers grows, the network will be positioned to generate advertising
revenue.
The Company has chosen to penetrate the C-Band market first
because it can be done quickly and inexpensively while meeting the pent-up
demand of C-Band owners for more programming. This market has an estimated
subscriber base of more than 2 million customers. These customers have made a
significant investment in the eight to twelve foot satellite dish needed to
receive television reception. As an industry, C-Band technology is still the
most widely used delivery method to transmit and receive television programing
to cable operators in the U.S.
The second phase of the roll out strategy is focused on cable TV.
With over 65 million subscribers, the cable industry is the largest of the four
television entertainment broadcast mediums. With a limited ability to increase
the number of homes passed, cable operators are always looking for new
programming niches to increase their revenue base. The Company has begun
discussions with several Multiple Systems Operators (MSO's).
The third phase of the roll out is focused on the 7.6 million
Direct to Home (DTH) subscribers that use the 18 to 24 inch dish and receiver
systems. The DTH market has been in existence for a relatively short period but
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has enjoyed very strong growth. This growth is expected to continue as DTH
offers a very attractive alternative to cable. It offers more television
programming, an acceptable installation process, is priced competitively, has
better picture and audio quality, more pay-per-view options and specialized
"niche" channels. The Company is in the process of evaluating the most favorable
digital platform for its launch.
The fourth phase will be focused on the lodging industry. By
differentiating programming and offering a unique 3D television viewing option,
the Company believes that lodging properties will increase pay-per-view buy
rates simply through consumer curiosity.
The Company has been able to successfully begin the
implementation of its business plan during the past quarter. Some of the key
elements of the business plan which have already been accomplished were securing
the satellite space segment and uplink service, opening an Los Angeles office to
help in the production and acquisition of 3D content, and securing advertising
to help promote the new 3D channel. An informational piece has already been
produced to explain the new 3D channel and how people can subscribe and obtain
the proper equipment. This show which lasts approximately 30 minutes will be
shown on our own network and can also be placed as advertisements on other
broadcast networks. The satellite space that has been secured for the
broadcasting of our channel is located on GE Spacenet 3R, Transponder 5. The
programming is expected to include a wide variety of choices including action
and horror movies, sporting events, nature shows, animation, travel and
documentary, and many others.
For the quarter ended December 31, 1998, the Company generated
revenues of $275,937 approximately 51% of total revenues came from sales related
to the 3D Imaging System. Five percent of revenues was from the newly acquired
hotel pay-per-view business and 44% of revenue from acting as a re-seller of 3D
graphic software. In addition to these sources of revenue, the Company also
anticipates future revenues to come from subscribers to the 3D network,
contracts with cable and satellite providers, and advertising revenue. The
Company's results of operations and future earnings is dependent on its ability
to further the implementation of its business plan and generate greater
revenues. This dependence may cause significant volatility to the stock price,
particularly on a quarterly basis.
The Company was also able to successfully close the asset
purchase from Alpha Broadcasting and immediately step into the hotel
pay-per-view business. This not only gives the Company an instant source of
revenue, but also another distribution channel for its 3D technology.
Results of Operations
Comparison of Quarters Ended December 31, 1998 and 1997
Gross Revenue
For the quarter ended December 31, 1998, total gross revenue of
the Company was $275,937 compared to $351,405 for the quarter ended December 31,
1997; a decrease of $75,468. However, revenues increased by nearly $200,000 when
compared to the quarter which ended September 30, 1998. The reason for this
sudden climb is an increase in sales from the 3D Imaging as well as new sources
of revenue from the hotel pay-per-view business and the reselling of graphic 3D
software.
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Gross Profit
The Company experienced a gross profit for the quarter ended
December 31, 1998 of $131,607 compared to gross profit of $124,947 for the
quarter ended December 31, 1997. The increase can be attributed to better profit
margins from the pay-per-view business and 3D software along with more sales
from the 3D Imaging system.
Operating Expenses
General and Administrative along with Selling expenses for the
quarter ending December 31, 1998 were $691,259 compared to $1,378,674 for the
same quarter last year; a decrease of $687,415. The decrease is to due to the
continuing focus on the 3D segment which caused the elimination of overhead
associated with other business areas of the Company.
Net Loss
The Company's net loss for the quarter ending December 31, 1998
was $568,128 a decrease of $552,306, when compared to the $1,120,434 loss for
the quarter ended December 31, 1997. The improvement is due to a slight increase
in gross profit and considerable decrease in expenses. The large decrease in
expenses and the corresponding improvement in the net loss is due to the
strategic decision to dispose of the financial services segment of the
corporation. It is anticipated that expenses will increase to support the new 3D
channel and provide more marketing dollars. It is expected that this increase in
expenses will be offset however by an increasing revenue stream.
Comparison of Nine Month Periods Ended December 31, 1998 and 1997
Gross Revenue
For the nine month period ended December 31, 1998, total gross
revenue of the Company was $443,313 compared to $945,498 for the nine month
period ended December 31, 1997; a decrease of $502,185. The lower revenue number
can be in part attributed to revenue which was lost due to selling the financial
services segment of the corporation. This action however was successful in
cutting expenses and focusing efforts on the 3D technology. During the quarter
just ended, the new revenue sources related to 3D technology have taken hold and
started to significantly replace any revenue that was lost.
Gross Profit
Gross profit for the nine month period ended December 31, 1998
was $192,738 compared to gross profit of $520,221 for the nine months ended
December 31, 1997. Much like the revenue, gross profit over the nine month
period is lower due to the strategic decisions which took place. However, with
the new revenue sources, the quarterly gross profit actually increased when
compared to last year.
Operating Expenses
General and Administrative expenses for the nine month period
ended December 31, 1998 were $1,599,581 compared to $2,315,829 for the same nine
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month period last year; a decrease of $716,248. The decrease is to due to the
continuing focus on the 3D segment which caused the elimination of overhead
associated with other business areas of the Company.
Net Loss
The Company's net loss for the nine month period ended December
31, 1998 was $1,887,826 a decrease of $1,185,755, when compared to the
$3,073,881 loss for the nine month period ended December 31, 1997. The
improvement is due to decreases in expenses related to the disposed financial
services segment of the corporation rather than increased revenue and gross
profit.
Liquidity and Capital Resources
The Company is currently unable to finance its operations from
cash flow from operating activities. The Company continues to finance its
operations through the net proceeds from private placements of its equity. A
convertible debenture agreement was executed during December for $750,000 and
second debenture agreement was executed on February 9, 1999 for $2,000,000. The
Company is required to register shares under the convertible debenture
agreements executed in December and February. The Company also continues to
receive capital from its Regulation S agreements with non-U.S. persons at rate
of $400,000 a month.
At December 31, 1998, the Company had current assets of
$4,093,725 and current liabilities of $1,743,447 resulting in net working
capital of $2,350,278 and a current ratio of 2.35. This is an increase of
$1,412,443 from the Company's working capital of $937,835 as of March 31, 1998.
The Company's total liabilities as of December 31, 1998 were $2,933,447, an
increase of $915,736, when compared to total liabilities as of March 31, 1998.
This increase is due to the note payable to Alpha Broadcasting related to the
asset acquisition and to the debenture agreement reached during the quarter.
Year 2000 Compliance
The Year 2000 issue is a result of computer programs being
written using two digits rather than four to define the applicable year. Any of
the Company's computer programs that have date-sensitive software may recognize
a date using "00" as the year 1900 rather than the year 2000. This could result
in a system/job failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar business transactions.
The Company utilizes and is dependent upon computer systems and
software to conduct its business. The Company began a review of its computer
systems and software applications during the first quarter of 1998. Preliminary
indications are that most of Company's systems are already year 2000 compliant
and that others can become compliant through manufacturer updates. The Company
does not use any specialized software programmed internally in its operations,
so there will be no need for expensive re- programming of this kind of system.
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The Company has initiated formal communications with all of its
significant suppliers and larger customers to determine the extent to which the
Company is vulnerable to third party failure to remediate their own Year 2000
issue. However, there can be no guarantee that the systems of other companies on
which the Company's systems rely will be timely converted, or that failure to
convert by another company, or a conversion that is incompatible with the
Company's systems, would not have a material adverse effect on the Company.
The Company presently believes that with modifications to
existing software and conversions to new software for those systems which may be
affected by the Year 2000 issue can be mitigated. However, if such modifications
and conversions are not made, or are not completed timely, the Year 2000 issue
could have a material adverse impact on the operations of the Company.
Forward-Looking Statements
Certain matters in the above discussion contain "forward-looking
statements". These forward-looking statements can generally be identified as
such because the context of the statement will include words such as the Company
"believes," "anticipates," "expects," "estimates," or words of similar meaning.
Similarly, statements that describe the Company's future plans, objectives or
goals are also forward-looking statements. Such forward-looking statements are
subject to certain risks and uncertainties which are described in close
proximity to such statements and which could cause actual results to differ
materially from those anticipated as of the date of this report. Shareholders,
potential investors and other readers are urged to consider these factors in
evaluating the forward-looking statements and are cautioned not to place undue
reliance on such forward-looking statements. The forward-looking statements are
included herein are only made as of the date of this report and the Company
undertakes no obligation to publicly update such forward-looking statements to
reflect subsequent events or circumstances.
PART II
Item 1. Legal Proceedings
As reflected in the Form 10-KSB report of the Company for the fiscal
year ending March 31, 1998, Chequemate International, Inc. was named as a
defendant in litigation filed by BH Productions, Inc. dba Ignite Advertising.
The litigation was filed to recover the costs of certain advertising services
rendered for Chequemate's wholly owned subsidiary, Chequemate Technologies, Inc.
This obligation had been listed in the accounts payable section of the financial
statements of the Company and is an acknowledged debt. In December 1998, the
Company entered into a complete settlement of this litigation and has agreed to
make ten monthly payments of forty thousand dollars each to satisfy this
obligation. The December 1998 and January 1999 payments have been made pursuant
to the settlement agreement.
As also referenced in the most recent Form 10-KSB report of the
Company, the Company's subsidiary, Chequemate Tele-Services, Inc., has been
named in litigation regarding a disputed lease obligation. The Chairman of the
Company has also been named as a defendant by reason of a written guarantee
given to the landlord of the subject lease. The defendants have responded to the
litigation and Tele-Services has asserted counterclaims against the landlord.
The Dallas County Texas District Court has referred the matter to mediation,
which is tentatively scheduled at the end of March 1999.
Item 2. Changes in Securities and Use of Proceeds
Sales of Equity Securities Pursuant to Regulation S
The following table shows sales of securities of the Company
during the quarter ended December 31, 1998 and to the date of this report. Such
sales were made pursuant to Regulation S promulgated by the Securities and
Exchange Commission. The securities were all restricted common stock, and shall
remain as restricted securities for the one-year distribution compliance period.
The facts relied upon to satisfy the exemption were as follows:
(a) The Regulation S stock purchasers (the "Purchasers") were not
U.S. persons as that term is defined under Regulation S.
(b) At the time the buy orders were originated, the Purchasers
were outside the U.S. and were outside the U.S. as of the date of the execution
and delivery of any subscription agreements.
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(c) Purchasers purchased the shares for their own account and not
on behalf of any U.S. person; the sales had not been pre-arranged with a
purchaser in the U.S.; and all offers and resales of the securities are to be
made only made in compliance with the provisions of Regulation S.
(d) The Purchasers were not entities organized under foreign law
by a U.S. person, as defined in Regulation S Rule 902(k), for the purpose of
investing in unregistered securities, unless the Purchasers were organized and
owned by accredited investors, as defined in Regulation D, Rule 501(a), who are
not natural persons, estates or trusts.
(e) The transactions were not purchases pursuant to a fiduciary
account where a U.S. person, as defined in Regulation S Rule 902(o), had
discretion to make investment decisions for the account.
(f) To the knowledge of the Registrant, all offers and sales of
the Regulation S shares by Purchasers prior to the expiration of a one-year
distribution compliance period have only been made in compliance with the safe
harbor contained in Regulation S, or pursuant to an exemption from registration.
(g) All offering documents received by Purchasers included
statements to the effect that the shares had not been registered under the 1933
Act and may not be offered or sold in the United States or to U.S. persons
unless the shares are registered under the 1933 Act or an exemption from the
registration requirements was available.
(h) The Purchasers acknowledged that the purchase of the shares
involved a high degree of risk and further acknowledged that they could bear the
economic risk of the purchase of the shares, including the total loss of their
investment.
(i) The Purchasers understood that the shares were being offered
and sold to them in reliance on specific exemptions from the registration
requirements of United States Federal and State securities laws and that the
Registrant was relying upon the truth and accuracy of the representations,
warranties, agreements, acknowledgments and understandings of the Purchasers.
- ----------------------- ----------------------- -----------------------
Date of Sale Amount of Securities Offering Price
- ----------------------- ----------------------- -----------------------
October 5, 1998 225,000 $.50
- ----------------------- ----------------------- -----------------------
October 29 and 30, 1998 325,000 $.50
- ----------------------- ----------------------- -----------------------
November 2, 1998 125,000 $.50
- ----------------------- ----------------------- -----------------------
November 30, 1998 400,000 $1.00
- ----------------------- ----------------------- -----------------------
December 23, 1998 400,000 $1.00
- ----------------------- ----------------------- -----------------------
January 25, 1999 200,000 $1.00
- ----------------------- ----------------------- -----------------------
February 5, 1999 200,000 $1.00
- ----------------------- ----------------------- -----------------------
All Regulation S sales were to non-U.S. persons, including private investment
firms.
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Sales of Equity Securities Pursuant to Regulation D
Prior to the date of this report, the Company issued its 8%
Convertible Debentures due December 21, 2001 in the face amount of $750,000, and
its 8% Convertible Debentures due February 9, 2002 in the face amount of
$2,000,000. These debentures were issued in private placements on December 21,
1998 and February 9, 1999 respectively. Both private placements were made to a
single accredited investor.
On November 8, 1998, the Company entered into an Asset Purchase
Agreement to purchase certain assets of Coast Communications, Inc., a Nevada
corporation doing business as Alpha Broadcasting Communications. Pursuant to the
Asset Purchase Agreement, the Company is obligated to issue 250,000 shares of
its restricted common stock to the selling entity, which is an accredited
investor. The remaining conditions to the delivery of such shares are expected
to be completed in the month of February 1999, and it is anticipated that the
certificate representing the 250,000 shares will be delivered to the selling
entity in February. Further details of the described transaction are included in
the Form 8-K report of the Company dated December 23, 1998 and filed with the
SEC.
In May 1997, the Company issued certain stock options to
accredited investors in the ATG Realeyes transaction whereby the Company
acquired its proprietary 3D technology. Certain of these options were exercised
in the Company's third quarter, ending December 31, 1998, and the Company issued
124,196 shares pursuant to the exercise of such options.
Item 5. Other Information
C-3D Digital, Inc. Adopted as New Name. The issuer has filed in the state of
Utah an application to conduct business under the assumed name of C-3D Digital,
Inc. This name is more in keeping with the issuer's focus on its entertainment
and communications business related to 3D technology. At the time of the next
meeting of shareholders of the issuer, management contemplates submitting a
proposal to amend the Articles of Incorporation to reflect this new name.
8% Convertible Redeemable Debenture Financing.
On February 9, 1999, the registrant closed a transaction that has
provided net capital proceeds to the registrant of $1,867,500. These funds have
been raised pursuant to the sale by the registrant of 8% Convertible Debentures
due February 9, 2002 in the aggregate face amount of $2,000,000. The transaction
has been accomplished pursuant to a Subscription Agreement between the
registrant and Augustine Fund, L.P., an Illinois limited partnership. This is
the same investment fund that entered into the December 21, 1998 Subscription
Agreement which is described in greater detail in the Form 8-K report of the
registrant which was dated December 23, 1998 and has been filed with the SEC.
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Copies of the February 1999 Subscription Agreement and a form of the convertible
debenture document and warrant are attached as exhibits to this report. The
attached copy of the Subscription Agreement does not include the voluminous
exhibits listed on Exhibit A to the Subscription Agreement (the Exhibit Index is
included at page 27 of this Form 10-QSB report).
In addition to the convertible debentures, the Augustine Fund has
received a warrant to purchase sixty-seven thousand eight hundred (67,800)
shares of common stock of the registrant at one hundred and twenty percent
(120%) of the average of the closing bid price of the stock of the registrant on
the five trading days prior to the February 9, 1999 closing date. The warrant
expires on February 9, 2002.
Pursuant to the Subscription Agreement, the registrant will
immediately prepare and file with the Securities and Exchange Commission a Form
S-3 Registration Statement to provide for the federal registration of all shares
which may be issued pursuant to the described transaction, including the common
shares underlying the convertible debentures and the warrant. This Form S-3
Registration Statement will also provide for the federal registration of the
shares to be issued pursuant to the December 21, 1998 transaction referred to
above.
Pursuant to the terms of the debentures, Augustine Fund may elect
to convert the debentures to common stock of the registrant at eighty percent
(80%) of the average closing bid price of the common stock of the registrant for
the five trading days prior to the date on which the debenture is presented for
conversion. The debentures provide for a maximum conversion price of $3.54.
At any time prior to the delivery by the Augustine Fund, or its
assignees, of written notice of conversion to common stock, the registrant has
the right to redeem the debentures at a redemption price equal to one hundred
and twenty percent (120%) of the principal amount of the debentures, plus
accrued interest on such principal amount. This redemption right may be
exercised as provided herein at any time during the three year term of the
debentures.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
- ----------- -----------
10.1 Augustine Fund Subscription
dated February 9, 1999
10.2 Form of Debenture
10.3 Form of Warrant
27 Financial Data Schedule (for SEC use only)
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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.
CHEQUEMATE INTERNATIONAL, INC.
- ------------------------------------------------------ ------------
J. Michael Heil Date
Chief Executive Officer
- ------------------------------------------------------ ------------
Steve Anderson Date
Chief Financial Officer
28
Exhibit 10.1
------------
Date: February 9, 1999
Chequemate International, Inc.
75 West 200 South
Suite 350
Salt Lake City, Utah 84101
Attention: Mr. J. Michael Heil, CEO
Re: Subscription Agreement for 8% Convertible Redeemable Debentures
---------------------------------------------------------------
Dear Sirs:
Pursuant to a private offering by Chequemate International, Inc., a Utah
corporation (the "Company"), the undersigned (the "Subscriber") hereby tenders
his or her subscription for the Company's units (the "Units"), each Unit
consisting of (i) the Company's 8% Convertible Redeemable Debentures
(collectively, the "Debentures" and each, a "Debenture") in the principal amount
of two hundred fifty thousand dollars ($250,000) and (ii) a warrant
(collectively, the "Warrants" and each, individually, a "Warrant") to purchase
eight thousand four hundred seventy-five (8,475) shares of the Company's common
stock, with a $0.0001 par value ("Common Stock"), at a purchase price of two
hundred fifty thousand dollars ($250,000) per Unit. As used in this Agreement,
the term "Conversion Shares" shall mean the shares of Common Stock issuable upon
conversion of the Debentures, the term "Warrant Shares" shall mean the shares of
Common Stock issuable upon exercise of the Warrants, the term "Shares" shall
mean the Warrant Shares and the Conversion Shares, and term "Securities" shall
mean the Units, the Debentures, the Warrants and the Shares. The maturity date
and conversion price of the Debentures and the exercise price of the Warrants
shall be determined in the manner provided in the form of Debenture and Warrant
included in the Disclosure Documents, as hereinafter defined.
The Company is offering the Debentures to a limited number of accredited
investors, as defined in Rule 501 of the Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933, as amended (the "Securities
Act"), pursuant to an exemption from the registration requirements of the
Securities Act provided by Sections 4(2) and 4(6) of the Securities Act and Rule
506 of the Commission under the Securities Act.
In consideration of the mutual covenants and agreements set forth herein, the
Company and the Subscriber hereby agree as follows:
1. (a) The Subscriber hereby agrees to purchase from the Company, and
the Company agrees to sell to the Subscriber, not less than eight Units at a
purchase price of two million dollars ($2,000,000). Payment of the purchase
price shall be made by check payable to the order of "Esanu Katsky Korins &
Siger, LLP, as escrow agent for Chequemate International, Inc." or by wire
transfer to the Esanu Katsky Korins & Siger, LLP escrow account.
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(b) The purchase price for the Unit shall be payable within
five (5) business days of the date of this Agreement. The date on the Unit is
purchased is referred to as the "Closing Date."
(c) Proceeds from the sale of the Debentures will be held
until checks have cleared, after which the proceeds will be disbursed.
(d) There is no placement agent in connection with the
offering of the Debentures. The Company has engaged Coleman Capital Partners,
Ltd. ("Coleman") as a consultant in connection with this Offering, to which the
Company will pay compensation pursuant to an agreement between the Company and
Coleman.
(e) The Company shall have the right, on written notice to the
Subscriber, to terminate the Subscriber's obligation to purchase Units,
provided, however, that such termination shall not affect the Company's
obligations pursuant to Paragraphs 6 and 7 of this Agreement, which shall
continue in full force and effect, except that the Company's obligations
pursuant to Paragraph 6(b) shall terminate at such time (prior to the date set
forth therein) as all of the Conversion Shares which have been issued or are
issuable upon conversion of outstanding Debentures shall have been sold.
2. The Company represents and warrants to the Subscriber as follows:
(a) Organization and Qualification. The Company is (i) a
corporation duly organized and existing in good standing under the laws of the
State of Utah and has the requisite corporate power to own its properties and to
carry on its business as now being conducted and (ii) qualified to conduct
business as a foreign corporation to do business and in good standing in every
jurisdiction in which the nature of the business conducted by it makes such
qualification necessary and where the failure so to qualify would have a
Material Adverse Effect. As used in this Agreement, the term "Material Adverse
Effect" means any material adverse effect on (A) the Securities; (B) the ability
of the Company to perform its obligations under this Agreement or under the
Securities, or (C) the business, operations, properties or financial condition
of the Company. The Company does not have any equity investment or other
interest, direct or indirect, in, nor any outstanding loans, advances or
guarantees to, any domestic or foreign corporation, association, partnership,
limited liability company, joint venture or other entity, except for the equity
interest in the Company's wholly owned subsidiary, Chequemate Technologies, Inc.
and except as reflected on the Financial Statements referenced in Paragraph 2(f)
herein.
(b) Authorization; Enforcement. The Company has the requisite
corporate power and authority to enter into and perform its obligations under
this Agreement, to issue and sell the Units pursuant to this Agreement and to
issue the Shares in accordance with the terms of the Debentures and Warrants, as
the case may be. The execution, delivery and performance of this Agreement, the
Debentures and the Warrants and the consummation by the Company of the
transactions contemplated by this Agreement, the Debentures and the Warrants
(including without limitation the issuance of the Debentures and Warrants and
the issuance and reservation for issuance of the Shares) have been duly
authorized by the Company's board of directors and no further consent or
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authorization of the Company, its board of directors, or its stockholders is
required. This Agreement has been duly executed and delivered by the Company and
constitutes the valid and binding obligation of the Company enforceable against
the Company in accordance with its terms.
(c) Capitalization. The authorized capital stock of the
Company consists of 500,000,000 shares of Common Stock, of which 20,651,951
shares are issued and outstanding. The document entitled "Capital Stock" in the
Disclosure Documents includes a description of the rights, preferences and
privileges of holders of the Common Stock and a listing of all shares of Common
Stock which are reserved for issuance. No person has any preemptive rights,
rights of first refusal or any other similar rights of any stockholders of the
Company, whether by statute, pursuant to the certificate of incorporation or
by-laws of the Company or pursuant to any agreement (collectively, "Preemptive
Rights") with respect to the issued and outstanding shares of Common Stock or
with respect to the Debentures, the Warrants or the Shares. Except for an
agreement that expires in May 1999, no person has the right to nominate or
designate directors or officer of the Company, including any stockholders or
voting trust agreements. All of the outstanding shares of Capital Stock have
been, or upon issuance will be, validly issued, fully paid and nonassessable. No
shares of capital stock of the Company (including the Shares, if and when
issued) are or will be subject to any Preemptive Rights.
(d) Issuance of Shares.
-------------------
(i) The Shares are duly authorized and reserved for
issuance, and upon conversion of the Debentures or upon exercise of the
Warrants, as the case may be, in accordance with the respective terms thereof,
will be validly issued, fully paid and non-assessable, will be free from all
taxes, liens, claims and encumbrances and will not be subject to Preemptive
Rights of stockholders of the Company and or subject the holder to personal
liability.
(ii) All of the outstanding shares of Common Stock
have been duly and validly authorized and issued, fully paid and nonassessable
and were not issued in violation of any Preemptive Rights, and were issued in
transaction that were either registered pursuant to the Securities Act or exempt
from the registration requirements of the Securities Act.
(e) No Conflicts. The execution, delivery and performance of
this Agreement by the Company, the performance by the Company of its obligations
under this Agreement and the Securities, and the consummation by the Company of
the transactions contemplated by this Agreement (including, without limitation,
the issuance of the Securities and the Shares) will not (i) result in a
violation of the Company's certificate of incorporation and by-laws, as
currently in effect (the "Organizational Documents") or (ii) conflict with, or
constitute a default (or an event which with notice or lapse of time or both
would become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation of, any agreement, indenture or
instrument to which the Company is a party or by which it is bound, or result in
a violation of any law, rule, regulation, order, judgment or decree (including,
based on the accuracy the Subscriber's representations and warranties set forth
in this Agreement, Federal and state securities laws and regulations) applicable
to the Company or by which any of the Company's property or asset is bound or
affected. The Company is not in violation of its Organizational Documents, and
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the Company is not in default (and no event has occurred which, with notice or
lapse of time or both, would put the Company in default) under, nor has there
occurred any event giving others (with notice or lapse of time or both) any
rights of termination, amendment, acceleration or cancellation of, any Contract,
as hereinafter defined, to which the Company is a party or by which it is bound,
except for possible defaults or rights as would not, individually or in the
aggregate, have a Material Adverse Effect. The business of the Company is not
being conducted in violation of any law, ordinance or regulation of any
governmental entity. The Company is not required to obtain any consent,
approval, authorization or order of, or make any filing or registration with,
any court or governmental agency or any regulatory or self regulatory agency or
other party (each of the foregoing being referred to as a "consent") in order
for it to execute, deliver or perform any of its obligations under this
Agreement or the Securities, in each case in accordance with the terms hereof or
thereof other than filings required pursuant to the Securities Act and
applicable state securities laws and except where the failure to obtain any such
consent would not have a Material Adverse Effect.
(f) Financial Statements. The Company's financial statements
for the years ended March 31, 1998 and 1997, which have been certified by Jones,
Jensen & Company, and the unaudited financial statements for the period ended
September 30, 1998, including, in each case, a balance sheet and the related
statements of income, stockholders' equity and cash flows, together with the
related notes (collectively, the "Financial Statements"), have been delivered to
the Subscriber. The Financial Statements were prepared in accordance with all
books, records and accounts of the Company, are true, correct and complete and
have been prepared in accordance with generally accepted accounting principles,
consistently applied. Jones, Jensen & Company is independent as to the Company
under the rules of the Commission pursuant to the Securities Act. The Financial
Statements present fairly the financial position of the Company at the
respective balance sheet dates, reflect all liabilities, contingent or other, of
the Company of the type required to be reflected on corporate balance sheets
prepared in accordance with generally accepted accounting principles as at such
dates, and fairly present the results of the Company's operations, changes in
stockholders' equity and cash flows for the periods covered. The unaudited
financial statements for the period ended September 30, 1998 include all
adjustments (which include only normal recurring adjustments) necessary to
present fairly the information for such period. Except as provided in Schedule
2(f) or as set forth in the March 31, 1998 Financial Statements, the Company has
no material liabilities, contingent or otherwise, other than (i) liabilities
incurred in the ordinary course of business subsequent to the date of such
Financial Statements and (ii) obligations under contracts and commitments
incurred in the ordinary course of business and not required under generally
accepted accounting principles to be reflected in such financial statements,
none of which are material to the Company.
(g) SEC Documents. The Company is required to file with the
Securities and Exchange Commission annual, quarterly and periodic reports
pursuant to Section 15(d) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). The Company has delivered to the Subscriber its Form
10-KSB Annual Report, as amended by a Form 10-KSB Amendment, for the fiscal year
ended March 31, 1998, its amended Form 10-QSB Quarterly Report for the quarter
ended September 30, 1998 and all other filings made with the Commission through
the date hereof, all of which are collectively referred to as the "SEC
Documents." The SEC Documents, taken as a whole, do not contain any misstatement
of fact or omit any statement of fact necessary to make them not materially
misleading.
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(h) Form S-3 Eligibility. The Company meets each of the
requirements listed in General Instructions 1.A to Form S-3, and the Company is
eligible to register the Shares on a Form S-3, or other appropriate registration
form.
(i) No Breach of Contract. Except as provided in Schedule 2(i)
attached hereto, the Company is not in breach or violation of any contracts,
agreements, leases or other instruments (each a "Contract") to which the Company
is a party or by which the Company is bound or to which any of its properties or
assets is subject, which breach or violation would have a Material Adverse
Effect.
(j) Absence of Certain Changes. Since September 30, 1998,
there has been no material adverse change in the business, properties,
operations, financial condition, or results of operations of the Company, or to
the best of the Company's knowledge, its prospects, except as disclosed in the
Financial Statements or the SEC Documents.
(k) Absence of Litigation. Except as disclosed in the
Financial Statements or the Disclosure Documents, there is no action, suit,
proceeding, inquiry or investigation before or by any court, public board,
government agency, self-regulatory organization or body pending or, to the
knowledge of the Company, threatened against or affecting the Company or any of
its respective directors or officers in their capacities as such wherein an
unfavorable decision, ruling or finding would have a Material Adverse Effect.
(l) Intellectual Property. Except as provided in Schedule 2(l)
or elsewhere in the Disclosure Documents, the Company owns or is licensed to use
all patents, patent applications, trademarks, trademark applications, trade
names, service marks, copyrights, copyright applications, licenses, permits,
know-how (including trade secrets and other unpatented and/or unpatentable
proprietary or confidential information, systems or procedures) and other
similar rights and proprietary knowledge (collectively, "Intangibles") necessary
for the conduct of its business as now being conducted and as described in the
Disclosure Documents. Except as disclosed in the document "Risk Factors" in the
Disclosure Documents, the Company has not received any formal or informal notice
(including any demand or request that the Company enter into a license or other
agreement in order to avoid any claim of infringement) to the effect that any of
its products or any Intangibles infringe upon the proprietary rights of any
other person. To the best knowledge of the Company, the Company does not
infringe or is in conflict with any right of any other person with respect to
any Intangibles which, individually or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, would have a Material Adverse Effect.
(m) Management. The document entitled "Management" in the
Disclosure Documents sets forth information concerning (i) each officer and
director, (ii) compensation information consistent with such information
required to be included in the Summary Compensation Table pursuant to Item 402
of Regulation S-B, (iii) a summary of all outstanding options and a description
of all outstanding stock option or other equity-based incentive plans, and (iv)
the information to be provided by Items 403 and 404 of Regulation S-B. Such
document shall update information included in the Company's Form 10-KSB for the
fiscal year ended March 31,1998.
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(n) Foreign Corrupt Practices. Neither the Company, nor any
director, officer, agent, employee or other person acting on behalf of the
Company has, in the course of his actions for or on behalf of, the Company, used
any corporate funds for any unlawful contribution, gift, entertainment or other
unlawful expenses relating to political activity; made any direct or indirect
unlawful payment to any foreign or domestic government official or employee from
corporate funds; violated or is in violation of any provision of the U.S.
Foreign Corrupt Practices Act of 1977; or made any bribe, rebate, payoff,
influence payment, kickback or other unlawful payment to any foreign or domestic
government official or employee.
(o) Subscriber's Legal Fees. The Company will pay Subscriber,
upon request, two thousand five hundred dollars ($2,500) for its legal fees, in
addition to the fees paid to Esanu, Katsky Korins & Siger, LLP referenced
herein.
(p) Disclosure. All information relating to or concerning the
Company set forth in this Agreement or included in the Disclosure Documents, as
hereinafter defined, taken together, is true and correct in all material
respects, and the Company has not omitted to state any material fact necessary
in order to make the statements made herein or therein, in light of the
circumstances under which they were made, not misleading. The Subscriber shall
be entitled to rely upon the Company's representations and warranties contained
in this Agreement, notwithstanding any independent investigation made by the
Subscriber.
(q) No Integrated Offering. Neither the Company nor any of its
affiliates, nor any person acting on its or their behalf, has directly or
indirectly made any offers or sales of any securities or solicited any offerers
to buy any security under circumstances that would require registration of the
Units being offered hereby under the Securities Act.
(r) Supplementation of Prior Disclosure. The representations,
warranties and Disclosure Documents of this Agreement, supplement and supercede
the representations, warranties and Disclosure Documents of the December 21,
1998 Subscription Agreement entered into between the parties to this Agreement.
3. The Subscriber understands and agrees that, after the Company's
receipt of this Agreement, the Company will review the Subscriber's eligibility
and will determine whether to accept or reject this subscription in whole or in
part. The Company may determine to reject this subscription in whole or in part
in its sole and absolute discretion. If this subscription is accepted in whole,
then the Company will issue the Debentures subscribed for to the Subscriber. If
this subscription is rejected in whole, this Agreement and any other
subscription materials will be promptly returned to the Subscriber and the
Subscriber's subscription payment will be refunded to the Subscriber without
interest. In that event, the Subscriber and the Company will have no further
rights or claims against each other by virtue of this Agreement. If this
subscription is accepted in part and rejected in part, the Company is authorized
to amend this Agreement to reflect the number of Units for which this
subscription is accepted, and the Company will issue the Debentures and Warrants
comprising the Units as to which this subscription is accepted at the same time
as if this subscription had been accepted in whole.
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4. The Subscriber hereby represents and warrants to, and covenants and
agrees with, the Company as follows:
(a) The Subscriber understands that the offer and sale of the
Units is being made only by means of this Agreement. In deciding to subscribe
for Units, the Subscriber has not considered any information other than that
contained in this Agreement and in the documents listed in Exhibit A to this
Agreement (the "Disclosure Documents"), a copy of each of which has been
provided to the Subscriber and reviewed by the Subscriber to the extent that the
Subscriber deemed necessary or advisable. In particular, the Subscriber
understands that the Company has not authorized the use of, and the Subscriber
confirms that he or she is not relying upon, any other information, written or
oral, other than material contained in this Agreement and the Disclosure
Documents. The Subscriber is aware that the purchase of the Units involves a
high degree of risk and that the Subscriber may sustain, and has the financial
ability to sustain, the loss of his or her entire investment. The Subscriber
understands that the Company is a development stage corporation, has incurred
significant losses and no assurance can be given that the Company will be
profitable in the future, that the failure of the Company to raise funds, in
addition to the proceeds from the sale of the Units, may have a material adverse
effect upon its business and, if sufficient additional funds are not raised, the
Company may not be able to pay the Debentures when due, and that there is no
assurance that there will be a market for the Company's Common Stock or other
securities. Furthermore, in subscribing for the Units, the Subscriber
acknowledges that the Company has not made, and the Subscriber is not relying in
any manner upon, any projections or forecasts of future operations. The
Subscriber has had the opportunity to ask questions of, and receive answers
from, the Company's management regarding the Company.
(b) The Subscriber represents to the Company that he or she
(i) is an accredited investor within the meaning of Rule 501 under the
Securities Act, (ii) understands that in order to be treated as an accredited
investor, the Subscriber must meet one of the tests for an accredited investor
set forth on Exhibit B to this Agreement, and (iii) has read Exhibit B and is an
accredited investor as set forth on the signature page of this Agreement. The
Subscriber further represents that he or she has such knowledge and experience
in financial and business matters as to enable him or her to understand the
nature and extent of the risks involved in purchasing the Units. The Subscriber
is fully aware that such investments can and sometimes do result in the loss of
the entire investment. The Subscriber can afford to sustain the loss of his or
her entire investment, and the Subscriber's purchase of the Units is being made
from funds which the Subscriber has allocated to high risk, illiquid investments
and such funds are not required by the Subscriber to meet his or her normal
expenses. The Subscriber has engaged his or her own counsel and accountants to
the extent that he deems it necessary.
(c) The Subscriber acknowledges that the Company is relying on
the Subscriber's representations contained in this Agreement in executing this
Agreement and issuing the Units and its counsel is relying on such statements
and representations in rendering its opinion pursuant to Paragraph 5(a)(v) of
this Agreement, and the Subscriber agrees to indemnify and hold harmless the
Company, and its officers, directors, controlling persons and counsel from and
against all manner of loss, liability, damage or expense which they or any of
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them may incur as a result of any material misstatement of fact or omission of a
material fact by the Subscriber in this Agreement.
(d) The Subscriber is acquiring the Units pursuant to this
Agreement for investment and not with a view to the sale or distribution
thereof, for his or her own account and not on behalf of others; has not granted
any other person any interest or participation in or right or option to purchase
all or any portion of the Units; is aware that the Units are restricted
securities within the meaning of Rule 144 of the Commission under the Securities
Act, and may not be sold or otherwise transferred other than pursuant to an
effective registration statement or an exemption from registration; and
understands and agrees that the Units may bear the Company's standard investment
legend. The Subscriber understands the meaning of these restrictions.
(e) The Subscriber will not transfer the Securities except in
compliance with all applicable Federal and state securities laws and
regulations. The Subscriber understands and agrees that the Company is not
obligated to recognize any transfer of any Securities unless it is satisfied in
its reasonable discretion that there has been compliance with such securities
laws and regulations, and, in such connection, the Company may request an
opinion of counsel acceptable to the Company as to the availability of any
exemption.
(f) The Subscriber has been informed by the Company that the
issuance of the Units pursuant to this Agreement will be exempt under Section
4(2) or 4(6) of the Securities Act and/or Regulation D, and in particular, Rule
506, of the Commission under the Securities Act and applicable exemption under
state securities laws, and the Subscriber understands that such exemption is
dependent upon the accuracy of the information contained in the Subscriber's
representations set forth in this Agreement.
(g) The Subscriber represents and warrants that it has engaged
no broker and that no finder was involved directly or indirectly in connection
with the Subscriber's purchase of the Units. The Subscriber shall indemnify and
hold harmless the Company from and against any manner of loss, liability, damage
or expense, including fees and expenses of counsel, resulting from a breach of
the Subscriber's warranty contained in this Paragraph 4(g).
(h) To the extent that the Subscriber has deemed it necessary,
the Subscriber has consulted his or her own legal, accounting, tax, investment
and other advisors.
(i) If the Subscriber is a corporation, all corporate action
necessary for the execution, delivery and performance by the Subscriber has been
taken and the person executing this Agreement on behalf of the Subscriber is an
authorized officer of the Subscriber. If the Subscriber is a limited partnership
or limited liability company, the person executing this Agreement is a general
partner or managing member of the Subscriber. If the Subscriber is a trust,
estate or other fiduciary, the person executing this Agreement is the trustee,
executor, administrator or other fiduciary.
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(j) Neither the Subscriber nor its affiliates will sell short
or sell against the box any securities of the Company owned by the undersigned
or with respect to which the undersigned has the power to vote or transfer such
securities.
(k) The subscriber shall not transfer the Units, Debentures,
or Warrants to another holder until after the effective date of the Registration
Statement. After the effective date of the Registration Statement, any such
transferee shall be required to make in writing all of the representations and
warranties set forth in paragraph 4(a) through 4(j) hereof.
5. (a) It shall be a condition precedent to the Subscriber's obligation
to pay for the Units that the following conditions shall have been met:
(i) The Company shall have delivered to the
Subscriber or his or her representative:
(A) A copy of the certificate of
incorporation of the Company, certified by the Secretary of State of Utah as of
a current date.
(B) A copy of the by-laws of the Company,
certified by the Secretary of the Company.
(C) Resolutions of the Company's board of
directors authorizing the transactions contemplated by this Agreement, certified
by the Secretary of the Company.
(ii) All of the Company's representations and
warranties set forth in this Agreement shall be true and correct in all material
respects on such date with the same effect as if such representations and
warranties were made on such date, the Company shall have complied in all
material respects with all of its obligations to be performed by it on or prior
to the such date.
(iii) No Material Adverse Change in the business or
financial condition of the Company shall have occurred or be threatened since
the date of this Agreement, and no proceedings shall be threatened or pending
before any governmental entity or authority which is likely to result in a
restraint, prohibition or the obtaining of damages or other relief in connection
with this Agreement or the consummation of the transactions contemplated by this
Agreement.
(iv) The Company shall have delivered to the
Subscriber the certificate of its chief executive and financial officers dated
the Closing Date as to the matters set forth in Paragraphs 5(a)(ii) and (iii) of
this Agreement.
(v) The Subscriber shall have received the opinion of
Bruce L. Dibb, counsel to the Company, dated the Closing Date, that:
(A) The Company is a corporation organized
and existing in good standing under the laws of the State of Utah with the
corporate power to conduct it business as the same is presently conducted.
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(B) All corporate action necessary for the
execution, delivery and performance by the Company of this Agreement, the
Debentures and the Warrants has been taken, and this Agreement, the Debentures
and Warrants constitute, the valid and binding obligations of the Company,
enforceable in accordance with their respective terms, except as enforceability
may be affected by customary principles governing equitable relief generally and
to any applicable bankruptcy, moratorium, equitable subordination, insolvency,
fraudulent conveyance, usury or other laws affecting creditors' rights and their
enforcement generally, and except that no opinion is given as to the
enforceability of any indemnification provisions.
(C) The Shares have been reserved for
issuance and, when issued upon conversion of the Debentures or exercise of the
Warrants, will be duly and validly authorized and issued, fully paid and
nonassessable and free from Preemptive Rights.
(D) In reliance upon the accuracy of the
representations and warranties of the Subscriber contained in this Agreement and
assuming that the Company files in a timely manner a Form D pursuant to
Regulation D of the Commission pursuant to the Securities Act, the sale of the
Units is exempt from the registration requirements of the Securities Act.
(vi) A Form D shall have been prepared for filing
with the Commission.
(vii) The Company shall have paid to Coleman the
compensation due to Coleman.
(viii) The Company shall have paid to Esanu Katsky
Korins & Siger, LLP, its legal fees of ten thousand dollars ($10,000) plus
disbursements.
6. The Company hereby covenants and agrees with the Subscriber that:
(a) The Company will, promptly, but in no event later than
three (3) business days after each closing, file (i) the Form D with the
Commission and (ii) all documents and instruments required by the state
securities laws of any state in which any purchaser of Units lives.
(b) During the period commencing on the Closing Date and
ending ninety (90) days after such Closing Date, the Company will not, without
the prior consent of the holders of a majority of the principal amount of
Debentures then outstanding, issue or sell or enter into any agreement to issue
or sell any shares of Common Stock or any Convertible Securities (i.e., any
warrants or options or convertible debt or equity securities or other securities
upon the exercise or conversion of which shares of Common Stock may be issued),
except that this Paragraph 6(b) shall not be construed to prohibit the Company
from (i) issuing Common Stock or Convertible Securities in connection with an
acquisition or pursuant to options or warrants which are outstanding on such
Closing Date or (ii) entering into any agreement to issue, or issuing, any
convertible securities or common stock pursuant to an equity line of credit
currently contemplated by the Company or (iii) issue common stock with regard to
a Regulation S private placement funded in the Company's fiscal third and fourth
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quarters or (iv) issuing options to employees or consultants at an exercise
price not less than the fair market value on the date of grant pursuant to the
Company's present stock option plan and performance stock plan or (v) issuing
restricted stock grants to employees or consultants pursuant to the Company's
present performance stock plan; provided, however, that in no event shall the
number of options and stock grants issued during any such ninety (90) day period
exceed Three Hundred Thousand (300,000) shares. References to consultants in
this Paragraph 6(b) shall mean only consultants who (x) perform functions that
would otherwise be performed by employees of the Company and (y) whose services
do not relate to the raising of money.
(c) As long as the Subscriber or any transferee (other than a
transferee pursuant to the Registration Statement) shall own any Securities, (i)
the Company shall file all annual, quarterly and periodic reports with the
Commission not later than the last day on which such filings may be made
pursuant to the Exchange Act, and (ii) the Company shall continue to be eligible
to use a Form S-3 or a Form SB-2 registration statement for the sale of the
Shares.
(d) As long as the Subscriber shall own any Securities, the
Company will provide the Subscriber with a copy of each Form 10-K or Form 10-KSB
Annual Report, Form 10- Q or Form 10-QSB Quarterly Report, each current report
on Form 8-K and any definitive proxy material, at the times such filings are
made with the Commission and will in addition provide the Subscriber with all
materials that are mailed to stockholders at such time as the materials are
mailed to the stockholders.
(e) The Company will comply with its obligations pursuant to
the Debentures and the Warrants.
(f) Until the earlier of (i) July 1, 1999 or (ii) such date as
all of the principal and interest on the Debentures shall have been paid in full
or (iii) such date as all of the Debentures shall have been converted, neither
the Company nor any of its subsidiaries shall borrow any money or incur any
obligations pursuant to a certain proposed equity line of credit agreement
between Bristol Asset Management, LLC (or a substitute lender) and the Company,
as the same may hereafter be modified, amended or replaced. The present terms of
such agreement have been previously disclosed to the Subscriber. This Paragraph
6(f) shall apply to any credit line facility entered into by the Company during
the period between the date of this Agreement and July 1, 1999.
7. (a) The Company shall (i) file or cause to be filed with the
Commission, not later than fourteen (14) days after the Closing Date, a
registration statement (the "Registration Statement") on Form S-3 or other
applicable form, providing for the sale by the Subscriber of all of the Shares
and (ii) use its best efforts to have the Registration Statement declared
effective by the Commission not later than one hundred twenty (120) days from
the Closing Date, time being of the essence. The Registration Statement shall
also provide for the sale by the Subscriber of the shares available to the
Subscriber under the debentures issued to the Subscriber pursuant to the
December 21, 1998 subscription agreement (the "December Agreement") of the
parties to this Agreement. The Company and the Subscriber agree that the time of
the filing and effective date of the registration statement, as provided in the
December Agreement, are extended to the dates provided for in this Agreement.
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The Registration Statement shall register such number of shares of Common Stock
equal to two hundred percent (200%) of the number of shares of Common Stock
which would be issuable upon conversion of the Debentures and upon exercise of
the Warrants provided for in this Agreement and in the December Agreement in the
event such conversion or exercise occurred at the lowest closing bid price of
the Common Stock for the sixty (60) trading days prior to the date of the
execution of this Agreement. The Registration Statement shall cover the issuance
of the Shares and the sale by the Subscriber or the Subscriber's transferee in
the manner or manners designated by the Subscriber. The Company agrees to keep
the Registration Statement continuously effective until all of the Shares have
been sold. References in this Paragraph 7 to the Subscriber shall include, in
addition to the Subscriber, any holder of the Shares or the Securities, other
than pursuant to the Registration Statement. Such Shares shall be registered
regardless of whether, at the effective date of the Registration Statement, the
Debentures shall have been issued or converted or the Warrants shall have been
issued or converted. In the event the Registration Statement does not register a
sufficient number of shares to cover all the shares underlying such the
Debenture and Warrant, the Company shall file an additional registration
statement not later than ninety (90) days from the date the Registration
Statement is declared effective by the Commission covering such number of
additional shares of Common Stock as the Subscriber may reasonably request.
(b) The Company shall pay all expenses incident to the
Company's performance of or compliance with its obligations under this Paragraph
7, including, without limitation, all registration, filing, listing, stock
exchange, Nasdaq and NASD fees, all fees and expenses of complying with state
securities or blue sky laws all word processing, duplicating and printing
expenses, messenger and delivery expenses, the fees, disbursements and other
charges of counsel for the Company and of its independent public accountants,
but excluding commissions and applicable transfer taxes, if any, which
commissions and transfer taxes shall be borne by the seller or sellers of Shares
in all cases.
(c) In complying with its obligations pursuant to Paragraph
7(a) of this Agreement, the Company shall, as expeditiously as possible:
(i) Prepare and file with the Commission the
Registration Statement to effect such registration and thereafter use its best
efforts to cause such registration statement to become effective as promptly as
possible.
(ii) Notify the Subscriber at any time when a
prospectus relating thereto is required to be delivered under the Securities
Act, upon discovery that, or upon the happening of any event as a result of
which, the prospectus included in the Registration Statement, as then in effect,
includes an untrue statement of a material fact or omits to state any material
fact required to be stated therein or necessary to make the statements therein
not misleading in the light of the circumstances under which they were made, and
promptly, but not later than ten (10) business days after the happening of such
event, prepare and file with the Commission such amendments and supplements to
the Registration Statement and the prospectus used in connection therewith as
may be necessary to keep the Registration Statement effective and to comply with
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the provisions of the Securities Act and the Exchange Act with respect to the
disposition of all Shares until such time as all of the Shares have been
disposed of in accordance with the method of disposition set forth in such
registration statement.
(iii) Before filing the Registration Statement or
prospectus or any amendments or supplements thereto, furnish to and afford the
Subscriber a reasonable opportunity (unless waived in writing by the Subscriber)
to review copies of all such documents (including copies of any documents to be
incorporated by reference therein and all exhibits thereto) proposed to be filed
(at least five (5) business days prior to such filing). The Company shall not
file any registration statement or prospectus or any amendments or supplements
thereto in respect to the Shares if the holders of a majority of the Shares
included in the Registration Statement shall reasonably object.
(iv) Use its best efforts to obtain the prompt
withdrawal of any order suspending the effectiveness of a registration
statement, and in any event shall, within thirty (30) days of such cessation of
effectiveness, use its best efforts to amend the Registration Statement in a
manner reasonably expected to obtain the withdrawal of the order suspending the
effectiveness thereof, or file an additional registration statement pursuant to
Rule 415 covering all of the Shares and use its best efforts to cause the
Registration Statement to be declared effective as soon as practicable after
such filing and to remain effective as provided in this Paragraph 7.
(v) In the event of any transfer of Shares or
Securities which requires a supplement or post-effective amendment to the
Registration Statement or prospectus, promptly file such supplement or
post-effective amendment and use its best efforts to have such filing declared
effective by the Commission as promptly as possible after the filing thereof.
(vi) Furnish to the Subscriber such number of copies
of such drafts and final conformed versions of such Registration Statement and
of each such amendment and supplement thereto (in each case including all
exhibits and any documents incorporated by reference), such number of copies of
such drafts and final versions of the prospectus contained in such Registration
Statement (including each preliminary prospectus and any summary prospectus) and
any other prospectus filed under Rule 424 under the Securities Act, in
conformity with the requirements of the Securities Act, and such other
documents, as such seller may reasonably request in writing.
(vii) Use its best efforts (i) to register or qualify
all Shares under such other securities or blue sky laws of not more than 20
states or other jurisdictions of the United States of America as the Subscriber
shall reasonably request in writing, (ii) to keep such registration or
qualification in effect for so long as such registration statement remains in
effect, (iii) to prevent the issuance of any order suspending the effectiveness
of a registration statement or of any order preventing or suspending the use of
a prospectus or suspending the qualification (or exemption from qualification)
of any of the Shares for sale in any jurisdiction, and, if any such order is
issued, to use its best efforts to obtain the withdrawal of any such order at
the earliest possible moment, and (iv) to take any other action that may be
reasonably necessary or advisable to enable such sellers to consummate the
disposition in such jurisdictions of the securities to be sold by such sellers,
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except that the Company shall not for any such purpose be required to qualify
generally to do business as a foreign corporation in any jurisdiction wherein it
would not but for the requirements of this Paragraph 7(c)(vii) be obligated to
be so qualified, to subject itself to taxation in such jurisdiction or to
consent to general service of process in any such jurisdiction.
(viii) Use its best efforts to cause all Shares to be
registered with or approved by such other federal or state governmental agencies
or authorities as may be necessary in the opinion of counsel to the Company and
counsel to the Subscriber to enable the seller or sellers thereof to consummate
the disposition of such Shares in the manner set forth in the Registration
Statement.
(ix) Otherwise comply with all applicable rules and
regulations of the Commission and any other governmental agency or authority
having jurisdiction over the offering, and make available to its security
holders, as soon as reasonably practicable, an earnings statement covering the
period of at least twelve months, but not more than eighteen months, beginning
with the first full calendar month after the effective date of such Registration
Statement, which earnings statement shall satisfy the provisions of Section
11(a) of the Securities Act and Rule 158 promulgated thereunder, and furnish to
each seller of Shares at least ten days prior to the filing thereof a copy of
any amendment or supplement to such Registration Statement or prospectus.
(d) The Registration Statement, when declared effective by the
Commission or when subsequently amended (by an amendment which is declared
effective by the Commission) or any prospectus in the form included in the
registration statement as declared effective by the Commission or when
subsequently supplemented will not contain an untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading.
(e) The Company may require the Subscriber to furnish the
Company such information regarding such seller and the distribution of the
securities covered by the Registration Statement as the Company may from time to
time reasonably request in writing and as is required by applicable laws and
regulations.
(f) The Company hereby agrees to indemnify and hold harmless
the Subscriber, including any other holder of Shares, and their respective
directors, officers, agents and advisers (collectively, the "Agents") and each
person, if any, who controls within the meaning of Section 15 of the Securities
Act (the "Control Person") the Subscriber or any such holder against any losses,
claims, damages or liabilities, joint or several, to which the Subscriber, any
such other holder of Shares, any such Agent, or any such Control Person may
become subject, under the Securities Act, the Exchange Act or any other Federal
or state law, including common law, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon (i)
any untrue statement or alleged untrue statement of a material fact contained in
(A) a registration statement, including (I) any pre- or post-effective
amendments or supplements thereof and (ll) any preliminary prospectus or final
prospectus contained therein or any pre- or post-effective amendments or
supplements thereto, filed for any registration under this Agreement, (B) in any
Blue Sky Law application or other document executed by the Company specifically
for such registration or (C) based upon information furnished by the Company
42
<PAGE>
filed in any state or other jurisdiction in order to qualify any or all of the
Shares under the securities laws thereof (any such application, document or
information in (B) and (C) above being hereinafter referred to as a "Blue Sky
Application"); (ii) the omission or alleged omission to state in such
registration statement or Blue Sky Application a material fact required to be
stated therein or necessary to make the statements therein not misleading; or
(iii) any untrue statement or alleged untrue statement of a material fact
contained in such registration statement or Blue Sky Application or the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, and will reimburse
such parties for any reasonable attorneys' fees or other expenses reasonably
incurred by them or any of them in connection with investigating or defending
against any such loss, claim, damage, liability or action; provided, however,
that the Company will not be liable or responsible for reimbursement of expenses
in any such case to the extent that any such loss, claim, damage or liability
arises out of or is based upon an untrue statement or alleged untrue statement
or omission or alleged omission made in reliance upon and in conformity with
written information furnished to the Company by or on behalf of such indemnified
party specifically for use with reference to or in the preparation of a
registration statement, any such pre- or post-effective amendment or supplement
thereof, or any Blue Sky Application. This indemnity agreement is in addition to
any liability which the Company may otherwise have. The indemnity agreement of
the Company contained in this Paragraph 7(f) shall remain operative and in full
force and effect regardless of any investigation made by or on behalf of any of
the Subscriber, any other holder of Shares, any Agent or any Control Person and
shall survive the registration and sale of any Shares by the Subscriber or any
such holder.
(g) The Subscriber and each other holder of Shares, by
including such holder's Shares in the Registration Statement, agrees, severally,
to indemnify and hold harmless the Company, its Agents and the Control Persons
thereof to the same extent as the indemnity from the Company to the Subscriber,
such other holders, their respective Agents and Control Persons but only with
respect to any untrue statement or alleged untrue statement or omission or
alleged omission made in reliance upon or in conformity with written information
relating to such person by such person expressly for use in connection with any
registration statement, pre- or post-effective amendment or supplement thereto
or in any Blue Sky Application filed pursuant to this Agreement. The liability
of any Holder under this Paragraph 7(g) shall be limited to the amount of net
proceeds to such Holder from the Shares sold pursuant to the registration
statement which gives rise to such liability. This indemnity agreement will be
in addition to any liability that the Subscriber or any such other holder may
otherwise have. The indemnity agreement of the Subscriber and such other holders
contained in this Paragraph 7(g) shall remain operative and in full force and
effect regardless of any investigation made by or on behalf of the Company or
any of its Control Persons and shall survive the registration and sale of any
Shares and the expiration or termination of this Agreement.
(h) If any action or claim shall be brought or asserted by a
party entitled to indemnification under Paragraph 7(f) or 7(g) (as the case may
be) of this Agreement (each an "Indemnified Party") in respect of which
indemnity may be sought from the responsible party identified in said Paragraph
7(f) or 7(g) (as the case may be) (the "Indemnifying Party"), the Indemnified
Party shall promptly notify the Indemnifying Party in writing, and the
Indemnifying Party shall assume the defense thereof, including the employment of
43
<PAGE>
counsel satisfactory to each Indemnified Party and the payment of all reasonable
legal and other expenses. The failure of any Indemnified Party to notify the
Indemnifying Party will not relieve the Indemnifying Party of any liability for
indemnification which it may have to any Indemnified Party under this Paragraph
7 unless the Indemnifying Party has been substantially prejudiced by such
failure and in no event will such failure relieve the Indemnifying Party from
any liability it may have to any Indemnified Party otherwise than under this
Paragraph 7. Each Indemnified Party shall have the right to employ separate
counsel in any such action and to participate in the defense thereof, but the
fees and expenses of such counsel shall be at the expense of such Indemnified
Party unless (i) the employment thereof has been specifically authorized by the
Indemnifying Party in writing, or (ii) the Indemnifying Party has failed to
assume the defense and employ counsel or (iii) the named parties to any such
action (including any impleaded parties) include both (A) any Indemnified Party
and (B) the Indemnifying Party, and, in the judgment of counsel to any
Indemnified Party, it is advisable for such Indemnified Party to be represented
by separate counsel (in which case the Indemnifying Party shall not have the
right to assume the defense of such action on behalf of such Indemnified Party;
provided, however, it being understood that the Indemnifying Party shall, in
connection with any one such action or separate but substantially similar or
related actions in the same jurisdiction arising out of the same general
allegations or circumstances, be liable for the reasonable fees and expenses of
only one separate firm of attorneys at any time for each Indemnified Party
pursuant to this Agreement in each jurisdiction, and each such firm shall be
designated in writing by such Indemnified Party holding a majority of the Shares
being registered for all Indemnified Parties). The Indemnifying Party shall not
be liable for any settlement of any such action effected by an Indemnified Party
without the written consent of the Indemnifying Party (which shall not be
withheld unreasonably in light of all factors of importance to such Indemnified
Party), but if settled with such written consent, or if there be a final
judgment or decree for the plaintiff in any such action by a court of competent
jurisdiction and the time to appeal shall have expired or the last appeal shall
have been denied, the Indemnifying Party agrees to indemnify and hold harmless
each Indemnified Party from and against any loss or liability by reason of such
settlement or judgment.
(i) If the indemnification provided for in this Agreement is
held by a court of competent jurisdiction to be unavailable to an Indemnified
Party with respect to any loss, liability, claim, damage or expense referred to
therein, then the Indemnifying Party, in lieu of indemnifying such Indemnified
Party thereunder, shall contribute to the amount paid or payable by such
Indemnified Party as a result of such loss, liability, claim, damage or expense
in such proportion as is appropriate to reflect the relative fault of the
Indemnifying Party on the one hand and of the Indemnified Party on the other
hand in connection with the statements or omissions which resulted in such loss,
liability, claim, damage or expense as well as any other relevant equitable
considerations. The relevant fault of the Indemnifying Party and the Indemnified
Party shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission to state a
material fact relates to information supplied by the Indemnifying Party or by
the Indemnified Party and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
Notwithstanding the foregoing, the amount any Holder is obligated to contribute
pursuant to this Agreement shall be limited to the net proceeds to such Holder
from the Shares sold pursuant to the Registration Statement which gives rise to
such obligation to contribute (less the aggregate amount of any damages which
44
<PAGE>
the Subscriber or such other holder has otherwise been required to pay in
respect of such loss, claim, damage, liability or action or any substantially
similar loss, claim, damage, liability or action arising from the sale of such
Shares). The foregoing contribution agreement shall in no way affect the
contribution liabilities of any persons having liability under Section 11 of the
Securities Act other than the Company, the Subscriber and such other holders. No
contribution shall be requested with regard to the settlement of any matter from
any party who did not consent to the settlement, provided, however, that such
consent shall not be unreasonably withheld in light of all factors of importance
to such party. Notwithstanding any provisions of this Paragraph 7, no person
guilty of a fraudulent misrepresentation (within the meaning of Section 11(f) of
the Securities Act) shall be entitled to contribution from any person who was
not guilty of such fraudulent misrepresentation.
8. All notices provided for in this Agreement shall be in writing
signed by the party giving such notice, and delivered personally or sent by
overnight courier or messenger against receipt thereof or sent by registered or
certified mail (air mail if overseas), return receipt requested or by telecopier
if receipt of transmission is confirmed or if transmission is confirmed by mail
as provided in this Paragraph 8. Notices shall be deemed to have been received
on the date of personal delivery or telecopy or, if sent by certified or
registered mail, return receipt requested, shall be deemed to be delivered on
the fifth (5th) business day after the date of mailing. Notices shall be sent to
the Company at 75 West 200 South, Suite 350, Salt Lake City, Utah 84101,
Attention: Mr. Michael Heil, CEO, telecopier (801) 322-1165, and to the
Subscriber at his or her address and telecopier number set forth on the
signature page or to such other address as any party shall designate in the
manner provided in this Paragraph 8.
9. (a) This Agreement constitutes the entire agreement between
the parties relating to the subject matter hereof, superseding any and all prior
or contemporaneous oral and prior written agreements, understandings and letters
of intent. This Agreement may not be modified or amended nor may any right be
waived except by a writing which expressly refers to this Agreement, states that
it is a modification, amendment or waiver and is signed by all parties with
respect to a modification or amendment or the party granting the waiver with
respect to a waiver. No course of conduct or dealing and no trade custom or
usage shall modify any provisions of this Agreement.
(b) This Agreement shall be governed by and construed in
accordance with the laws of the State of New York applicable to agreements
executed and to be performed wholly within such state, without regard for
principles of conflicts of law. The Company hereby (i) consents to the exclusive
jurisdiction of the United States District Court for the Southern District of
New York and Supreme Court of the State of New York in the County of New York in
any action relating to or arising out of this Debenture, (ii) agrees that any
process in any such action may be served upon it, in addition to any other
method of service permitted by law, by certified or registered mail, return
receipt requested, or by an overnight courier service which obtains evidence of
delivery, with the same full force and effect as if personally served upon him
in New York City, and (iii) waives any claim that the jurisdiction of any such
tribunal is not a convenient forum for any such action and any defense of lack
of in personam jurisdiction with respect thereto.
45
<PAGE>
(c) Any termination of this Agreement shall not affect in any
manner the parties' obligations pursuant to Paragraphs 6, 7, 8 and 9 of this
Agreement, which shall survive such termination.
(d) This Agreement shall be binding upon and inure to the
benefit of the parties hereto, and their respective successors and permitted
assigns.
(e) In the event that any provision of this Agreement becomes
or is declared by a court of competent jurisdiction to be illegal, unenforceable
or void, this Agreement shall continue in full force and effect without said
provision.
(f) Each party shall, without payment of any additional
consideration by any other party, at any time on or after the sale of the Units
take such further action and execute such other and further documents and
instruments as the other party may request in order to provide the other party
with the benefits of this Agreement.
(g) All references to any gender shall be deemed to include
the masculine, feminine or neuter gender, the singular shall include the plural,
and the plural shall include the singular.
(h) 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 document.
(i) The various representations, warranties, and covenants set
forth in this Agreement or in any other writing delivered in connection
therewith shall survive the issuance of the Units.
46
<PAGE>
Please confirm your agreement with the foregoing by signing this
Agreement where indicated.
Very truly yours,
Number of Units
Subscribed for: eight -------------------------------------------------
Name of Subscriber
Total
Purchase Price: By: /s/
----------------------------------------------
$2,000,000 (Signature)
Title, if applicable
-----------------------------
Address:
-----------------------------------------------------
- -------------------------------------------------------------
Telecopier Number:
-------------------------------------------
Social Security No. or Tax I.D. No.:
-------------------------
The Subscriber is an accredited investor based on the following paragraphs of
Exhibit B to this Agreement:
---------------------------------
Accepted this 9th day of
February, 1999
CHEQUEMATE INTERNATIONAL, INC.
By: /s/ J. Michael Heil
- -----------------------
J. Michael Heil, CEO
47
<PAGE>
Exhibit A
Disclosure Documents
1. Risk Factors
2. Form 10-KSB for the fiscal year ended March 31, 1998
3. Form 10-QSB for the quarter ended September 30, 1998
4. Capital Stock
5. Management
6. Form of Debenture.
7. Form of Warrant
Schedule 2(f)
Schedule 2(i)
Schedule 2(l)
48
Exhibit 10.2
------------
NEITHER THIS DEBENTURE NOR THE SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION
OF THIS DEBENTURE HAS BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR ANY STATE SECURITIES LAW, AND SUCH SECURITIES MAY NOT BE SOLD OR
OTHERWISE TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT
UNDER SAID ACT OR STATE LAW OR AN OPINION OF COUNSEL THAT SUCH REGISTRATION IS
NOT REQUIRED.
NA-4 New York, New York
$250,000 February 9, 1999
CHEQUEMATE INTERNATIONAL, INC.
8% REDEEMABLE CONVERTIBLE DEBENTURE DUE February 9, 2002
FOR VALUE RECEIVED, Chequemate International, Inc., a Utah corporation
(the "Company"), hereby promises to pay to the order of Augustine Fund, L.P. an
Illinois limited partnership (the "holder"), the principal amount of two hundred
fifty thousand dollars ($250,000) on February 9, 2002 Interest on this Debenture
shall be payable quarterly, on the 15th day of each October, January, April and
July of each year to the holder of record of this Debenture on the last day of
September, February, March and June, respectively, with the first interest
payment being due on April 15, 1999. Interest shall be payable at the rate of
eight percent (8%) per annum (computed on the basis of a 360-day year, using the
number of days actually elapsed). Interest shall be payable, to the extent
permitted by law, at the rate equal to the lesser of (i) eighteen percent (18%)
per annum or (ii) the maximum rate permitted by law, on the entire unpaid
principal amount of this Debenture from and after the time that such principal
amount shall have become due and payable (whether at maturity or by
acceleration). In no event shall the rate of interest exceed the maximum
interest rate which may legally be charged, and any payments which would result
in an interest payment being in excess of such legal rate shall be treated for
all purposes as payments of principal. This Debenture is one of the Company's 8%
Redeemable Convertible Debentures due February 9, 2002 (collectively, the
"Debentures"), which were issued in the aggregate maximum principal amount of
two million dollars ($2,000,000) (the "Maximum Principal Amount").
ARTICLE 1.
Covenants of the Company
Until the principal of and interest on the Debentures shall have been
paid in full:
(a) Continued Organization; Good Standing. Each of the Company and each
of its present or future subsidiaries (each, a "Subsidiary") will continue its
corporate existences and good standing in the state or province of its
organization and in each other state or province in which it owns or leases real
property.
(b) Filings under the Securities Exchange Act of 1934. The Company is
required to file annual, quarterly and periodic reports pursuant to Section
15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act").
The Company shall file all reports required by Section 15(d) of the Exchange Act
not later than the date that such reports are due.
87797-1 -49-
<PAGE>
(c) Comply with Obligations under Subscription Agreement. The Company
shall comply in all material respects with its obligations pursuant to the
subscription agreements (collectively, the "Subscription Agreements") pursuant
to which the Debentures were issued.
ARTICLE 2
Events of Default and Acceleration
(a) Events of Default Defined. The entire unpaid principal amount of
this Debenture, together with interest thereon shall, at the option of the
holder this Debenture, exercised by written notice to the Company, forthwith
become and be due and payable if any one or more the following events ("Events
of Default") shall have occurred (for any reason whatsoever and whether such
happening shall be voluntary or involuntary or be affected or come about by
operation of law pursuant to or in compliance with any judgment, decree, or
order of any court or any order, rule or regulation of any administrative or
governmental body) and be continuing. An Event of Default shall occur:
(i) if failure shall be made in the payment of the principal
of this Debenture when and as the same shall become due; or
(ii) if failure shall be made in the payment of any
installment of interest on this Debenture when and as the same shall become due
and payable whether at maturity or otherwise and such failure shall continue for
five (5) days after the date such payment is due; or
(iii) if the Company shall violate or breach any of the
covenants set forth in this Debenture and such violation or breach shall
continue for fifteen (15) days thereafter; or
(iv) if the Company shall violate or breach any of the
representations, warranties, covenants or agreements contained in any of the
Subscription Agreements, and such violation or breach shall continue for thirty
(30) days thereafter.
(v) if the Company or any Subsidiary shall consent to the
appointment of a receiver, trustee or liquidator of itself or of a substantial
part of its property, or shall admit in writing its inability to pay its debts
generally as they become due, or shall make a general assignment for the benefit
of creditors, or shall file a voluntary petition in bankruptcy, or an answer
seeking reorganization in a proceeding under any bankruptcy law (as now or
hereafter in effect) or an answer admitting the material allegations of a
petition filed against the Company or any Subsidiary, in any such proceeding, or
shall by voluntary petition, answer or consent, seek relief under the provisions
of any other now existing or future bankruptcy or other similar law providing
for the reorganization or winding up of corporations, or an arrangement,
composition, extension or adjustment with its or their creditors, or shall, in a
petition in bankruptcy filed against it or them be adjudicated a bankrupt, or
the Company or any Subsidiary or their directors or a majority of its
stockholders shall vote to dissolve or liquidate the Company or any Subsidiary
other than a liquidation involving a transfer of assets from a Subsidiary to the
Company or another Subsidiary; or
(vi) if an involuntary petition shall be filed against the
Company or any Subsidiary seeking relief against the Company or any Subsidiary
under any now existing or future bankruptcy, insolvency or other similar law
87797-1 -50-
<PAGE>
providing for the reorganization or winding up of corporations, or an
arrangement, composition, extension or adjustment with its or their creditors,
and such petition shall not be vacated or set aside within sixty (60) days from
the filing thereof; or
(vii) if a court of competent jurisdiction shall enter an
order, judgment or decree appointing, without consent of the Company or any
Subsidiary, a receiver, trustee or liquidator of the Company or any Subsidiary,
or of all or any substantial part of the property of the Company or any
Subsidiary, or approving a petition filed against the Company or any Subsidiary
seeking a reorganization or arrangement of the Company or any Subsidiary under
the Federal bankruptcy laws or any other applicable law or statute of the United
States of America or any State thereof, or any substantial part of the property
of the Company or any Subsidiary shall be sequestered; and such order, judgment
or decree shall not be vacated or set aside within sixty (60) days from the date
of the entry thereof; or
(viii) if, under the provisions of any law for the relief or
aid of debtors, any court of competent jurisdiction shall assume custody or
control of the Company or any Subsidiary or of all or any substantial part of
the property of the Company or any Subsidiary and such custody or control shall
not be terminated within sixty (60) days from the date of assumption of such
custody or control.
(b) Rights of Debenture Holder. Nothing in this Debenture shall be
construed to modify, amend or limit in any way the right of the holder of this
Debenture to bring an action against the Company.
ARTICLE 3.
Conversion
(a) Right of Conversion.
(i) At any time on or after the Initial Conversion Date, as
hereinafter defined, and subject to the rights of the Company to redeem
Debentures or restrict conversion pursuant to Paragraph 3(f) of this Debenture,
the holder of this Debenture shall have the right, in whole at any time and in
part from time to time, prior to payment of the principal of this Debenture, to
convert all or any part of the principal amount of this Debenture outstanding
from time to time and accrued interest into such number of shares of Common
Stock at the conversion price hereinafter defined (the "Conversion Price");
provided, that the right to conversion shall terminate at 5:00 P.M. New York
City time on the business day prior to the maturity date of this Debenture.
(ii) The "Initial Conversion Date" shall mean the first to
occur of:
(A) Fourteen (14) days after the Closing Date (the
"Registration Date"), or
(B) The effective date of the Registration Statement,
as hereinafter defined.
(b) Exercise of Conversion Right. In order to exercise the conversion
right, the holder of this Debenture shall surrender this Debenture at the office
of the Company together with written instructions specifying the portion of the
principal amount of and accrued interest on this
87797-1 -51-
<PAGE>
Debenture which the holder elects to convert and the registration and delivery
of certificates for shares of Common Stock issuable upon such conversion. The
shares of Common Stock issuable upon conversion of this Debenture are referred
to as the "Conversion Shares." The number of Conversion Shares shall be
determined by dividing the amount of principal and interest being converted by
the Conversion Price in effect on the date of such conversion, which shall be
the date this Debenture is delivered to the Company for conversion. The holder
shall thereupon be deemed the holder of the shares of Common Stock so issued and
the principal amount of and interest on the Debenture, to the extent so
converted, shall be deemed to have been paid in full. If this Debenture shall
have been converted in part, the holder of this Debenture shall be entitled to a
new Debenture representing the unpaid principal balance of such Debenture
remaining after deducting the principal amount of the Debenture converted. Any
interest not converted into Common Stock pursuant to this Paragraph 3 shall be
paid to the holder in cash at the time of conversion.
(c) Conversion Price.
-----------------
(i) The Conversion Price shall be the lesser of the Maximum
Conversion Price, as hereinafter defined, or the Current Conversion Price, as
hereinafter defined, which shall be subject to adjustment as hereinafter
provided.
(ii) The Maximum Conversion Price shall mean $3.54.
(iii) The Current Conversion Price shall mean eighty percent
(80%) of the average closing bid price of the Common Stock for the five (5)
trading days prior to the date on which this Debenture is presented for
conversion on the principal stock exchange or market on which the Common Stock
is traded. If there is more than one reported closing bid price on any day, the
lowest closing bid price shall be used for the closing bid price on such day. If
this Debenture is being converted in part only, then the Current Conversion
Price shall relate to the Debenture to the extent that principal and interest is
converted, and the Current Conversion Price for any subsequent conversion shall
be determined in accordance with this Paragraph 3(c)(iii) at the time of such
subsequent conversion.
(iv) The Maximum Conversion Price shall be subject to
adjustment as follows:
(A) If the Company shall, subsequent to February 9,
1999, (A) pay a dividend or make a distribution on its shares of Common Stock in
shares of Common Stock, (B) subdivide or reclassify its outstanding Common Stock
into a greater number of shares, or (C) combine or reclassify its outstanding
Common Stock into a smaller number of shares or otherwise effect a reverse
split, the Maximum Conversion Price in effect at the time of the record date for
such dividend or distribution or of the effective date of such subdivision,
combination or reclassification shall be proportionately adjusted upward or
downward, as the case may be. Such adjustment shall be made successively
whenever any event listed in this Paragraph 3(c)(iv)(A) shall occur.
(B) In case the Company shall, subsequent to February
9, 1999, issue rights or warrants to all holders of its Common Stock entitling
them to subscribe for or purchase shares of Common Stock (or securities
convertible into Common Stock) at a price (or having a conversion price per
share) less than the current market price of the Common Stock (as defined in
Paragraph 3(c)(iv)(D) of this Debenture) on the record date mentioned below, the
Maximum
87797-1 -52-
<PAGE>
Conversion Price shall be adjusted so that the Maximum Conversion Price shall
equal the price determined by multiplying the Maximum Conversion Price in effect
immediately prior to the date of such issuance by a fraction, the numerator of
which shall be the number of shares of Common Stock outstanding on the record
date mentioned below plus the number of additional shares of Common Stock which
the aggregate offering price of the total number of shares of Common Stock so
offered (or the aggregate conversion price of the convertible securities so
offered) would purchase at such current market price per share of the Common
Stock, and the denominator of which shall be the number of shares of Common
Stock outstanding on such record date plus the maximum number of additional
shares of Common Stock offered for subscription or purchased (or into which the
convertible securities so offered are convertible). Such adjustment shall be
made successively whenever such rights or warrants are issued and shall become
effective immediately after the record date for the determination of
stockholders entitled to receive such rights or warrants; and to the extent that
shares of Common Stock or securities convertible into Common Stock are not
delivered after the expiration of such rights or warrants, the Maximum
Conversion Price shall be readjusted to the Maximum Conversion Price which would
then be in effect had the adjustments made upon the issuance of such rights or
warrants been made upon the basis of delivery of only the number of shares of
Common Stock (or securities convertible into Common Stock) actually delivered.
(C) In case the Company shall, subsequent to February
9, 1999, distribute to all holders of Common Stock evidences of its indebtedness
or assets (excluding cash dividends or distributions paid out of current
earnings and dividends or distributions referred to in Paragraph 3(c)(iv)(A) of
this Debenture) or subscription rights or warrants (excluding those referred to
in Paragraph 3(c)(iv)(B) of this Debenture), then in each such case the Maximum
Conversion Price in effect thereafter shall be determined by multiplying the
Maximum Conversion Price in effect immediately prior thereto by a fraction, of
which the numerator shall be the total number of shares of Common Stock
outstanding multiplied by the current market price per share of Common Stock (as
defined in Paragraph 3(c)(iv)(D) of this Debenture), less the fair market value
(as determined by the Company's Board of Directors) of said assets or evidences
of indebtedness so distributed or of such rights or warrants, and of which the
denominator shall be the total number of shares of Common Stock outstanding
multiplied by such current market price per share of Common Stock. Such
adjustment shall be made successively whenever such a record date is fixed. Such
adjustment shall be made whenever any such distribution is made and shall become
effective immediately after the record date for the determination of
stockholders entitled to receive such distribution.
(D) For the purpose of any computation under
Paragraphs 3(c)(iv)(B) and (C) of this Debenture, the current market price per
share of Common Stock at any date shall be deemed to be the average of the daily
closing prices for ten (10) consecutive trading days commencing twenty (20)
trading days before such date. The closing price for each day shall be the
reported closing price on the principal national securities exchange or market
on which the Common Stock is admitted to trading or listed, or if not listed or
admitted to trading on any such exchange or such market or if there is no
trading on any day in the computation period, the closing low bid price as
reported by the Nasdaq Stock Market ("Nasdaq"), the National Quotation Bureau,
Inc. or other similar organization, shall be used, or if such prices are not
available, the fair market price as determined in good faith by the Board of
Directors.
(v) In the event that, during any five (5) trading day period
during which a computation of the Current Market Price is being made, there is a
87797-1 -53-
<PAGE>
record date for an event described in Paragraphs 3(c)(iv)(A), (B) or (C) of this
Debenture, the closing bid price of the Common Stock for each day in such period
which is prior to such record date shall be adjusted in the same manner as the
Maximum Conversion Price.
(d) Reclassification, Reorganization or Merger. In case of any
reclassification, capital reorganization or other change of outstanding shares
of Common Stock of the Company, or in case of any consolidation or merger of the
Company with or into another corporation (other than a merger with a Subsidiary
in which merger the Company is the continuing corporation and which does not
result in any reclassification, capital reorganization or other change of
outstanding shares of Common Stock or the class issuable upon conversion of this
Debenture) or in case of any sale, lease or conveyance to another corporation of
the property of the Company as an entirety, the Company shall, as a condition
precedent to such transaction, cause effective provisions to be made so that the
holder of this Debenture shall have the right thereafter by converting this
Debenture, to purchase the kind and amount of shares of stock and other
securities and property receivable upon such reclassification, capital
reorganization and other change, consolidation, merger, sale or conveyance by a
holder of the number of shares of Common Stock which might have been purchased
upon conversion of this Debenture immediately prior to such reclassification,
change, consolidation, merger, sale or conveyance. Any such provision shall
include provision for adjustments which shall be as nearly equivalent as may be
practicable to the adjustments provided for in this Debenture. The foregoing
provisions of this Paragraph 3(d) shall similarly apply to successive
reclassifications, capital reorganizations and changes of shares of Common Stock
and to successive consolidations, mergers, sales or conveyances. In the event
that in connection with any such capital reorganization or reclassification,
consolidation, merger, sale or conveyance, additional shares of Common Stock
shall be issued in exchange, conversion, substitution or payment, in whole in
part, for a security of the Company other than Common Stock, such transaction
shall be treated as a reclassification or reorganization pursuant to this
Paragraph 3(d).
(e) Fractional Shares. No fractional shares or script representing
fractional shares shall be issued upon the conversion of any Debentures. If,
upon any full or partial conversion of this Debenture, the holder would, except
for the provisions of this Paragraph 3(e), be entitled to receive a fractional
share of Common Stock, then the Company shall pay the holder, at the time the
shares of Common Stock are issued on such conversion, an amount equal to such
fractional share multiplied by the then current value per share of Common Stock,
determined as follows:
(i) If the Common Stock is listed on a national securities
exchange or admitted to unlisted trading privileges on such exchange or listed
for trading on Nasdaq or other automated quotation system which provides
information as to the last sale price, the current value shall be the average of
the reported last sale prices of one share of Common Stock on such exchange or
system on the last trading days prior to the date of conversion, or if, on such
date, no such sale is made on such day, the average of the closing bid and asked
prices for such date on such exchange or system shall be used; or
(ii) If the Common Stock is not so listed or admitted to
unlisted trading privileges, the current value shall be the mean the average of
the reported last bid and asked prices of one share of Common Stock as reported
by Nasdaq, the National Quotation Bureau, Inc. or other similar reporting
service, on the trading day prior to the date of conversion; or
87797-1 -54-
<PAGE>
(iii) If the Common Stock is not so listed or admitted to
unlisted trading privileges and bid and asked prices are not so reported, the
current value of one share of Common Stock shall be an amount, not less than
book value, determined in such reasonable manner as may be prescribed by the
Board of Directors of the Company.
(f) Right of Company to Redeem or Restrict Conversion.
--------------------------------------------------
(i) At any time prior to the delivery by the holder of written
notice of conversion, as provided in this Agreement, the Company shall have the
right to exercise the Redemption Right, as hereinafter defined. Notice (the
"Notice") of the exercise of the Redemption Right must be given by telephone,
and confirmed by telecopier and by mail as provided in Paragraph 5(g) of this
Debenture.
(ii) The Redemption Right shall mean the right of the Company
to redeem one or more of the outstanding Debentures at a redemption price equal
to one hundred twenty percent (120%) of the principal amount of the Debenture
plus accrued interest on such principal amount. Payment of such redemption price
shall be made by certified or official bank check or by wire transfer in
accordance with instructions from the holder of this Debenture. The redemption
price shall be paid not later than the business day following the date on which
the Company exercises the Redemption Right by giving Notice to the holder. The
exercise of the Redemption Right on any occasion shall not affect the ability of
the Company to exercise the Redemption Right on a subsequent occasion provided,
however, that in the event that the Company fails to pay the Redemption Price on
the date such payment is to be made pursuant to this Paragraph 3(f)(ii), then
the right to redeem the Debentures shall terminate, and the Company shall have
no right thereafter to redeem any Debentures or to restrict conversion of
Debentures.
ARTICLE 4.
Filing of S-3 Registration Statement; Payment for Failure to Register.
(a) Not later than the Registration Date, the Company shall file a
registration statement (the "Registration Statement") under the Securities Act
of 1933, as amended (the "Securities Act") on Form S-3 covering the sale of the
Conversion Shares by the holders thereof, and the Company will use its best
efforts to have such registration statement declared effective as soon as
possible thereafter. The Company shall take such steps to insure that the
Registration Statement is current and effective until all of the Conversion
Shares shall have been sold or until such time as all of the Conversion Shares
issuable upon all of the Debentures may be sold without registration pursuant to
Rule 144 of the Securities and Exchange Commission (the "Commission") or any
similar subsequent rule without regard to volume limitations and filing
requirements.
(b) The Company recognizes that its agreement to have the Conversion
Shares registered pursuant to the Securities Act was a material inducement for
the holder of this Debenture to purchase this Debenture. Accordingly, if the
Registration Statement is not declared effective by the Commission within one
hundred six (106) days following the Registration Date (the "Default Date"), the
Company shall pay the holder of this Debenture, as liquidated damages for such
failure, the Registration Payment, as hereinafter defined.
(c) The Registration Payment shall mean the Applicable Percentage, as
hereinafter defined, multiplied by the number of days between Registration Date
87797-1 -55-
<PAGE>
and the date on which the Registration Statement is declared effective by the
Commission. In making such computation, the Registration Date shall not be
counted, and the date on which the Registration Statement is declared effective
shall be counted.
(d) The Applicable Percentage shall mean one-fifteenth of one percent
(.066 2/3%) of the principal amount of the Debenture for each day after the
Default Date that the Registration Statement has not been declared effective by
the Commission.
(e) Payment of the Registration Payment shall be made on the first day
of each calendar month following the Registration Date, based on the amount
accrued to the day prior to the date of such payment, except that the last
payment shall be made within two (2) business days after the effective date of
the Registration Statement.
ARTICLE 5.
Miscellaneous
(a) Transferability. This Debenture shall not be transferred except as
provided in the Subscription Agreement and in a transaction exempt from
registration pursuant to the Securities Act and applicable state securities law.
The Company shall treat as the owner of this Debenture the person shown as the
owner on its books and records.
(b) Right of Prepayment. Subject to the right of the Company to
exercise the Redemption Right, the Company may, but only with the written
consent of the holder of this Debenture, prepay all, and not less than all, of
the principal amount of this Debenture plus accrued interest, provided, that in
the event that the Company elects to make such prepayment it shall offer to
prepay all of the outstanding Debentures.
(c) Waiver of Trial by Jury. In any legal proceeding to enforce payment
of this Debenture, the Company waives trial by jury, claims for offset and
counterclaims, if any.
(d) Legal Fees. In the event that the holder of this Debenture engages
counsel in connection with the administration or enforcement of this Debenture,
the Company shall pay all reasonable legal fees and expenses incurred by the
holder, regardless of whether an action has been commenced.
(e) Governing Law. This Debenture shall be governed by the laws of the
State of New York applicable to agreement executed and to be performed wholly
within such State without regard to principles of conflict of laws.
(f) Court Jurisdiction. The Company hereby (i) consents to the
exclusive jurisdiction of the United States District Court for the Southern
District of New York and Supreme Court of the State of New York in the County of
New York in any action relating to or arising out of this Debenture, (ii) agrees
that any process in any such action may be served upon it, in addition to any
other method of service permitted by law, by certified or registered mail,
return receipt requested, or by an overnight courier service which obtains
evidence of delivery, with the same full force and effect as if personally
served upon him in New York City, and (iii) waives any claim that the
jurisdiction of any such tribunal is not a convenient forum for any such action
and any defense of lack of in personam jurisdiction with respect thereto.
87797-1 -56-
<PAGE>
(g) Notices. Notice to the Company shall be given to the Company at 75
West 200 South, Suite 350, Salt Lake City, Utah 84101, Attention: Mr. Michael
Heil, CEO, telecopier (801) 322-1165, or to the holder at the address set forth
on the Company's records, or to such other address as the Company or the holder
may advise by hand delivery, certified or registered mail, return receipt
requested, overnight courier service, or by telecopier if confirmation of
receipt is given or of confirmation of transmission is sent by mail as herein
provided.
(h) Indemnification. The Company agrees to indemnify and hold harmless
the holder and each officer, director of the holder or person, if any, who
controls the holder within the meaning of the Securities Act against any losses,
claims, damages or liabilities, joint or several (which shall, for all purposes
of this Debenture, include, but not be limited to, all costs of defense and
investigation and all attorneys' fees), to which the holder may become subject,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon the breach of any term of this
Debenture. This indemnity agreement will be in addition to any liability which
the Company may otherwise have.
IN WITNESS WHEREOF, the Company has executed this Agreement as of the
date and year first aforesaid.
CHEQUEMATE INTERNATIONAL, INC.
By:
-------------------------------------
J. Michael Heil, CEO
87797-1 -57-
<PAGE>
NOTICE OF CONVERSION
[To be Signed Only Upon Conversion
of Part or All of Debentures]
CHEQUEMATE INTERNATIONAL, INC.
The undersigned, the holder of the foregoing Debenture, hereby
surrenders such Debenture for conversion into shares of Common Stock of
Chequemate International, Inc. to the extent of $ * unpaid principal amount of
and interest due on such Debenture, and requests that the certificates for such
shares be issued in the name of__________________, and delivered
to____________________ , whose address is____________________________________.
DATED:
- -----------------------------------------
(Signature)
(Signature must conform in all respects to name of holder as specified
on the face of the Debenture.)
- ---------
* Insert here the unpaid principal amount of the Debenture (or, in the
case of a partial conversion, the portion thereof as to which the
Debenture is being converted). In the case of a partial conversion, a
new Debenture will be issued and delivered, representing the
unconverted portion of the unpaid principal amount of this Debenture,
to or upon the order of the holder surrendering such Debenture.
deb2febfinal.697
87797-1 -58-
Exhibit 10.3
------------
Warrant to Purchase
WA-2 **67,800**
Shares of Common Stock
NEITHER THIS WARRANT NOR THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF
THIS WARRANT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
AND NEITHER THIS WARRANT NOR SUCH SHARES MAY BE SOLD, ENCUMBERED OR OTHERWISE
TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH
ACT OR AN EXEMPTION FROM SUCH REGISTRATION REQUIREMENT, AND, IF AN EXEMPTION
SHALL BE APPLICABLE, THE HOLDER SHALL HAVE DELIVERED AN OPINION OF COUNSEL
ACCEPTABLE TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.
Void after 5:00 P.M. New York City time on February 9, 2002
COMMON STOCK PURCHASE WARRANT
OF
CHEQUEMATE INTERNATIONAL, INC.
This is to certify that, FOR VALUE RECEIVED, Augustine Fund L.P. or its
registered assigns ("Holder"), is entitled to purchase, on the terms and subject
to the provisions of this Warrant, from Chequemate International, Inc. a Utah
corporation (the "Company"), at an exercise price per share of three dollars and
fifty-four cents ($3.54), sixty-seven thousand eight hundred (67,800) shares of
no par value common stock ("Common Stock"), of the Company at any time during
the period (the "Exercise Period"), commencing on the date of issuance of this
Warrant and ending at 5:00 P.M. New York City time, on February 9, 2002;
provided, however, that if such date is a day on which banking institutions in
the State of New York are authorized by law to close, then on the next
succeeding day which shall not be such a day. The number of shares of Common
Stock to be issued upon the exercise of this Warrant and the price to be paid
for a share of Common Stock may be adjusted from time to time in the manner set
forth in this Warrant. The shares of Common Stock deliverable upon such
exercise, and as adjusted from time to time, are hereinafter sometimes referred
to as "Warrant Shares," and the exercise price for the purchase of a share of
Common Stock pursuant to this Warrant, as the same may be adjusted from time to
time is hereinafter sometimes referred to as the "Exercise Price." Reference in
the Warrant to the "Warrants" shall mean any or all of the warrants designated
as Common Stock Purchase Warrants by the Company. The Warrants were issued
pursuant to a subscription agreement dated February 9, 1999 (the "Subscription
Agreement"), between the Company and the initial holder of the Warrant.
(a) EXERCISE OF WARRANT. This Warrant may be exercised in whole at any
time or in part from time to time during the Exercise Period by presentation and
surrender of this Warrant to the Company at its principal office, or at the
office of its stock transfer agent, if any, with the Purchase Form annexed
hereto duly executed and accompanied by payment of the Exercise Price for the
number of shares of Common Stock specified in such form. Payment of the Exercise
Price may be made either by check (subject to collection) in the amount of the
Exercise Price or by delivery of such number of shares of Common Stock as has a
87800-1 -59-
<PAGE>
current value, determined in the manner provided for in Paragraph (a)(2) of this
Warrant (with the current value being based on the market price of the Common
Stock on the date the Warrant, accompanied by the shares of Common Stock
delivered in respect of such exercise, is received by the Company or its
transfer agent), equal to the Exercise Price. If this Warrant should be
exercised in part only, whether pursuant to this Paragraph (a)(1) or pursuant to
Paragraph (a)(2) of this Warrant, the Company shall, upon surrender of this
Warrant for cancellation, execute and deliver a new Warrant evidencing the
rights of the Holder hereof to purchase the balance of the shares of Common
Stock purchasable hereunder. Upon receipt by the Company of this Warrant at its
office, or by the stock transfer agent of the Company at its office, in proper
form for exercise, the Holder shall be deemed to be the holder of record of the
shares of Common Stock issuable upon such exercise, notwithstanding that the
stock transfer books of the Company shall then be closed or that certificates
representing such shares of Common Stock shall not then be actually delivered to
the Holder.
(b) RESERVATION OF SHARES. The Company hereby agrees that at all times
there shall be reserved for issuance and/or delivery upon exercise of this
Warrant such number of shares of Common Stock as shall be required for issuance
and delivery upon exercise of this Warrant and that it shall not, without the
prior approval of the holders of a majority of the Warrants then outstanding,
increase the par value of the Common Stock.
(c) FRACTIONAL SHARES. No fractional shares or script representing
fractional shares shall be issued upon the exercise of this Warrant. With
respect to any fraction of a share called for upon any exercise of this Warrant,
the Company shall pay to the Holder an amount in cash equal to such fraction
multiplied by the current market value of such fractional share.
(d) EXCHANGE, TRANSFER, ASSIGNMENT OR LOSS OF WARRANT. This Warrant is
exchangeable, without expense, at the option of the Holder, upon presentation
and surrender hereof to the Company or at the office of its stock transfer
agent, if any, for other Warrants of different denominations entitling the
holder thereof to purchase in the aggregate the same number of shares of Common
Stock purchasable hereunder. Subject to the provisions of Paragraph (k) of this
Warrant, upon surrender of this Warrant to the Company or at the office of its
stock transfer agent, if any, with the Assignment Form annexed hereto duly
executed and funds sufficient to pay any transfer tax, the Company shall,
without charge, execute and deliver a new Warrant in the name of the assignee
named in such instrument of assignment and this Warrant shall promptly be
canceled. This Warrant may be divided or combined with other Warrants which
carry the same rights upon presentation hereof at the office of the Company or
at the office of its stock transfer agent, if any, together with a written
notice specifying the names and denominations in which new Warrants are to be
issued and signed by the Holder hereof. The term "Warrant" as used herein
includes any Warrants into which this Warrant may be divided or exchanged. Upon
receipt by the Company of evidence satisfactory to it of the loss, theft,
destruction or mutilation of this Warrant, and (in the case of loss, theft or
destruction) of reasonably satisfactory indemnification, and upon surrender and
cancellation of this Warrant, if mutilated, the Company will execute and deliver
a new Warrant of like tenor. Any such new Warrant executed and delivered shall
constitute an additional contractual obligation on the part of the Company,
whether or not this Warrant so lost, stolen, destroyed, or mutilated shall be at
any time enforceable by anyone.
87800-1 -60-
<PAGE>
(e) RIGHTS OF THE HOLDER. The Holder shall not, by virtue of this
Warrant, be entitled to any rights of a stockholder in the Company, either at
law or equity, and the rights of the Holder are limited to those expressed in
the Warrant and are not enforceable against the Company except to the extent set
forth in this Warrant.
(f) ANTI-DILUTION PROVISIONS. The Exercise Price in effect at any time
and the number and kind of securities purchasable upon exercise of each Warrant
shall be subject to adjustment as follows:
(1) In case the Company shall, subsequent to February 9, 1999,
(A) pay a dividend or make a distribution on its shares of Common Stock in
shares of Common Stock (B) subdivide or reclassify its outstanding Common Stock
into a greater number of shares, or (C) combine or reclassify its outstanding
Common Stock into a smaller number of shares or otherwise effect a reverse
split, the Exercise Price in effect at the time of the record date for such
dividend or distribution or of the effective date of such subdivision,
combination or reclassification shall be proportionately adjusted so that the
Holder of this Warrant exercised after such date shall be entitled to receive
the aggregate number and kind of shares which, if this Warrant had been
exercised immediately prior to such time, he would have owned upon such exercise
and been entitled to receive upon such dividend, subdivision, combination or
reclassification. Such adjustment shall be made successively whenever any event
listed in this Paragraph (f)(1) shall occur.
(2) In case the Company shall, subsequent to February 9, 1999,
issue rights or warrants to all holders of its Common Stock entitling them to
subscribe for or purchase shares of Common Stock (or securities convertible into
Common Stock) at a price (or having a conversion price per share) less than the
current market price of the Common Stock (as defined in Paragraph (f)(5) of this
Warrant) on the record date mentioned below, the Exercise Price shall be
adjusted so that the same shall equal the price determined by multiplying the
Exercise Price in effect immediately prior to the date of such issuance by a
fraction, of which the numerator shall be the number of shares of Common Stock
outstanding on the record date mentioned below plus the number of shares
determined by multiplying the price or the conversion price at which additional
shares of Common Stock are offered by the number of shares of Common Stock being
offered by the number of shares being issued, including shares being issued upon
conversion of any convertible securities, and dividing the result so obtained by
the current market price of the Common Stock, and of which the denominator shall
be the number of shares of Common Stock outstanding on such record date plus the
number of additional shares of Common Stock offered for subscription or
purchased (or into which the convertible securities so offered are convertible).
Such adjustment shall be made successively whenever such rights or warrants are
issued and shall become effective immediately after the record date for the
determination of stockholders entitled to receive such rights or warrants; and
to the extent that shares of Common Stock or securities convertible into Common
Stock are not delivered after the expiration of such rights or warrants, the
Exercise Price shall be readjusted to the Exercise Price which would then be in
effect had the adjustments made upon the issuance of such rights or warrants
been made upon the basis of delivery of only the number of shares of Common
Stock (or securities convertible into Common Stock) actually delivered.
87800-1 -61-
<PAGE>
(3) In case the Company shall, subsequent to February 9, 1999,
distribute to all holders of Common Stock evidences of its indebtedness or
assets (excluding cash dividends or distributions paid out of current earnings
and dividends or distributions referred to in Paragraph (f)(1) of this Warrant)
or subscription rights or warrants (excluding those referred to in Paragraph
(f)(2) of this Warrant), then in each such case the Exercise Price in effect
thereafter shall be determined by multiplying the Exercise Price in effect
immediately prior thereto by a fraction, of which the numerator shall be the
total number of shares of Common Stock outstanding multiplied by the current
market price per share of Common Stock (as defined in Paragraph (f)(5) of this
Warrant), less the fair market value (as determined by the Company's Board of
Directors) of said assets or evidences of indebtedness so distributed or of such
rights or warrants, and of which the denominator shall be the total number of
shares of Common Stock outstanding multiplied by such current market price per
share of Common Stock. Such adjustment shall be made successively whenever such
a record date is fixed. Such adjustment shall be made whenever any such
distribution is made and shall become effective immediately after the record
date for the determination of stockholders entitled to receive such
distribution.
(4) Whenever the Exercise Price payable upon exercise of each
Warrant is adjusted pursuant to Paragraphs (f)(1), (2) or (3) of this Warrant,
the number of shares of Common Stock purchasable upon exercise of each Warrant
shall simultaneously be adjusted by multiplying the number of shares of Common
Stock issuable upon exercise of each Warrant in effect on the date thereof by
the Exercise Price in effect on the date thereof and dividing the product so
obtained by the Exercise Price, as adjusted. In no event shall the Exercise
Price per share be less than the par value per share, and, if any adjustment
made pursuant to Paragraph (f)(1), (2) or (3) would result in an exercise price
of less than the par value per share, then, in such event, the Exercise Price
per share shall be the par value per share. The Company agrees not to increase
the par value of the Common Stock other than in connection with a reverse split
or combination or shares or other recapitalization, in which event any such
increase shall not be greater than that which would result from the application
of the adjustments provided in Paragraph (f)(1) of this Warrant to the par
value.
(5) For the purpose of any computation under Paragraphs (f)(2)
and (3) of this Warrant, the current market price per share of Common Stock at
any date shall be deemed to be the average of the daily closing prices for
thirty (30) consecutive trading days commencing forty five (45) trading days
before such date. The closing price for each day shall be the reported last sale
price regular way or, in case no such reported sale takes place on such day, the
average of the reported last bid and asked prices regular way, in either case on
the principal national securities exchange on which the Common Stock is admitted
to trading or listed or on Nasdaq, or if not listed or admitted to trading on
such exchange or such market, the average of the reported highest bid and
reported lowest asked prices as reported by Nasdaq, the National Quotation
Bureau, Inc. or other similar organization if Nasdaq is no longer reporting such
information, or if not so available, the fair market price as determined by the
Board of Directors.
(6) No adjustment in the Exercise Price shall be required
unless such adjustment would require an increase or decrease of at least one
cent ($0.01) in such price; provided, however, that any adjustments which by
reason of this Paragraph (f)(6) are not required to be made shall be carried
87800-1 -62-
<PAGE>
forward and taken into account in any subsequent adjustment. All calculations
under this Paragraph (f) shall be made to the nearest cent or to the nearest
one-hundredth of a share, as the case may be. Anything in this Paragraph (f) to
the contrary notwithstanding, the Company shall be entitled, but shall not be
required, to make such changes in the Exercise Price, in addition to those
required by this Paragraph (f), as it in its discretion shall determine to be
advisable in order that any dividend or distribution in shares of Common Stock,
subdivision, reclassification or combination of Common Stock, issuance of
warrants to purchase Common Stock or distribution of evidences of indebtedness
or other assets (excluding cash dividends) referred to hereinabove in this
Paragraph (f) hereafter made by the Company to the holders of its Common Stock
shall not result in any tax to the holders of its Common Stock or securities
convertible into Common Stock.
(7) The Company may retain a firm of independent public
accountants of recognized standing selected by the Board of Directors (who may
be the regular accountants engaged by the Company) to make any computation
required by this Paragraph (f), and a certificate signed by such firm shall be
conclusive evidence of the correctness of such adjustment.
(8) In the event that at any time, as a result of an
adjustment made pursuant to Paragraph (f)(1) of this Warrant, the Holder of any
Warrant thereafter shall become entitled to receive any shares of the Company,
other than Common Stock, thereafter the number of such other shares so
receivable upon exercise of any Warrant shall be subject to adjustment from time
to time in a manner and on terms as nearly equivalent as practicable to the
provisions with respect to the Common Stock contained in Paragraphs (f)(1) to
(6), inclusive, of this Warrant.
(9) Irrespective of any adjustments in the Exercise Price or
the number or kind of shares purchasable upon exercise of Warrants, Warrants
theretofore or thereafter issued may continue to express the same price and
number and kind of shares as are stated in this and similar Warrants initially
issued by the Company.
(g) OFFICER'S CERTIFICATE. Whenever the Exercise Price shall be
adjusted as required by the provisions of Paragraph (f) of this Warrant, the
Company shall forthwith file in the custody of its Secretary or an Assistant
Secretary at its principal office and with its stock transfer agent, if any, an
officer's certificate showing the adjusted Exercise Price and the adjusted
number of shares of Common Stock issuable upon exercise of each Warrant,
determined as herein provided, setting forth in reasonable detail the facts
requiring such adjustment, including a statement of the number of additional
shares of Common Stock, if any, and such other facts as shall be necessary to
show the reason for and the manner of computing such adjustment. Each such
officer's certificate shall be made available at all reasonable times for
inspection by the Holder, and the Company shall, forthwith after each such
adjustment, mail, by first class mail, a copy of such certificate to the Holder
at the Holder's address set forth in the Company's Warrant Register.
(h) NOTICES TO WARRANT HOLDERS. So long as this Warrant shall be
outstanding, (1) if the Company shall pay any dividend or make any distribution
upon Common Stock (other than a regular cash dividend payable out of retained
earnings) or (2) if the Company shall offer to all holders of Common Stock for
subscription or purchase by them any share of any class or any other rights or
(3) if any capital reorganization of the Company, reclassification of the
87800-1 -63-
<PAGE>
capital stock of the Company, consolidation or merger of the Company with or
into another corporation, sale, lease or transfer of all or substantially all of
the property and assets of the Company to another corporation, or voluntary or
involuntary dissolution, liquidation or winding up of the Company shall be
effected, then in any such case, the Company shall cause to be mailed by
certified mail, return receipt requested, to the Holder, at least fifteen days
prior to the date specified in clauses (i) and (ii), as the case may be, of this
Paragraph (h) a notice containing a brief description of the proposed action and
stating the date on which (i) a record is to be taken for the purpose of such
dividend, distribution or rights, or (ii) such reclassification, reorganization,
consolidation, merger, conveyance, lease, dissolution, liquidation or winding up
is to take place and the date, if any is to be fixed, as of which the holders of
Common Stock or other securities shall receive cash or other property
deliverable upon such reclassification, reorganization, consolidation, merger,
conveyance, dissolution, liquidation or winding up.
(i) RECLASSIFICATION, REORGANIZATION OR MERGER. In case of any
reclassification, capital reorganization or other change of outstanding shares
of Common Stock of the Company, or in case of any consolidation or merger of the
Company with or into another corporation (other than a merger in which the
Company is the continuing corporation and which does not result in any
reclassification, capital reorganization or other change of outstanding shares
of Common Stock of the class issuable upon exercise of this Warrant) or in case
of any sale, lease or conveyance to another corporation of the property of the
Company as an entirety, the Company shall, as a condition precedent to such
transaction, cause effective provisions to be made so that the Holder shall have
the right thereafter by exercising this Warrant, to purchase the kind and amount
of shares of stock and other securities and property receivable upon such
reclassification, capital reorganization and other change, consolidation,
merger, sale or conveyance by a holder of the number of shares of Common Stock
which might have been purchased upon exercise of this Warrant immediately prior
to such reclassification, change, consolidation, merger, sale or conveyance. Any
such provision shall include provision for adjustments which shall be as nearly
equivalent as may be practicable to the adjustments provided for in this
Warrant. The foregoing provisions of this Paragraph (i) shall similarly apply to
successive reclassifications, capital reorganizations and changes of shares of
Common Stock and to successive consolidations, mergers, sales or conveyances.
(j) REGISTRATION UNDER THE SECURITIES ACT OF 1933.
(1) The holder of this Warrant and/or the Warrant Shares shall
be entitled to the benefits of the registration provisions of the Subscription
Agreement with the same effect as if such rights were set forth verbatim in this
Warrant.
(2) In the event that, for any reason and for any period, the
Warrant Shares shall not be registered pursuant to a current and effective
registration statement or such registration statement shall cease to be current,
the last day of the exercise period shall be extended by two (2) days for each
day that the registration statement shall not be available to the holder of this
Warrant or the Warrant Shares.
87800-1 -64-
<PAGE>
(k) TRANSFER TO COMPLY WITH THE SECURITIES ACT. This Warrant or the
Warrant Shares or any other security issued or issuable upon exercise of this
Warrant may not be sold or otherwise disposed of except as follows:
(1) To a person who, in the opinion of counsel for the
Company, is a person to whom this Warrant or Warrant Shares may legally be
transferred without registration and without the delivery of a current
prospectus under the Securities Act with respect thereto and then only against
receipt of an agreement of such person to comply with the provisions of this
Paragraph (k) with respect to any resale or other disposition of such securities
which agreement shall be satisfactory in form and substance to the Company and
its counsel; or
(2) to any person upon delivery of a prospectus then meeting
the requirements of the Securities Act relating to such securities and the
offering thereof for such sale or disposition.
Dated as of February 9, 1999
CHEQUEMATE INTERNATIONAL, INC.
By:
Name: _______________________
Its: __________________________
87800-1 -65-
<PAGE>
PURCHASE FORM
-------------
Dated:
The undersigned hereby irrevocably exercises this Warrant to the extent
of purchasing_______________ shares of Common Stock and hereby makes
payment of $_______________________ in payment of the Exercise Price
therefor.
INSTRUCTIONS FOR REGISTRATION OF STOCK
--------------------------------------
Name
-------------------------------------------------------
(Please typewrite or print in block letters)
Signature
--------------------------------------------------
Social Security or Employer Identification No.
-------------------------
ASSIGNMENT FORM
---------------
FOR VALUE RECEIVED, hereby sells, assigns and transfer unto
Name
------------------------------------------------------
(Please typewrite or print in block letters)
Address
---------------------------------------------------
Social Security or Employer Identification No.
-------------------------
The right to purchase Common Stock represented by this Warrant to the extent
of_________________ shares as to which such right is exercisable and does hereby
irrevocably constitute and appoint__________________________________ attorney to
transfer the same on the books of the Company with full power of substitution.
Signature
--------------------------------------
Signature Medallion Guaranteed:
- -------------------------------
warrant2febfinal.697
Inserts10qsb.491C
87800-1 -66-
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
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<ALLOWANCES> 153446
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<PP&E> 528098
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0
0
<COMMON> 1763
<OTHER-SE> 4481783
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<CGS> 144330
<TOTAL-COSTS> 691259
<OTHER-EXPENSES> 0
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<INCOME-PRETAX> (568128)
<INCOME-TAX> 0
<INCOME-CONTINUING> (568128)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (568128)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> (.03)
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