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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from ____________ to ____________
Commission file number 0-18410
IAT RESOURCES CORPORATION
(Name of Small Business Issuer in its Charter)
DELAWARE 95-4233050
State or other jurisdiction of I.R.S. Employer
incorporation or organization) Identification Number)
5757 WILSHIRE BOULEVARD, PENTHOUSE ONE,
LOS ANGELES, CALIFORNIA 90036
(Address of Principal Executive Offices) (Zip Code)
(323) 634-8634
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act:
<TABLE>
<CAPTION>
Name of Each Exchange
Title of Each Class on which registered
------------------- -------------------
<S> <C>
Common Stock, Par Value $.001 NASDAQ SmallCap Market
Redeemable Warrants
</TABLE>
Securities registered under Section 12(g) of the Exchange Act:
Series A Convertible Preferred Stock
Common Stock, par value $.001
Redeemable Warrants
Class B Warrants
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Check whether the issuer: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is not contained in this form, and no disclosure
will be contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [ ]
Issuer's revenues for its most recent fiscal year - $2,936,718.
The aggregate market value of the voting stock held by
non-affiliates based upon the average of the closing bid and asked prices of
such stock as of September 29, 1999 as reported on the Nasdaq Small Cap
Market was $18,632,821.
As of September 29, 1999, there were 13,613,657 shares of common
stock outstanding.
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IAT RESOURCES CORPORATION
FORM 10-KSB ANNUAL REPORT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
PART I
<S> <C> <C>
Item 1 Business.........................................................................................2
Item 2 Properties.......................................................................................3
Item 3 Legal Proceedings................................................................................3
Item 4 Submission of Matters to a Vote of Security Holders..............................................3
PART II
Item 5 Market for Common Equity and Related Stockholder Matters.........................................5
Item 6 Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................................................6
Item 7 Financial Statements............................................................................17
Item 8 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure........................................................................17
PART III
Item 9 Directors and Executive Officers; Compliance with
Section 16(a) of the Exchange Act...............................................................18
Item 10 Executive Compensation..........................................................................19
Item 11 Security Ownership of Certain Beneficial Owners and Management..................................21
Item 12 Certain Relationships and Related Transactions..................................................22
Item 13 Exhibits, and Reports on Form 8-K...............................................................23
</TABLE>
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FORWARD-LOOKING STATEMENTS
This Report contains statements which constitute forward-looking
statements. These statements appear in a number of places in this Report and
include statements regarding the intent, belief or current expectations of
the Company with respect to (i) the Company's growth and expansion
opportunities, (ii) trends affecting the Company's financial condition or
results of operations, (iii) integration of acquisitions and (iv) the impact
of competition in the internet industry. Such forward-looking statements may
be identified by the use of words such as "believe," "anticipate," "intend,"
and "expect." Readers are cautioned that any such forward-looking statements
are not guarantees of future performance and involve risks and uncertainties,
and that actual results may differ materially from those in the
forward-looking statements as a result of various factors. The accompanying
information contained in this Report, including, without limitation, the
information set forth in Item 6, "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Factors That Could Impact
Future Results" identifies important factors that could cause such
differences. The Company does not ordinarily make projections of its future
operating results and undertakes no obligation to publicly update or revise
any forward-looking statements, whether as a result of new information,
future events or otherwise.
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PART I
ITEM 1. BUSINESS
OVERVIEW
OUR COMPANY
For approximately eight years, we operated under the name The
Producers Entertainment Group Ltd. Historically, we acquired, developed,
produced and distributed dramatic, comedy, documentary and instructional
television series and movies and theatrical motion pictures. We distributed
our projects in the United States and in international markets for exhibition
on standard broadcast television (network and syndication), basic cable and
pay cable and for video distribution. We also provided producer and executive
producer services in exchange for fees and participations in future profits
from these projects. Although we continue to engage in certain entertainment
related production and distribution activities, during the past eight months
we have reduced our network and cable television activities and have begun to
redirect our core business toward the internet and technology industry.
While operating as The Producers Entertainment Group, in July 1998,
we acquired MWI Distribution, Inc., which does business under the name
MediaWorks International. MediaWorks International continues to distribute
television and video programming in the international market, concentrating
on children's and family programming and animation. MediaWorks also
co-produces animated and live action programming ventures and sells
direct-to-video series and specials.
As part of our expansion into the internet and on line commerce
industries, we have identified and made small investments in
early and expansion stage companies which we believe have unique
internet-based hardware and/or software applications and which show promise
as catalysts in the internet and online commerce industries. In February
1999, we purchased 150,000 shares of common stock of flowersandgifts.com, a
portal on the internet for the sale of flowers and other gifts, and 100,000
shares of common stock of Pacific Softworks, Inc., a licensor of
internet-related software and related software development tools, which
recently completed an initial public offering. We also have warrants to
purchase up to an additional 100,000 shares of Pacific Softworks' common
stock.
We are currently developing programs to integrate and deliver
internet services and online content in the education and entertainment
segments. Currently, we are in discussions to provide internet access and
portal development for a state university medical system and an educational
content provider to U.S. public schools. We are also looking to acquire
software and hardware companies that provide competitive advantages in the
delivery of online services and content to enterprise systems within these
markets.
RECENT DEVELOPMENTS
On September 23, 1999, we announced that we had entered into a
definitive merger agreement to acquire Infolocity, Inc., a privately held
internet company. Through its proprietary search technology, Infolocity
assists publicly traded companies in minimizing the impact of negative or
false information posted on the internet. The terms of the merger include a
tax-free exchange of our common stock for 100% of the issued and outstanding
stock of Infolocity. As a result of the merger, Infolocity will be a
wholly-owned subsidiary of our company. Completion of the merger depends upon
a number of conditions. These conditions include approval of the merger by
our shareholders and the shareholders of Infolocity. The conditions also
include our receipt of non-competition agreements from Infolocity's principal
shareholders and non-disclosure agreements from the employees of Infolocity.
Each of the principal shareholders of Infolocity is required, prior to
closing, to sign a lock-up agreement preventing the principal shareholders
from selling or transferring shares of our Common Stock received as
consideration in the merger for a specified period of time. As part of the
merger, we will enter into employment agreements with key employees of
Infolocity. Another condition to the merger is that at the time of closing we
continue to maintain our current compliance with the published net tangible
assets requirement of the Nasdaq Small Cap Market.
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OUR STRATEGY
Our current strategy is to divide IATR's operation into two separate
divisions. We will continue to operate our MediaWorks International
subsidiary which will distribute family and children's television programming
throughout the world, as well as represent the sale of movies in certain
international territories. On closing the merger with Infolocity, Inc., which
is subject to the conditions described above, we will conduct our internet
and technology business through our wholly-owned subsidiary, Infolocity.
Infolocity's primary business, Investorfacts, is a unique business to
business internet service using Infolocity's proprietary search engine FIRST
(Fast Internet Real Time Search Technology). FIRST searches 50,000 internet
locations and 400 publications, 24 hours per day, 7 days per week, in 15
seconds and notifies Infolocity's clients through detailed analytical
reports, of critical information received in accordance with the client's
specific criteria. Infolocity has patents pending for its technology as well
as its business use. We will work to build new services and products and to
create new technologies with commercial and business appeal using FIRST. We
will also attempt to seek out other companies which further the use of the
FIRST technology, create meaningful synergies, or are potential acquisition
candidates.
CORPORATE INFORMATION
Our executive offices are located at 5757 Wilshire Boulevard,
Penthouse One, Los Angeles, California 90036. Our telephone number is (323)
634-8634. Information on our web site does not constitute part of this Report.
ITEM 2. PROPERTIES
We lease approximately 13,725 square feet located at 5757 Wilshire
Boulevard, Los Angeles, California for our corporate offices pursuant to a
lease which expires on November 30, 1999. Our current annual rent expense is
$150,000. We plan to relocate our offices and we will not renew our current
lease. We are in negotiations to lease new corporate offices and we estimate
the annual rent expense to be approximately $100,000. We currently sublease
to a third party approximately 4,429 square feet located at 767 3rd Avenue in
New York City pursuant to a lease which expires on June 30, 2002. The current
annual rent expense is approximately $167,928, which is fully covered by the
terms of the sublease. We believe that our current facilities are sufficient
for our current needs and our needs for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
In the normal course of our business, we are subject to various
claims and legal actions. We believe that we will not be materially adversely
affected by the ultimate outcome of any of these matters either individually
or in the aggregate.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) On May 26, 1999, we held an annual meeting of our
stockholders.
(b) The following directors were elected at the meeting: Ivan
Berkowitz, Arthur H. Bernstein, Thomas A. Daniels, Michael Iscove, and Irwin
Meyer.
(c) Stockholders voted to approve the Amendment to our Restated
Certificate of Incorporation to change our name to IAT Resources Corporation.
There were 8,184,052 votes cast in favor of the Amendment, 24,192 votes cast
against the amendment, and 8,121 abstentions.
(d) Stockholders voted to approve the issuance of additional
shares of common stock pursuant to the Securities Purchase Agreement with
Augustine Fund, L.P. There were 2,541,948 votes case in favor of the issuance
of additional shares of common stock pursuant to the Securities Purchase
Agreement with Augustine Fund, L.P., 241,126 votes cast against the issuance
of additional shares, and 16,930 abstentions.
3
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(e) Stockholders voted to approve the Amendment to our 1998 Stock
Incentive Plan. There were 2,607,619 votes cast in favor of the Amendment to
the Stock Incentive Plan, 174,136 votes cast against the Amendment to the
Stock Incentive Plan, and 18,249 abstentions.
At the meeting, the votes cast in the election for directors were as
follows:
<TABLE>
<CAPTION>
Nominee Votes in Favor Votes Against Abstentions
------- -------------- ------------- -----------
<S> <C> <C> <C>
Arthur H. Bernstein 8,170,680 0 45,685
Ivan Berkowitz 8,170,680 0 45,685
Thomas A. Daniels 8,170,680 0 45,685
Michael Iscove 8,170,680 0 45,685
Irwin Meyer 8,170,680 0 45,685
</TABLE>
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND STOCKHOLDER MATTERS
Our Common Stock is currently traded on the Nasdaq Small Cap Market
("Nasdaq") under the symbol "IATR." The following table sets forth the high and
low bid prices on Nasdaq for the periods indicated, as reported by Nasdaq,
retroactively adjusted for the May 1996 one-for-four and the May 1998
one-for-three reverse stock splits. The quotations are inter-dealer prices
without adjustment for retail mark-ups, mark-downs or commissions, and do not
necessarily represent actual transactions.
<TABLE>
<CAPTION>
Common Stock
----------------------------------
High Bid Low Bid
------------- -------------
<S> <C> <C>
Fiscal Year -1999:
Quarter Ended
September 30, 1998............................ $2.00 $0.75
December 31, 1998............................. 0.88 0.19
March 31, 1999................................ 4.25 0.22
June 30, 1999................................. 3.88 1.00
Fiscal Year - 1998:
Quarter Ended
September 30, 1997............................ $3.38 $2.25
December 31, 1997............................. 3.28 1.88
March 31, 1998................................ 2.72 1.50
June 30, 1998................................. 2.38 1.44
</TABLE>
On September 29, 1999, the prices of the Common Stock as reported by
Nasdaq were $1.38 bid and $1.44 asked. On such date there were approximately 208
holders of record of the Common Stock. The number of shareholders does not take
into account shareholders for whom shares are being held in the name of
brokerage firms or clearing agencies.
As of September 22, 1999, we have outstanding 1,000,000 shares of
Series A Preferred Stock which is entitled to annual dividends aggregating
$425,000. We have outstanding 2,500,000 shares of Series C Preferred Stock.
Holders of our Series C Preferred Stock are entitled to dividends of 8%
annually, so long as we have net profits in excess of $1,000,000 in the
applicable fiscal year. No dividends are currently due on the Series C Preferred
Stock. No dividends may be paid on the Common Stock unless all dividends on the
Series A Preferred Stock and Series C Preferred Stock have been paid or
provision has been made for such payment. Pursuant to the terms of our
outstanding Series A Preferred Stock, which we issued in a public offering
consummated in December 1994, and pursuant to the terms of our outstanding
Series C Preferred Stock, at our option, we may pay dividends on the preferred
stock in cash or in shares of our Common Stock.
We have never paid a cash dividend on our Common Stock and presently
intend to retain any future earnings for investment and use in our business
operations. We cannot assure you that our operations will generate the revenues
and cash flow required to declare cash dividends on our outstanding Common Stock
in future fiscal periods or that we will have legally available funds to pay
dividends on our Common Stock. Consequently, we do not expect to pay cash
dividends in the foreseeable future except to the extent required to satisfy our
obligations with respect to our outstanding Series A Preferred Stock and Series
C Preferred Stock.
During the fiscal year ended June 30, 1999, we sold the
following equity securities which were not registered under the Securities Act;
- On January 14, 1999, we sold 3,000,000 shares of Series C
Preferred Stock, all of which were sold at $.001 per share.
This sale was exempt under Rule 506 of the Securities Act. The
Series C Preferred Stock converts on a one-for-one basis at a
conversion price of $.50 per share.
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- On July 31, 1998, we sold 50,000 shares of Series D Preferred
Stock for $500,000 and issued 50,000 shares of Series F
Preferred Stock. This sale was exempt under Rule 506 of the
Securities Act. The Series D Preferred Stock converts
according to a formula based on a 20% discount to the market
price of the common stock. The Series F Preferred Stock
converts on a one-for-one basis at fair market value.
- On August 2, 1999, we sold an aggregate of 175,000 shares of
Series E Preferred Stock for $1,750,000 and 175,000 shares of
Series F Preferred Stock. This sale was exempt under Rule 506
of the Securities Act. The Series E Preferred Stock converts
at a 17.5% discount to the market price of the common stock.
The Series F Preferred Stock converts on a one-for-one basis
at fair market value.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The following discussion and analysis should be read in conjunction
with our Financial Statements and notes included elsewhere in this Form 10-KSB.
The Notes to the Financial Statements and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" set forth herein
contain forward-looking statements with respect to us and our operations that
are subject to certain risks and factors which could cause our future actual
results of operations and future financial condition to differ materially from
that described herein. These risk factors include, but are not limited to, our
potential inability to realize the new business plan. Other risk factors include
the intensity of competition from other companies which focus on enabling
innovations in the converging telecommunications, entertainment and technology
industries, the status of our liquidity in future fiscal periods, factors that
affect the internet technology and online commerce industries such as network
performance, reliability, speed of access, ease of use and bandwidth
availability, and factors that generally affect the entertainment industry, such
as changes in management at the major studios, broadcast and distribution
companies, as well as economic, political, regulatory, technological and public
taste environments, as well as the factors discussed below in "-- Factors That
Could Impact Future Results".
Although we are in the process of transitioning our business, our
revenues are currently derived primarily from our MediaWorks subsidiary and the
licensing of our library product. The amount of revenues recognized in any
period are not necessarily indicative of revenues to be recognized by us in
future periods.
Revenue Recognition
Revenues received from license fees for distribution rights to
projects-in-process constitute deferred income until the project becomes
available for broadcast in accordance with the terms of its licensing agreements
and are recognized as revenue at such time. Revenues from completed projects
where distribution rights are owned by us are recognized when the project
becomes commercially available for broadcasting or exhibition in certain media
and geographical territories by the licensee. Revenues from the sale of projects
completed under straight producer arrangements are recognized during the
production phase. Additional licensing fees, distribution fees or profit
participations are recognized as earned in accordance with the terms of the
related agreements.
Amortization of film costs is charged to operations on a project by
project basis. Under the individual film forecast method of Statement of
Financial Accounting Standards No. 53, the cost charged per period is determined
by multiplying the remaining unamortized costs of the project by a fraction,
whose numerator is the income generated by the project during the period and
whose denominator is management's estimate of the total gross revenue to be
derived by the project over its useful life from all sources. The effect on the
amortization of completed projects resulting from revision of management's
estimates of total gross revenue on certain projects are reflected in the year
in which such revisions are made.
On October 20, 1997, we acquired 100% of the capital stock of the
Grosso-Jacobson Companies for 2,222,222 shares of our Common Stock. The
acquisition was accounted for as a pooling of interests and,
6
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consequently, the accompanying historical financial information for all
periods presented has been restated to reflect the effects of the combination.
On July 15, 1998, we acquired 100% of the capital stock of MWI
Distribution, Inc., (doing business as MediaWorks International). The
acquisition was accounted for using the purchase accounting method and,
consequently, our historical financial statements will not reflect the results
of operations of MediaWorks International prior to the date of acquisition.
7
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RESULTS OF OPERATIONS
YEAR ENDED JUNE 30, 1999 ("FISCAL 1999") COMPARED WITH THE YEAR ENDED JUNE 30,
1998 ("FISCAL 1998")
Revenues for the year ended June 30, 1999 were $2,936,718 as compared
to $22,369,511 for the year ended June 30, 1998, a decrease of 87%. Revenues for
the year ended June 30, 1999 primarily consisted of sales made by our MediaWorks
subsidiary and licensing of programs made by us. Revenues for the year ended
June 30, 1998 primarily consisted of fees from the production and distribution
of one made-for-television movie for a broadcast network and four additional
made-for-television movies which were exhibited on The Family Channel and
Showtime Network, and are currently being distributed internationally. This
significant decrease from Fiscal 1998 was the result of a reduction in our
television development and production activities.
Amortization of film costs for the year ended June 30, 1999 was $0,
while the amortization of film costs for the year ended June 30, 1998 was
$9,384,311, and was computed using the Individual Film Forecast Method.
Amortization as a percentage of total revenues decreased from 42.0% for
Fiscal 1998 to 0% for Fiscal 1999. In 1998, we had a mix of projects, some of
which had no expectation of additional revenues and were amortized at 100% of
cost and some of which projects we retained distribution rights for future
sale and were amortized according to the Individual Film Forecast Method.
Write-offs of projects in development were $301,037 for the year ended June
30, 1999 and $199,450 for the year ended June 30, 1998.
Cost of sales for the year ended June 30, 1999 was $926,295 as compared
to $9,773,397 for the year ended June 30, 1998. Cost of sales as a percentage of
total revenues decreased from 43.7% for Fiscal 1998 to 31.5% for Fiscal 1999.
The difference results from the mix of product produced by us in Fiscal 1999 as
compared to Fiscal 1998.
General and administrative expenses increased to $3,953,012 in Fiscal
1999 from $3,592,772 in Fiscal 1998 or an increase of $360,240. This increase
was primarily attributable to the acquisition of MWI Distribution, Inc .
Interest income during the year ended June 30, 1999 was $1,140, and
primarily consisted of amortization of the imputed interest discount on notes
received from the sale of common stock by us to related parties and interest
related to a trade note receivable. On June 30, 1997 we and Mountaingate
Productions LLC ("Mountaingate") mutually agreed to terminate the purchase
agreement and promissory note. This termination resulted in our writing off
the non-recourse portion of the accrued interest on the note totaling
$133,142.
Interest and financing expense in Fiscal 1999 was $12,447 as compared
to $4,225 in Fiscal 1998. The interest and financing expense in Fiscal 1999
primarily consisted of deferred financing charges which were expensed upon the
termination of certain promissory notes.
During the year ended June 30, 1999, we wrote off $166,965 as compared
to $196,105 during the year ended June 30, 1998, of notes receivable and other
assets relating to the sale by us of 175,000 shares of Common Stock to certain
related parties.
On November 4, 1996, we settled our litigation with a former officer
and director in a negotiated stipulated settlement filed with the Los Angeles
County Superior Court that required us to make aggregate payments of $575,000 in
exchange for an agreement by this individual not to compete with us through
December 31, 1998. Accordingly, amortization of the covenant not to compete was
$115,000 in Fiscal 1999 and $276,000 in Fiscal 1998. The covenant not to
compete is now fully amortized.
The net loss applicable to common shareholders was $3,156,302 for
Fiscal 1999 as compared to a net loss of $1,836,916 for Fiscal 1998. Of this
amount for Fiscal 1999, $416,037 represents non-recurring expenses and
$425,000 represents the dividend paid in Common Stock to the holders of the
Series A Preferred Stock. Of the amount for Fiscal 1998, $889,089 represented
non-recurring expenses and $425,000 represented the dividend paid in Common
Stock to the holders of the Series A Preferred Stock.
8
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YEAR ENDED JUNE 30, 1998 ("FISCAL 1998") COMPARED WITH THE YEAR ENDED JUNE 30,
1997 ("FISCAL 1997")
Revenues for the year ended June 30, 1998 were $22,369,511 as compared
to $5,521,441 for the year ended June 30, 1997, an increase of 400%. Revenues
for the year ended June 30, 1998 primarily consisted of fees from the production
and distribution of one made-for-television movie for a broadcast network and
four additional made-for-television movies which were exhibited on The Family
Channel and Showtime Network, and are currently being distributed
internationally. Revenues for the year ended June 30, 1997 primarily consisted
of the continuing international distribution of completed projects and from
personal management fees, which business was discontinued in June 1998. This
significant increase from Fiscal 1997 was the result of a greater level of
production and distribution.
Amortization of film costs for the year ended June 30, 1998 was
$9,384,311, while the amortization of film costs for the year ended June 30,
1997 was $503,552, and was computed using the Individual Film Forecast
Method. Amortization as a percentage of total revenues increased from 9.1%
for Fiscal 1997 to 42.0% for Fiscal 1998. The difference reflects the mix of
projects for which we had no expectation of additional revenues that are
amortized at 100% of cost and projects for which we had retained distribution
rights for future sale that are amortized according to the Individual Film
Forecast Method. Write-offs of projects in development were $199,450 for the
year ended June 30, 1998 and $212,920 for the year ended June 30, 1997.
Cost of sales for the year ended June 30, 1998 was $9,773,397 as
compared to $3,769,025 for the year ended June 30, 1997. Cost of sales as a
percentage of total revenues decreased from 68.2% for Fiscal 1997 to 43.7% for
Fiscal 1998. The difference results from the mix of product produced by us in
Fiscal 1998 as compared to Fiscal 1997.
General and administrative expenses decreased to $3,592,772 in Fiscal
1998 from $4,980,816 in Fiscal 1997 or a decrease of $1,388,044. This decrease
was primarily attributable to an increase in production activity which absorbed
more of the producer fees.
Interest income during the year ended June 30, 1998 was $61,817.
During the year ended June 30, 1997, interest income was $227,188 and
primarily consisted of amortization of the imputed interest discount on notes
received from the sale of common stock by us to related parties, interest
related to a trade note receivable and dividends earned on a portion of the
cash proceeds from our September 1996 public offering. On June 30, 1997 the
Company and the related parties mutually agreed to terminate the purchase
agreement and promissory note. This termination resulted in our writing off
the non-recourse portion of the accrued interest on the note totaling
$133,142.
Interest and financing expense in Fiscal 1998 was $4,225 as compared
to $156,975 in Fiscal 1997. The interest and financing expense in Fiscal 1997
primarily consisted of deferred financing charges which were expensed upon
repayment of the $500,000 aggregate principal amount of 10% promissory notes.
During the year ended June 30, 1998, we wrote off $196,105 as compared
to $387,295 during the year ended June 30, 1997, of notes receivable and other
assets relating to the sale by us of 175,000 shares of Common Stock to certain
related parties.
On November 4, 1996, we settled our litigation with a former officer
and director in a negotiated stipulated settlement filed with the Los Angeles
County Superior Court that required us to make aggregate payments of $575,000
in exchange for an agreement by this individual not to compete with us
through December 31, 1998. Accordingly, amortization of the covenant not to
compete was ($276,000) in Fiscal 1998.
The net loss applicable to common shareholders was $1,836,916 for
Fiscal 1998 as compared to $5,017,145 for Fiscal 1997. Of this amount for
Fiscal 1998, $889,089 represents non-recurring expenses and $425,000
represents the dividend paid in Common Stock to the holders of the Series A
Preferred Stock.
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LIQUIDITY AND CAPITAL RESOURCES
We need a significant amount of resources to develop our internet
technology plan and increase our presence in the internet industry. We have
had, and intend to continue to engage in, exploratory discussions concerning
acquisition opportunities, and any such acquisition could result in additional
capital requirements.
Our cash commitments for the year ending June 30, 2000 include payment
of our current liabilities of $1,399,530 and compensation to officers and key
independent contractors of $850,000 and office rent of $100,000, aggregating
approximately $2,349,530.
Net cash provided by (used in) operating activities of our company in
Fiscal 1999 was ($1,238,343) as compared to $2,593,520 in Fiscal 1998. Net cash
used in investing activities during the year ended June 30, 1999 was ($814,265)
and net cash used in investing activities during the year ended June 30, 1998
was ($3,630,449). Net cash provided by financing activities of our company
during the year ended June 30, 1999 was $1,990,101 and net cash used in
financing activities of our company during the year ended June 30, 1998 was
($234,190).
Our total cash and cash equivalent balance as of June 30, 1999 was
$11,244 as compared to our total cash and cash equivalent balance of $73,151 as
of June 30, 1998.
In July 1998, we secured access to a $5,500,000 equity-based line of
credit with an institutional investor, subject to certain minimum trading
qualifications. To date, we have sold $2,250,000 of convertible preferred stock
to the investor.
In August 1999, we entered into an agreement for a private placement of
up to $4,000,000 of 6 percent convertible debentures. We have closed on
$1,350,000 as of September 29, 1999.
We believe that cash flow from operations, cash on hand and
availability under our current equity-based line of credit, as well as other
available financing sources, should be sufficient to fund our operations and
service its debt in the foreseeable future. However, there are a number of
factors that could change our anticipated needs, and could require that we try
to raise additional financing.
NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 130 ("SFAS No. 130"),
"Reporting Comprehensive Income," is effective for financial statements with
fiscal years beginning after December 15, 1997. SFAS No. 130 establishes
standards for reporting and display of comprehensive income and its components
in a full set of general-purpose financial statements. We do not expect adoption
of SFAS No. 130 to have a material effect, if any, on our financial position or
results of operations.
Statement of Financial Accounting Standards No. 131 ("SFAS No. 131"),
"Disclosure about Segments of an Enterprise and Related Information," is
effective for financial statements with fiscal years beginning after December
15, 1997. This statement establishes standards for the way that public entities
report selected information about operating segments, products and services,
geographic areas and major customers in interim and annual financial reports. We
do not expect adoption of SFAS No. 131 to have a material effect, if any, on our
financial position or results of operations.
IMPACT OF YEAR 2000
The Year 2000 issue is the result of computer programs being written
using two digits instead of four to define the applicable year. Any of our
computer programs that have time-sensitive software or facilities or
equipment containing embedded micro-controllers may recognize a date using
"00" as the year 1900 rather than the year 2000. This could cause a system
failure or miscalculations resulting in potential disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices or engage in similar normal business activities.
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We have assessed our hardware and software systems, which are comprised
solely of an internal personal computer network and commercially available
software products. Based on this assessment, we believe that our hardware and
software systems are year 2000 compliant.
In addition, we have received information from our key vendors and
customers regarding their Year 2000 exposures which would have a material effect
on us. The financial impact on us of such third parties not achieving high
levels of year 2000 readiness cannot be estimated with any degree of accuracy.
In the area of business continuity, technological operations dependent in some
way on one or more third parties, the situation is much less in our ability to
predict or control. In some cases, third party dependence is on vendors or
technology who are themselves working towards solutions to year 2000 problems.
In other cases, third party dependence is on suppliers of products and services
that are themselves computer-intensive. We are in various stages of attempting
to ascertain the state of year 2000 readiness of significant third parties. We
are taking steps to attempt to ensure that the third parties on which we are
heavily reliant are year 2000 ready, but cannot predict the likelihood of such
compliance nor the direct and indirect costs of non-readiness by those third
parties or of securing such services from alternate third parties. We are not
yet aware of any year 2000 issues relating to third parties with which we have a
material relationship. If such critical third party providers experience
difficulties resulting in disruption of service to us, a shutdown of our
operations at individual facilities could occur for the duration of the
disruption.
The Year 2000 project cost has been minimal and, based on preliminary
information, is not currently anticipated to have a material adverse effect on
our financial condition, results of operations or cash flow in future periods.
However, if we, our customers or vendors are unable to resolve any Year 2000
compliance problems in a timely manner, there could result a material financial
impact on us. Accordingly, management plans to devote the resources it considers
appropriate to resolve all significant Year 2000 problems in a timely manner.
The costs of the project and the date on which we believe we will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources and other factors. However,
there can be no guarantee that these estimates will be achieved and actual
results could differ materially from those anticipated. Specific factors that
might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes and similar uncertainties.
FACTORS THAT COULD IMPACT FUTURE RESULTS
FACTORS AFFECTING THE COMPANY'S LIQUIDITY AND CAPITAL RESOURCES
RISKS RELATED TO OUR BUSINESS
ALTHOUGH WE CONTINUE TO OPERATE IN THE ENTERTAINMENT BUSINESS ON A REDUCED
SCALE, OUR PROSPECTS IN THE INTERNET SECTOR ARE DIFFICULT TO FORECAST BECAUSE WE
HAVE ONLY BEEN TRANSITIONING TO THE INTERNET AND ONLINE COMMERCE INDUSTRIES
SINCE FEBRUARY 1999.
We announced our intention to expand our business in the internet and
electronic commerce industries in February 1999 and we are gradually changing
our core television production business to internet technology services and
integration. These industries are new, highly speculative and involve a
substantial degree of risk. Since we are in an early stage of development in
these rapidly evolving industries, our prospects are difficult to predict and
could change rapidly and without warning. You must consider our prospects in
light of the risks, expenses and difficulties frequently encountered by
companies in the early stages of developing and expanding their business,
particularly companies in the new and rapidly evolving internet technology and
online commerce markets. These risks include, but are not limited to, the
inability to attract key personnel knowledgeable in the internet markets, the
inability to respond promptly to changes in a rapidly evolving and unpredictable
business environment and the inability to manage potential growth. To address
these risks, we must, among other things:
- successfully implement new business and marketing strategies;
- respond to competitive developments;
- expand our funding of early and expansion-stage companies; and
- attract and retain qualified personnel.
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WE MAY NOT BE SUCCESSFUL IN ENTERING INTO THE INTERNET AND ONLINE COMMERCE
FIELDS SINCE WE HAVE NEVER HISTORICALLY OPERATED IN THESE BUSINESSES.
OPERATING IN THESE BUSINESSES WILL ALSO REQUIRE SUBSTANTIAL WORKING CAPITAL.
The internet and online commerce industries are completely new
business ventures for us, and are businesses in which we have never operated.
None of our current executives has experience operating internet-related
companies. Although we believe that our experience in the entertainment
business lends itself well to these industries, we may not be able to operate
successfully in them.
We retained the services of Strategic Capital Consultants to assist
us in investing in or acquiring interests in internet and online commerce
companies. However, if we fail to complete the acquisition of these types of
companies, or if we cannot successfully integrate their businesses into ours,
our business and financial condition could suffer.
In addition, our new business strategy, investment and acquisition
activities will require substantial working capital. We have spent and will
continue to spend substantial funds to locate appropriate acquisition
candidates, to market our efforts and to establish an effective management
team with experience in the internet and online commerce industries. We
cannot assure you that we will be successful in any of these areas.
WE RECENTLY ANNOUNCED THAT WE SIGNED A DEFINITIVE AGREEMENT TO MERGE WITH
INFOLOCITY. IF WE FAIL TO CONSUMMATE THE MERGER WITH INFOLOCITY OR IF WE
CANNOT SUCCESSFULLY INTEGRATE INFOLOCITY'S BUSINESS INTO OURS, OUR BUSINESS
AND FINANCIAL CONDITION COULD SUFFER.
In September 1999, we announced that we had entered into a
definitive agreement to merge with Infolocity, a privately held internet
company which, through its proprietary search technology, helps publicly
traded companies minimize the impact of negative information posted on the
internet. We are seeking to merge with Infolocity with the expectation that
the merger will help us execute our plan to expand our core business into the
internet industry and provide us with further opportunities to promote
synergistic business relationships among other internet companies. In order
to achieve these anticipated benefits, we must efficiently, effectively and
timely integrate Infolocity's operations into ours. The combination of these
businesses requires, among other things:
- integration of management staffs;
- coordination of operations and marketing efforts; and
- location of adequate sources of additional funding.
Full integration of these businesses will require considerable
effort on the part of our management, who will need to dedicate considerable
time toward integrating the financial and information systems, management
staffs and organizational cultures of the separate businesses. We could
experience problems associated with the integration, and the integration
itself may not proceed efficiently or be successful. Furthermore, even if we
successfully integrate Infolocity's operations into ours, the combination may
adversely affect our business and results of operations.
Completion of the merger depends upon a number of conditions. These
conditions include approval of the merger by our shareholders and the
shareholders of Infolocity. The conditions also include our receipt of
non-competition agreements from Infolocity's principal shareholders and
non-disclosure agreements from the employees of Infolocity. Each of the
principal shareholders of Infolocity is required prior to closing, to sign a
lock-up agreement preventing the principal shareholders from selling or
transferring shares of our Common Stock received as consideration in the
merger for a specified period of time. As part of the merger, we will enter
into employment agreements with key employees of Infolocity. Another
condition to the merger is that at the time of closing we continue to
maintain our current compliance with the published net tangible assets
requirement of the Nasdaq Small Cap Market.
OUR GROWTH AND OPERATING RESULTS COULD BE IMPAIRED IF WE ARE UNABLE TO MEET
OUR CURRENT LIQUIDITY AND CAPITAL RESOURCES REQUIREMENTS.
Our cash commitments for the next 12 months include paying aggregate
minimum base compensation of approximately $850,000 to our officers and key
independent contractors and minimum office rent of approximately
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$100,000. We also incur overhead and other costs such as employee salaries,
related benefits, office expenses, professional fees and similar expenses.
For our fiscal year ended June 30, 1999, our general and administrative
expenses, which included compensation and rent, totaled $3,953,012. Dividends
on our outstanding Series A Preferred Stock aggregate $425,000 annually,
which we have paid in stock during the past three years. At our option, we
may pay dividends on our series of preferred stock in shares of common stock
or in cash. As a result of all of these expenses, we had an accumulated
deficit of ($23,436,654) at June 30, 1999. As of that date, we also had cash
and cash equivalents of $11,244, accounts and contracts receivable of
$1,751,884 and accounts payable and accrued expenses of $1,087,522.
We may need to raise additional funds in order to meet these
expenses, fund our transition into the internet and online commerce
industries and to respond to competitive pressures. If we raise additional
funds by issuing equity or convertible debt securities, the percentage
ownership of our stockholders will be diluted. Any new securities could have
rights, preferences and privileges senior to those of our common stock.
Furthermore, we cannot be certain that additional financing will be available
when and to the extent required or that, if available, it will be on
acceptable terms. If adequate funds are not available on acceptable terms, we
may not be able to fund our expansion of our business into the internet and
online commerce sectors.
WE HAVE A HISTORY OF LOSSES AND MAY NOT BE PROFITABLE IN THE FUTURE.
For the fiscal years ended June 30, 1997, 1998 and 1999, we
generated revenues of $5,521,441, $22,369,511 and $2,936,718, respectively,
and incurred net losses of $4,592,145, $1,411,916 and $2,665,052,
respectively (without giving effect to the payment in 1997, 1998 and 1999 of
dividends of $425,000 annually, on the Series A Preferred Stock and payment
in 1999 of dividends of $66,250 on the Series E Preferred Stock). As of June
30, 1999, we had an accumulated deficit of ($23,436,654). If the cash we
generate from our operations cannot sufficiently fund possible future
operating losses, we may need to raise additional funds. Additional financing
may not be available in amounts or on terms acceptable to us, if at all.
OUR FUTURE OPERATING RESULTS MAY FLUCTUATE AND ARE UNPREDICTABLE. IF WE FAIL
TO MEET THE EXPECTATIONS OF PUBLIC MARKET ANALYSTS AND INVESTORS, THE MARKET
PRICE OF OUR COMMON STOCK MAY DECLINE SIGNIFICANTLY.
Our limited operating history in the internet and online commerce
industries makes it difficult to forecast accurately our revenues, operating
expenses and operating results. As a result, we may be unable to adjust our
spending in these areas in a timely manner to compensate for any unexpected
revenue shortfall.
BECAUSE OF THE LIMITED BARRIERS TO ENTRY IN THE INTERNET AND ONLINE COMMERCE
BUSINESSES, COMPETITION IN THESE MARKETS IS INTENSE. IF WE ARE UNABLE TO
COMPETE SUCCESSFULLY AGAINST CURRENT AND FUTURE COMPETITORS THAT ENTER THESE
MARKETS, OUR REVENUES AND OPERATING RESULTS COULD BE IMPAIRED.
The internet and online commerce markets are new, rapidly evolving
and intensely competitive, and we expect that competition could further
intensify in the future. Barriers to entry are limited, and current and new
competitors can launch web sites and other similar businesses at a relatively
low cost. Many of our current and potential competitors have longer operating
histories and significantly greater financial, marketing and other resources
than us. Increased competition may result in reduced operating margins and
loss of market share.
We have not yet determined whether we will be able to compete
successfully against our current and future competitors. Further, as a
strategic response to changes in the competitive environment, we may from
time to time make marketing decisions or acquisitions that could adversely
affect our business, prospects, financial condition and results of operations.
OUR GROWTH AND OPERATING RESULTS WILL BE IMPAIRED IF THE INTERNET AND ONLINE
COMMERCE INDUSTRIES DO NOT CONTINUE TO GROW.
Our growth and operating results depend in part on widespread
acceptance and use of the internet as a point of convergence in the
telecommunications, entertainment and technology industries, as well as on
continued consumer acceptance and use of the internet as a way to buy
products. These practices are at an early stage of development, and demand
and market acceptance are uncertain.
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The internet may not become a viable medium for telecommunications,
entertainment and technology convergence or a healthy commercial marketplace
due to inadequate development of network infrastructure and enabling
technologies that address the public's concerns about:
- network performance;
- reliability;
- speed of access;
- ease of use; and
- bandwidth availability.
In addition, the internet's overall viability could be adversely
affected by increased government regulation. Changes in or insufficient
availability of telecommunications or other services to support the internet
could also result in slower response times and adversely affect general usage
of the internet. Also, negative publicity and consumer concern about the
security of transactions conducted on the internet and the privacy of users
may also inhibit the growth of commerce on the internet.
BURDENSOME GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES COULD IMPAIR OUR
RESULTS OF OPERATIONS.
It is possible that a number of laws and regulations may be adopted
concerning the internet, relating to, among other things:
- user privacy;
- content;
- copyrights;
- distribution;
- telecommunications; and
- characteristics and quality of products and services.
The adoption of any additional laws or regulations may decrease the
popularity or expansion of the internet. A decline in the growth of the
internet could decrease demand for our services and increase our cost of
doing business. The application of laws and regulations from jurisdictions
whose laws do not currently apply to our business, or the application of
existing laws and regulations to the internet and other online services could
also harm our business.
IF THE SOFTWARE, HARDWARE, COMPUTER TECHNOLOGY AND OTHER SYSTEMS AND SERVICES
THAT WE USE ARE NOT YEAR 2000 COMPLIANT, OUR OPERATING RESULTS COULD BE
IMPAIRED.
Many existing computer programs use only two digits to identify a
year. These programs were designed and developed without addressing the
impact of the upcoming change in the century. If not corrected, many computer
software applications could fail or create erroneous results by, at or beyond
the year 2000. This could result in system failures or miscalculations
causing disruptions of operations, including, among others, a temporary
inability to process transactions, send invoices or engage in similar normal
business activities.
We use hardware and software systems, which are comprised only of an
internal personal computer network and commercially available software
products. We have assessed these systems and we believe that our systems
correctly define the year 2000. We have also assessed the embedded system
contained in our leased equipment, which we believe to be Year 2000 compliant.
In addition, we have received information from our key vendors and
customers with respect to their significant Year 2000 exposures which would
have a material effect on us. The financial impact on us of such third
parties not achieving high levels of year 2000 readiness cannot be estimated
with any degree of accuracy. In the area of business continuity,
technological operations dependent in some way on one or more third parties,
the situation is much less in our ability to predict or control. In some
cases, third party dependence is on vendors who are themselves working
towards solutions to year 2000 problems. In other cases, third party
dependence is on suppliers of products and services that are themselves
computer-intensive. We are in various stages of attempting to ascertain the
state of year 2000 readiness of significant third parties. We are taking
steps to attempt to ensure that the third parties on which we are heavily
reliant are year 2000 ready, but cannot predict the likelihood of such
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compliance nor the direct and indirect costs of non-readiness by those third
parties or of securing such services from alternate third parties. We are not
yet aware of any year 2000 issues relating to third parties with which we
have a material relationship. If such critical third party providers
experience difficulties resulting in disruption of service to us, a shutdown
of our operations at individual facilities could occur for the duration of
the disruption.
The Year 2000 issue also presents numerous other risks that could
hurt our business, such as disruptions of service from third parties who
provide us with electricity, water or telephone service. If these critical
third party providers experience difficulties that result in disruptions of
services to us, a shutdown of our operations at individual facilities could
occur. Also, general uncertainty exists regarding the Year 2000 problem and
its potential effect on the overall business environment and economies of the
United States and other nations. As a result, we cannot determine at this
time whether the Year 2000 problem will materially impact our operations or
financial condition as a result of significant disruption to these economies
and/or business environments.
THE INDUSTRY IN WHICH MEDIAWORKS COMPETES IS INTENSELY COMPETITIVE. IF
MEDIAWORKS IS UNABLE TO COMPETE SUCCESSFULLY AGAINST ITS CURRENT AND FUTURE
COMPETITORS, ITS REVENUES AND OPERATING RESULTS COULD BE IMPAIRED AND OUR
BUSINESS COULD SUFFER AS A RESULT.
The television industry is highly competitive and involves a
substantial degree of risk. MediaWorks directly competes with many other
television distributors which are significantly larger than it. These
distributors typically have financial and other resources which are far
greater than those available to MediaWorks now or in the foreseeable future.
New technologies and the expansion of existing technologies in the television
industry may further increase the competitive pressures on MediaWorks. We
cannot assure you that MediaWorks will be successful in competing in the
television field.
MediaWorks' success depends upon its ability to distribute
programming for television which will appeal to markets characterized by
changing popular tastes. In light of the intense competition in the
television industry, MediaWorks may not be able to continuously acquire and
develop products which can be made into profitable television series.
OUR OUTSTANDING OPTIONS AND WARRANTS MAY DILUTE OUR STOCKHOLDERS' INTERESTS
AND COULD HINDER US FROM OBTAINING ADDITIONAL FINANCING.
As of September 30, 1999, we have granted options and warrants to
purchase a total of 6,439,792 shares of common stock that have not been
exercised. To the extent that these outstanding options and warrants are
exercised, our stockholders' interests will be diluted. Also, we may not be
able to obtain additional equity capital on terms we like, since the holders
of the outstanding options and warrants will likely exercise them at a time
when we may be able to obtain such capital on better terms than those in the
options and warrants.
THE CONVERSION OF OUR CONVERTIBLE PREFERRED STOCK MAY DILUTE OUR
STOCKHOLDERS' INTERESTS AND COULD HINDER US FROM OBTAINING ADDITIONAL
FINANCING.
As of September 30, 1999, we have issued and outstanding 1,000,000
shares of our Series A Preferred Stock, 2,500,000 shares of our Series C
Preferred Stock and 225,000 shares of our Series F Preferred Stock. At our
option, we can pay the dividends on our Series A Preferred Stock in cash or
in shares of common stock. No dividends are currently due on the Series C
Preferred Stock. We are not required to pay dividends on the Series F
Preferred Stock.
Holders of our convertible preferred stock could convert their
shares into common stock at any time in the future. To the extent all of the
shares of our outstanding convertible preferred stock are converted into
common stock, our common stockholders' interests will be diluted. Since these
shares of common stock will be registered for sale in the marketplace, future
offers to sell such shares could potentially depress the price of our common
stock. In the future, this could make it difficult for us or our stockholders
to sell the common stock. Also, we may have problems obtaining additional
equity capital on terms we like, since we can expect the holders of our
convertible preferred stock to convert their shares into common stock at a
time when we would be able to obtain any needed capital on more favorable
terms than those of the convertible preferred stock.
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STOCK PRICES OF INTERNET-RELATED COMPANIES HAVE FLUCTUATED WIDELY IN RECENT
MONTHS AND THE TRADING PRICE OF OUR COMMON STOCK IS LIKELY TO BE VOLATILE,
WHICH COULD RESULT IN SUBSTANTIAL LOSSES TO INVESTORS.
As a result of our recent expansion into internet and online
commerce, the trading price of our common stock could become more volatile
and could fluctuate widely in response to factors including the following,
some of which are beyond our control:
- variations in our operating results;
- announcements of technological innovations or new services by
us or our competitors;
- changes in expectations of our future financial performance,
including financial estimates by securities analysts and
investors;
- changes in operating and stock price performance of other
internet-related companies similar to us;
- conditions or trends in the internet and technology
industries;
- additions or departures of key personnel; and
- future sales of our common stock.
Domestic and international stock markets often experience
significant price and volume fluctuations. These fluctuations, as well as
general economic and political conditions unrelated to our performance, may
adversely affect the price of our common stock.
TAKEOVER EFFORTS COULD BE DETERRED AS A RESULT OF OUR RIGHT TO ISSUE
PREFERRED STOCK IN THE FUTURE AND CERTAIN PROVISIONS IN OUR CERTIFICATE OF
INCORPORATION.
Our Certificate of Incorporation permits our Board of Directors to
issue up to 20,000,000 shares of "blank check" Preferred Stock. Our Board of
Directors also has the authority to determine the price, rights, preferences,
privileges and restrictions of those shares without any further vote or
action by our stockholders. We have issued and outstanding 1,000,000 shares
of Series A Preferred Stock, 2,500,000 shares of Series C Preferred Stock and
225,000 shares of Series F Preferred Stock. If we issue additional preferred
stock with voting and conversion rights, the rights of our common
stockholders could be adversely affected by, among other things, the loss of
their voting control to others. Any additional issuances could also delay,
defer or prevent a change in our control, even if these actions would benefit
our stockholders.
Additionally, provisions of Delaware law and our Certificate of
Incorporation could make it more difficult for a third party to acquire us,
even if doing so would be beneficial to our stockholders.
WE HAVE NEVER PAID DIVIDENDS ON OUR COMMON STOCK. WE PAY ANNUAL CASH OR STOCK
DIVIDENDS ON SOME OF OUR PREFERRED STOCK.
We have never paid cash dividends on our common stock and we do not
expect to pay these dividends in the foreseeable future. Holders of our
Series A Preferred Stock are entitled to annual dividends of 8 1/2%
(aggregating $425,000 annually, in cash or stock at our option, assuming no
conversion). Holders of our Series C Preferred Stock are entitled to
dividends of 8% annually, so long as we have net income in excess of
$1,000,000 in the applicable fiscal year. We pay these dividends quarterly,
in cash or in shares of our common stock. For the foreseeable future, we
anticipate that we will retain all of our cash resources and earnings, if
any, for the operation and expansion of our business, except to the extent
required to satisfy our obligations under the terms of the Series A Preferred
Stock and Series C Preferred Stock.
SALES OF ADDITIONAL SHARES OF OUR COMMON STOCK INTO THE PUBLIC MARKET MAY
CAUSE OUR STOCK PRICE TO FALL.
If we or our stockholders sell substantial amounts of our common
stock (including shares issued upon the exercise of outstanding options and
warrants or upon the conversion of shares of our convertible preferred stock)
in the public market, the market price of our common stock could fall. As of
September 29, 1999, we will have outstanding approximately 13,613,657 shares
of our common stock. The unregistered common stock and the common stock held
by our officers and directors are "restricted" securities as that term is
defined by Rule 144 under the Securities Act. In the future, these restricted
securities may be sold only in compliance with Rule 144 or if they are
registered under the Securities Act or under an exemption. Generally, under
Rule 144, each person who holds
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restricted securities for a period of one year may, every three months, sell
in ordinary brokerage transactions an amount of shares which does not exceed
the greater of 1% of our then-outstanding shares of common stock, or the
average weekly volume of trading of our common stock as reported during the
preceding four calendar weeks. A person who has not been an affiliate of ours
for at least the three months immediately preceding the sale and who has
beneficially owned shares of common stock for at least two years can sell
such shares under Rule 144 without regard to any of the limitations described
above. Sales of substantial amounts of common stock in the public market, or
the perception that such sales could occur, may adversely affect the
prevailing market price for our common stock and could impair our ability to
raise capital through a public offering of equity securities.
In addition, as of June 30, 1999 holders of options and warrants may
acquire approximately 6,439,792 shares of Common Stock and holders of shares
of our Series A Preferred Stock, Series C Preferred Stock and Series F
Preferred Stock may acquire shares of Common Stock at various conversion
rates.
NASDAQ COULD DELIST OUR COMMON STOCK WHICH COULD MAKE IT MORE DIFFICULT FOR
YOU TO SELL OR OBTAIN QUOTATIONS AS TO THE PRICE OF OUR COMMON STOCK.
In order to continue to be listed on Nasdaq, we must meet the
following requirements:
- net tangible assets of at least $2,000,000, or a market
capitalization of $35,000,000 or $500,000 in net income for
two of the last three years;
- a minimum bid price of $1.00;
- two market makers;
- 300 stockholders;
- at least 500,000 shares in the public float o a minimum market
value for the public float of $1,000,000; and o compliance
with certain corporate governance standards.
Our minimum bid price at September 29, 1999 was $1.34375. If we
cannot satisfy Nasdaq's maintenance criteria in the future, Nasdaq could
delist our common stock. In the event of delisting, trading, if any, would be
conducted only in the over-the-counter market in the so-called "pink sheets"
or the NASD's "Electronic Bulletin Board." As a result of any possible
delisting, an investor would likely find it more difficult to sell or obtain
quotations as to the price of our common stock.
ITEM 7. FINANCIAL STATEMENTS
The Report of Independent Certified Public Accountants, Financial
Statements and Notes to the Financial Statements appear in a separate section
of this Form 10-KSB following Part III. The Index to Financial Statements
appears on page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
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PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS; COMPLIANCE WITH SECTION 16(a)
OF THE EXCHANGE ACT
The directors and executive officers of our company and their ages
at June 30, 1999 are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Irwin Meyer 64 Chief Executive Officer, Chairman of the
Board of Directors
Arthur H. Bernstein 36 Executive Vice President, Secretary and
Director
Michael Iscove (1)(2) 48 Director
Thomas A. Daniels 46 Director
Ivan Berkowitz (1)(2) 53 Director
</TABLE>
- ---------------------------
(1) Audit Committee Member
(2) Compensation Committee Member
Directors are elected to an annual term that expires at our Company's annual
meeting of stockholders.
IRWIN MEYER has been a director of our Company since its inception
in 1989 and has served as our Chief Executive Officer since February 1995.
Since October 1997, Mr. Meyer has been Chairman of the Board of Directors. At
various times prior to October 1997, Mr. Meyer has served as our Chairman of
the Board (April 1996-October 1997; January 1991-June 1992); Co-Chairman of
the Board (February 1990-December 1990) and President (February 1995-October
1997). From 1988 to July 1994, Mr. Meyer was a director of Ventura
Entertainment Group Ltd., our former parent company ("Ventura"), and from May
1988 to December 1990, Mr. Meyer was President of Ventura. Mr. Meyer was an
executive producer of seven of our made-for-television movies. In 1995 he was
nominated for Producer of the Year by the Producers Guild of America. Mr. Meyer
received the Antoinette Perry ("Tony") Award, the New York Drama Critics
Circle Award, the Drama Desk Award, the Outer Critics Circle Award and the
Cue Magazine Golden Apple Award for his 1977 production of the musical
"Annie." Mr. Meyer is a member of the Academy of Motion Picture Arts and
Sciences and the Academy of Television Arts and Sciences. He holds a B.S.
from New York University.
ARTHUR H. BERNSTEIN has been a director of our Company since
February 1995 and has served as the Executive Vice President of our Company
since October 1997 as well as our Secretary since March 1995. Between June
1992 and October 1997, Mr. Bernstein served as a Senior Vice President of our
Company and was our Vice President-Business and Legal Affairs from September
1991 to June 1992. Prior to this, Mr. Bernstein was a Director of Legal and
Business Affairs for New World Entertainment Ltd. from July 1989 to August
1991. From 1987 to June 1989, he was Assistant General Counsel of Four Star
International, Inc. Mr. Bernstein received a B.S. in finance and marketing
from Philadelphia College of Textiles and Sciences in 1984 and his law degree
from Temple University in 1987.
MICHAEL ISCOVE has been a director of our Company since October
1997. Since June 1995, Mr. Iscove has served as the Chairman, President and
Chief Executive Officer of Sirius Corporate Finance Inc. Prior to that,
Mr. Iscove was the President of Creative Fusion from April 1989 to June 1995.
In 1978, Mr. Iscove received a Chartered Accounts Designation in accounting
from The Canadian Institute of Chartered Accountants. In 1972, Mr. Iscove
received a B.A. degree in English from York University, Toronto, Canada.
THOMAS A. DANIELS has been a director of our Company since July
1998. Since our acquisition of MediaWorks in July 1998, Mr. Daniels has
served as President of MediaWorks. Mr. Daniels co-founded
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MediaWorks in 1996. Prior to that time, Mr. Daniels was, at various
times, a senior production and distribution executive with Blake Edward's
Television, Paramount Pictures Television and Columbia Pictures Television.
IVAN BERKOWITZ has been a director of our Company since February
1999. Since 1993, Mr. Berkowitz has served as managing General Partner of
Steib & Company, a privately held New York based investment company. Between
1995 and 1997, Mr. Berkowitz served as Chief Executive Officer of PolyVision
Corporation. Between 1990 and 1994, Mr. Berkowitz served as Chairman of the
Board of Directors of Migdalei Shekel. Currently, Mr. Berkowitz serves on the
Board of Directors of the following public companies: Propierre, a real
estate fund, HMG WorldWide, a manufacturer of point of purchase displays,
PolyVision Corporation, a manufacturer of school products and displays, and
Migdalei Shekel, a real estate company based in Tel Aviv, Israel. Since 1989,
Mr. Berkowitz has served as President of Great Court Holdings Corporation, a
privately held New York based investment company. Mr. Berkowitz holds a B.A.
(cum laude) from Brooklyn College, an MBA in Finance from Baruch College,
City University of New York, and a Ph.D. in International Law from Cambridge
University, England.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 requires our
directors and executive officers and persons who own more than ten percent of
a registered class of our equity securities, to file with the Securities and
Exchange Commission initial reports of ownership and reports of changes in
ownership of Common Stock and other equity securities of our Company.
Officers, directors and greater than ten percent stockholders are required by
SEC regulations to furnish us with copies of Section 16(a) forms they file.
To our knowledge, based solely on review of the copies of such
reports furnished to us and written representations that no other reports
were required during the fiscal year ended June 30, 1999 all Section 16(a)
filing requirements applicable to our officers, directors and greater than
ten percent beneficial owners were satisfied, except Ivan Berkowitz filed a
Form 3 late and Arthur Bernstein filed a Form 4 late.
ITEM 10. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth information concerning the annual and
long-term compensation for services in all capacities to us for the fiscal
years ended June 30, 1997, 1998 and 1999, of those persons who were (i) at
June 30, 1999 the Chief Executive Officer and (ii) each other executive
officer of our Company whose annual compensation exceeded $100,000 (the
"Named Executive Officers") in such fiscal years:
19
<PAGE>
<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation
------------------- Number of
Fiscal Year Securities
Ended Underlying All Other
June 30, Salary Bonus Options Compensation
----------- -------- ----- ------------ ------------
<S> <C> <C> <C> <C> <C>
Irwin Meyer........................... 1999 $312,000 $0 0 $18,000(2)
Chief Executive Officer (1) 1998 312,000 0 0 18,000(2)
1997 312,000 0 0 18,000(2)
68,016(3)
Arthur H. Bernstein................... 1999 $175,000 $0 600,000 $12,000(2)
Executive Vice President 1998 175,000 0 0 12,000(2)
and Secretary 1997 160,000 0 150,000 12,000(2)
Thomas A. Daniels..................... 1999 $188,482 $0 500,000 $11,500(2)
Director and President of 1998 0 0 0 0
MediaWorks, a wholly owned 1997 0 0 0 0
subsidiary of the Company (4)
</TABLE>
- ---------------------------
(1) Includes amounts paid to Mountaingate which provides us with the service of
Mr. Meyer and others.
(2) Automobile reimbursement.
(3) Forgiveness of note receivable due from Mountaingate.
(4) Mr. Daniels began employment with us on July 15, 1998.
EMPLOYMENT AGREEMENTS
We have entered into an employment agreement with Irwin Meyer for
his services as Chief Executive Officer of our Company and a production
agreement with Mountaingate Productions LLC ("Mountaingate") for the services
of Mr. Meyer and others as producers and/or executive producers and to
perform other duties. Mountaingate is a California limited liability company
of which Alison Meyer and Patricia Meyer, the adult children of Mr. Meyer,
are the sole members. The production agreement with Mountaingate provides for
annual compensation of $262,000, plus a $1,500 monthly automobile
reimbursement. The employment agreement with Mr. Meyer provides for annual
compensation of $50,000. Both of these agreements have been extended to June 30,
2002. Both agreements are terminable by us in the event of Mr. Meyer's death
or disability. In such event, we shall pay Mountaingate a guaranteed fee of
$262,000 for one year. We may also terminate these agreements "for cause" (as
defined in the agreements). Mountaingate and Mr. Meyer may terminate their
respective agreements in the event of a material breach thereof by us or for
"good reason" (as defined in the agreements). In such event, we shall be
obligated to pay all amounts due thereunder for the balance of their
respective terms. In the event that we materially breach either agreement
after a "change in control" (as defined in the agreements), Mountaingate and
Mr. Meyer, respectively, shall be entitled to a lump sum payment equal to
three times their then current total annual compensation.
Arthur Bernstein is employed as Executive Vice President of our
Company pursuant to an employment agreement, as amended, which has been
extended to June 30, 2002. Mr. Bernstein's annual compensation is $175,000
plus a $1,000 monthly automobile reimbursement. The employment agreement is
terminable by us in the event of Mr. Bernstein's death or disability. In such
event, we are obligated to pay Mr. Bernstein's compensation for one year. We
may also terminate the employment agreement "for cause" (as defined in the
agreement). Mr. Bernstein may terminate this Employment Agreement in the
event of a material breach by us or for "good reason" (as defined in the
agreement). In such event, we will be obligated to pay him all amounts due
thereunder for the balance of its term and all unvested stock options held by
him shall vest. In the event of a "change in control" (as defined in this
agreement) of our Company, all stock options issued to Mr. Bernstein shall
vest and we shall, at Mr.
20
<PAGE>
Bernstein's option, purchase shares of Common Stock owned by him at the then
market price and shall acquire all of his stock options for the difference
between the exercise price of such options and the greater of the price at
which the new controlling entity acquired its interest in our Company or the
then market price of the Common Stock.
Thomas Daniels is employed as Chief Executive Officer of our
subsidiary, MWI Distribution, Inc. d/b/a MediaWorks International pursuant to
an employment agreement, as amended, which will terminate on June 30, 2002.
Mr. Daniel's annual compensation is $186,000 plus a $750.00 monthly
automobile reimbursement. The employment agreement is terminable by us in the
event of Mr. Daniel's death or disability. We may also terminate the
employment agreement "for cause" (as defined in the agreement). Mr. Daniels
may terminate this Employment Agreement in the event of a material breach by
us or for "good reason" (as defined in the agreement). In such event, we will
be obligated to pay him all amounts due thereunder for the balance of its
term.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of June 30, 1999,
relating to the ownership of the Common Stock, Series C Preferred Stock and
Series F Preferred Stock by (i) each person known by us to be the beneficial
owner of more than five percent of the outstanding shares of our Common Stock,
Series C Preferred Stock and Series F Preferred Stock, (ii) each of our
directors, (iii) each of the Named Executive Officers, and (iv) all of our
executive officers and directors as a group. Except as may be indicated in
the footnotes to the table and subject to applicable community property laws,
each such person has the sole voting and investment power with respect to the
shares owned. The address of each person listed is in care of us, 5757 Wilshire
Boulevard, Penthouse 1, Los Angeles, California 90036, unless otherwise set
forth below.
<TABLE>
<CAPTION>
Number of Number of
Number of Shares of Shares of
Shares of Series C Series F
Common Preferred Preferred
Stock Stock Stock
Beneficially Percent of Beneficially Percent of Beneficially Percent of
Name and Address Owned (1) Class (1) Owned (1) Class (1) Owned (1) Class (1)
- ---------------------------- ------------ ---------- -------------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Alison Meyer (2) 1,700,000 12.3% 1,300,000 52.0%
Patricia Meyer (2) 1,700,000 12.3% 1,300,000 52.0%
Arthur H. Bernstein (3) 200,000 1.6%
Salvatore Grosso (4) 1,611,111 12.8%
Lawrence S. Jacobson (4) 1,611,111 12.8%
Irwin Meyer 0 0%
Ivan Berkowitz (5) 525,000 4.2%
Mountaingate Productions LLC (2) 1,700,000 12.3% 1,300,000 52.0%
Strategic Capital 1,200,000 48.0%
Consultants
Michael Iscove (6) 366,945 3.0%
Thomas A. Daniels (7) 1,001,945 7.9%
Joseph Stephens & 498,473 4.0%
Company, Inc. (8)
Augustine Fund, L.P. 225,000 100%
Directors and Executive 2,093,890 15.2%
Officers as a group (5
persons) (9)
</TABLE>
- ---------------------------
21
<PAGE>
(1) Under Rule 13d-3 under the Exchange Act, certain shares may be deemed to
be beneficially owned by more than one person (if, for example, persons
share the power to vote or the power to dispose of the shares). In
addition, shares are deemed to be beneficially owned by a person if the
person has the right to acquire the shares (for example, upon exercise of
an option) within 60 days of the date as of which the information is
provided. In computing the percentage ownership of any person, the amount
of shares outstanding is deemed to include the amount of shares
beneficially owned by such person (and only such person) by reason of
these acquisition rights. As a result, the percentage of outstanding
shares of any person as shown in this table does not necessarily reflect
the person's actual ownership or voting power with respect to the number
of shares of Common Stock actually outstanding at June 30, 1999.
(2) Includes options to purchase 1,700,000 shares of Common Stock by
Mountaingate. Mountaingate owns 1,300,000 shares of Series C Convertible
Preferred Stock. Alison Meyer and Patricia Meyer, the adult children of
Irwin Meyer, our Chief Executive Officer, beneficially own the options
to purchase the 1,700,000 shares of Common Stock and the 1,300,000 shares
of Series C Convertible Stock by virtue of being the sole members of
Mountaingate.
(3) Represents options to purchase 200,000 shares of Common Stock.
(4) Each of Mr. Grosso and Mr. Jacobson directly holds and has sole
dispositive and voting power as to 1,111,111 shares. Includes options to
purchase 500,000 shares of Common Stock by each of Mr. Grosso and
Mr. Jacobson.
(5) Represents options to purchase 525,000 shares of Common Stock.
(6) Represents 16,945 shares of Common Stock held through Sirius Corporate
Finance, Inc., of which Mr. Iscove is President and options to purchase
350,000 shares of Common Stock held by Mr. Iscove.
(7) Includes options to purchase 620,000 shares of Common Stock.
(8) According to a Schedule 13G filed by Joseph Stevens & Company, Joseph
Sobara and Steven Markowitz on February 11, 1999, Joseph Stevens &
Company, Inc. owned as of December 31, 1998, warrants to purchase 200,000
units, each unit consisting of four shares of common stock and two
redeemable common stock purchase warrants. Each redeemable warrant
entitles the holder to purchase an additional share of Common Stock. All
of the warrants are currently exercisable. Additionally, Joseph Stevens &
Company, Inc. held as of December 31, 1998, 8,753 redeemable warrants in
its market making account, all of which are currently exercisable.
Mr. Sobara and Mr. Markowitz each was a controlling shareholder,
director and officer of Joseph Stevens & Company, Inc. on December 31,
1998. Additionally, Mr. Markowitz owned 1,833 shares of Common Stock. The
address of Joseph Stevens & Company, Inc., and Messrs. Sobara and
Markowitz is 33 Maiden Lane, New York, New York 10038.
(9) Includes options to purchase 1,695,000 shares of Common Stock.
There are no issued and outstanding shares of Series B Preferred
Stock, Series D Preferred Stock or Series E Preferred Stock. There are no 5%
beneficial owners of Series A Preferred Stock.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For consulting services performed in connection with our acquisition
of the Grosso-Jacobson Companies during the fiscal year ended June 30, 1998,
Michael Iscove, a member of the Board of Directors of the Company, received
approximately $160,000 in consulting fees from us, comprised of $100,000 in
cash and 16,945 shares of common stock, valued at $3.60 per share.
In connection with our acquisition of MediaWorks International,
Michael Iscove received $40,000 in consulting fees from us during the fiscal
year ended June 30, 1998.
During the fiscal year ended June 30, 1999, Michael Iscove provided
$75,000 of consulting services to our company.
For legal services performed in connection with our acquisition of
the Grosso-Jacobson Companies, the law firm of Kay, Collyer & Boose was paid
$150,000 in cash. Michael Collyer, a former member of our Board of Directors,
is a partner in the law firm of Kay, Collyer & Boose.
22
<PAGE>
During the fiscal year ended June 30, 1999, we issued a promissory
note to Mountaingate for the sum of $44,046.14, which represents amounts owed
to Mountaingate under its production agreement with our company. The
promissory note bears interest at the rate of ten percent (10%) per annum.
During the fiscal year ended June 30, 1999, we and Mountaingate
entered into a Securities Purchase Agreement. Mountaingate purchased for
$1,300.00, 1,300,000 shares of the Series C Convertible Preferred Stock
convertible at a fixed rate of $0.50 per share.
For more information concerning transactions between us and related
parties, see Note 6 of the Notes to the Financial Statements.
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Annual Report
on Form 10-KSB for the fiscal year ended June 30, 1999.
1. Financial Statements:
Financial Statements are listed in the "Index to Financial
Statements" at page F-1.
2. Schedules:
Financial Statements schedules are listed in the "Index to
Financial Statements" at page F-1 herein.
3. Exhibits: (numbered in accordance with Item 601 of Regulation S-B)
(a) The Exhibits listed below are filed or incorporated by
reference as part of this Report.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
<S> <C>
2.1 Agreement and Plan of Merger, dated September 15, 1997, by and
among The Producers Entertainment Group Ltd., TPEG Acquisition
I Corp., The Grosso-Jacobson Entertainment Corporation,
Salvatore Grosso and Lawrence S. Jacobson.(3)
2.2 Agreement and Plan of Merger, dated September 15, 1997, by and
among The Producers Entertainment Group Ltd., TPEG Acquisition
II Corp., The Grosso-Jacobson Productions, Inc., Salvatore
Grosso and Lawrence S. Jacobson. (3)
2.3 Agreement and Plan of Merger, dated September 15, 1997, by and
among The Producers Entertainment Group Ltd., TPEG Acquisition
III Corp., Grosso-Jacobson Music Company, Inc., Salvatore
Grosso and Lawrence S. Jacobson. (3)
2.4 Agreement of Merger dated as of July 15, 1998, by and among
The Producers Entertainment Group Ltd., TPEG Merger Company,
MWI Distribution, Inc. and Tom Daniels and Craig Sussman.(4)
2.5 Agreement and Plan of Merger, dated September 22, 1999, by and
among IAT Resources Corporation, Infolocity Merger Sub, Inc.
and Infolocity, Inc.
3.1 Restated Certificate of Incorporation, dated June 24, 1993.(1)
3.2 Amendment to Certificate of Incorporation, dated April 28,
1998.(2)
3.3 Bylaws. (1)
23
<PAGE>
3.4 Amendment No. 1 to Bylaws.(1)
4.1 Certificate of Designations for Series A Preferred Stock dated
December 13, 1994.(1)
4.2 Certificate of Designations for Series B Preferred Stock dated
July 15 , 1998.
4.3 Certificate of Designations for Series C Preferred Stock dated
May 20, 1999.
4.4 Certificate of Designations for Series D Preferred Stock,
dated July 31, 1998.(2)
4.5 Certificate of Designations for Series E Preferred Stock,
dated July 31, 1998.(2)
4.6 Certificate of Designations for Series F Preferred Stock,
dated July 31, 1998.(2)
4.7 Securities Purchase Agreement, dated July 31, 1998 between The
Producers Entertainment Group Ltd. and the Augustine Fund,
L.P.(2)
4.8 Registration Rights Agreement, dated July 31, 1998 between The
Producers Entertainment Group Ltd. and the Augustine Fund,
L.P. (2)
4.9 Escrow Agreement dated as of July 31, 1998 among the Augustine
Fund, L.P., The Producers Entertainment Group Ltd. and H.
Glenn Bagwell, Jr., as Escrow Agent.(1)
10.1 1998 Stock Incentive Plan.(5)
10.2 Executive Extension Agreement, dated October 20, 1997, between
The Producers Entertainment Group Ltd. and Irwin Meyer.(3) +
10.3 Executive Extension Agreement, dated October 20, 1997, between
The Producers Entertainment Group Ltd. and Arthur Bernstein.
(3) +
10.4 Mountaingate Extension Agreement, dated October 20, 1997,
between The Producers Entertainment Group Ltd. and
Mountaingate Productions, LLC. (3)
10.5 Employment Agreement dated as of July 15, 1998, by and among
TPEG Merger Company and Thomas Daniels. (4) +
10.6 Registration Rights Agreement dated as of July 15, 1998, by
and among The Producers Entertainment Group Ltd., Tom Daniels
and Craig Sussman. (4)
10.7 Securities Purchase Agreement with Strategic Capital
Consultants, dated as of January 14, 1999. (6)
10.8 Securities Purchase Agreement with Mountaingate Productions
LLC, dated as of January 14, 1999. (6)
21.1 Subsidiaries of the Company.
23.1 Consent of Singer Lewak Greenbaum & Goldstein LLP.
27.1 Financial Data Schedule.
</TABLE>
- ---------------------------
(1) Incorporated by reference to Registrant's Report on Form 8-K dated June 18,
1996.
(2) Incorporated by reference to Registrant's Registration Statement on Form S-3
filed September 1, 1998.
24
<PAGE>
(3) Incorporated by reference to Registrant's Report on Form 8-K filed
November 4, 1997 (as amended on December 29, 1997).
(4) Incorporated by reference to Registrant's Report on Form 8-K filed July 31,
1998.
(5) Incorporated by reference to Registrant's Proxy Statement filed April 1,
1998.
(6) Incorporated by reference to Registrant's Report on Form 10-Q filed on
May 24, 1999.
+ Denotes employment contract.
(b) Reports on Form 8-K:
The following Current Reports on Form 8-K were filed by the
Company during the quarter ended June 30, 1999:
(i) Current Report on Form 8-K filed May 3, 1999. Items 5 and 7
were reported.
25
<PAGE>
SIGNATURES
IN ACCORDANCE WITH SECTION 13 OR 15(d) OF THE EXCHANGE ACT, THE
REGISTRANT HAS CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED,
HEREUNDER DULY AUTHORIZED.
IAT RESOURCES CORPORATION
Dated: October 11, 1999 By /s/ Irwin Meyer
---------------------------------
Irwin Meyer
Chief Executive Officer
IN ACCORDANCE WITH EXCHANGE ACT, THIS REPORT HAS BEEN SIGNED BY THE
FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON
THE DATES INDICATED:
<TABLE>
<CAPTION>
Name Position Date
- ------------------------------------------- ---------------------------------------- ------------------------
<S> <C> <C>
/s/ Irwin Meyer Chief Executive Officer, Chairman of October 11, 1999
- ------------------------------------------- the Board of Directors
Irwin Meyer
/s/ Arthur Bernstein Executive Vice President, Secretary October 11, 1999
- ------------------------------------------- and Director
Arthur H. Bernstein
/s/ Michael Iscove Director October 11, 1999
- -------------------------------------------
Michael Iscove
/s/ Thomas A. Daniels Director and Chief Executive Officer October 11, 1999
- ------------------------------------------- of MediaWorks
Thomas A. Daniels
/s/ Ivan Berkowitz Director October 11, 1999
- -------------------------------------------
Ivan Berkowitz
</TABLE>
26
<PAGE>
IAT RESOURCES CORPORATION
(FORMERLY THE PRODUCERS ENTERTAINMENT GROUP LTD.)
AND SUBSIDIARY
CONTENTS
JUNE 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
<S> <C>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-2
FINANCIAL STATEMENTS
Consolidated Balance Sheet F-3-4
Consolidated Statements of Operations F-5-6
Consolidated Statements of Shareholders' Equity F-7-8
Consolidated Statements of Cash Flows F-9-10
Notes to Consolidated Financial Statements F-11-29
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
IAT Resources Corporation
(formerly The Producers Entertainment Group Ltd.)
We have audited the accompanying consolidated balance sheet of IAT Resources
Corporation (formerly The Producers Entertainment Group Ltd.) and subsidiary as
of June 30, 1999, and the related consolidated statements of operations,
shareholders' equity, and cash flows for each of the two years in the period
ended June 30, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of IAT Resources
Corporation (formerly The Producers Entertainment Group Ltd.) and subsidiary as
of June 30, 1999, and the results of its consolidated operations and its
consolidated cash flows for each of the two years in the period ended June 30,
1999 in conformity with generally accepted accounting principles.
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
October 8, 1999
F-2
<PAGE>
IAT RESOURCES CORPORATION
(FORMERLY THE PRODUCERS ENTERTAINMENT GROUP LTD.)
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
JUNE 30, 1999
- --------------------------------------------------------------------------------
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS
Cash and cash equivalents $ 11,244
Accounts receivable, Net of
allowance for doubtful accounts of $562,830 $1,638,484
Receivable from related parties 102,156
Prepaid assets 19,207
----------
Total current assets 1,771,091
FILM COSTS 471,762
FIXED ASSETS, at cost, net 100,843
GOODWILL, less accumulated amortization of $99,282 886,913
INVESTMENTS 800,000
OTHER ASSETS 10,035
----------
TOTAL ASSETS $4,040,644
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
IAT RESOURCES CORPORATION
(FORMERLY THE PRODUCERS ENTERTAINMENT GROUP LTD.)
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
JUNE 30, 1999
- --------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<S> <C>
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 1,018,476
Dividends payable 278,750
Due to related parties 69,046
Capital lease obligation 33,258
------------
Total current liabilities 1,399,530
------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred stock, Series A, $0.001 par value
1,300,000 shares authorized
1,000,000 shares issued and outstanding 1,000
Preferred stock, Series C, $0.001 par value
3,000,000 shares authorized
3,000,000 shares issued and outstanding 3,000
Preferred stock, Series D, $0.001 par value
50,000 shares authorized
50,000 shares issued and outstanding 50
Preferred stock, Series E, $0.001 par value
500,000 shares authorized
225,000 shares issued and outstanding 225
Preferred stock, Series F, $0.001 par value
500,000 shares authorized
275,000 shares issued and outstanding 275
Common stock, $0.001 par value
50,000,000 shares authorized
11,975,764 shares issued and outstanding 11,976
Treasury stock, at cost
93,536 shares (1,010,192)
Additional paid-in capital 27,071,434
Accumulated deficit (23,436,654)
------------
Total shareholders' equity 2,641,114
------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 4,040,644
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
IAT RESOURCES CORPORATION
(FORMERLY THE PRODUCERS ENTERTAINMENT GROUP LTD.)
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30,
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
--------------- ----------------
<S> <C> <C>
REVENUES $ 2,936,718 $ 22,369,511
------------ ------------
COSTS RELATED TO REVENUES
Amortization of film costs -- 9,384,311
Cost of sales 926,295 9,773,397
------------ ------------
Total costs related to revenues 926,295 19,157,708
------------ ------------
NET REVENUES 2,010,423 3,211,803
WRITE-OFF OF PROJECTS IN DEVELOPMENT 301,037 199,450
GENERAL AND ADMINISTRATIVE EXPENSES 3,953,012 3,592,772
------------ ------------
LOSS FROM OPERATIONS (2,243,626) (580,419)
------------ ------------
OTHER INCOME (EXPENSE)
Merger expenses (6,696) (372,695)
Interest and dividend income 1,140 61,817
Interest and financing expense (12,447) (4,225)
Write-off of notes receivable and other assets (166,965) (196,105)
Amortization of related party covenant not to compete (115,000) (276,000)
Amortization of goodwill (99,282) --
Other expense (22,176) (44,289)
------------ ------------
Total other income (expense) (421,426) (831,497)
------------ ------------
NET LOSS (2,665,052) (1,411,916)
DIVIDEND REQUIREMENT OF SERIES A PREFERRED STOCK (425,000) (425,000)
DIVIDEND REQUIREMENT OF SERIES E PREFERRED STOCK (66,250) --
------------- -------------
NET LOSS APPLICABLE TO COMMON SHAREHOLDERS $ (3,156,302) $ (1,836,916)
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
IAT RESOURCES CORPORATION
(FORMERLY THE PRODUCERS ENTERTAINMENT GROUP LTD.)
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30,
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
--------------- ----------------
<S> <C> <C>
BASIC LOSS PER COMMON SHARE $ (0.35) $ (0.29)
=============== ================
DILUTED LOSS PER COMMON SHARE $ (0.35) $ (0.29)
=============== ================
WEIGHTED-AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
BASIC 9,085,053 6,522,459
=============== ================
FULLY DILUTED 9,085,053 6,522,459
=============== ================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
IAT RESOURCES CORPORATION
(FORMERLY THE PRODUCERS ENTERTAINMENT GROUP LTD.)
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30,
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Preferred Stock
----------------------------------------------------------------------------------------------------------
Series A Series C Series D Series E Series F
------------------ ------------------ ------------------ ------------------ ------------------
Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30,
1997 1,000,000 $ 1,000 - $ - - $ - - $ - - $ -
Issuance of common
shares in payment
of dividends on
Series A preferred
stock
Issuance of common
shares and planned
issuance of warrants
in payment of
consulting and
legal fees
Dividends paid on
Series A preferred
stock
Net loss
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Balance, June 30,
1998 1,000,000 1,000 - - - - - - - -
Issuance of common
shares in payment
of dividends on
Series A preferred
stock
Issuance of common
stock in connection
with the acquisition
of MWI
Distributions, Inc.
Issuance of common
stock for the
exercise of options
Issuance of common
stock for the
exercise of options-
Strategic
Issuance of Series C
preferred stock 3,000,000 3,000
Issuance of Series D
preferred stock 50,000 50
Offering costs
Issuance of Series E
preferred stock 225,000 225
Offering costs
Issuance of Series F
preferred stock 275,000 275
Issuance of common
stock from the
preferred Series D
conversion -
Augustine Fund
<CAPTION>
Common Stock Additional
------------------- Treasury Paid-in Accumulated
Shares Amount Stock Capital Deficit Total
------ ------ -------- ---------- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance, June 30, 6,351,476 $ 6,352 $(1,010,192) $ 22,963,421 $(18,443,436) $3,517,145
1997
Issuance of common
shares in payment
of dividends on
Series A preferred
stock 293,689 293 318,456 318,749
Issuance of common
shares and planned
issuance of warrants
in payment of
consulting and
legal fees 27,778 28 129,472 129,500
Dividends paid on
Series A preferred
stock (425,000) (425,000)
Net loss (1,411,916) (1,411,916)
-------- ------- ----------- ------------ ------------- -----------
Balance, June 30,
1998 6,672,943 6,673 (1,010,192) 23,411,349 (20,280,352) 2,128,478
Issuance of common
shares in payment
of dividends on
Series A preferred
stock 343,932 344 318,406 318,750
Issuance of common
stock in connection
with the acquisition
of MWI
Distributions, Inc. 1,203,704 1,204 525,416 526,620
Issuance of common
stock for the
exercise of options 600,000 600 427,400 428,000
Issuance of common
stock for the
exercise of options-
Strategic 500,000 500 249,500 250,000
Issuance of Series C
preferred stock 3,000
Issuance of Series D
preferred stock 499,950 500,000
Offering costs (35,000) (35,000)
Issuance of Series E
preferred stock 1,001,744 1,001,969
Offering costs (157,500) (157,500)
Issuance of Series F
preferred stock 275
Issuance of common
stock from the
preferred Series D
conversion -
Augustine Fund 2,005,185 2,005 1,245,800 1,247,805
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
IAT RESOURCES CORPORATION
(FORMERLY THE PRODUCERS ENTERTAINMENT GROUP LTD.)
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
FOR THE YEARS ENDED JUNE 30,
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Preferred Stock
----------------------------------------------------------------------------------------------------------
Series A Series C Series D Series E Series F
------------------ ------------------ ------------------ ------------------ ------------------
Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of common
stock for
consulting
services $ $ $ $ $
Return of stock -
Grosso-Jacobson
Dividends paid on
Series A preferred
stock
Dividends paid on
Series E preferred
stock
Net loss
--------- ------- --------- ------- ------ ------ ------- ------ ------- ------
Balance, June 30,
1999 1,000,000 $ 1,000 3,000,000 $ 3,000 50,000 $ 50 225,000 $ 225 275,000 $ 275
========= ======= ========= ======= ====== ====== ======= ====== ======= ======
<CAPTION>
Common Stock Additional
------------------- Treasury Paid-in Accumulated
Shares Amount Stock Capital Deficit Total
------ ------ -------- ---------- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
Issuance of common
stock for
consulting
services 650,000 $ 650 $ $ 279,350 $ $ 280,000
Return of stock -
Grosso-Jacobson (694,981) (694,981)
Dividends paid on
Series A preferred
stock (425,000) (425,000)
Dividends paid on
Series E preferred
stock (66,250) (66,250)
Net loss
Balance, June 30,
1999 (2,665,052) (2,665,052)
---------- ----------- ------------ ------------ ------------- -----------
11,975,764 $ 11,976 $ (1,010,192) $ 27,071,434 $(23,436,654) $ 2,641,114
========== =========== ============ ============ ============= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE>
IAT RESOURCES CORPORATION
(FORMERLY THE PRODUCERS ENTERTAINMENT GROUP LTD.)
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30,
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (2,665,052) $ (1,411,916)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities
Depreciation of fixed assets 102,355 53,387
Amortization of film costs - 9,384,311
Write-off of film projects in development 301,037 199,450
Provision for doubtful accounts - (12,934)
Amortization of related party covenant not to compete 115,000 276,000
Amortization of goodwill 99,282 -
Write-off of notes receivable and other assets 654,428 196,105
Issuance of common stock for consulting services 280,000 129,500
(Increase) decrease in
Accounts receivable (432,414) (402,969)
Other assets and prepaid expenses (83,044) (90,485)
Increase (decrease) in
Accounts payable and accrued expenses 529,191 (457,060)
Deferred revenue (139,126) (5,269,869)
----------- -----------
Net cash provided by (used in) operating activities (1,238,343) 2,593,520
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
(Increase) decrease in short-term investments (800,000) 2,698,568
Additions to film costs (278,388) (6,355,444)
Capital expenditures on fixed assets (16,014) (60,772)
Decrease in receivables from related parties 43,015 87,199
Additions to goodwill (15,000) -
Cash from purchase of business 252,122 -
----------- -----------
Net cash used in investing activities (814,265) (3,630,449)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on notes payable (1,210,802) -
Payments on capital lease obligation (37,647) (21,690)
Payment of cash dividends on preferred stock - (212,500)
Proceeds from issuance of preferred stock 3,431,050 -
Offering costs (192,500) -
----------- -----------
Net cash provided by (used in) financing activities 1,990,101 (234,190)
----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-9
<PAGE>
IAT RESOURCES CORPORATION
(FORMERLY THE PRODUCERS ENTERTAINMENT GROUP LTD.)
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED JUNE 30,
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
Net decrease in cash and cash equivalents $ (62,507) $ (1,271,119)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 73,751 1,344,870
------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 11,244 $ 73,751
============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
INTEREST PAID $ 12,447 $ 4,225
============= =============
INCOME TAXES PAID $ - $ -
============= =============
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
During the year ended June 30, 1999, the Company exchanged capitalized film
costs of $694,981 for 1,666,667 shares of common stock.
During the year ended June 30, 1999, the Company issued 1,203,704 shares of
common stock valued at $526,620 for the acquisition of a company. Cash from
investing, financing, and operating activities excludes the following:
<TABLE>
<S> <C>
Accounts receivable $ 1,611,037
Fixed assets, net 4,709
Other assets 10,835
Goodwill 961,913
Accounts payable and accrued expenses (153,570)
Deferred revenues (139,126)
Notes payable (1,884,172)
</TABLE>
During the year ended June 30, 1999, the Company issued 650,000 shares of common
stock for consulting services valued at $280,000.
During the years ended June 30, 1999 and 1998, the Company issued 343,932 and
293,689 shares of common stock, respectively, valued at $318,750 and $318,749,
respectively, in payment of dividends on its Series A preferred stock.
During the year ended June 30, 1998, the Company acquired fixed assets under a
capital lease obligation totaling $92,594.
The accompanying notes are an integral part of these financial statements.
F-10
<PAGE>
IAT RESOURCES CORPORATION
(FORMERLY THE PRODUCERS ENTERTAINMENT GROUP LTD.)
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
- --------------------------------------------------------------------------------
NOTE 1 - BUSINESS ACTIVITY
IAT Resources Corporation (formerly The Producers Entertainment Group
Ltd.) ("IAT") was incorporated under its former name, The Producers
Entertainment Group, Ltd. ("TPEG"), under the laws of the State of
Delaware on August 10, 1989. Effective June 4, 1999, TPEG officially
changed its name to IAT Resources Corporation, reflecting a significant
change of TPEG's core business from entertainment production and
distribution to Internet technology development and integration.
For approximately eight years, IAT acquired, developed, produced, and
distributed drama, comedy, documentary, and instructional television
series, made-for-television movies, and theatrical motion pictures.
Although IAT continues to engage in certain entertainment-related
production and distribution activities, during the past eight months,
it has reduced its network and cable television activities and has
begun to redirect its core business toward the Internet and technology
industry.
ACQUISITION
On July 15, 1998, IAT acquired 100% of the capital stock of MWI
Distributions, Inc., dba MediaWorks International ("MWI"), a
California corporation. MWI provides international television and
video distribution, specializing in the licensing of children's and
family programming and animation. MWI is also an active
co-production and co-financing partner in various animated and
live-action programming ventures and engages in worldwide sales of
direct-to-video series and specials. The transaction was accounted
for as a purchase. The results of operations of MWI are included in
these financial statements from the date of acquisition. The
consideration paid at closing to the shareholders of MWI was 763,232
shares of IAT's common stock with an additional 440,472 shares held
in escrow pending collection of receivables and potential future
revenues.
On March 22, 1999, IAT entered into an agreement with the shareholders
of MWI under which one of the shareholders cancelled 89,352 shares of
common stock issued to him in connection with the acquisition.
The purchase price exceeded the fair value of net assets acquired by
approximately $986,195, including $15,282 of additional cost
incurred during the year, which is being amortized on a
straight-line basis over ten years. The following summarized,
unaudited, pro forma financial information assumes the acquisition
had occurred on July 1, 1996:
<TABLE>
<CAPTION>
1998 1997
----------- ------------
(unaudited) (unaudited)
<S> <C> <C>
Net sales $24,187,692 $ 6,349,258
Net loss $(2,092,056) $ (4,693,293)
Loss per share $ (0.33) $ (0.68)
</TABLE>
F-11
<PAGE>
IAT RESOURCES CORPORATION
(FORMERLY THE PRODUCERS ENTERTAINMENT GROUP LTD.)
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
- --------------------------------------------------------------------------------
NOTE 1 - BUSINESS ACTIVITY (CONTINUED)
ACQUISITION (Continued)
These pro forma amounts include MWI's actual results from November
11, 1996 (inception) to June 30, 1997 and for the year ended June
30, 1998. The amounts are based upon certain assumptions and
estimates and do not reflect any benefit from economies which might
be achieved from combined operations. The pro forma results do not
necessarily represent results which would have occurred if the
acquisition had taken place on the basis assumed above, nor are they
indicative of the results of future combined operations.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying financial statements include the accounts of IAT and
its wholly-owned subsidiary, MWI (collectively, the "Company"). All
significant intercompany accounts have been eliminated.
REVENUE RECOGNITION
Amounts received as license fees for projects in production are
deferred until the project becomes available for broadcast in
accordance with the terms of the licensing agreement and are recognized
as revenues at such time. Additional licensing and distribution fees
are recognized as earned in accordance with the terms of the related
agreements. Revenues from the sale of completed productions are
generally recognized upon their sale.
CASH AND CASH EQUIVALENTS
For the purpose of reporting cash flows, the Company considers United
States treasury bills, money market funds, and certificates of deposit
purchased with an original maturity of three months or less to be cash
equivalents.
F-12
<PAGE>
IAT RESOURCES CORPORATION
(FORMERLY THE PRODUCERS ENTERTAINMENT GROUP LTD.)
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FILM COSTS AND AMORTIZATION
Film costs include the costs of completed projects, costs of projects
in production, and costs expended on projects in development. Film
costs are stated at the lower of amortized cost or estimated net
realizable value. Amortization of completed projects is charged to
operations on an individual project basis in a ratio that the current
year's revenue bears to management's estimate of total revenues
(current and future years) from all sources. This is commonly referred
to as the individual-film-forecast method. Adjustments of amortization
resulting from changes in estimates of total revenues are recognized in
the current year's amortization. When a completed project is fully
amortized, its cost and related accumulated amortization are removed
from the accounts. If, in the opinion of management, any property in
the development stage is not planned for use, the net carrying value of
such property is charged to the current year's operations.
FIXED ASSETS
Fixed assets are stated at cost. The Company provides for depreciation
and amortization using the straight-line method over the estimated
useful lives of the assets of three to seven years.
CAPITAL LEASES
The Company leases fixed assets under non-cancelable leases that are
classified as capital leases (see Note 17). The leased fixed assets
have been capitalized, and the related obligations have been recorded
at the fair value of the assets at the inception of the leases. The
leased fixed assets are depreciated using the straight-line method over
the estimated useful lives, and interest expense is recognized over the
terms of the leases.
COST OF REVENUES
Costs related to projects sold consist of direct costs incurred in the
production of projects that are subsequently sold to third parties. The
Company does not retain any ownership interest in these projects, and
accordingly, upon their sale, all incurred costs are charged to
operations. Participation in future profits from projects that are sold
are included in revenues when earned.
RELATED PARTY COVENANT NOT TO COMPETE
The covenant not to compete was the result of a litigation settlement
with a former officer and is being amortized over the covenant period
ending December 31, 1998.
F-13
<PAGE>
IAT RESOURCES CORPORATION
(FORMERLY THE PRODUCERS ENTERTAINMENT GROUP LTD.)
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
UNCLASSIFIED BALANCE SHEET
The Company has elected to present an unclassified balance sheet in
accordance with Statement of Financial Accounting Standards ("SFAS")
No. 53, "Financial Reporting by Producers and Distributors of Motion
Picture Films."
LOSS PER COMMON SHARE
Basic and diluted loss per common share have been computed after
deducting the dividend requirement of the Company's Series A preferred
stock from net loss. Basic loss per share is based on the
weighted-average number of common shares outstanding during the years
ended June 30, 1999 and 1998. Diluted loss per share is equal to the
basic loss per share because the assumed conversion of the Series A and
Series E preferred stock and the assumed exercise of outstanding stock
purchase warrants and options have not been included as the effect
would be anti-dilutive. Treasury stock has been excluded from the loss
per common share calculation.
REVERSE STOCK SPLIT
In April 1998, the shareholders approved a 1-for-3 reverse split of the
Company's common stock. The reverse split was effective in May 1998.
All agreements concerning stock options and other commitments payable
in shares of the Company's common stock provide for a reduction in the
number of shares due to the declaration of the reverse stock split. An
amount equal to the par value of the common shares issued was
transferred from the common stock to additional paid-in capital. This
transfer has been reflected in the consolidated statement of
shareholders' equity at July 1, 1996. All references to the number of
shares, except shares authorized, and to per share information in the
consolidated financial statements have been adjusted to reflect the
reverse stock split on a retroactive basis.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to
significant credit risks consist of cash and trade receivables. The
Company places its cash with high-credit, quality financial
institutions or in high-quality, short-term investments such as insured
certificates of deposit. At times, the cash in any one bank may exceed
the Federal Deposit Insurance Corporation's insured limit of $100,000.
At June 30, 1999, the Company had no uninsured cash. With regard to
receivables, the risk is relatively limited due to most customers being
either domestic or foreign broadcasting networks or established
domestic and foreign distributors.
F-14
<PAGE>
IAT RESOURCES CORPORATION
(FORMERLY THE PRODUCERS ENTERTAINMENT GROUP LTD.)
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Company accounts for income taxes under SFAS No. 109,
"Accounting for Income Taxes." SFAS No. 109 requires a liability
approach for measuring deferred tax assets and liabilities based on
temporary differences existing at each balance sheet date using
enacted tax rates in effect when those differences are expected to
reverse. As of June 30, 1999, such differences arose principally from
net operating loss carryforwards.
Deferred tax assets, consisting primarily of the tax effect of net
operating loss carryforwards, are offset with a valuation allowance
because of the uncertainty regarding realizability.
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 disclosures of contingent assets and liabilities at
the date of the financial statements, as well as the reported amounts
of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
COMPREHENSIVE INCOME
For the year ended June 30, 1999, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income." This statement establishes
standards for reporting comprehensive income and its components in a
financial statement. Comprehensive income as defined includes all
changes in equity (net assets) during a period from non-owner
sources. Examples of items to be included in comprehensive income,
which are excluded from net income, include foreign currency
translation adjustments and unrealized gains and losses on
available-for-sale securities. Comprehensive income is not presented
in the Company's financials statements since the Company did not
have any of the items of comprehensive income in any period
presented.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In February 1998, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 132, "Employers' Disclosures about Pensions and Other
Post-Retirement Benefits." The Company does not expect adoption of
SFAS No. 132 to have a material impact, if any, on its financial
position or results of operations.
F-15
<PAGE>
IAT RESOURCES CORPORATION
(FORMERLY THE PRODUCERS ENTERTAINMENT GROUP LTD.)
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (Continued)
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," is effective for financial statements with fiscal years
beginning after June 15, 1999. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities. The Company does not expect adoption of SFAS No. 133 to
have a material effect, if any, on its financial position or results
of operations.
SFAS No. 134, "Accounting for Mortgage-Backed Securities Retained
after the Securitization of Mortgage Loans Held for Sale by a Mortgage
Banking Enterprise," is effective for financial statements with the
first fiscal quarter beginning after December 15, 1998. The Company
does not expect adoption of SFAS No. 134 to have a material effect, if
any, on its financial position or results of operations.
SFAS No. 135, "Rescission of FASB Statement No. 75 and Technical
Corrections," is effective for financial statements with fiscal years
beginning February 1999. This statement is not applicable to the
Company.
In June 1999, the FASB issued SFAS No. 136, "Transfer of Assets to
a Not-for-Profit Organization or Charitable Trust that Raises or
Holds Contributions for Others." This statement is not applicable to
the Company.
In June 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities." The Company does not
expect adoption of SFAS No. 137 to have a material impact, if any,
on its financial position or results of operations.
NOTE 3 - LIQUIDITY AND CAPITAL RESOURCES
The accompanying consolidated financial statements have been prepared
in conformity with generally accepted accounting principles, which
contemplate the continuation of the Company as a going concern,
including the realization of assets and liquidation of liabilities in
the ordinary course of business. For the years ended June 30, 1999 and
1998, the Company incurred net losses of $2,665,052 and $2,641,114,
respectively. At June 30, 1999, the Company's total shareholders'
equity was $1,828,810, including an accumulated deficit of $24,547,149.
F-16
<PAGE>
IAT RESOURCES CORPORATION
(FORMERLY THE PRODUCERS ENTERTAINMENT GROUP LTD.)
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
- --------------------------------------------------------------------------------
NOTE 3 - LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
The Company's cash commitments for the year ended June 30, 2000
include payment of its current liabilities of $ 1,399,530 and
compensation to officers and key independent contractors and office
rent of approximately $ 950,000. The Company also incurs other costs
such as salaries, related benefits, professional fees, office, and
other expenses. For the year ended June 30, 1999, general and
administrative expenses aggregated to $4,727,600. Dividends on the
Company's Series A preferred stock aggregate to $425,000 annually.
Dividends are payable either in cash or common stock. The Company's
operations have been financed mostly by the net proceeds received
from private placements of its securities and proceeds received from
exercise of stock options and warrants. At June 30, 1999,
substantially all of the Company's outstanding stock options were
exercisable at prices substantially above the market price of the
Company's common stock.
NOTE 4 - LOSS OF REVENUE SOURCE
During the year ended June 30, 1998, the Company discontinued its
personal management services. As a result, the Company will no longer
be receiving revenue from this source. Revenue from this source was
$1,605,861 for the year ended June 30, 1998. Income before income tax
from this source was approximately $166,000 for the year ended
June 30, 1998.
NOTE 5 - ACQUISITION OF GROSSO-JACOBSON ENTERTAINMENT CORP.
On October 20, 1997, the Company exchanged 2,222,222 shares of the
Company's common stock for all of the outstanding stock of
Grosso-Jacobson Entertainment Corporation, Grosso-Jacobson
Productions, Inc., and Grosso-Jacobson Music Company, Inc.
(collectively, the "G-J Companies"). The G-J Companies produce a wide
variety of television programming, including prime time series and
made-for-television movies.
On January 19, 1999, the Company entered into an agreement to terminate
all agreements and relationships between the Company and the G-J
Companies, except the Merger Agreement. In exchange for the Company
investing $575,000 in a new company to be formed by the officers of the
G-J Companies and the transfer of certain unproduced projects in
development for a 15% profit participation, the officers agreed to
terminate their employment agreement and return 1,666,667 shares of the
Company's common stock. As of June 30, 1999, these shares are held in
escrow.
F-17
<PAGE>
IAT RESOURCES CORPORATION
(FORMERLY THE PRODUCERS ENTERTAINMENT GROUP LTD.)
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
- --------------------------------------------------------------------------------
NOTE 5 - ACQUISITION OF GROSSO-JACOBSON ENTERTAINMENT CORP. (CONTINUED)
In accordance with paragraph 23 of Accounting Principles Bulletin
("APB") Opinion No. 29, "Accounting for Non-Monetary Transactions,"
this transaction has been recorded based on the recorded amount of the
non-monetary assets distributed. Because the shares are held in
escrow, outstanding shares have been reduced and shareholders' equity
has been debited with the recorded amount of the assets distributed of
$694,981.
In addition, the Company issued 500,000 options to each of the two
officers at an exercise price of $0.82 per share. All options are
exercisable and outstanding at June 30, 1999.
NOTE 6 - RELATED PARTY TRANSACTIONS
The Company has entered into a production agreement with a Loan-Out
Company for the services of a key officer and others as producer and
to perform other duties. The Loan-Out Company is under the control of
officers/directors of the Company and their family. This agreement
expires in June 2002 and provides for an approximate annual payment of
$262,000, plus a $1,500 monthly automobile reimbursement.
During the year ended June 30, 1999, the Company incurred a promissory
note to the Loan-Out Company for the sum of $44,046, which represents
amounts owed to the Company under its production agreement. The
promissory note bears interest at the rate of 10% per annum and is due
in December 1999.
During the year ended June 30, 1999, the Company entered into a
Securities Purchase Agreement with the Loan-Out Company. The Loan-Out
Company purchased 1,300,000 shares of Series C convertible preferred
stock, par value $0.001 per share, for a purchase price of $0.001 per
share.
During the year ended June 30, 1999, the Company entered into
financial consulting agreements with a shareholder and issued an
aggregate of 650,000 shares of common stock valued at $280,000 for
consulting services. In addition, the Company granted 500,000 options
at an exercise price of $0.50 per share, all of which have been
exercised at June 30, 1999.
During the year ended June 30, 1999, the Company entered into a
Securities Purchase Agreement with the consulting company. The
consulting company purchased 1,700,000 shares of the Company's
Series C preferred stock, par value $0.001 per share, for a purchase
price of $0.001 per share.
F-18
<PAGE>
IAT RESOURCES CORPORATION
(FORMERLY THE PRODUCERS ENTERTAINMENT GROUP LTD.)
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
- --------------------------------------------------------------------------------
NOTE 6 - RELATED PARTY TRANSACTIONS (CONTINUED)
The Company receives legal services from a law firm, a partner of
which is a member of the Board of Directors. During the year ended
June 30, 1998, the Company paid the law firm $17,000. In addition,
during the year ended June 30, 1998, the Company formulated a plan
to issue options with a value of $25,000 for legal services.
The Company receives financial consulting services from a member of
the Board of Directors. During the years ended June 30, 1999 and 1998,
the Company paid $81,000 and $210,000, respectively, for consulting
services. In addition, during the year ended June 30, 1998, the
Company issued stock options with a value of $104,500 for consulting
services. During the year ended June 30, 1999, the Company issued
300,000 and 25,000 options at an exercise price of $0.82 and $2.35,
respectively. All options are exercisable and outstanding at
June 30, 1999.
The Company used the services of a law firm in which the former
chairman of the Board of Directors is a partner. During the years
ended June 30, 1999 and 1998, the Company paid this law firm
$10,000 and $61,000, respectively.
Receivables from related parties of $47,778 at June 30, 1998 were
receivable upon demand and paid in full at June 30, 1999.
Payables to related parties of $25,000 at June 30, 1999 were payable
on demand and were paid in full subsequent to June 30, 1999.
The Company granted 50,000 options to a former executive at an
exercise price of $1.75. These options are exercisable and outstanding
at June 30, 1999.
The Company granted 150,000 options to another former executive at an
exercise price of $1.50. These options are exercisable and outstanding
at June 30, 1999.
The Company granted 25,000 and 500,000 options to a director of the
Company at exercise prices of $2.35 and $1.35, respectively. These
options are exercisable and outstanding at June 30, 1999.
NOTE 7 - LITIGATION
SETTLEMENTS
During the year ended June 30, 1999, the Company settled certain
litigation for $46,725. The Company paid the settlement in
August 1999, for which the amount has been accrued as of
June 30, 1999.
F-19
<PAGE>
IAT RESOURCES CORPORATION
(FORMERLY THE PRODUCERS ENTERTAINMENT GROUP LTD.)
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
- --------------------------------------------------------------------------------
NOTE 7 - LITIGATION (CONTINUED)
SETTLEMENTS (Continued)
On March 22, 1999, the Company filed a request for arbitration against
the former employee and Chief Executive Officer of MWI Distributions,
Inc., alleging breach of contract. On June 29, 1999, the parties
entered into a settlement agreement releasing each other from all
present and future claims. The Company has agreed to return 89,352
shares of common stock already held by the former employee received
from the merger. In addition, the Company will pay 25% of the
Company's net recovery from the Company's disputes with an
entertainment company, after deduction for attorney's fees, contingent
fees, and costs. Deduction for contingent fees is limited to 15% of
the total recovery. The former employee will be released from any
obligation to comply with the non-competition clause as included in
the employment agreement.
PENDING LITIGATION
On April 15, 1999, suit was filed against the Company alleging breach
of contract with a financing company. The claim indicates failure to
deliver Class B preferred stock per a Finders Fee Agreement entered
into in July 1998. The Company denies the claim, the parties are
currently in negotiation, and no estimate can be made in the
likelihood of an unfavorable outcome.
The Company is currently in litigation with an entertainment company.
The Company believes that the entertainment company wrongfully
terminated its contracts. The Company seeks to recover commissions owed
to MWI, and no estimate can be made in the likelihood of an
unfavorable outcome.
OTHER LITIGATION
In the normal course of its business, the Company is subject to
various lawsuits and claims. The Company believes that the final
outcomes of these matters, either individually or in the aggregate,
will not have a material effect on its consolidated financial
statements.
NOTE 8 - DISTRIBUTION RIGHTS
During the year ended June 30, 1995, the Company transferred a
completed television service with a net carrying value of $291,241 in
exchange for the right to receive a portion of the distribution
revenue from the series. This amount was written down by $95,136 at
June 30, 1997 to reflect the estimated present value of this right.
The balance of $196,105 was written off during the year ended
June 30, 1998.
F-20
<PAGE>
IAT RESOURCES CORPORATION
(FORMERLY THE PRODUCERS ENTERTAINMENT GROUP LTD.)
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
- -------------------------------------------------------------------------------
NOTE 9 - FILM COSTS
Film costs as of June 30, 1999 consisted of projects in development of
$471,762. Write-offs of projects in development for the years ended
June 30, 1999 and 1998 aggregated to $301,037 and $199,450,
respectively. Based on management's present estimate of future revenues
at June 30, 1999, substantially all of the unamortized costs of
completed projects will be amortized by June 30, 2004.
NOTE 10 - FIXED ASSETS
Fixed assets as of June 30, 1999 consisted of the following:
<TABLE>
<S> <C>
Furniture and equipment $ 179,604
Computer equipment 77,784
Equipment held under capital leases 92,594
Leasehold improvements 45,979
----------------
395,961
Less accumulated deprecation and amortization 295,118
----------------
TOTAL $ 100,843
================
</TABLE>
Depreciation and amortization expense for the years ended June 30,
1999 and 1998 were $102,355 and $53,387, respectively.
NOTE 11 - INVESTMENTS
On February 24, 1999, the Company entered into an agreement to invest
in a publicly held company and agreed to purchase 100,000 shares of
restricted shares of the Company's common stock for $500,000. For no
additional consideration, the Company was issued 100,000 warrants at an
exercise price of $6.00 per share. The warrants shall only be
exercisable at any time prior to March 1, 2001. The Company has booked
this investment at cost, and the investment represents less than 5%
ownership in the investee.
On February 3, 1999, the Company entered into an agreement to invest in
a privately held company and agreed to purchase up to $1,000,000 in
common shares at a purchase price of $2.00 per share. As of June 30,
1999, the Company purchased 150,000 shares for a total investment of
$300,000. The Company has booked the investment at cost, and the
investment represents less than 5% ownership in the investee.
F-21
<PAGE>
IAT RESOURCES CORPORATION
(FORMERLY THE PRODUCERS ENTERTAINMENT GROUP LTD.)
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
- -------------------------------------------------------------------------------
NOTE 11 - INVESTMENTS (CONTINUED)
These investments are stated at cost, which approximates their fair
value as of June 30, 1999.
NOTE 12 - FINANCING FACILITY AND ISSUANCE OF PREFERRED STOCK
On July 31, 1998, IAT entered into a financing arrangement. At IAT's
option, the arrangement allows IAT to sell and requires the other party
to purchase up to $5,000,000 worth of convertible preferred stock over
a 24-month period, subject to certain restrictions and limitations.
In the event that IAT's average daily stock closing price, multiplied
by the number of shares traded on that day for the preceding 20 trading
days is less than $40,000, the preferred stock investor is not required
to purchase shares. Although IAT did not exceed the minimum requirement
for the September 22, 1998 purchase, the investor did not exercise the
right to refuse funding.
The preferred stock is convertible to common stock at 80% to 82.5% of
the average of the closing bid prices for the common stock for the five
trading days immediately preceding the date of conversion.
Alternatively, the first tranche of $500,000 can be converted at 100%
of the average of the closing bid prices for the common stock for the
five days preceding such initial $500,000 investment.
The preferred stock pays quarterly dividends at an annual rate of 6%
per year.
On July 31, August 11, and September 22, 1998, IAT exercised its right
under this agreement and sold $500,000 worth of Series D and $2,250,000
worth of Series E preferred stock to the investor. In conjunction with
this transaction, IAT issued 275,000 shares of Series F preferred stock
to the investor which is convertible into common stock at $1.02 per
share.
In addition, IAT paid a finder's fee of $56,250 and granted the
investment banker warrants to purchase 30,000 shares of common stock at
$1.44 per share.
F-22
<PAGE>
IAT RESOURCES CORPORATION
(FORMERLY THE PRODUCERS ENTERTAINMENT GROUP LTD.)
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
- -------------------------------------------------------------------------------
NOTE 13 - STOCK OPTIONS AND WARRANTS
STOCK OPTIONS
The Company's Board of Directors adopted the 1998 Stock Incentive Plan
(the "Plan") on February 17, 1998. The Plan, which was amended in April
1999, authorizes the granting of stock options to officers,
non-employee directors, employees, and consultants to purchase an
aggregate of 3,000,000 shares of common stock. Options awarded under
the Plan expire after 10 years. The Company may also grant other stock
options outside its stock option plan.
The Company has adopted only the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." It applies APB Opinion No.
25, "Accounting for Stock Issued to Employees," and related
interpretations in accounting for its plans and does not recognize
compensation expense for its stock-based compensation plans other than
for restricted stock and options/warrants issued to outside third
parties. If the Company had elected to recognize compensation expense
based upon the fair value at the grant date for awards under its plan
consistent with the methodology prescribed by SFAS No. 123, the
Company's net loss and loss per share would be increased to the pro
forma amounts indicated below for the year ended June 30, 1999 and
1998:
<TABLE>
<CAPTION>
1999 1998
--------------- ----------------
<S> <C> <C>
Net loss
As reported $ (2,665,052) $ (1,411,916)
Pro forma $ (4,372,852) $ (1,411,916)
Basic loss per common share
As reported $ (0.35) $ (0.29)
Pro forma $ (0.48) $ (0.29)
</TABLE>
These pro forma amounts may not be representative of future disclosures
because they do not take into effect pro forma compensation expense
related to grants made before 1995. The fair value of these options was
estimated at the date of grant using the Black-Scholes option-pricing
model with the following weighted-average assumptions for the year
ended June 30, 1999 and 1998: dividend yields of 0% and 0%,
respectively; expected volatility of 100% and 99%, respectively;
risk-free interest rate of 5.5% and 6%, respectively; and expected
lives of two and 4.48 years, respectively.
F-23
<PAGE>
IAT RESOURCES CORPORATION
(FORMERLY THE PRODUCERS ENTERTAINMENT GROUP LTD.)
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
- -------------------------------------------------------------------------------
NOTE 13 - STOCK OPTIONS AND WARRANTS (CONTINUED)
STOCK OPTIONS (Continued)
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of
traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion,
the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
The following summarizes the stock option transactions under the Stock
Option Plan:
<TABLE>
<CAPTION>
Weighted-
Average
Number of Exercise
Shares Price
--------------- ----------------
<S> <C> <C>
Balance, June 30, 1997 293,972 $ 16.74
Expired (6,944) $ (97.20)
---------------
Balance, June 30, 1998 287,028 $ 14.79
Granted 3,420,000 $ 1.19
Exercised (600,000) $ 0.71
Expired (585,416) $ 2.56
---------------
BALANCE, JUNE 30, 1999 2,521,612 $ 4.57
===============
EXERCISABLE, JUNE 30, 1999 2,521,612 $ 4.57
===============
</TABLE>
F-24
<PAGE>
IAT RESOURCES CORPORATION
(FORMERLY THE PRODUCERS ENTERTAINMENT GROUP LTD.)
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
- -------------------------------------------------------------------------------
NOTE 13 - STOCK OPTIONS AND WARRANTS (CONTINUED)
STOCK OPTIONS (Continued)
The weighted-average remaining contractual life of the options
outstanding is 7.13 years at June 30, 1999. The exercise prices for the
options outstanding as of June 30, 1999 ranged from $0.50 to $39.00,
and the information relating to these options is as follows:
<TABLE>
<CAPTION>
Weighted- Weighted- Weighted-
Average Average Average
Remaining Exercise Exercise
Range of Stock Stock Contractual Price Price
Exercise Options Options Life of Options of Options of Options
Prices Outstanding Exercisable Outstanding Outstanding Exercisable
---------------- --------------- --------------- --------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$ 0.50 - 0.82 720,000 720,000 7.06 $ 0.77 $ 0.77
$ 0.83 - 2.35 1,600,000 1,600,000 4.94 $ 1.19 $ 1.19
$ 2.36 - 39.00 201,612 201,612 2.00 $ 14.79 $ 14.79
--------------- ---------------
2,521,612 2,521,612
=============== ===============
</TABLE>
WARRANTS
In addition to the 1,533,333 redeemable warrants exercisable at $5.25
per share of common stock issued in connection with the September 1996
public offering, there are approximately 216,667 other outstanding
warrants. As part of a June 1996 private placement of $500,000
aggregate principal amount of 10% promissory notes ("Bridge Notes"),
166,667 "Bridge Warrants" were issued. Upon repayment of the Bridge
Notes in September 1996, the "Bridge Warrants" were automatically
exchanged for 166,667 redeemable warrants exercisable at $5.25 per
share. The Company has other existing warrants outstanding to purchase
an aggregate of 50,000 shares of common stock at prices ranging from
$21.00 to $24.00 per share. There were a total of approximately
1,533,333 warrants outstanding as of June 30, 1999.
NOTE 14 - EMPLOYMENT AGREEMENTS
The Company has entered into agreements for the services of certain of
its key executives. These agreements expire through June 30, 2002 and
provide for approximate aggregate annual payments of $411,000 and an
annual auto allowance of $21,000. Certain of these agreements provide
for payments by the Company in the event of death, disability,
termination, or a change in control of the Company.
F-25
<PAGE>
IAT RESOURCES CORPORATION
(FORMERLY THE PRODUCERS ENTERTAINMENT GROUP LTD.)
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
- -------------------------------------------------------------------------------
NOTE 15 - INCOME TAXES
The provision for (benefit from) federal income taxes at statutory
rates is computed as follows:
<TABLE>
<CAPTION>
1999 1998
--------------- -------------
<S> <C> <C>
Provision for (benefit from) income taxes at statutory
34% rate $ (1,151,000) $ (480,051)
Tax effect (benefit) of
Change in valuation allowance 1,348,000 521,240
State income tax deduction, net of federal
benefit (197,000) (41,189)
--------------- -------------
TOTAL $ - $ -
=============== =============
</TABLE>
The Company's total deferred tax assets, deferred tax liabilities, and
deferred tax asset valuation allowance at June 30, 1999 were as
follows:
<TABLE>
<S> <C>
Deferred tax asset
State net operating loss carryforward $ 833,000
Federal net operating loss carryforward 6,363,000
-------------
7,196,000
Valuation allowance (7,196,000)
-------------
NET DEFERRED TAX ASSETS $ -
=============
</TABLE>
As of June 30, 1999, the Company had federal and state net operating
loss carryforwards of approximately $18,145,000 and $9,072,000,
respectively, which expire through 2013 and 2004, respectively.
Utilization of the net operating loss carryforwards in any one year may
be limited by, among other things, alternative minimum tax rules and
restrictions caused by changes in the Company's stock ownership
(Internal Revenue Code Section 382). The 1996 ownership changes
resulted in an annual Section 382 net operating loss limitation of
approximately $945,700.
F-26
<PAGE>
IAT RESOURCES CORPORATION
(FORMERLY THE PRODUCERS ENTERTAINMENT GROUP LTD.)
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
- -------------------------------------------------------------------------------
NOTE 16 - COMMITMENTS AND CONTINGENCIES
The Company's office leases provide for minimum annual base rents and
payment of certain defined operating expenses. The leases expire
through June 2002. At June 30, 1999, future minimum annual commitments
under non-cancelable lease obligations are as follows:
<TABLE>
<CAPTION>
Year Ending Capital Operating
June 30, Leases Leases
----------- --------- ---------
<S> <C> <C>
2000 $ 34,942 $ 89,215
--------- ---------
Total minimum lease payments 39,942 $ 89,215
=========
Less amount representing interest 1,684
---------
PRESENT VALUE OF NET MINIMUM LEASE
PAYMENTS $ 33,258
=========
</TABLE>
For capitalized leases, the original contract's present value, net of
depreciation, is included in net fixed assets. The net book value of
fixed assets under capital leases at June 30, 1999 is $50,155.
Depreciation expense for leased fixed assets was $30,865 for the year
ended June 30, 1999.
Rent expense for the years ended June 30, 1999 and 1998 was $269,219
and $450,219, respectively.
The Company is a party to various agreements relating to its properties
that provide for payments to others upon the sale, production, and/or
distribution of the property. Other agreements provide for
participation by others in the net revenues and/or profits from
completed projects.
In the normal course of its business, the Company is subject to various
lawsuits and claims. The Company believes that the final outcomes of
these matters, either individually or in the aggregate, will not have a
material effect on its consolidated financial statements.
F-27
<PAGE>
IAT RESOURCES CORPORATION
(FORMERLY THE PRODUCERS ENTERTAINMENT GROUP LTD.)
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
- -------------------------------------------------------------------------------
NOTE 17 - MAJOR CUSTOMERS
For the year ended June 30, 1999, the Company had sales to one customer
representing approximately 77% of total revenues. For the year ended
June 30, 1998, the Company had sales to three customers representing
approximately 40%, 15%, and 11% of total revenues.
As of June 30, 1999, 70% of the Company's trade receivables was from
one customer. As of June 30, 1998, 73% and 21% of the Company's trade
receivables were from two customers. One of these customers was
acquired by the Company subsequent to the year ended June 30, 1998 (see
Note 1).
NOTE 18 - YEAR 2000 ISSUE
The Company is conducting a comprehensive review of its computer
systems to identify the systems that could be affected by the Year 2000
Issue and is developing an implementation plan to resolve the Issue.
The Issue is whether computer systems will properly recognize
date-sensitive information when the year changes to 2000. Systems that
do not properly recognize such information could generate erroneous
data or cause a system to fail. The Company is dependent on computer
processing in the conduct of its business activities.
Based on the review of the computer systems, management does not
believe the cost of implementation will be material to the Company's
financial position and results of operations.
F-28
<PAGE>
IAT RESOURCES CORPORATION
(FORMERLY THE PRODUCERS ENTERTAINMENT GROUP LTD.)
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
- -------------------------------------------------------------------------------
NOTE 19 - SUBSEQUENT EVENTS
On September 23, 1999, the Company entered into a merger agreement with
Infolocity, Inc., a privately-held Internet company. Through its
proprietary search technology, Infolocity, Inc. assists publicly traded
companies in minimizing the impact of negative or false information
posted on the Internet. The terms of the merger include a tax-free
exchange of the Company's common stock for 100% of the issued and
outstanding stock of Infolocity, Inc. As a result of the merger,
Infolocity, Inc. will be a wholly-owned subsidiary of the Company. In
addition to the merger, the Company entered into a Bridge Loan
Promissory Note for $2,000,000 due from Infolocity, Inc. for advances
given by the Company, of which $900,000 has been advanced as of
September 30, 1999. The remaining advance will be given in October and
November 1999. The note shall accrue interest at 7% per annum and shall
be payable quarterly, commencing on November 30, 1999. The loan is
guaranteed by the owners of Infolocity, Inc. One of the conditions of
this merger is that the Company must maintain its NASDAQ listing. At
June 30, 1999, the Company is not in compliance with NASDAQ's listing
requirements.
In August 1999, the Company entered into a $4,000,000 private placement
agreement of 6% convertible debentures on a best effort basis. To date,
the Company has received $1,350,000.
F-29
<PAGE>
EXHIBIT 2.5
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "AGREEMENT") is made and
entered into as of September 22, 1999 by and among IAT Resources Corporation, a
Delaware corporation (the "PARENT"), Infolocity Merger Sub, Inc., a Delaware
corporation ("MERGER SUB"), Infolocity, Inc., a California corporation (the
"COMPANY"), James J. Cerna, Jr., an individual ("CERNA"), and Victor Alonso
Holtorf, an individual ("HOLTORF" and, together with Cerna, the "PRINCIPAL
SHAREHOLDERS").
RECITALS
A. The Boards of Directors of the Parent, Merger Sub and the Company
have determined that the merger of Merger Sub with and into the Company on the
terms set forth herein, with the Company surviving as a wholly-owned subsidiary
of the Parent, is advisable and in the best interests of their respective
corporations and stockholders and have approved this Agreement.
B. The parties hereto desire to adopt a plan of reorganization within
the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended
(the "CODE").
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing premises and the
mutual covenants and conditions contained herein, the parties to this Agreement
hereby agree as follows:
1. DEFINITIONS; INTERPRETATION.
1.1 CERTAIN DEFINITIONS. As used in this Agreement, terms defined in
the preamble and recitals hereto shall have the respective meanings specified
therein and the following terms shall have the following meanings:
1.1.1 "ACTION" means any litigation, action, suit, proceeding,
arbitration or claim before any court or Governmental Authority, or any
investigation by any Governmental Authority.
1.1.2 "AFFILIATE" shall mean, with respect to any specified
Person, (i) any other Person who, directly or indirectly, owns or controls,
is under common ownership or control with, or is owned or controlled by, such
specified Person, (ii) any other Person who is a director, officer, manager,
member, partner or trustee of the specified Person or a Person described in
clause (i) of this definition or any spouse or non-adult child (including by
adoption) of the specified Person or any such other Person, (iii) any
relative (other than a spouse or non-adult child (including by adoption)) of
the specified Person or any other Person described in clause (ii) of this
definition who has the same principal address as such person, (iv) any trust
of which the specified Person and/or any one or more of the Persons specified
in clause (i), (ii) or (iii) of this definition has a beneficial interest, or
(v) any Person of which the specified Person and/or any one or more of the
Persons specified in clause (i),(ii) or (iii) of this definition,
individually or in the aggregate, beneficially own
1
<PAGE>
10% or more of any class of voting securities or otherwise have a substantial
beneficial interest. For purposes of this definition, "control" shall have
the meaning for such term set forth in Rule 405 under the Securities Act.
1.1.3 "ANNUAL FINANCIAL STATEMENTS" shall mean the audited
consolidated balance sheet of the Company as at June 30, 1999 and the related
audited consolidated statements of operations, changes in shareholders'
equity and cash flows for the six months then ended, including, without
limitation, the notes and schedules to such financial statements.
1.1.4 "BEST EFFORTS" shall mean the efforts that a prudent
Person desirous of achieving a result would use in similar circumstances to
ensure that the result is achieved as expeditiously as practicable under the
circumstances; PROVIDED, HOWEVER, that an obligation to use Best Efforts
under this Agreement does not require the Person subject to that obligation
to (i) take actions that would result in a material adverse change in the
benefits to such Person under this Agreement or the transactions contemplated
by this Agreement, (ii) make any significant cash payments or (iii) incur any
significant liability or obligation.
1.1.5 "BEST KNOWLEDGE" (i) with respect to the Company shall
mean the actual knowledge of each of the Principal Shareholders and Carlos
Gonzalez, and (ii) with respect to the Parent shall mean the actual knowledge
of each of Irwin Meyer and Arthur Bernstein.
1.1.6 "BRIDGE LOAN PROMISSORY NOTE" shall mean the Bridge Loan
Promissory Note of the Company made to the Parent as holder dated August 26,
1999, which provides for loans by the Parent to the Company in the aggregate
amount of $2,000,000 on the terms and subject to the conditions contained
therein.
1.1.7 "BUSINESS CONDITION" of any Person shall mean the
business, properties, assets, revenues, operations, financial condition,
results of operations, or prospects of such Person.
1.1.8 "BUSINESS DAY" shall mean each Monday, Tuesday, Wednesday,
Thursday and Friday which is not a day on which banking institutions in Los
Angeles, California are authorized or obligated by Law or executive order to
close.
1.1.9 "CERNA EMPLOYMENT AGREEMENT" shall mean that certain
employment agreement between the Company and Cerna in the form of EXHIBIT
1.1.9 attached hereto.
1.1.10 "CGCL" shall mean the General Corporation Law of the
State of California.
1.1.11 "CHARTER DOCUMENTS" shall mean with respect to any
Person, the Articles or Certificate of Incorporation, By-Laws, Articles of
Organization, Operating Agreement or other organizational documents, as
applicable, of such Person.
1.1.12 "CLOSING VALUE OF THE PARENT COMMON STOCK" shall mean the
average per share closing sale price of the Parent Common Stock on the Nasdaq
SmallCap Market for the ten consecutive trading days immediately prior to the
Business Day prior to the Closing Date.
1.1.13 "COMMISSION" shall mean the Securities and Exchange
Commission.
2
<PAGE>
1.1.14 "COMPANY COMMON STOCK" shall mean the common stock, no
par value per share, of the Company.
1.1.15 "COMPANY SERIES A PREFERRED STOCK" shall mean the Series
A Preferred Stock, no par value per share, of the Company.
1.1.16 "COMPANY STOCK" shall mean the Company Common Stock and
the Company Series A Preferred Stock.
1.1.17 "CONDITIONAL GUARANTY" shall mean the Conditional
Guaranty dated as of August , 1999 by the Principal Shareholders to the
Parent.
1.1.18 "CONTRACT" shall mean any written or oral note, bond,
debenture, mortgage, license, agreement, commitment, contract or
understanding.
1.1.19 "DGCL" shall mean the General Corporation Law of the
State of Delaware.
1.1.20 "EQUITY SECURITIES" shall mean (i) with respect to any
Person that is a corporation, the capital stock and/or any Stock Equivalents
of such Person, and (ii) with respect to any Person that is not a
corporation, any and all partnership, limited liability company or other
equity interests and/or any Stock Equivalents of such Person.
1.1.21 "EMPLOYEE PLANS" with respect to any Person shall mean
any plan, arrangement or Contract providing compensation or benefits to, for
or on behalf of employees and/or directors of such Person, including, without
limitation, employment, deferred compensation, retirement or severance
Contracts; plans pursuant to which Equity Securities are issued, including,
without limitation, stock purchase, stock option and stock appreciation
rights plans; bonus, thrift, pension, savings, insurance, profit sharing,
severance, loan guaranty, employee loan or incentive compensation plans or
arrangements; and unemployment benefit, hospitalization or other medical,
life, dental, vision, health care or other insurance plans and policies.
1.1.22 "EXPLOIT" shall mean manufacture, advertise, license,
market, merchandise, promote, publicize, sell, use, supply or distribute, and
"EXPLOITATION" and "EXPLOITED" shall have correlative meanings.
1.1.23 "GAAP" shall mean generally accepted accounting
principles, consistently applied.
1.1.24 "GONZALEZ EMPLOYMENT AGREEMENT" shall mean that certain
employment agreement between the Company and Carlos Gonzalez in the form of
EXHIBIT 1.1.24 attached hereto.
1.1.25 "GOVERNMENTAL AUTHORITY" shall mean any nation or
government, any state or other political subdivision thereof, and any entity
exercising executive, legislative, judicial, regulatory or administrative
functions of or pertaining to government.
3
<PAGE>
1.1.26 "HOLTORF EMPLOYMENT AGREEMENT" shall mean that certain
employment agreement between the Company and Holtorf in the form of
EXHIBIT 1.1.26 attached hereto.
1.1.27 "MERGER SHARES" shall mean 7,250,000 shares of Parent
Common Stock, subject to adjustment as provided in SECTION 2.10.
1.1.28 "LAW" shall mean any federal, state or local statute,
law, rule, regulation, ordinance, order, code, policy or rule of common law,
now or hereafter in effect, and in each case as amended, and any judicial or
administrative interpretation thereof by a Governmental Authority, including,
without limitation, any judicial or administrative order, consent, decree or
judgment; PROVIDED that for purposes of SECTION 4.15 and 4.17, "Laws" shall
be limited to federal and California Laws.
1.1.29 "LIEN" shall mean any liens, options, security interests,
pledges or other encumbrances, proxies, voting trusts, voting agreements,
judgments, charges, escrows, rights of first refusal or first offer,
indentures, claims or transfer restrictions, whether arising by Contract or
operation of law.
1.1.30 "NON-DISCLOSURE AGREEMENTS" shall mean those certain
non-disclosure agreements entered into by the employees of the Company and
the Parent, each in the form of EXHIBIT 1.1.30 attached hereto.
1.1.31 "ORDER" shall mean any Law, rule, regulation, judgment,
decree, injunction or other order (whether temporary, preliminary or
permanent).
1.1.32 "OUTSTANDING COMPANY SHARES" shall mean the sum of the
total number of shares of Company Common Stock and the total number of shares
of Company Series A Preferred Stock issued and outstanding immediately prior
to the Closing.
1.1.33 "PARENT COMMON STOCK" shall mean the common stock, par
value $0.001 per share, of the Parent.
1.1.34 "PARENT SEC REPORTS" shall mean each form, report,
schedule, registration statement and definitive proxy statement filed by the
Parent with the Commission since January 1, 1998.
1.1.35 "PERSON" shall mean an individual or a partnership,
corporation, trust, association, limited liability company, Governmental
Authority or other entity.
1.1.36 "PROXY STATEMENT" shall mean the proxy statement to be
filed by the Parent with the Commission in connection with the Parent
Stockholders Meeting.
1.1.37 "PARENT STOCKHOLDERS MEETING" mean the Parent's special
meeting of stockholders to be held after the mailing of the definitive Proxy
Statement in accordance with SECTION 7.5.2, at which meeting, among other
things, the Parent will seek the Parent Stockholders Approval.
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1.1.38 "PARENT STOCKHOLDERS APPROVAL" shall mean the approval by
the stockholders of the Parent, in accordance with the DGCL and the rules of
the Nasdaq Stock Market, of all matters which are required to be approved by
the Parent's stockholders in connection with the issuance of the Merger
Shares in the Merger and the other transactions contemplated hereby.
1.1.39 "SOFTWARE" shall mean the Company's Maximillian software.
1.1.40 "STOCK EQUIVALENTS" of any Person shall mean options,
warrants, calls, rights, commitments, convertible securities and other
securities or interests pursuant to which the holder, directly or indirectly,
has the right to acquire (with or without additional consideration) capital
stock, partnership interests, membership interests or other equity interests
of such Person.
1.1.41 "SUBSIDIARY" of any Person shall mean any entity of which
securities or other ownership interests having ordinary voting power to elect
a majority of the board of directors or other persons performing similar
functions are owned directly or indirectly by such Person.
1.1.42 "TAX" shall mean any federal, state, local, or foreign
income, gross receipts, license, payroll, employment, excise, severance,
stamp, occupation, premium, windfall profits, environmental (including taxes
under Code section 59A), customs duties, capital stock, franchise, profits,
withholding, social security (or similar), unemployment, disability, real
property, personal property, sales, use, transfer, registration, value added,
alternative or add-on minimum, estimated, or other tax of any kind
whatsoever, including, without limitation, any interest, penalty, or addition
thereto, whether disputed or not.
1.1.43 "TAX LIABILITIES" shall mean all Liabilities related to
Taxes.
1.1.44 "TAX RETURN" shall mean any return, declaration, report,
claim for refund, or information return or statement relating to Taxes,
including any schedule or attachment thereto, and including any amendment
thereof.
1.1.45 "TRANSACTION CONTRACTS" shall mean this Agreement, the
Bridge Loan Promissory Note, the Cerna Employment Agreement, the Gonzalez
Employment Agreement, the Holtorf Employment Agreement, the Conditional
Guaranty, the Non-Competition Agreements, the Non-Disclosure Agreements, the
Rule 145 Affiliate Letters and each other Contract or instrument executed and
delivered by any party hereto in connection with the transactions
contemplated by this Agreement.
1.1.46 "TRANSACTION EXPENSES" of a party hereto shall mean all
costs and expenses incurred by or on behalf of such party in connection with,
arising out of or relating to this Agreement and the transactions
contemplated hereby, including, without limitation, all legal fees and costs,
all broker, finder, investment banker, appraiser and similar fees and costs,
and all costs and expenses of other experts and advisors.
1.1.47 "TRANSFER" shall mean sell, assign, transfer, pledge,
grant a security interest in, or otherwise dispose of, with or without
consideration, and "TRANSFERRED" shall have a correlative meaning.
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1.2 OTHER DEFINITIONS. The following terms shall have the meanings
given the terms in the Sections set forth below:
<TABLE>
<CAPTION>
TERM SECTION
---- -------
<S> <C>
"Acquisition Proposal" 7.4
"Affiliate Letter" 7.7
"California Secretary of State" 2.2
"Certificate" 2.5.4
"Certificate of Merger" 2.2
"Claim" 11.5
"Claim Notice" 11.5
"Closing" 3
"Common Merger Consideration" 2.5.2
"Company Disclosure Schedule" 4
"Company Financial Schedule" 4.6
"Company Indemnified Party" 11.4
"Damages" 11.2
"Delaware Secretary of State" 2.2
"Direct Claim" 11.5
"Effective Time" 2.2
"Executive Committee" 10.2.3
"Indemnified Party" 11.5
"Indemnifying Party" 11.5
"Investor Letter" 7.11
"Letter of Transmittal" 2.6.1
"Liabilities" 4.7
"Listed Securities" 6.15
"Lock-Up Agreements" 8.9
"Material Contracts" 4.11.2
"Merger" 2.1
"Merger Consideration" 2.5.2
"Merger Share Transfer Agreement" 7.12
"Non-Competition Agreements" 8.7
"Parent Disclosure Schedule" 6
"Notices" 14.1
</TABLE>
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<TABLE>
<CAPTION>
TERM SECTION
---- -------
<S> <C>
"Parent Financial Statements" 6.9
"Parent Indemnified Party" 11.2
"Permits" 4.16
"Rule 145 Affiliates" 7.7
"Surviving Corporation" 2.1
"Third Party Claim" 11.5
</TABLE>
1.3 CONSTRUCTION OF CERTAIN TERMS AND PHRASES. Unless the context
otherwise requires, (a) words of any gender include each other gender; (b)
words using the singular or plural number also include the plural or singular
number, respectively; (c) the terms "hereof," "herein," "hereby" and
derivative or similar words refer to this entire Agreement; (d) the term
"Section" refers to the specified Section of this Agreement; (e) the terms
"and" and "or" include the term "and/or" when the context is appropriate; and
(f) the phrase "ordinary course of business" refers to the business and
practice of the Person specified. Whenever this Agreement refers to a number
of days, such number shall refer to calendar days unless Business Days are
specified. All accounting terms used herein and not expressly defined herein
shall have the meanings given to them under GAAP. Whenever this Agreement
refers to an Exhibit or Schedule attached hereto, the Exhibit or Schedule
shall be deemed to be incorporated by reference herein.
2. THE MERGER.
2.1 THE MERGER. Upon the terms and subject to the conditions set forth
in this Agreement, at the Effective Time and in accordance with the DGCL and
the CGCL, Merger Sub shall be merged with and into the Company in accordance
with this Agreement (the "MERGER") and the separate existence of Merger Sub
shall cease. The Company shall be the surviving corporation in the Merger
(hereinafter sometimes referred to as the "SURVIVING Corporation").
2.2 FILINGS; EFFECTIVE TIME OF THE MERGER. On the Closing Date, Merger
Sub and the Company shall cause the Merger to be consummated by executing,
delivering and filing a certificate of merger with the Secretary of State of
the State of Delaware (the "DELAWARE SECRETARY OF STATE") in accordance with
Section 252 of the DGCL and an agreement of merger with the Secretary of
State of the State of California (the "CALIFORNIA SECRETARY OF STATE") in
accordance with Section 1108 of the CGCL. The parties shall on the Closing
Date file such other documents with the Delaware Secretary of State and the
California Secretary of State as may be required by the provisions of the
DGCL and the CGCL and as are necessary to cause the Merger to become
effective. The Merger shall become effective when the certificate of merger,
the agreement of merger and such other necessary documents are so filed with
the Delaware Secretary of State and the California Secretary of State, as
applicable, or at such other time thereafter as provided in the certificate
of merger and the agreement of merger. The time at which the Merger becomes
effective is herein referred to as the "EFFECTIVE TIME."
2.3 EFFECTS OF THE MERGER. The Merger shall have the effects set forth
in the DGCL and the CGCL. Without limiting the generality of the foregoing,
and subject thereto, at the Effective
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Time, all of the properties, rights, privileges, powers and franchises of the
Company and Merger Sub shall vest in the Surviving Corporation, and all
debts, liabilities and duties of the Company and Merger Sub shall become the
debts, liabilities and duties of the Surviving Corporation.
2.4 THE SURVIVING CORPORATION.
2.4.1 ARTICLES OF INCORPORATION. At the Effective Time, the
Articles of Incorporation of the Company, as in effect immediately prior to
the Effective Time, shall be the Articles of Incorporation of the Surviving
Corporation.
2.4.2 BYLAWS. At the Effective Time, the Bylaws of the Company,
as in effect immediately prior to the Effective Time, shall be the Bylaws of
the Surviving Corporation.
2.4.3 DIRECTORS AND OFFICERS. At and after the Effective Time,
until successors are duly elected or appointed and qualified in accordance
with applicable Law or until their earlier death, resignation or removal in
accordance with the Surviving Corporation's Articles of Incorporation and
Bylaws, Cerna, Holtorf, two individuals to be designated by the Parent not
later than two Business Days prior to the Effective Time, and one individual
to be mutually designated by the Parent, Cerna and Holtorf not later than two
Business Days prior to the Effective Time shall be the directors of the
Surviving Corporation. At and after the Effective Time, until successors are
duly elected or appointed and qualified in accordance with applicable Law or
until their earlier death, resignation or removal in accordance with the
Surviving Corporation's Certificate of Incorporation and Bylaws, the officers
of the Company in office immediately prior to the Effective Time shall be the
officers of the Surviving Corporation.
2.5 CONVERSION OF CAPITAL STOCK OF THE MERGER SUB AND THE COMPANY.
2.5.1 At the Effective Time, each issued and outstanding share
of common stock, par value $0.001 per share, of Merger Sub shall be converted
into and become one fully paid and nonassessable share of common stock, par
value $0.001 per share, of the Surviving Corporation.
2.5.2 At the Effective Time, each issued and outstanding share
of Company Common Stock and each issued and outstanding share of Company
Series A Preferred Stock shall be converted into the right to receive that
number of validly issued, fully paid and non-assessable shares of Parent
Common Stock (including any fractional share, subject to SECTION 2.5.3) as is
equal to the Merger Shares divided by the Outstanding Company Shares (the
"MERGER CONSIDERATION").
2.5.3 No fractional shares of Parent Common Stock will be issued
in the Merger, but in lieu thereof, any holder of Company Stock who would
otherwise be issued a fractional share of Parent Common Stock after
aggregating all of the shares of the Parent Common Stock otherwise issuable
to such holder of Company Stock in the Merger, shall be paid cash equal to
the value of such fractional share, based on a per share value of the Parent
Common Stock of $2.05.
2.5.4 As a result of the Merger and without any action on the
part of the holders thereof, at the Effective Time, all shares of Company
Common Stock and Company Series A Preferred Stock shall no longer be
outstanding and shall automatically be cancelled and retired and shall cease
to exist, and each holder of shares of Company Common Stock and Company
Series A Preferred Stock shall thereafter cease to have any rights with
respect to such shares of Company
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Common Stock and Company Series A Preferred Stock, except the right to
receive, without interest, the Common Merger Consideration or the Preferred
Merger Consideration, as applicable, and cash for fractional shares of Parent
Common Stock in accordance with SECTION 2.5.3 upon the surrender of a
certificate that, immediately prior to the Effective Time, represented an
outstanding share or shares of Company Common Stock or Company Series A
Preferred Stock (in each such case, a "CERTIFICATE").
2.5.5 Notwithstanding anything contained in this SECTION 2.5 to
the contrary, each share of Company Stock issued and held in the Company's
treasury immediately prior to the Effective Time, and each share of Company
Stock owned by the Parent or Merger Sub immediately prior to the Effective
Time, shall, by virtue of the Merger, cease to be outstanding and shall be
cancelled and retired and shall cease to exist without payment of any
consideration therefor.
2.6 DELIVERY OF CONSIDERATION.
2.6.1 As soon as reasonably practicable after the Effective
Time, the Parent shall mail to each holder of record of Company Stock
immediately prior to the Effective Time (i) a letter of transmittal (a
"LETTER OF TRANSMITTAL") (which shall specify that delivery shall be
effected, and risk of loss and title to the Certificates shall pass, only
upon delivery of the Certificates to the Parent and shall be in such form and
have such other customary provisions as the Parent may reasonably specify),
and (ii) instructions for use in effecting the surrender of the Certificates
in exchange for the Merger Consideration with respect to the shares of
Company Stock formerly represented thereby.
2.6.2 Upon surrender of a Certificate for cancellation to the
Parent or to any agent or agents as may be appointed by the Parent, together
with a Letter of Transmittal, duly completed and executed, and such other
documents as the Parent or any such agent may reasonably request, the holder
of such Certificate shall be entitled to receive in exchange therefor, (i) a
certificate representing the number of Merger Shares which such holder has
the right to receive pursuant to the provisions of this SECTION 2, and (ii) a
check of the Parent in an amount equal to the cash, if any, which such holder
has the right to receive pursuant to SECTION 2.5.3 (in each case, less the
amount of any required withholding taxes), and the Certificate so surrendered
shall forthwith be cancelled. Until surrendered as contemplated by this
SECTION 2.6.2, each Certificate shall be deemed at any time after the
Effective Time to represent only the right to receive the Merger
Consideration with respect to the shares of Company Stock formerly
represented thereby.
2.7 TERMINATION OF COMPANY STOCK EQUIVALENTS. All Stock Equivalents of
the Company outstanding immediately prior to the Closing shall be terminated
in accordance with their terms and shall be of no further force or effect as
of the Closing Date.
2.8 CLOSING OF TRANSFER BOOKS. At and after the Effective Time,
transfers of the shares of Company Stock outstanding immediately prior to the
Effective Time shall not be made on the stock transfer books of the Company.
2.9 LOST CERTIFICATES. Notwithstanding the provisions of SECTION 2.6,
in the event any Certificate representing Company Stock has been lost, stolen
or destroyed, upon the making of an affidavit of that fact by the Person
claiming such Certificate to be lost, stolen or destroyed and an agreement to
indemnify the Parent against any claim that may be made against it with
respect to
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such Certificate, the Parent will issue in exchange for such lost, stolen or
destroyed Certificate the Merger Consideration into which such Company Stock
would have been converted and any fractional payment due in connection
therewith pursuant to SECTION 2.5.3.
2.10 ADJUSTMENTS TO MERGER SHARES.
2.10.1 If the Closing Value of the Parent Common Stock is less
than $1.75 per share, then, and in such event, that number of shares of
Parent Common Stock (rounded up to the nearest whole share) as is equal to
the amount determined by (i) subtracting the Closing Value of the Parent
Common Stock from $1.93, (ii) multiplying the difference by 7,250,000, and
(iii) dividing the result by the Closing Value of the Parent Common Stock
shall be added to the Merger Shares.
2.10.2 If the Parent purchases any shares of the Company Series A
Preferred Stock pursuant to SECTION 7.13, that number of shares of Parent
Common Stock (rounded up to the nearest whole share) as is equal to the
amount determined by dividing the total cash amount paid by the Parent in
purchasing such shares of Company Series A Preferred Stock by $1.93 shall be
subtracted from the Merger Shares.
3. CLOSING. The Closing of the Merger (the "CLOSING") shall, unless
another date or place is agreed to in writing by the parties, take place at
the offices of Troop Steuber Pasich Reddick & Tobey, LLP, 2029 Century Park
East, 24th Floor, Los Angeles, California 90067 on October 31, 1999 or such
later date as is the fifth Business Day after the satisfaction or waiver of
all conditions precedent to the Merger. The date and time of the Closing is
referred to in this Agreement as the "CLOSING DATE."
4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE PRINCIPAL
SHAREHOLDERS. Except as set forth in the disclosure schedule delivered by the
Company to the Parent concurrently with the execution and delivery of this
Agreement, which schedule shall refer to the relevant Sections of this
Agreement (the "COMPANY DISCLOSURE SCHEDULE"), the Company and the Principal
Shareholders, jointly and severally, represent and warrant to the Parent and
Merger Sub as follows (the representations and warranties contained in this
SECTION 4 being the only representations and warranties of the Company
contained in this Agreement):
4.1 ORGANIZATION, STANDING AND POWER. The Company is a corporation
duly organized, validly existing and in good standing under the laws of the
State of California and has all requisite corporate power and corporate
authority to own, lease and operate its properties and assets and to carry on
its business as now being conducted. True and correct copies of the Charter
Documents of the Company have been delivered to the Parent.
4.2 AUTHORITY; ENFORCEABILITY; EFFECT OF AGREEMENT.
4.2.1 The Company has full corporate power and corporate
authority to enter into, execute and deliver each Transaction Contract to
which it is a party and perform its obligations thereunder. Subject to the
approval of the Company's shareholders, each Transaction Contract to which
the Company is a party has been duly authorized by all necessary corporate
action of the Company. This Agreement has been, and at the Closing each other
Transaction Contract to which the Company is a party will be, duly executed
and delivered by the Company. Assuming each
10
<PAGE>
Transaction Contract to which the Parent or Merger Sub is a party is duly
executed and delivered by Parent and Merger Sub, respectively, this Agreement
constitutes and, at the Closing, each other Transaction Contract to which the
Company is a party will constitute, a valid and legally binding obligation of
the Company, enforceable against the Company in accordance with its terms,
subject to the effect of bankruptcy, insolvency, reorganization, moratorium,
fraudulent conveyance and other similar laws relating to or affecting
creditors' rights generally, or the availability of equitable remedies.
4.2.2 The execution and delivery by the Company of each
Transaction Contract to which it is a party do not, and compliance by the
Company with the provisions of each such Transaction Contract will not, (A)
conflict with or result in a breach or default under the Charter Documents of
the Company or any of the terms, conditions or provisions of any Contract to
which the Company is a party or otherwise bound, or to which any property or
asset of the Company is subject; (B) violate any Law applicable to the
Company; or (C) result in the creation or imposition of any Lien on any asset
of the Company.
4.3 CAPITALIZATION. The authorized capital stock of the Company
consists of 20,000,000 shares of Company Common Stock and 4,000,000 shares of
Company Series A Preferred Stock. The Company Disclosure Schedule lists the
name and the place of residence of each of the holders of the Company's
outstanding Equity Securities and the class, number and material terms of
such Equity Securities held by each such holder (including, without
limitation, all Stock Equivalents) and the consideration provided to the
Company by the holder for such securities. Other than as set forth in the
Company Disclosure Schedule, there are no issued or outstanding Equity
Securities of the Company or any subscription rights (including preemptive
rights), calls or Contracts obligating the Company now or at any time in the
future to issue Equity Securities. All of the outstanding shares of Company
Stock have been duly authorized and validly issued and are fully paid and
non-assessable and were not issued in violation of any preemptive rights or
any Federal or state securities laws.
4.4 SUBSIDIARIES. The Company does not have any direct or indirect
Subsidiaries and does not own of record or beneficially any Equity Securities
of any Person.
4.5 NO CONSENTS REQUIRED. There are no approvals, authorizations,
consents, orders or other actions of, or filings or registrations with, any
Person that are required to be obtained or made by the Company in connection
with the execution of, and the consummation of the transactions contemplated
under, this Agreement, other than the approval of the Company's shareholders
of this Agreement and the transactions contemplated hereby and the filings
with the Delaware Secretary of State and the California Secretary of State
set forth in SECTION 2.2.
4.6 FINANCIAL SCHEDULE. SECTION 4.6 of the Company Disclosure Schedule
(the "COMPANY FINANCIAL SCHEDULE") accurately sets forth the accounts
receivable and the liabilities of the Company as of August 31, 1999.
4.7 LIABILITIES. The Company does not have any obligations or
liabilities (direct or indirect, matured or unmatured, absolute, accrued,
contingent or otherwise) whether or not required by GAAP to be reflected or
reserved against on a balance sheet ("LIABILITIES") other than (a)
Liabilities set forth on the Company Financial Schedule, or (b) Liabilities
incurred in the ordinary
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course of business consistent with past practice since August 31, 1999. None
of the Liabilities described above relates to or has arisen out of a breach
of Contract, breach of warranty, tort or infringement by or against the
Company or any claim or Action involving the Company.
4.8 ABSENCE OF CERTAIN CHANGES AND EVENTS. Since June 30, 1999, the
Company has conducted its business only in the ordinary course of business
consistent with past practice and there has not been any:
4.8.1 material adverse change in the Business Condition of the
Company;
4.8.2 purchase, redemption, retirement or other acquisition by
the Company of any Equity Securities of the Company;
4.8.3 declaration or payment of any dividend or other
distribution by the Company on any of its Equity Securities;
4.8.4 increase by the Company in the compensation payable or to
become payable by the Company to any director, officer or employee of the
Company in excess of $5,000 individually or $15,000 in the aggregate;
4.8.5 payments or distributions to employees, officers or
directors of the Company except such amounts as constitute currently
effective compensation for services rendered, or reimbursement for
reasonable, ordinary and necessary out-of-pocket business expenses;
4.8.6 hiring or termination of any employee who has an annual
salary in excess of $40,000;
4.8.7 discharge of any Liability except in the usual and
ordinary course of business in accordance with past practices, or prepayment
of any Liability or Liabilities which, in the aggregate, exceed $50,000;
4.8.8 Transfer or lease of any assets to, or entry into any
Contract with, any shareholder of the Company or any officer or director of
the Company (other than payment of salaries to officers in the ordinary
course of business and consistent with past practice) or any of their
respective Affiliates;
4.8.9 revaluation of any assets of the Company, including,
without limitation, any write off of any material asset as unusable or
obsolete or for any other reason;
4.8.10 change in accounting methods, principles and practices
employed by the Company;
4.8.11 material change in the conduct or nature of any aspect of
the business of the Company;
4.8.12 casualty, damage, destruction or loss, or interruption of
use of any assets or property (whether covered by insurance or not) in excess
of $50,000 individually or in the
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aggregate or which otherwise has had a material adverse effect on the
Business Condition of the Company;
4.8.13 Transfer or lease of any assets, except for Transfers of
cash applied in the payment of the Company's Liabilities in the ordinary
course of business consistent with past practice;
4.8.14 research and development or capital expenditures by the
Company in an amount which exceeds $50,000 in the aggregate;
4.8.15 borrowing of money other than in the ordinary course of
business consistent with past practice or issuance or sale of any bonds,
debentures, notes or other corporate securities of any class, including
without limitation, those evidencing borrowed money, or prepayment or
acceleration of any payments under any of the foregoing, or otherwise making
of any payments in respect thereof other than in accordance with regularly
scheduled payments;
4.8.16 cancellation, without full payment, of any note, loan or
other obligation owing to the Company;
4.8.17 any amendment or termination of any Contract which would be
a Material Contract if such Contract were in effect as of the date of this
Agreement, other than in the ordinary course of business consistent with past
practice;
4.8.18 issuance or sale of any Equity Securities of the Company; or
4.8.19 without limitation by the enumeration of the foregoing,
entry into any Contract with respect to any of the foregoing or entry into
any material transactions other than in the ordinary course of business
consistent with past practice.
4.9 TITLE TO PROPERTIES; ABSENCE OF ENCUMBRANCES.
4.9.1 The Company Disclosure Schedule contains a correct and
complete list of the real properties leased or occupied by the Company as of
the date hereof. The Company owns no real properties.
4.9.2 The Company enjoys peaceful and undisturbed possession to
the real property covered by all of the leases under which it is operating.
All of such leases are valid, subsisting and in full force and effect, and
the Company is not in breach or default of any such lease.
4.9.3 All material items of tangible personal property owned or
leased by the Company in the ordinary course of its business are in good
operating condition, ordinary wear and tear excepted.
4.9.4 The Company has good and marketable title to or a valid
right to use all its properties and assets, free and clear of any and all
Liens.
4.10 ACCOUNTS RECEIVABLE. The Company Financial Schedule sets
forth a true and complete schedule and description of the accounts receivable
of the Company as of August 31,
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1999, including, without limitation, the names and addresses of the account
debtors, the balance amount and aging as of the date indicated therein. The
accounts receivable, whether reflected on the Company Financial Schedule or
subsequently created, and all books, records and documents relating to such
accounts receivable, are genuine and accurate. All accounts receivable of the
Company, whether reflected on the Company Financial Schedule or subsequently
created: (A) constitute bona fide and valid rights of the Company to collect
payments from other Persons; (B) represent credit extended in a manner
consistent with the Company's trade practices; (C) are not subject to any
defense, counterclaim or offset; and (D) except for reserves for bad debts
set forth in the Company Financial Schedule, are fully collectable within 60
days of the respective dates on which such accounts receivable were billed.
The Company has not sold, assigned, subjected to Liens or otherwise disposed
of any of its accounts receivables.
4.11 MATERIAL CONTRACTS.
4.11.1 The Company Disclosure Schedule identifies each written
Material Contract and summarizes the material terms of each Material Contract
that is not in writing. True and correct copies of each Material Contract,
including, without limitation, all amendments and modifications thereof and
waivers thereunder, have been delivered to the Parent or its counsel. Each
Material Contract is in full force and effect, and is the valid and binding
obligation of each party thereto. The Company has performed all of its
obligations required to be performed by it to date under each Material
Contract, and the Company is not in breach of or default under any Material
Contract, and no event has occurred or circumstance exists which, with notice
or lapse of time or both, would constitute a breach of or default by the
Company under any Material Contract. To the Best Knowledge of the Company,
each party to each Material Contract other than the Company has performed all
of the obligations required to be performed by such party to date under the
Material Contract and is not in breach of or in default under the Material
Contract, and no event has occurred or circumstance exists which, with notice
or lapse of time or both, would constitute a breach of or default by such
party under the Material Contract.
4.11.2 For purposes of this Agreement, "MATERIAL CONTRACTS" shall
mean the following Contracts to which the Company is a party or otherwise
bound:
4.11.2.1 each Contract pursuant to which the Company provides
services to any customer of the Company;
4.11.2.2 employment, management, consulting and other Contracts
with any current or former officer, director, employee or consultant or with
any entity in which any of the foregoing is an owner, officer, director,
employee or consultant;
4.11.2.3 Contracts for the purchase or sale of any materials,
products, services or supplies (i) calling (individually or together with any
related Contracts) for a purchase price or payment by the Company in any one
year of more than $50,000 or (ii) which are not one-time purchase orders and
cannot be canceled or terminated by the Company without liability, premium or
penalty on one month's or less notice;
4.11.2.4 leases, conditional sales Contracts, licenses and other
agreements under which the Company uses any tangible personal property
(including, without limitation, all
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computer and peripheral and other related equipment and devices) to which any
Company security holder or officer or director of the Company or their
respective Affiliates is a party or with respect to which there are remaining
payment obligations which exceed $50,000 in the aggregate;
4.11.2.5 each Contract (1) under which the benefits cannot be
retained upon the consummation of the transactions contemplated by this
Agreement without the written consent or approval of other Person(s), (2)
under which there will be a default as a result of the consummation of the
transactions contemplated by this Agreement unless any Person(s) provide
written consent or approval or (3) which would require the making of any
payment, other than payments as contemplated by this Agreement, to any
employee of the Company or to any other Person as a result of the
consummation of the transactions contemplated herein;
4.11.2.6 Contracts with customers or suppliers for the sharing of
fees, the rebating of charges or other similar arrangements;
4.11.2.7 Contracts relating to either (i) the acquisition by the
Company of any operating business or substantially all of the assets of a
third party or (ii) the purchase or Transfer of any tangible or intangible
assets of the Company other than in the ordinary and usual course of business;
4.11.2.8 Contracts containing covenants or restrictions limiting
in any way the freedom of the Company to compete in any line of business or
with any Person in any geographical area or for any period of time;
4.11.2.9 Contracts requiring the payment to any Person of an
override or similar commission or royalty or fee;
4.11.2.10 guarantees, performance bid or completion bonds, or
other Contracts of suretyship or indemnification;
4.11.2.11 trade secret, confidentiality or similar Contracts;
4.11.2.12 joint venture, operating, shareholder and partnership
Contracts;
4.11.2.13 loan agreements, notes, security agreements, mortgages,
debentures, indentures, factoring agreements or letters of credit;
4.11.2.14 sales representative, distribution, franchise,
advertising and similar Contracts;
4.11.2.15 license Contracts;
4.11.2.16 each Contract providing the Company the right to use or
Exploit the intellectual property of any Person; and
4.11.2.17 service Contracts affecting the Company's assets where
the service charge is in excess of $50,000 in the aggregate or is not
terminable on 30 days or less notice with a payment of no more than $5,000.
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4.12 SOFTWARE. The Company owns the Software free and clear of any
claims of Cerna, Anthony Cerna or Carlos Gonzalez. The Software is accurately
described in Attachment B and the files containing the complete source code
to the Software are listed in Attachment C to the Assignment of Rights to
Software executed by Anthony Cerna and Carlos Gonzalez on April 10, 1999. To
the Best Knowledge of the Company, the Company's Exploitation of the Software
does not infringe upon the rights of any Person.
4.13 ACTIONS. There is no Action pending or, to the Best Knowledge of
the Company, threatened, in law or in equity, against the Company or any of
its officers or directors with respect to or affecting the Business Condition
of the Company or related to the consummation of the transactions
contemplated hereby. To the Best Knowledge of the Company, there are no facts
which, if known by a potential claimant or Governmental Authority, would be
reasonably likely to give rise to a Claim which, if asserted or conducted
with results unfavorable to the Company, would have a material adverse effect
on the Business Condition of the Company or on the consummation of the
transactions contemplated hereby. The Company is not a party to, or bound by,
any decree, order or arbitration award (or Contract entered into in any
administrative, judicial or arbitration proceeding with any Governmental
Authority) with respect to or affecting its Business Condition.
4.14 BROKERS. The Company has not retained or otherwise engaged or
employed any broker, finder or any other Person, or paid or agreed to pay any
fee or commission to any agent, broker, finder or other Person, for or on
account of acting as a finder or broker in connection with this Agreement or
the transactions contemplated hereby.
4.15 COMPLIANCE WITH APPLICABLE LAW. To the Best Knowledge of the
Company, the Company has complied and is in compliance with all applicable
Laws. No investigation by any Governmental Authority of any alleged violation
or noncompliance with any Law is pending or, to the Best Knowledge of the
Company, threatened.
4.16 PERMITS. The Company Disclosure Schedule lists all federal, state,
local and foreign governmental franchises, licenses, approvals,
authorizations and permits ("PERMITS") issued by any Governmental Authority
to the Company. To the Best Knowledge of the Company, each of such Permits is
in full force and effect. The Company has all Permits and other rights that
are required in order to conduct its business as presently conducted. No
violation of any of such Permits has occurred and no Action is pending or, to
the Best Knowledge of the Company, threatened to revoke or restrict any of
such Permits.
4.17 EMPLOYEES. With respect to employees of the Company:
4.17.1 To the Best Knowledge of the Company, the Company is and
has been in compliance with all applicable Laws respecting employment and
employment practices, terms and conditions of employment and wages and hours,
including, without limitation, any such Laws respecting employment
discrimination, sexual harassment, occupational safety and health,
immigration status, and unfair labor practices. There are no pending or, to
the Best Knowledge of the Company, threatened unfair labor practice charges
or employee grievance charges.
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4.17.2 There is no request for union representation, labor
strike, dispute, slowdown or stoppage pending or, to the Best Knowledge of
the Company, threatened against or directly affecting the Company.
4.17.3 At the Closing Date, the Company shall have no Liabilities
to any of its past or current employees or any Persons who have provided
consulting, advisory or similar services to the Company, other than
liabilities reflected, reserved against or otherwise disclosed in the Company
Financial Schedule.
4.17.4 No grievance or arbitration proceeding arising out of or
under collective bargaining agreements to which the Company is a party or
otherwise bound is pending and no claims therefor exist before any
Governmental Authority.
4.17.5 The employment of each employee of the Company is
terminable at will without cost to the Company except for payment of accrued
salaries or wages and vacation pay.
4.17.6 There is no collective bargaining agreement or other
Contract that is binding on the Company with respect to collective bargaining
with any union or group of employees.
4.17.7 The Company has not experienced any work stoppage.
4.17.8 The Company Disclosure Schedule contains a true and
complete list of all employees who were employed by the Company as of
September 13, 1999, and such list correctly reflects their salaries, wages,
other compensation, dates of employment and positions. To the Best Knowledge
of the Company, no employee of the Company presently intends to terminate his
or her employment with the Company.
4.18 EMPLOYEE BENEFITS. The Company Disclosure Schedule sets forth a
list of all Employee Plans of the Company. All Employee Plans of any kind or
nature maintained by or on behalf of the Company comply with and are and have
been operated in material compliance with all applicable Laws. None of such
plans are subject to regulation under the Employment Retirement Income
Security Act of 1974, as amended.
4.19 TAX MATTERS.
4.19.1 The Company has filed all Tax Returns that it has been
required to file. All such Tax Returns were correct and complete in all
respects. All Taxes owed by the Company (whether or not shown on any Tax
Return) have been paid. No claim has ever been made by a Governmental
Authority in a jurisdiction where the Company does not file Tax Returns that
it is or may be subject to taxation by that jurisdiction. There are no Liens
on any of the assets of the Company that arose in connection with any failure
(or alleged failure) to pay any Tax.
4.19.2 The Company has withheld and paid all Taxes required to
have been withheld and paid in connection with amounts paid or owing to any
employee, independent contractor, creditor, stockholder, or other Person.
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4.19.3 To the Best Knowledge of the Company, no Governmental
Authority is expected to assess any additional Taxes for any period for which
Tax Returns have been filed. There is no pending or, to the Best Knowledge of
the Company, threatened dispute or claim of any Governmental Authority
relating to any Tax Liability of the Company.
4.19.4 The unpaid Taxes of the Company (A) did not, as of August
31, 1999, exceed the reserve for Tax Liability (rather than any reserve for
deferred Taxes established to reflect timing differences between book and Tax
income) set forth in the Company Financial Schedule and (B) do not exceed
that reserve as adjusted for the passage of time from August 31, 1999 through
the Closing Date in accordance with prudent business practice.
4.20 OTHER RELATIONSHIPS. None of the shareholders of the Company or
any of their respective Affiliates has any interest (other than as a
noncontrolling holder of securities of a publicly traded company), either
directly or indirectly, in any Person (whether as an employee, officer,
director, shareholder, partner, member, agent, independent contractor,
security holder, creditor, consultant, or otherwise) that presently (i)
provides any services or designs, produces and/or sells any products or
product lines, or engages in any activity which is the same, similar to or
competitive with any activity or business in which the Company is now
engaged; (ii) is a supplier of, customer of, creditor of, or has an existing
contractual relationship with the Company; or (iii) has any direct or
indirect interest in any asset or property used by the Company or any
property, real or personal, tangible or intangible, that is necessary or
desirable for the conduct of the business of the Company. No current or
former stockholder, director, officer or employee of the Company nor any
Affiliate of any such Person is at present or at any prior time has been,
directly or indirectly through his affiliation with any other Person, a party
to any transaction (other than as an employee) with the Company providing for
the furnishing of services by, or rental of real or personal property from,
or otherwise requiring cash payments to, any such Person.
4.21 CONFLICTS OF INTEREST. No shareholder of the Company nor any
officer, employee, agent or any other Person acting on behalf of the Company
or any shareholder of the Company has, directly or indirectly, given or
agreed to give or receive any money, gift or similar benefit (other than
legal price concessions to customers in the ordinary course of business) to
or from any customer, supplier, employee or agent of a customer or supplier,
or official or employee of any Governmental Authority or other Person who
was, is, or may be in a position to help or hinder the business of the
Company (or assist in connection with any actual or proposed transaction
therewith) which (i) might subject the Company to any Damages in any Action,
(ii) if not given in the past, might have had a material adverse effect on
the Business Condition of the Company or (iii) if not continued in the
future, might have a material adverse effect on the Business Condition of the
Company.
4.22 INSURANCE. The Company has in full force and effect insurance with
respect to its assets and businesses against such casualties and
contingencies and of such types and forms and to such extent as is customary
in the case of Persons engaged in its businesses and in its areas. The
Company Disclosure Letter contains a true and correct list of all insurance
policies maintained by the Company and a general description of such policies.
4.23 SEVERANCE PAYMENTS. The Company is not a party to any Contract and
has no policy providing for severance or termination payments to any officer,
director, consultant or employee.
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4.24 MATERIAL MISSTATEMENTS AND OMISSIONS; PROXY STATEMENT. No
representations and warranties by the Company in this Agreement, or any
exhibit, schedule or certificate furnished by the Company to the Parent
pursuant to this Agreement, contains or will contain any untrue statement of
material fact or omits or will omit to state any material fact necessary to
make the statements made therein, in light of the circumstances under which
they were made, not misleading. The information supplied or to be supplied by
the Company for inclusion in the Parent Proxy Statement, including any
amendments and supplements thereto, will not, at the date mailed to the
Parent's stockholders or at the time of the Parent Meeting or at the
Effective Time, contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading. The information supplied or to be supplied by the
Company for inclusion in the Parent Proxy Statement, including any amendments
and supplements thereto, will not, at the date mailed to the Parent's
stockholders or at the time of the Parent Meeting or at the Effective Time,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
5. ADDITIONAL REPRESENTATIONS AND WARRANTIES OF THE PRINCIPAL
SHAREHOLDERS. Each Principal Shareholder, severally and not jointly,
represents and warrants to the Parent and Merger Sub as follows (the
representations and warranties contained in SECTION 4 and this SECTION 5
being the only representations and warranties of the Principal Shareholders
contained in this Agreement):
5.1 AUTHORITY; ENFORCEABILITY; EFFECT OF AGREEMENT.
5.1.1 Such Principal Shareholder has full power and authority to
enter into, execute and deliver each Transaction Contract to which he is a
party and perform his obligations thereunder. Each Transaction Contract to
which such Principal Shareholder is a party has been duly authorized by all
necessary action of such Principal Shareholder. This Agreement has been, and
at the Closing each other Transaction Contract to which such Principal
Shareholder is a party will be, duly executed and delivered by such Principal
Shareholder. Assuming each Transaction Contract to which the Parent or Merger
Sub is a party is duly executed and delivered by the Parent or Merger Sub,
this Agreement constitutes and, at the Closing, each other Transaction
Contract to which such Principal Shareholder is a party will constitute, a
valid and legally binding obligation of such Principal Shareholder,
enforceable against such Principal Shareholder in accordance with its terms,
subject to the effect of bankruptcy, insolvency, reorganization, moratorium,
fraudulent conveyance and other similar laws relating to or affecting
creditors' rights generally, or the availability of equitable remedies.
5.1.2 The execution and delivery by such Principal Shareholder
of each Transaction Contract to which such Principal Shareholder is a party
do not, and compliance by such Principal Shareholder with the provisions of
each such Transaction Contract will not, (A) conflict with or result in a
breach or default under any of the terms, conditions or provisions of any
Contract to which such Principal Shareholder is a party or otherwise bound,
or to which any property or asset of such Principal Shareholder is subject;
(B) violate any Law applicable to such Principal Shareholder; or (C) result
in the creation or imposition of any Lien on any asset of such Principal
Shareholder.
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5.2 THE COMPANY STOCK. Such Principal Shareholder owns the shares of
Company Stock set forth opposite his name in the Company Disclosure Letter,
free and clear of all Liens. Such Principal Shareholder is not the beneficial
owner (as determined pursuant to Rule 13d-3 of the Exchange Act) of any
Company Stock except as set forth in SECTION 4.3 of the Company Disclosure
Schedule. Such Principal Shareholder has not Transferred any shares of
Company Stock.
5.3 BROKERS. Such Principal Shareholder has not retained or otherwise
engaged or employed any broker, finder or any other Person, or paid or agreed
to pay any fee or commission to any agent, broker, finder or other Person,
for or on account of acting as a finder or broker in connection with this
Agreement or the transactions contemplated hereby.
5.4 NO CONSENTS REQUIRED. There are no approvals, authorizations,
consents, orders or other actions of, or filings with, any Person that are
required to be obtained or made by such Principal Shareholder in connection
with the execution of, and the consummation of the transactions contemplated
under, this Agreement.
5.5 ENTIRELY FOR OWN ACCOUNT. The Merger Shares to be received by such
Principal Shareholder pursuant to the Merger will be acquired for investment
for such Principal Shareholder's own account, not as a nominee or agent, and
not with a view to the resale or distribution of any part thereof, and such
Principal Shareholder has no present intention of selling, granting any
participation in, or otherwise distributing the same. Such Principal
Shareholder has no Contract with any Person to sell, transfer or grant
participations to such Person or to any third Person with respect to any of
the Merger Shares that such Principal Shareholder will acquire pursuant to
the Merger.
5.6 DISCLOSURE OF INFORMATION. Such Principal Shareholder believes he
has received all the information he considers necessary or appropriate for
deciding whether to acquire the Merger Shares that he is acquiring pursuant
to this Agreement. Such Principal Shareholder has had an opportunity to ask
questions and receive answers from the Parent regarding the Merger Shares
that such Principal Shareholder is acquiring pursuant to the Merger and the
Business Condition of the Parent.
5.7 INVESTMENT EXPERIENCE. Such Principal Shareholder can bear the
economic risk of his investment in the Merger Shares that he is acquiring
pursuant to the Merger, and has such knowledge and experience in financial or
business matters that he is capable of evaluating the merits and risks of the
investment in the Merger Shares that he is acquiring pursuant to this
Agreement.
5.8 RESTRICTED SECURITIES. Such Principal Shareholder understands that
the Merger Shares that he is acquiring pursuant to this Agreement are
characterized as "restricted securities" under the federal securities laws
inasmuch as they are being acquired from the Parent in a transaction not
involving a public offering and that under such laws and applicable
regulations such Merger Shares may be resold without registration under the
Securities Act only in certain limited circumstances. Such Principal
Shareholder represents that he is familiar with Rule 144 under the Securities
Act, as presently in effect, and understands the resale limitations imposed
thereby and by the Securities Act.
6. REPRESENTATIONS AND WARRANTIES OF THE PARENT. Except as set forth in
the disclosure schedule delivered by the Parent to the Company and the
Principal Shareholders concurrently with
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the execution and delivery of this Agreement, which schedule shall refer to
the relevant Sections of this Agreement (the "PARENT DISCLOSURE SCHEDULE"),
the Parent hereby represents and warrants to the Company and the Principal
Shareholders as follows (the representations and warranties contained in this
SECTION 6 being the only representations and warranties of the Parent and
Merger Sub contained in this Agreement):
6.1 ORGANIZATION, STANDING AND POWER. Each of the Parent and its
Subsidiaries is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation and has all
requisite corporate power and authority to own, lease and operate its
properties and assets and to carry on its business as now being conducted.
Each of the Parent and its Subsidiaries is duly qualified or licensed as a
foreign corporation and is in good standing in each jurisdiction where the
nature of its properties owned or held under lease or the nature of the
business conducted by it make such qualification necessary.
6.2 AUTHORITY; ENFORCEABILITY; EFFECT OF AGREEMENT.
6.2.1 Each of the Parent and Merger Sub has full corporate power
and corporate authority to enter into, execute and deliver each Transaction
Contract to which it is a party and perform its obligations thereunder.
Subject to the Parent Stockholders Approval, each Transaction Contract to
which the Parent or Merger Sub is a party has been duly authorized by all
necessary corporate action of the Parent or Merger Sub, respectively. This
Agreement has been, and at the Closing each other Transaction Contract to
which the Parent or Merger Sub is a party will be, duly executed and
delivered by the Parent or Merger Sub, respectively. Assuming each
Transaction Contract to which the Company or any Principal Shareholder is a
party is duly executed and delivered by the Company or such Principal
Shareholder to the extent they are parties thereto, this Agreement
constitutes and, at the Closing, each other Transaction Contract to which the
Parent or Merger Sub is a party will constitute, a valid and legally binding
obligation of the Parent or Merger Sub, respectively, enforceable against the
Parent and Merger Sub, respectively, in accordance with its terms, subject to
the effect of bankruptcy, insolvency, reorganization, moratorium, fraudulent
conveyance and other similar laws relating to or affecting creditors' rights
generally, or the availability of equitable remedies.
6.2.2 The execution and delivery by each of the Parent and
Merger Sub of each Transaction Contract to which it is a party do not, and
compliance by each of the Parent and Merger Sub with the provisions of each
such Transaction Contract will not, (A) conflict with or result in a breach
or default under the Charter Documents of the Parent or Merger Sub or any of
the terms, conditions or provisions of any Contract to which the Parent or
Merger Sub is a party or otherwise bound, or to which any property or asset
of the Parent or Merger Sub is subject; (B) violate any Law applicable to the
Parent or Merger Sub; or (C) result in the creation or imposition of any Lien
on any asset of the Parent or Merger Sub.
6.3 CAPITALIZATION. The authorized, issued and outstanding capital
stock of the Parent as of September 20, 1999 is set forth in SECTION 6.3 of
the Parent Disclosure Schedule. Other than as set forth in SECTION 6.3 of the
Parent Disclosure Schedule, as of September 20, 1999 there were no issued or
outstanding shares of the Equity Securities of the Parent or any subscription
rights (including preemptive rights), calls or Contracts obligating the
Parent now or at any time in the future to issue shares of its Equity
Securities. All of the outstanding shares of Parent Stock have
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been duly authorized, validly issued, fully paid and non-assessable and not
issued in violation of any preemptive rights or any Federal or state
securities laws.
6.4 DIRECTORS. The Charter Documents of the Parent authorize a Board
of Directors of the Parent consisting of up to nine members and provide that
each Parent director is elected by the stockholders at each annual meeting of
the stockholders.
6.5 NO CONSENTS REQUIRED. There are no approvals, authorizations,
consents, orders or other actions of, or filings with, any Person that are
required to be obtained or made by either of the Parent or Merger Sub in
connection with the execution of, and the consummation of the transactions
contemplated under, this Agreement.
6.6 VALIDITY OF MERGER SHARES. Upon delivery of the certificates for
the Merger Shares pursuant to the terms of this Agreement, due
countersignature of the certificates by the Parent's transfer agent and
delivery to the Company Shareholders receiving Merger Shares pursuant to this
Agreement, the Merger Shares to be issued by the Parent represented thereby
will be duly authorized and validly issued, fully paid and nonassessable.
6.7 BROKERS. Other than Jeffrey Marcus (whose fee in connection with
the Merger will not exceed $280,000, payable in cash or shares of Parent
Common Stock at the Parent's election), neither the Parent nor Merger Sub has
retained or otherwise engaged or employed any broker, finder or any other
person for or on account of acting as a finder or broker in connection with
this Agreement or the transactions contemplated hereby for which either of
the Parent or Merger Sub could be responsible.
6.8 SEC REPORTS. As of their respective dates, each of the Parent SEC
Reports complied as to form in all material respects with the requirements
applicable thereto and did not contain any 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. Except as disclosed in the Parent SEC
Reports, since March 31, 1999 there has not occurred any change or event
which has resulted in a material adverse effect on the Business Condition of
the Parent and its Subsidiaries taken as a whole.
6.9 FINANCIAL STATEMENTS. The books, accounts and records of the
Parent and its Subsidiaries are and have been maintained at all times in the
Parent's usual, regular and ordinary manner in accordance with GAAP,
consistently applied. The audited consolidated financial statements and
unaudited consolidated interim financial statements of the Parent included in
the Parent SEC Reports (collectively, the "PARENT FINANCIAL STATEMENTS"),
including any appended notes which are an integral part of such statements,
have been prepared in conformity with GAAP applied on a consistent basis
throughout the periods covered thereby, present fairly in all material
respects the consolidated financial position of the Parent as at their
respective dates and the consolidated results of operations and cash flows of
the Parent for the periods covered thereby, subject in the case of the
unaudited interim financial statements to normal recurring year-end
adjustments.
6.10 LIABILITIES. The Parent and its Subsidiaries do not have any
liabilities other than (a) Liabilities provided for or reserved against in
the Parent Financial Statements, (b) Liabilities
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disclosed in the Parent SEC Reports, or (c) Liabilities incurred in the
ordinary course of business consistent with past practice since March 31,
1999. None of the Liabilities described above relates to or has arisen out of
a breach of Contract, breach of warranty, tort or infringement by or against
the Company or any claim or Action involving the Company.
6.11 ACTIONS. There is no Action pending or, to the Best Knowledge of
the Parent, threatened, in law or in equity, against the Parent, any of its
Subsidiaries or any of their respective officers or directors with respect to
or affecting the Business Condition of the Parent or its Subsidiaries or
related to the consummation of the transactions contemplated hereby. To the
Best Knowledge of the Parent, there are no facts which, if known by a
potential claimant or Governmental Authority, would be reasonably likely to
give rise to a Claim which, if asserted or conducted with results unfavorable
to the Parent or its Subsidiaries, would have a material adverse effect on
the Business Condition of the Parent or its Subsidiaries, taken as a whole,
or on the consummation of the transactions contemplated hereby. None of the
Parent and its Subsidiaries is a party to, or bound by, any decree, order or
arbitration award (or Contract entered into in any administrative, judicial
or arbitration proceeding with any Governmental Authority) with respect to or
affecting its Business Condition.
6.12 COMPLIANCE WITH APPLICABLE LAW. To the Best Knowledge of the
Parent, the Parent and each of its Subsidiaries has complied and is in
compliance with all applicable Laws. No investigation by any Governmental
Authority of any alleged violation or noncompliance with any Law is pending
or, to the Best Knowledge of the Parent, threatened against the Parent or any
of its Subsidiaries.
6.13 PERMITS. To the Best Knowledge of the Parent, each Permit issued
by any Governmental Authority to the Parent or any of its Subsidiaries is in
full force and effect. The Parent and its Subsidiaries have all Permits and
other rights that are required in order to conduct their business as
presently conducted. No violation of any of such Permits has occurred and no
Action is pending or, to the Best Knowledge of the Parent, threatened to
revoke or restrict any of such Permits.
6.14 TAX MATTERS.
6.14.1 The Parent and its Subsidiaries have filed all Tax Returns
that each of them has been required to file. All such Tax Returns were
correct and complete in all respects. All Taxes owed by the Parent and its
Subsidiaries (whether or not shown on any Tax Return) have been paid. No
claim has ever been made by a Governmental Authority in a jurisdiction where
the Parent or its Subsidiaries do not file Tax Returns that any of them is or
may be subject to taxation by that jurisdiction. There are no Liens on any of
the assets of the Parent or any of its Subsidiaries that arose in connection
with any failure (or alleged failure) to pay any Tax.
6.14.2 Each of the Parent and its Subsidiaries has withheld and
paid all Taxes required to have been withheld and paid in connection with
amounts paid or owing to any employee, independent contractor, creditor,
stockholder, or other Person.
6.14.3 To the Best Knowledge of the Parent, no Governmental
Authority is expected to assess any additional Taxes for any period for which
Tax Returns have been filed.
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There is no pending or, to the Best Knowledge of the Parent, threatened
dispute or claim of any Governmental Authority relating to any Tax Liability
of the Parent or any of its Subsidiaries.
6.14.4 The unpaid Taxes of the Parent and its Subsidiaries (A)
did not, as of the most recent fiscal month end, exceed the reserve for Tax
Liability (rather than any reserve for deferred Taxes established to reflect
timing differences between book and Tax income) set forth in the Parent
Financial Statements (rather than in any notes thereto) and (B) do not exceed
that reserve as adjusted for the passage of time from March 31, 1999 through
the Closing Date in accordance with the past custom and practice of the
Parent in filing its Tax Returns.
6.15 LISTING ON THE NASDAQ SMALLCAP MARKET. The Parent Common Stock,
the Parent's Series A Convertible Preferred Stock and the Parent's Warrants
exercisable for an aggregate of 5,100,000 shares of Parent Common Stock
(collectively, the "LISTED SECURITIES") are listed for trading on the Nasdaq
SmallCap Market. To the Best Knowledge of the Parent, there are no pending or
threatened proceedings by the Nasdaq Stock Market with respect to the
delisting of the Listed Securities from the Nasdaq SmallCap Market.
6.16 MATERIAL MISSTATEMENTS AND OMISSIONS. No representations and
warranties by the Parent or Merger Sub in this Agreement, or any exhibit,
schedule or certificate furnished by the Parent or Merger Sub to the Company
pursuant to this Agreement, contains or will contain any untrue statement of
material fact or omits or will omit to state any material fact necessary to
make the statements made therein, in light of the circumstances under which
they were made, not misleading.
7. COVENANTS PRIOR TO THE CLOSING DATE.
7.1 CONDUCT OF BUSINESS BY THE COMPANY. Prior to the Closing, except
as contemplated by this Agreement or with the prior written consent of the
Parent, the Company agrees, and the Principal Shareholders agree to cause the
Company:
7.1.1 to conduct its operations according to its ordinary and
usual course of business;
7.1.2 not to Transfer any assets, other than asset Transfers
according to its ordinary and usual course of business;
7.1.3 not to propose, adopt or authorize any amendment to the
Charter Documents of the Company except as provided for in this Agreement
(including, without limitation, the expansion of the Company's Board of
Directors to five members to allow for the composition of the Company's Board
of Directors at the Effective Time as provided in SECTION 2.4.3);
7.1.4 to promptly notify the Parent of any material change in
the Company's business, properties, assets or liabilities or in the operation
of its properties and of any governmental complaints, investigations or
hearings (or communications indicating that the same may be contemplated) or
the breach in any material respect of any representation or warranty of the
Company contained herein;
7.1.5 not to adopt, or amend to increase compensation or
benefits payable
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under, any Benefit Plan, Contract or arrangement for the benefit of employees;
7.1.6 not to (A) except pursuant to the exercise of Stock
Equivalents of the Company existing on the date hereof and disclosed in this
Agreement, authorize, issue, sell, pledge, encumber or agree to authorize,
issue, sell, pledge or encumber any Equity Securities of the Company, (B)
effect any stock split, combination, recapitalization or otherwise change its
capitalization as it existed on the date hereof, (C) grant, confer or award
any Stock Equivalents, or alter any terms of or accelerate the vesting or
exercise date of any outstanding Stock Equivalents, (D) redeem or otherwise
acquire any of its outstanding Equity Securities or make any commitment to
take such action, or (E) declare, set aside or pay any dividend or
distribution payable in cash, Equity Securities or other property with
respect to the Company's Equity Securities;
7.1.7 not to enter into any Material Contract;
7.1.8 not to amend, modify or terminate, or grant any waiver of
any right under, any Material Contract, and not to make any payment under any
Material Contract which is not required to be made strictly in accordance
with the terms of the Material Contract;
7.1.9 to comply with all of its obligations and duties under any
Material Contract and not to create or permit to exist any default or event
of default on behalf of the Company under any Material Contract, or any event
or circumstance which, with lapse of time or notice, or both, would
constitute a default under a Material Contract;
7.1.10 not to commence or settle any Action;
7.1.11 to use its Best Efforts to preserve intact its business
organization and goodwill, keep available the services of its officers and
employees and maintain satisfactory relationships with those Persons having
business relationships with the Company;
7.1.12 to duly comply in all material aspects with all applicable
Laws;
7.1.13 not to (A) acquire any assets, other than in the ordinary
course of business consistent with past practice, (B) dispose of or encumber
any assets other than in the ordinary course of business consistent with past
practice or relinquish, forfeit or waive any right under any Contract, Permit
or other instrument that is material to its business or operations as
presently conducted or proposed to be conducted, (C) incur any indebtedness
for borrowed money, or assume, guarantee or otherwise as an accommodation
become responsible for, the obligations of any other Person, (D) acquire any
Equity Securities of any Person, or (E) enter into any other transaction
other than in the ordinary course of business consistent with past practice,
7.1.14 to maintain all properties necessary for the conduct of
the business of the Company, whether owned or leased, in substantially the
same condition as they now are;
7.1.15 to maintain its books, records and accounts in the usual,
regular and ordinary manner, on a basis consistent with prior periods;
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7.1.16 not to enter into any Contract of any kind or nature with any
Affiliate, or make any payment or other asset Transfer to or for the benefit
of any Affiliate (other than employment compensation in the ordinary course
of business consistent with past practice);
7.1.17 not to enter into any transaction or perform any act which
would make any of the representations, warranties or agreements of the
Company and the Principal Shareholders contained in this Agreement false or
misleading in any material respect if made again immediately after such
transaction or act; and
7.1.18 not to take any affirmative action (including, without
limitation, entering into any Contract) or fail to take any action within its
control that is likely to cause any of the changes or events listed in this
SECTION 7.1 to occur.
7.2 CONDUCT OF BUSINESS BY THE PARENT. Prior to the Closing, except as
contemplated by this Agreement or with the prior written consent of the
Company, the Parent agrees, and agrees to cause each of its Subsidiaries:
7.2.1 to conduct its operations according to its ordinary and usual
course of business;
7.2.2 not to Transfer any assets, other than asset Transfers
according to its ordinary and usual course of business;
7.2.3 to promptly notify the Company of any material change in the
business, properties, assets or liabilities of the Parent and its
Subsidiaries or in the operation of their properties and of any governmental
complaints, investigations or hearings (or communications indicating that the
same may be contemplated) or the breach in any material respect of any
representation or warranty of the Parent contained herein;
7.2.4 not to adopt, or amend to increase compensation or benefits
payable under, any Benefit Plan, Contract or arrangement for the benefit of
existing employees;
7.2.5 not to (A) except pursuant to (1) the exercise or conversion
of Stock Equivalents of the Company existing on the date hereof and disclosed
in this Agreement or (2) issuances of Parent capital stock at a price per
share not less than eighty percent of the closing price per share of the
Parent Common Stock on the Nasdaq SmallCap Market on the trading day prior to
the issuance, which issuances shall be approved by the Parent's Board of
Directors and the proceeds of such issuances shall be used for working
capital and other valid business purposes of the Parent and its Subsidiaries
as determined in good faith by the Parent's Board of Directors, authorize,
issue, sell, pledge, encumber or agree to authorize, issue, sell, pledge or
encumber any Equity Securities of the Company, (B) effect any stock split,
combination or recapitalization of its capital stock as it existed on the
date hereof, (C) redeem or otherwise acquire for cash any of its outstanding
Equity Securities or make any commitment to take such action, or (D) declare,
set aside or pay any dividend or distribution payable in cash, Equity
Securities or other property with respect to the Parent's Equity Securities,
other than regularly scheduled dividend payments on the Parent's preferred
stock;
7.2.6 to comply with all of its obligations and duties under any
Contract and not to create or permit to exist any default or event of default
on behalf of the Parent or any of its
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Subsidiaries under any Contract, or any event or circumstance which, with
lapse of time or notice, or both, would constitute a default under a
Contract, in each case which would have a material adverse effect on the
Business Condition of the Parent and its Subsidiaries taken as a whole;
7.2.7 to use its Best Efforts to preserve intact its business
organization and goodwill, keep available (except for terminations for cause)
the services of its officers and employees and maintain satisfactory
relationships with those Persons having business relationships with the
Parent or any of its subsidiaries;
7.2.8 to duly comply in all material aspects with all applicable
Laws;
7.2.9 to maintain all properties necessary for the conduct of the
business of the Parent and its Subsidiaries, whether owned or leased, in
substantially the same condition as they now are;
7.2.10 to maintain its books, records and accounts in the usual,
regular and ordinary manner, on a basis consistent with prior periods;
7.2.11 not to make any payment or other asset Transfer to or for the
benefit of any Affiliate (other than employment compensation in the ordinary
course of business consistent with past practice);
7.2.12 not to enter into any transaction or perform any act which
would make any of the representations, warranties or agreements of the Parent
contained in this Agreement false or misleading in any material respect if
made again immediately after such transaction or act; and
7.2.13 not to take any affirmative action (including, without
limitation, entering into any Contract) or fail to take any action within its
control that is likely to cause any of the changes or events listed in this
SECTION 7.2 to occur.
7.3 INSPECTION OF RECORDS. Between the date of this Agreement and the
Closing, the Company shall allow the duly authorized officers, attorneys,
accountants and other representatives of the Parent access at all reasonable
times to the records and files, correspondence, audits and properties, as
well as to all information in each case relating to the business and affairs
of the Company.
7.4 ACQUISITION PROPOSALS. From the date hereof through the Effective
Time, the Company agrees and each of the Principal Shareholders severally,
and not jointly, agree (a) that each of them shall, and they shall direct and
use their respective Best Efforts to cause the officers, directors,
employees, agents and representatives of the Company (including, without
limitation, any investment banker, attorney or accountant retained by the
Company) not to, initiate, solicit or encourage, directly or indirectly, any
inquiries or the making or implementation of any proposal or offer
(including, without limitation, any proposal or offer to the shareholders of
the Company) with respect to a merger, acquisition, consolidation or similar
transaction involving, or any purchase of all or any significant portion of
the assets or any Equity Securities of, the Company (any such proposal or
offer being hereinafter referred to as a "ACQUISITION PROPOSAL") or engage in
any negotiations concerning, or provide any confidential information or data
to, or have any discussions with, any person relating to an Acquisition
Proposal, or otherwise facilitate any effort or attempt to make or
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implement an Acquisition Proposal; (b) that each of them will immediately
cease and cause to be terminated any existing activities, discussions or
negotiations with any parties conducted heretofore with respect to any of the
foregoing and will take the necessary steps to inform the individuals or
entities referred to above of the obligations undertaken in this SECTION 7.4;
and (c) that each of them will notify the Parent immediately if any such
inquiries or proposals are received by, any such information is received
from, or any such negotiations or discussions are sought to be initiated or
continued with, the Company.
7.5 SHAREHOLDER MEETINGS.
7.5.1 As promptly as practicable after the date hereof, the
Principal Shareholders shall use their respective Best Efforts to obtain the
written approval of each other holder of Company Stock to this Agreement and
the transactions contemplated hereby.
7.5.2 As promptly as practicable after the date hereof, the Parent
shall prepare and file with the Commission the Proxy Statement. The Proxy
Statement shall contain, among other things, the proposals of the Parent's
Board of Directors to (i) elect Cerna and Holtorf as directors of the Parent
, (ii) issue the Merger Shares in connection with the Merger and (iii)
increase the number of shares of Parent Common Stock available for issuance
under the Parent's 1998 Stock Incentive Plan from 3,000,000 to 4,000,000
shares. The Parent shall use its Best Efforts to file a definitive Proxy
Statement with the Commission as promptly as practicable after such initial
filing, and promptly thereafter the Parent shall mail the definitive Proxy
Statement to the holders of Parent Common Stock. The Company and the Parent
shall, upon request by the other, furnish the other with all information
concerning itself, its Subsidiaries, directors, executive officers and
stockholders and such other matters as may be reasonably necessary or
advisable in connection with the Proxy Statement, or any other statement,
filing, notice or application made by or on behalf of the Company or the
Parent to any third party and/or any Government Authority in connection with
the transactions contemplated by this Agreement. The Parent shall take all
necessary or appropriate action under the DGCL and the Charter Documents of
the Parent to call the Parent Stockholders Meeting, to be held at the
earliest practicable date for the purpose of seeking the Parent Stockholder
Approval. The Board of Directors of the Parent shall recommend that the
stockholders of the Parent vote in favor of the matters that are the subject
of the Parent Stockholder Approval.
7.6 COMPANY EMPLOYMENT OFFERS. As promptly as practicable after the date
hereof, Cerna and Holtorf shall submit to the Parent a written schedule of
proposed salaries, benefits and new stock option terms for each of the
Company's current employees. Upon the approval of such schedule by the
Parent, the Company shall extend new employment offers to all of its current
employees on an "at will" basis at the respective salaries, benefits and new
stock option terms for such employees set forth in the schedule as approved
by the Parent.
7.7 RULE 145 AFFILIATES. Prior to the Effective Time, the Company shall
deliver to the Parent a letter identifying all persons who were, in the
Company's reasonable judgment, at the record date for its shareholders
meeting (or the record date for receipt of a written consent) to approve this
Agreement and the Merger, "affiliates" of the Company for purposes of Rule
145 under the Securities Act ("RULE 145 AFFILIATES"). Each of such Rule 145
Affiliates will deliver to the Parent on or prior to the Effective Time a
written agreement (the "AFFILIATE LETTER") substantially in the form attached
as EXHIBIT 7.7 hereto to the effect that such person will not offer to sell,
sell or
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otherwise dispose of any Merger Shares except pursuant to an effective
registration statement or in compliance with Rule 145, as amended from time
to time, or in a transaction which, in the opinion of legal counsel
reasonably satisfactory to the Parent, is exempt from the registration
requirements of the Securities Act. The Parent shall be entitled to place
legends as specified in such Affiliate Letters on the certificate evidencing
any Merger Shares to be received by such Rule 145 Affiliates pursuant to the
terms of this Agreement, and to issue appropriate stop transfer instructions
to the transfer agent for the Parent Common Stock, consistent with the terms
of such Affiliate Letters.
7.8 REORGANIZATION. From and after the date hereof and until the
Effective Time, none of the Parent, the Company, Merger Sub, the Principal
Shareholders or any of their respective Subsidiaries or other Affiliates
shall knowingly take any action, or knowingly fail to take any action, that
would jeopardize qualification of the Merger as a reorganization with the
meaning of Section 368(a) of the Code. Following the Effective Time, the
Parent shall use its Best Efforts to conduct its business in a manner that
would not jeopardize the characterization of the Merger as a reorganization
within the meaning of Section 368(a) of the Code. Each of the Parent and the
Company shall reflect the Merger on their respective federal income tax
returns as a Section 368(a)(2)(E) reorganization.
7.9 NO TRANSFER OF EQUITY SECURITIES. Each Principal Shareholder agrees
that, prior to the consummation of the Merger, such Principal Shareholder
will not transfer in any way any of the Equity Securities of the Company held
by such Principal Shareholder or any interest therein.
7.10 MERGER TAX MATTERS. The parties hereto agree that none of the
Parent, Merger Sub nor any of their respective Affiliates, nor their
officers, directors, agents, or representatives have made any representation
or warranty with respect to the tax consequences of the Merger for the
shareholders of the Company.
7.11 INVESTOR LETTER. The Company shall use its Best Efforts to obtain
from each of its shareholders an investor letter in a form acceptable to the
Parent and its counsel (an "INVESTOR LETTER") containing representations and
warranties of such shareholders substantially similar to those of the
Principal Shareholders contained in SECTIONS 5.5 through 5.8 inclusive.
7.12 MERGER SHARE TRANSFER AGREEMENTS. The Company shall use its Best
Efforts to obtain from each of its shareholders other than the Principal
Shareholders a Merger Share Transfer Agreement in the form attached as
EXHIBIT 7.12 hereto (a "MERGER SHARE TRANSFER AGREEMENT").
7.13 PURCHASE OF COMPANY SERIES A PREFERRED STOCK. Within five Business
Days from the date hereof, the Principal Shareholders shall deliver to the
Parent a list of the holders of Company Series A Preferred Stock who desire
to receive cash from the Parent for their shares of such stock. The Parent
shall offer to purchase the shares of Company Series A Preferred Stock from
the holders identified in such list for cash equal to $3.60 per share. The
closing of the Parent's purchase of such shares shall occur immediately prior
to the Effective Time of the Merger and shall be subject to the consummation
of the Merger and the execution by the selling shareholders of documentation
containing representations and warranties and other provisions reasonably
acceptable to the Parent.
7.14 PUBLIC ANNOUNCEMENTS. No public announcements or other disclosures
of this Agreement or the transactions contemplated hereby shall be made by
any party without the prior
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written consent of the other parties until the Closing Date; PROVIDED,
HOWEVER, that upon prior notice to the Company, the Parent may make public
disclosures of such information regarding this Agreement and the transactions
contemplated hereby as it deems appropriate under applicable securities Laws
or in connection with obtaining financing contemplated by this Agreement.
7.15 FILINGS; OTHER ACTIONS. Subject to the terms and conditions herein
provided, the Parent, the Company, the Principal Shareholders and Merger Sub
shall: (a) use their respective Best Efforts to cooperate with one another in
(i) determining which filings are required to be made, and which consents,
approvals, permits or authorizations are required to be obtained, prior to
the Effective Time in connection with the execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby and
(ii) timely making all such filings and timely seeking all such consents,
approvals, permits or authorizations; and (b) use their respective Best
Efforts to take, or cause to be taken, all other action and do, or cause to
be done, all other things necessary, proper or appropriate to consummate and
make effective the transactions contemplated by this Agreement. If, at any
time after the Effective Time, any further action is necessary or desirable
to carry out the purpose of this Agreement, the proper officers and directors
of the Parent and the Principal Shareholders shall take all such necessary
action.
7.16 TERMINATION OF LIENS. The Principal Shareholders shall cause all
Liens for the benefit of Cerna encumbering any shares of Company Common Stock
to be terminated prior to the Closing Date.
8. CONDITIONS TO THE OBLIGATIONS OF THE PARENT AND MERGER SUB. The obligation
of the Parent and Merger Sub to consummate the Merger and to take the other
actions required to be taken by the Parent and Merger Sub at the Closing
pursuant to the Transaction Contracts is subject to the satisfaction, at or
prior to the Closing, of each of the following conditions (any of which may
be waived by the Parent in writing, in whole or in part):
8.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties of
each of the Company and the Principal Shareholders set forth in this
Agreement subject to materiality or material adverse effect qualifications
shall be true and correct, and those not so qualified shall be true and
correct in all material respects, as of the Closing Date with the same effect
as though such representations and warranties had been made at and as of the
Closing Date, except to the extent such representations and warranties
expressly relate to an earlier date (in which case such representations and
warranties subject to materiality or material adverse effect qualifications
shall be true and correct, and those not so qualified shall be true and
correct in all material respects, on and as of such earlier date).
8.2 PERFORMANCE. Each of the Company and the Principal Shareholders shall
have performed in all material respects all obligations and complied in all
material respects with all covenants required by any Transaction Contract to
be performed or complied with by any of them on or prior to the Closing Date.
8.3 CONSENTS. All consents, Permits and approvals required, in the
reasonable opinion of counsel for the Parent, as a condition to the lawful
consummation of the Merger and of the transactions contemplated in this
Agreement, or as necessary to avoid a breach of or default or an
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acceleration of a contractual right or payment under any material Contract to
which the Company, the Parent or any of its Subsidiaries is a party, shall
have been obtained.
8.4 CERTIFICATE. The Company and the Principal Shareholders shall have
delivered to the Parent a certificate, dated the Closing Date and executed by
the Company and each Principal Shareholder, certifying that the conditions
specified in SECTIONS 8.1, 8.2 and 8.3 have been satisfied.
8.5 AUDITED FINANCIAL STATEMENTS. The Company shall have delivered to the
Parent the Annual Financial Statements, with the report of the independent
auditors subject to no qualifications and which otherwise shall be in form
and substance satisfactory to the Parent.
8.6 GOVERNMENTAL AND REGULATORY CONSENTS. All filings required to be made
prior to the Effective Time by the Company or the Parent with, and all
consents, approvals, orders, registrations and authorizations required to be
obtained prior to the Effective Time by the Company or the Parent from
Governmental Authorities in connection with the execution and delivery of
this Agreement by the parties hereto and the consummation of the transactions
contemplated hereby by the parties hereto shall have been made or obtained
(as the case may be), except where the failure to have obtained or made such
consent, filing, authorization, order, approval or registration would not
have a material adverse effect on the Business Condition of the Company or
the Business Condition of the Parent and its Subsidiaries taken as a whole.
8.7 NON-COMPETITION AGREEMENTS. At or before the Effective Time, each of
the Principal Shareholders shall have executed and delivered to the Parent a
Non-Competition Agreement (the "NON-COMPETITION AGREEMENTS") substantially in
the form attached hereto as EXHIBIT 8.7.
8.8 NON-DISCLOSURE AGREEMENTS. Each of the Non-Disclosure Agreements
shall have been executed and delivered to the Parent by the employees of the
Company.
8.9 LOCK-UP AGREEMENTS. Prior to the Closing Date, the Parent shall have
received an agreement (each, a "LOCK-UP AGREEMENT" and collectively, the
"LOCK-UP AGREEMENTS") in a form reasonably satisfactory to it executed by
each Principal Shareholder to the effect that each such holder shall not
sell, transfer or otherwise dispose of the Merger Shares received by such
holder for a period ending on the second anniversary of the Closing; PROVIDED
that 50% of such Merger Shares issued to each Principal Shareholder shall be
free of such restriction on the one year anniversary of the Closing;
PROVIDED, FURTHER, that 300,000 of the Merger Shares issuable to Cerna shall
not be subject to such restriction and shall not be covered by Cerna's
Lock-Up Agreement; PROVIDED, FURTHER, that the Lock-Up Agreement with respect
to a Principal Shareholder shall terminate if and when (i) such Principal
Shareholder's employment under the Cerna Employment Agreement (with respect
to Cerna) or the Holtorf Employment Agreement (with respect to Holtorf) is
terminated by the Parent and/or the Surviving Corporation other than for
Cause in accordance with the applicable employment agreement or is
voluntarily terminated by such Principal Shareholder for Good Reason as
defined in the employment agreement or (ii) a Change of Control occurs (as
defined in such Principal Shareholder's employment agreement).
8.10 COMPANY SHAREHOLDERS APPROVAL. Prior to the Effective Time, the
shareholders of the Company shall have approved the Merger in accordance with
SECTION 7.5.1 and the CGCL.
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8.11 PARENT STOCKHOLDERS APPROVAL. Prior to the Effective Time, the
Parent Stockholders Approval shall have been obtained.
8.12 INVESTOR LETTERS. The Parent shall have received Investor Letters
executed by each shareholder of the Company.
8.13 RULE 145 AFFILIATE LETTERS. Each of the Rule 145 Affiliates shall
have executed and delivered to the Parent a Rule 145 Affiliate Letter.
8.14 EMPLOYMENT AGREEMENTS. Prior to the Effective Time, each of Cerna,
Holtorf and Carlos Gonzalez shall have executed and delivered to the Parent
the Cerna Employment Agreement, the Holtorf Employment Agreement and the
Gonzalez Employment Agreement, respectively.
8.15 SHAREHOLDERS AGREEMENTS. All shareholder, voting, registration
rights or other agreements with respect to the Company Stock shall have been
terminated.
8.16 MERGER SHARE TRANSFER AGREEMENTS. The Parent shall have received
Merger Share Transfer Agreements executed by each shareholder of the Company
other than the Principal Shareholders.
8.17 TERMINATION OF LIENS. All Liens for the benefit of Cerna encumbering
any shares of Company Common Stock shall have been terminated.
8.18 AMENDMENT TO ASSIGNMENT OF RIGHTS TO SOFTWARE. Cerna, Anthony Cerna
and Carlos Gonzalez each shall have executed and delivered to the Parent an
Amendment to Assignment of Rights to Software in the form of EXHIBIT 8.18
attached hereto.
8.19 NO ACTIONS. No Action pertaining to the transactions contemplated by
this Agreement or to their consummation shall have been instituted or
threatened on or prior to the Closing Date.
8.20 NO MATERIAL ADVERSE CHANGES. There shall not exist any circumstance
and there shall not have occurred any event which has had or reasonably could
have a material adverse effect on the Business Condition of the Company.
8.21 OPINION LETTER. The Parent shall have received from Capstone Law
Group LLP, counsel to the Company, an opinion letter, dated as of the Closing
Date and addressed to the Parent, in form and substance satisfactory to the
Parent.
9. CONDITIONS TO THE OBLIGATIONS OF THE COMPANY AND THE PRINCIPAL
SHAREHOLDERS. The obligation of the Company to consummate the Merger and to
take the other actions required to be taken by the Company and the Principal
Shareholders at the Closing pursuant to the Transaction Contracts is subject
to the satisfaction, at or prior to the Closing, of each of the following
conditions (any of which may be waived by the Company in writing, in whole or
in part):
9.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties of
each of the Parent and Merger Sub set forth in this Agreement subject to
materiality or material adverse effect qualifications shall be true and
correct, and those not so qualified shall be true and correct in all
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material respects, as of the Closing Date with the same effect as though such
representations and warranties had been made at and as of the Closing Date,
except to the extent such representations and warranties expressly relate to
an earlier date (in which case such representations and warranties subject to
materiality or material adverse effect qualifications shall be true and
correct, and those not so qualified shall be true and correct in all material
respects, on and as of such earlier date).
9.2 PERFORMANCE. Each of the Parent and Merger Sub shall have performed
in all material respects all obligations and complied in all material
respects with all covenants required by any Transaction Contract to be
performed or complied with by any of them on or prior to the Closing Date.
9.3 CERTIFICATE. The Parent and Merger Sub each shall have delivered to the
Company and the Principal Shareholders a certificate, dated the Closing Date and
executed by each of the Parent and Merger Sub, certifying that the conditions
specified in SECTIONS 9.1 and 9.2 have been satisfied and representing and
warranting to the Company and the Principal Shareholders that (i) as of the
Closing Date the Parent is in full compliance with all of the published
requirements of the Nasdaq SmallCap Market for the continued listing of the
Listed Securities on the Nasdaq SmallCap Market; and (ii) if the Parent's
Quarterly Report on Form 10-Q for the three months ended September 30, 1999 (the
"10-Q") has not been filed with the Commission prior to the Closing Date, the
unaudited consolidated financial statements of the Parent as of and for the
three months ended September 30, 1999 included in the draft 10-Q as of the
Closing Date, including any appended notes which are an integral part of such
statements, have been prepared in conformity with GAAP applied on a consistent
basis throughout the periods covered thereby, present fairly in all material
respects the consolidated financial position of the Parent as at their
respective dates and the consolidated results of operations and cash flows of
the Parent for the periods covered thereby, subject to normal recurring year-end
adjustments.
9.4 GOVERNMENTAL AND REGULATORY CONSENTS. All filings required to be made
prior to the Effective Time by the Parent or Merger Sub with, and all
consents, approvals, orders, registrations and authorizations required to be
obtained prior to the Effective Time by the Parent or Merger Sub from
Governmental Authorities in connection with the execution and delivery of
this Agreement by the Parent and Merger Sub and the consummation of the
transactions contemplated hereby by the Parent and Merger Sub shall have been
made or obtained (as the case may be), except where the failure to have
obtained or made such consent, filing, authorization, order, approval or
registration would not have a material adverse effect on the Business
Condition of the Parent and its Subsidiaries taken as a whole.
9.5 PARENT STOCKHOLDERS APPROVAL. Prior to the Effective Time, the Parent
Stockholders Approval shall have been obtained.
9.6 ELECTION OF CERNA AND HOLTORF AS PARENT DIRECTORS. Each of Cerna and
Holtorf shall have been elected as directors of the Parent, subject to the
consummation of the Merger and effective as of the Effective Time.
9.7 NO ACTIONS. No Action pertaining to the transactions contemplated by
this Agreement or to their consummation shall have been instituted or
threatened on or prior to the Closing Date.
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9.8 NO MATERIAL ADVERSE CHANGES. There shall not exist any circumstance
and there shall not have occurred any event which has had or reasonably could
have a material adverse effect on the Business Condition of the Parent and
its Subsidiaries taken as a whole.
9.9 EMPLOYMENT AGREEMENTS. Prior to the Effective Time, the Parent and
Merger Sub shall have executed and delivered to Cerna, Holtorf and Carlos
Gonzalez the Cerna Employment Agreement, the Holtorf Employment Agreement and
the Gonzalez Employment Agreement, respectively.
9.10 NET TANGIBLE ASSETS. The Parent shall have been in compliance with
the published net tangible assets requirement for the continued listing of
the Listed Securities on the Nasdaq SmallCap Market as of a date prior to the
Closing Date at least as recent as September 30, 1999, as supported by the
financial statements of the Company included in the 10-Q, which financial
statements shall have been prepared with the assistance of the accounting
firm of Parks Palmer Business Services Inc. and reviewed by the accounting
firm of Singer Lewak Greenbaum & Goldstein, LLP.
9.11 OPINION LETTER. The Company and the Principal Shareholders shall
have received from Troop Steuber Pasich Reddick & Tobey, LLP, counsel to the
Parent, an opinion letter, dated as of the Closing Date and addressed to the
Company and the Principal Shareholders, in form and substance satisfactory to
the Company and the Principal Shareholders.
10. FURTHER AGREEMENTS OF THE PARTIES.
10.1 CONFIDENTIALITY.
10.1.1 The parties hereto hereby acknowledge and agree that any and
all information which has been disclosed by one to the other, its directors,
partners, members, managers, employees, consultants, agents and shareholders
during the discussions and negotiations leading to the execution of this
Agreement, and all information to be disclosed by one to the other, its
directors, employees, consultants and agents and shareholders during the
period commencing on the date of execution of this Agreement through the
Closing or termination of this Agreement, shall constitute confidential
information and trade secrets of the disclosing party, and as such are
secret, confidential and unique and constitute the exclusive trade secrets
and property of such party. Such information has been made known and
available to the other party and its respective employees, consultants and
agents strictly in connection with the negotiation and execution of this
Agreement and the consummation of the transactions provided for herein. Each
party hereby acknowledges and agrees that any use or disclosure of any such
confidential information or trade secrets, other than pursuant to this
Agreement, would be wrongful and would cause irreparable injury to the other.
Accordingly, each party hereby expressly agrees, for itself and on behalf of
its shareholders, partners, members and directors, if any, and its principal
officers, managers, employees, agents, consultants and representatives, that
it and they will not at any time prior to the Closing or at any time
thereafter, use or disclose, other than in accordance with the terms and
provisions of this Agreement, any of such confidential information or trade
secrets; PROVIDED that any of the parties hereto may use or disclose such
confidential information or secrets of another party without restriction if
such information or secrets (i) were or are available to such party on a
non-confidential basis from a source other than the other party, or (ii) were
or become generally available to the
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public (other than as a result of an impermissible disclosure by such party
or its Affiliates); and PROVIDED, FURTHER, that if a party is required (by
oral question, interrogatories, requests for information or documents,
subpoena or similar process) to disclose any of such information or secrets
of another party, such disclosure be made without liability hereunder
(although notice of such requirement shall be given to the other party so
that, if practicable, the other party may seek a protective order against
such disclosure). Each party acknowledges that, in the event of a violation
by the other of the terms and provisions of this SECTION 10.1, the remedies
at law would not be adequate; and accordingly, in such event (subject to
SECTION 14.6) such party may proceed to protect and enforce its rights under
this SECTION 10.1 by a suit in equity for specific performance and temporary,
preliminary and permanent injunctive relief from violation of any of the
provisions of this SECTION 10.1 from any court of competent jurisdiction
without the necessity of proving the amount of any actual damages to the
party resulting from the breach.
10.1.2 The Company and the Principal Shareholders acknowledge that
the Parent has public reporting obligations under the Exchange Act, and the
Parent intends to arrange for certain financing in connection with this
Agreement. Accordingly, notwithstanding the provisions of SECTION 10.1.1:
10.1.2.1 Upon prior notice to the Company and the Principal
Shareholders, the Parent may make public disclosures of such information
regarding the Company and the Principal Shareholders as it deems appropriate
under applicable securities Laws; and
10.1.2.2 Upon prior notice to the Company and the Principal
Shareholders, the Parent may disclose information regarding the Company and
the Principal Shareholders to Persons from whom the Purchaser seeks financing
in connection with this Agreement and to underwriters, finders and
broker/dealers who assist in locating such investors.
10.2 CORPORATE GOVERNANCE.
10.2.1 At the Effective Time, the Board of Directors of the Parent
shall consist of seven members. As part of the Proxy Statement, the Parent
shall nominate Cerna and Holtorf to the Parent's stockholders for election as
directors at the Parent Stockholders Meeting, subject to the consummation of
the Merger and effective as of the Effective Time. From the Effective Time up
to but not including the second anniversary thereof, the Parent shall
nominate Cerna and Holtorf for election as directors at each meeting or other
action of stockholders at which directors are elected and shall use its Best
Efforts to cause the election of Cerna and Holtorf, including soliciting
proxies in favor of the election of each of them. From the Effective Time up
to but not including the second anniversary thereof, Cerna and Holtorf each
(severally and not jointly) shall vote his shares of capital stock of the
Parent to elect the nominees of the Parent as directors of the Parent at each
meeting or other action of stockholders at which directors are elected.
10.2.2 From the Effective Time up to but not including the second
anniversary thereof, the Parent shall cause the Board of Directors of the
Surviving Corporation to consist of Cerna, Holtorf, two individuals to be
designated by the Parent and one individual to be designated by the Parent,
Cerna and Holtorf.
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10.2.3 On the Closing Date and following each annual meeting of the
stockholders of the Parent during the period from the Effective Time up to
but not including the second anniversary thereof, the Board of Directors of
the Parent shall appoint an Executive Committee (the "EXECUTIVE COMMITTEE")
which shall report to the Board of Directors of the Parent. The
responsibilities of the Executive Committee shall include directing and
administering the day to day operations of both the Parent and the Surviving
Corporation, reviewing and making recommendations to the Parent's Board of
Directors on all potential acquisitions and investments and public and
private financings, and such other responsibilities as the Board of Directors
may delegate consistent with the DGCL. From the Effective Time up to but not
including the second anniversary thereof, the Executive Committee shall
consist of Cerna, Holtorf and two designees of the Parent, one of whom shall
be Irwin Meyer.
10.2.4 Notwithstanding anything to the contrary contained in this
Agreement, each Principal Shareholder agrees that he shall resign from all
positions held as a member (or member of any committee) of the Board of
Directors of the Parent or any of its Subsidiaries if and when his employment
with the Parent and/or the Surviving Corporation under the Cerna Employment
Agreement (with respect to Cerna) or the Holtorf Employment Agreement (with
respect to Holtorf) is terminated by the Parent and/or the Surviving
Corporation for Cause or Disability in accordance with the applicable
employment agreement or is voluntarily terminated by such Principal
Shareholder other than for Good Reason as defined in the employment agreement.
10.3 KEY MAN INSURANCE. Cerna and Holtorf each agrees that the Company
and/or the Surviving Corporation may purchase key man insurance on him in
such amounts as the Board of Directors of the Company and the Parent deem
appropriate.
10.4 DIRECTORS AND OFFICERS LIABILITY INSURANCE. Following the Closing,
each Principal Shareholder shall be named as an insured in the directors and
officers liability insurance policies maintained by the Parent, in such a
manner as to provide the Principal Shareholder the same rights and benefits
as are accorded to the most favorably insured of the Parent's directors.
10.5 REGISTRATION STATEMENT. As soon as reasonably practicable after the
Effective Time, but in no event later than 30 days after the Effective Time,
the Parent shall prepare and file a Registration Statement on Form S-3 or
such other successor form as is then available (the "REGISTRATION STATEMENT")
with the Commission and shall include in such Registration Statement all of
the Merger Shares issued pursuant to the Merger. The Parent shall promptly
pay all registration expenses incurred in connection with the preparation and
filing of the Registration Statement and the Parent shall use its Best
Efforts to register or qualify the shares of Merger Shares covered by the
Registration Statement under such securities or blue sky laws in such
jurisdictions as the Principal Shareholders may reasonably request. The
Parent shall at all times until the third anniversary of the Closing Date use
its Best Efforts to continue to meet the conditions required in order to use
the Registration Statement and to maintain its listing on the Nasdaq SmallCap
Market or, alternatively, list on another national securities exchange.
11. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; INDEMNITY.
11.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations and
warranties made in this Agreement or made in any document delivered pursuant
to this Agreement by or on behalf of
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any party shall survive the execution and delivery of this Agreement and the
Closing, regardless of notice of or any investigation or right of
investigation made prior to or after the date of this Agreement by or on
behalf of any party, and shall terminate and expire two years following the
Closing Date, after which date they shall be of no further force or effect;
PROVIDED that the representations and warranties contained in SECTIONS 4.13,
4.19, 5.2, 6.11 and 6.14 shall terminate and expire upon the expiration of
the statute of limitations therefor.
11.2 INDEMNIFICATION BY THE PRINCIPAL SHAREHOLDERS WITH RESPECT TO THE
COMPANY. The Principal Shareholders shall, jointly and severally, indemnify,
save and hold harmless the Parent, Merger Sub, and each of their respective
officers, directors, employees, agents and Affiliates, and each of their
successors and assigns (individually, a "PARENT INDEMNIFIED PARTY" and
collectively, the "PARENT INDEMNIFIED PARTIES") from and against any and all
costs, losses, claims, liabilities, fines, penalties, damages and expenses
(including, without limitation, interest which may be imposed in connection
therewith and court costs and reasonable fees and disbursements of counsel)
("DAMAGES") incurred in connection with, arising out of, resulting from or
incident to:
11.2.1 any breach of, or any inaccuracy in any of, the
representations or warranties of the Company and the Principal Shareholders
contained in SECTION 4, or any default in any agreements made by the Company
in this Agreement, any exhibit or schedule hereto or any certificate,
instrument or writing delivered in connection herewith;
11.2.2 any failure by the Company prior to the Effective Time to
obtain or maintain in effect any Permit relating to the Company and/or its
business, assets or operations; or
11.2.3 any Action, compromise, settlement, assessment or judgment
arising out of or incidental to any of the matters indemnified against in
this SECTION 11.2.
11.3 INDEMNIFICATION BY EACH PRINCIPAL SHAREHOLDER WITH RESPECT TO SUCH
PRINCIPAL SHAREHOLDER. Each Principal Shareholder shall, severally and not
jointly, indemnify, save and hold harmless the Parent Indemnified Parties
from and against any and all Damages incurred in connection with, arising out
of, resulting from or incident to:
11.3.1 any breach of, or any inaccuracy in any of, the
representations or warranties of such Principal Shareholder contained in
SECTION 5, or any default in any agreements made by such Principal
Shareholder in this Agreement, any exhibit or schedule thereto or any
certificate, instrument or writing delivered in connection herewith; or
11.3.2 any Action, compromise, settlement, assessment or judgment
arising out of or incidental to any of the matters indemnified against in
this SECTION 11.3.
11.4 INDEMNIFICATION BY THE PARENT. The Parent shall indemnify, save and
hold harmless the shareholders of the Company and each of their respective
officers, directors, employees, agents and Affiliates, and each of their
successors and assigns (individually, a "COMPANY INDEMNIFIED PARTY" and
collectively, the "COMPANY INDEMNIFIED PARTIES") from and against any and all
Damages incurred in connection with, arising out of, resulting from or
incident to:
11.4.1 any breach of, or any inaccuracy in any of, the
representations or warranties of the Parent or Merger Sub contained in
SECTION 6, or any default in any agreements made by the
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Parent or Merger Sub in this Agreement, any exhibit or schedule hereto or any
certificate, instrument or writing delivered in connection herewith; or
11.4.2 any Action, compromise, settlement, assessment or judgment
arising out of or incidental to any of the matters indemnified against in
this SECTION 11.4.
11.5 NOTICE OF CLAIM. If a claim for Damages (a "CLAIM") is to be made by
a party entitled to indemnification hereunder (an "INDEMNIFIED PARTY")
against the indemnifying party (the "INDEMNIFYING PARTY"), the Indemnified
Party shall give written notice (a "CLAIM NOTICE") to the Indemnifying Party,
which notice shall specify whether the Claim arises as a result of a claim by
a person against the Indemnified Party (a "THIRD PARTY CLAIM") or whether the
Claim does not so arise (a "DIRECT CLAIM"), and shall also specify (to the
extent that the information is available) the factual basis for the Claim and
the amount of the Damages, if known. If the Claim is a Third Party Claim, the
Indemnified Party shall provide the Claim Notice as soon as practicable after
such party becomes aware of any fact, condition or event which may give rise
to Damages for which indemnification may be sought hereunder. If any Action
is filed against any Indemnified Party, written notice thereof shall be given
to the Indemnifying Party as promptly as practicable (and in any event within
15 calendar days after the service of the citation or summons). The failure
of any Indemnified Party to give timely notice hereunder shall not affect
rights to indemnification hereunder, except to the extent that the
Indemnifying Party has been damaged by such failure.
11.6 DEFENSE OF CLAIMS. With respect to a Third Party Claim, if after
receipt of the Claim Notice the Indemnifying Party acknowledges in writing to
the Indemnified Party that the Indemnifying Party shall be obligated under
the terms of its indemnity hereunder in connection with such Third Party
Claim, the Indemnifying Party shall, at its own cost, risk and expense, (i)
take control of the defense and investigation of such Action, (ii) employ and
engage attorneys of its own choice, but, in any event, reasonably acceptable
to the Indemnified Party, to handle and defend the same unless the named
parties to such action or proceeding (including, without limitation, any
impleaded parties) include both the Indemnifying Party and the Indemnified
Party and the Indemnified Party has been advised in writing by counsel that
there may be one or more legal defenses available to such Indemnified Party
that are different from or additional to those available to the Indemnifying
Party, in which event the Indemnified Party shall be entitled, at the
Indemnifying Party's cost, risk and expense, to engage one firm of counsel
(in addition to appropriate local counsel) of its own choosing, and (iii)
compromise or settle such Action, which compromise or settlement shall be
made only with the written consent of the Indemnified Party, such consent not
to be unreasonably withheld or delayed.
11.6.1 If the Indemnifying Party fails to assume the defense of such
Claim within 15 calendar days after receipt of the Claim Notice, the
Indemnified Party against which such Claim has been asserted will (upon
delivering notice to such effect to the Indemnifying Party) have the right to
undertake, at the Indemnifying Party's cost and expense, the defense,
compromise or settlement of such Claim on behalf of and for the account and
risk of the Indemnifying Party. If the Indemnified Party assumes the defense
of the Claim, the Indemnified Party will keep the Indemnifying Party
reasonably informed of the progress of any such defense, compromise or
settlement. The Indemnifying Party shall be liable for any settlement of any
action effected pursuant to and in accordance with this SECTION 11.6.1 and
for any final judgment (subject to any right of
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appeal) and the Indemnifying Party agrees to indemnify and hold harmless the
Indemnified Party from and against any Damages by reason of such settlement
or judgment.
11.7 NO RIGHT OF CONTRIBUTION. The Principal Shareholders shall have no
right of contribution against the Company or against the Parent or any of
their respective Subsidiaries by reason of or arising from any claim asserted
by an Indemnified Party hereunder.
11.8 LIMITATION ON INDEMNIFICATION OBLIGATIONS. The Parent Indemnified
Parties shall not be entitled to recover under SECTION 11.2 unless the
aggregate amount of indemnifiable Damages incurred by the Parent Indemnified
Parties under SECTION 11.2 exceeds $250,000, at which time any claim for
indemnification may be made only for the excess. The Company Indemnified
Parties shall not be entitled to recover under SECTION 11.4 unless the
aggregate amount of indemnifiable Damages incurred under SECTION 11.4 exceeds
$250,000, at which time any claim for the indemnification may be made only
for the excess. Notwithstanding anything to the contrary herein contained,
the limitations contained in this SECTION 11.8 shall not apply to
indemnification for fraud by an indemnifying party in connection with this
Agreement and the transactions contemplated hereby.
12. TAX MATTERS. The following provisions shall govern the allocation of
responsibility as between the Parent and the Principal Shareholders for
certain tax matters following the Closing Date:
12.1 TAX PERIODS ENDING ON OR BEFORE THE CLOSING DATE. The Parent shall
prepare or cause to be prepared and file or cause to be filed all Tax Returns
for the Company for all periods ending on or prior to the Closing Date, which
are filed after the Closing Date. The Parent shall permit the Principal
Shareholders to review and comment on each such Tax Return described in the
preceding sentence prior to filing. The Principal Shareholders shall
reimburse the Parent for Taxes of the Company with respect to such periods
within fifteen (15) days after payment by the Parent or the Company of such
Taxes to the extent such Taxes are not reflected in the reserve for Tax
Liability (rather than any reserve for deferred Taxes established to reflect
timing differences between book and Tax income) shown on the Current Balance
Sheet.
12.2 TAX PERIODS BEGINNING BEFORE AND ENDING AFTER THE CLOSING DATE. The
Parent shall prepare or cause to be prepared and file or cause to be filed
any Tax Returns of the Company for Tax periods which begin before the Closing
Date and end after the Closing Date. The Parent shall permit the Principal
Shareholders to review and comment on each such Tax Return described in the
preceding sentence prior to filing. The Principal Shareholders shall pay to
the Parent within fifteen (15) days after the date on which Taxes are paid
with respect to such periods an amount equal to the portion of such Taxes
which relates to the portion of such Taxable period ending on the Closing
Date to the extent such Taxes are not reflected in the reserve for Tax
Liability (rather than any reserve for deferred Taxes established to reflect
timing differences between book and Tax income) shown on the Current Balance
Sheet. For purposes of this SECTION 12, in the case of any Taxes that are
imposed on a periodic basis and are payable for a Taxable period that
includes (but does not end on) the Closing Date, the portion of such Tax
which relates to the portion of such Taxable period ending on the Closing
Date shall, in the case of any Taxes other than Taxes based upon or related
to income or receipts, be deemed to be the amount of such Tax for the entire
Taxable period multiplied by a fraction the numerator of which is the number
of days in the Taxable period ending on the Closing Date and the denominator
of which is the number of days in the entire Taxable
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period; and, in the case of any Tax based upon or related to income or
receipts be deemed equal to the amount which would be payable if the relevant
Taxable period ended on the Closing Date. Any credits relating to a Taxable
period that begins before and ends after the Closing Date shall be taken into
account as though the relevant Taxable period ended on the Closing Date. All
determinations necessary to give effect to the foregoing allocations shall be
made in a manner consistent with prior practice of the Company.
12.3 COOPERATION ON TAX MATTERS. The Parent, the Company and the
Principal Shareholders shall cooperate fully, as and to the extent reasonably
requested by the other party, in connection with the filing of Tax Returns
pursuant to this SECTION 12 and any audit, litigation or other proceeding
with respect to Taxes. Such cooperation shall include the retention and (upon
the other party's request) the provision of records and information which are
reasonably relevant to any such audit, litigation or other proceeding and
making employees available on a mutually convenient basis to provide
additional information and explanation of any material provided hereunder.
12.4 CERTAIN TAXES. All transfer, documentary, sales, use, stamp,
registration and other such Taxes and fees (including any penalties and
interest) incurred in connection with this Agreement shall be paid by the
Principal Shareholders when due, and the Principal Shareholders shall, at
their own expense, file all necessary Tax Returns and other documentation
with respect to all such transfer, documentary, sales, use, stamp,
registration and other Taxes and fees, and, if required by applicable Law,
the Parent shall, and shall cause its affiliates to, join in the execution of
any such Tax Returns and other documentation.
13. TERMINATION. This Agreement may be terminated and the Merger abandoned at
any time prior to the Effective Time:
13.1 TERMINATION BY MUTUAL CONSENT. By the mutual agreement, in writing,
of each of the parties to this Agreement.
13.2 TERMINATION BY THE PARENT. By the Parent on behalf of the Parent and
Merger Sub by giving written notice to the Company if:
13.2.1 there has been a material violation or breach by the Company
or any Principal Shareholder of any agreement, covenant, representation or
warranty contained in any Transaction Contract, which violation or breach
shall not have been cured or corrected within 30 days after receipt of notice
thereof;
13.2.2 the Closing does not occur on or prior to December 31, 1999
or such later date as may be agreed to in writing by the parties; or
13.2.3 if the Closing Value of the Parent Common Stock is less than
$1.75 per share, thereby triggering the increase in the number of Merger
Shares set forth in SECTION 2.10.1.
13.3 TERMINATION BY THE COMPANY. By the Company on behalf of the Company
and the Principal Shareholders by giving written notice to the Parent if:
13.3.1 there has been a material violation or breach by the Parent
or Merger Sub of any agreement, covenant, representation or warranty
contained in any Transaction Contract,
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which violation or breach shall not have been cured or corrected within ten
days after receipt of notice thereof; or
13.3.2 the Closing does not occur on or prior to December 31, 1999,
or such later date as may be agreed to in writing by the parties.
13.4 EFFECT OF TERMINATION. In the event of the termination of this
Agreement without the Closing occurring, no party shall have any obligation
or liability to any other party in respect to this Agreement, except for (i)
any material breach of any covenant contained in SECTION 7 occurring prior to
such termination, or (ii) any material breach of or material inaccuracy in
any representation or warranty occurring prior to such termination that is
intentional; and provided that SECTIONS 7.15, 10.1, 14.10 and 14.11 shall
remain in full force and effect.
14. MISCELLANEOUS.
14.1 NOTICES. All notices, requests, demands and other
communications (collectively, "NOTICES") given pursuant to this Agreement
shall be in writing, and shall be delivered by personal service, courier,
facsimile transmission (which must be confirmed) or by United States first
class, registered or certified mail, postage prepaid, to the following
addresses:
14.1.1 if to the Parent or Merger Sub, to:
IAT Resources Corporation
5757 Wilshire Boulevard, PH 1
Los Angeles, California 90036
Facsimile No.: (323) 634-2221
Attn: Mr. Irwin Meyer
with a copy to:
Troop Steuber Pasich Reddick & Tobey, LLP
2029 Century Park East, 24th Floor
Los Angeles, California 90067
Facsimile No.: (310) 728-2316
Attn: Linda Giunta Michaelson, Esq.
14.1.2 if to the Company or Cerna, to:
Infolocity, Inc.
165 Mitchell Avenue, Suite 200
South San Francisco, California 94080
Facsimile No.: (650) 873-0381
Attn: James J. Cerna, Jr.
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with a copy to:
Capstone Law Group LLP
250A Twin Dolphin Drive
Redwood City, California 94065
Facsimile No.: (650) 551-0804
Attn: Andrew Won, Esq.
14.1.3 if to Holtorf, to:
Infolocity, Inc.
165 Mitchell Avenue, Suite 200
South San Francisco, California 94080
Facsimile No.: (650) 873-0381
Attn: Victor Alonso Holtorf
with a copy to:
Capstone Law Group LLP
250A Twin Dolphin Drive
Redwood City, California 94065
Facsimile No.: (650) 551-0804
Attn: Andrew Won, Esq.
Any Notice, other than a Notice sent by registered or certified mail, shall
be effective when received; a Notice sent by registered or certified mail,
postage prepaid return receipt requested, shall be effective on the earlier
of when received or the third day following deposit in the United States
mails. Any party may from time to time change its address for further Notices
hereunder by giving notice to the other parties in the manner prescribed in
this Section.
14.2 ENTIRE AGREEMENT. This Agreement, the other Transaction Contracts
and the exhibits and schedules thereto contain the sole and entire agreement
and understanding of the parties with respect to the entire subject matter of
this Agreement, and any and all prior discussions, negotiations, commitments
and understandings, whether oral or otherwise, related to the subject matter
of this Agreement are hereby merged herein. Nothing in this Agreement,
express or implied, is intended to confer upon any person other than the
parties hereto any rights or remedies under or by way of this Agreement.
14.3 ASSIGNMENT. No party may assign its rights or obligations under this
Agreement, and any attempted or purported assignment or any delegation of any
party's duties or obligations arising under this Agreement to any Person
shall be deemed to be null and void, and shall constitute a material breach
by such party of its duties and obligations under this Agreement. This
Agreement shall inure to the benefit of and be binding upon any successors of
each party by way of merger or consolidation.
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14.4 WAIVER AND AMENDMENT.
14.4.1 At any time prior to the Effective Time, each of the parties
hereto (in the case of the Parent, the Company and Merger Sub, by action
taken or authorized by its Board of Directors) may, to the extent legally
allowed, (i) extend the time for the performance of any of the obligations or
other acts of the other party hereto, (ii) waive any inaccuracies in the
representations and warranties of the other party contained herein or in any
document delivered pursuant hereto and (iii) waive compliance with any of the
agreements or conditions of the other party contained herein. Any agreement
on the part of a party hereto to any such extension or waiver shall be valid
only if set forth in a written instrument signed on behalf of such party, but
such extension or waiver or failure to insist on strict compliance with an
obligation, covenant, agreement or condition shall not operate as a waiver
of, or estoppel with respect to, any subsequent or other failure.
14.4.2 Prior to the Effective Time, any provision of this Agreement
may be amended or modified at any time, by an agreement in writing between
the parties hereto executed in the same manner as this Agreement, PROVIDED
that after the Company Meeting, this Agreement may not be amended if it would
violate the CGCL or reduce the amount or change the form of the consideration
to be received by the Company shareholders in the Merger.
14.5 GOVERNING LAW. This Agreement shall be construed in accordance with
the laws of the State of California without giving effect to the principles
of conflicts of law thereof.
14.6 DISPUTE RESOLUTION. In case of any dispute arising out of this
Agreement or any dealings between any of the parties hereto relating to the
subject matter of this Agreement, the parties shall use their respective Best
Efforts for a period of not less than 30 days to resolve such dispute by
mutual agreement. If the parties fail to resolve such dispute within such
30-day period, the provisions set forth on EXHIBIT 14.6 attached hereto shall
govern the resolution of such dispute.
14.7 SEVERABILITY. Whenever possible each provision of this Agreement
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement shall be or become
prohibited or invalid under applicable law, such provision shall be
ineffective to the extent of such prohibition or invalidity without
invalidating the remainder of such provision or the remaining provisions of
this Agreement.
14.8 CAPTIONS. The various captions of this Agreement are for reference
only and shall not be considered or referred to in resolving questions of
interpretation of this Agreement.
14.9 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all of
which together shall constitute one and the same instrument.
14.10 TRANSACTION EXPENSES. If the Closing occurs, all Transaction
Expenses incurred by each of the parties hereto shall be paid by the Parent.
If the Closing does not occur, all Transaction Expenses incurred by each
party hereto shall be paid by such party.
14.11 COSTS AND ATTORNEYS' FEES. If any Action is instituted to remedy,
prevent or obtain relief from a default in the performance by any party to
this Agreement of its obligations under this
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Agreement, the prevailing party shall recover its reasonable attorneys' fees
incurred in each and every such Action, including, without limitation, any
and all appeals or petitions therefrom.
14.12 RIGHTS CUMULATIVE. No right granted to the parties under this
Agreement on default or breach is intended to be in full or complete
satisfaction of any Damages arising out of such default or breach, and each
and every right under this Agreement, or under any other document or
instrument delivered hereunder, or allowed by law or equity, shall be
cumulative and may be exercised from time to time.
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IN WITNESS WHEREOF, this Agreement and Plan of Merger has been made and
entered into as of the date and year first above written.
IAT RESOURCES CORPORATION,
a Delaware corporation
By: /s/ Irwin Meyer
---------------------------------------
Name: Irwin Meyer
Title: Chief Executive Officer
INFOLOCITY MERGER SUB, INC.,
a Delaware corporation
By: /s/ Arthur Bernstein
---------------------------------------
Name: Arthur Bernstein
Title: Executive Vice-President
INFOLOCITY, INC.,
a California corporation
By: /s/ James J. Cerna, Jr.
---------------------------------------
Name: James J. Cerna, Jr.
Title: Chief Executive Officer
JAMES J. CERNA, JR.
/s/ James J. Cerna, Jr.
----------------------------------------------
VICTOR ALONSO HOLTORF
/s/ Victor Alonso Holtorf
----------------------------------------------
45
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LIST OF EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Exhibit Name
- ----------- ------------
<S> <C>
1.1.9 Cerna Employment Agreement
1.1.24 Gonzalez Employment Agreement
1.1.25 Holtorf Employment Agreement
1.1.30 Non-Disclosure Agreement
7.7 Affiliate Letter
7.12 Merger Share Transfer Agreement
8.7 Non-Competition Agreement
8.18 Amendment to Assignment of Rights to Software
14.6 Dispute Resolution
</TABLE>
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EXHIBIT 4.2
CERTIFICATE OF DESIGNATIONS
OF THE
SERIES B CONVERTIBLE PREFERRED STOCK
OF
THE PRODUCERS ENTERTAINMENT GROUP LTD.
Pursuant to Section 151 of the General Corporation Law
of the State of Delaware
The Producers Entertainment Group Ltd. (the "Company"), a corporation
organized and existing under the General Corporation Law (the "GCL") of the
State of Delaware, DOES HEREBY CERTIFY:
That pursuant to authority conferred upon the Board of Directors (the
"Board") in the Restated Certificate of Incorporation of the Company, and
pursuant to the provisions of Section 151 of the GCL, the Board, by unanimous
written consent dated July 15, 1998, duly adopted resolutions providing for
the designation and issuance of a series of 1,375,662 shares of preferred
stock, $0.001 par value per share, designated "Series B Convertible Preferred
Stock" (the "Series B Stock"). The resolutions of the Board designating the
Series B Stock read as follows:
"RESOLVED that pursuant to the authority expressly granted to and
vested in the Board of Directors of this Company in Article VII of the
Restated Certificate of Incorporation of this Company, a series of preferred
stock of the Company be and is hereby fixed and given the distinctive
designation of "Series B Convertible Preferred Stock" (the "Series B Stock"),
said Series B Stock to consist of 1,375,662 shares with $0.001 par value per
share, and of which the voting powers, preferences and relative
participating, optional or other special rights, and the qualifications,
limitations or restrictions thereof, shall be as follows:
1. DIVIDENDS.
The Series B Stock is not, and shall not be, entitled to receive any
dividends if and when declared by the Board, whether payable in cash,
property or stock.
2. RIGHTS ON LIQUIDATION, DISSOLUTION AND WINDING-UP.
In the event of any liquidation, dissolution or winding up of the
Company, the holders of shares of Series B Stock shall not be entitled to be
paid anything out of the assets of the Company available for distribution to
its stockholders, whether from capital, surplus or earnings.
3. VOTING.
The Series B Stock shall have no voting rights other than as may be
required by law or as set forth below.
4. CONVERSION RIGHTS.
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(a) OPTIONAL CONVERSION OF SERIES B STOCK. Subject to the requisite
approval of the holders of shares of the Company's common stock, $0.001 par
value per share (the "Common Stock") as may be required by applicable laws
and/or listing rules, each share of Series B Stock may, immediately following
such approval, be converted, at the option of the holder in its sole and
absolute discretion, into one share of Common Stock of the Company.
(b) TERMINATION OF RIGHTS. Upon the effective date of the conversion
of shares of Series B Stock and conditioned upon fulfillment of the
obligations set forth below, all rights in respect of the shares being
converted (except the right to receive shares into which such shares are
converted) shall cease and terminate and such shares shall no longer be
deemed outstanding. At any time on or after the effective date of the
conversion of shares of Series B Stock, the holder of any shares so converted
shall be entitled to receive the number of shares of Common Stock resulting
from such conversion, upon delivery to the Company during regular business
hours, at the office of any transfer agent of the Company for the shares
being converted or at such other place as may be designated by the Company,
the certificate or certificates for the shares of Series B Stock to be
converted, duly endorsed or assigned in blank or to the Company (if required
by it), accompanied by written notice stating the name or names (with
address) to be set forth on the certificate or certificates for the shares of
Common Stock to be issued. As promptly as practicable thereafter (but in any
event within five business days), the Company shall issue and deliver to or
upon the written order of such holder, to the place designated by such
holder, a certificate or certificates for the number of shares to which such
holder is entitled as a result of such conversion, and a certificate
representing any shares of Series B Stock which were represented by the
certificate or certificates delivered to the Company in connection with such
conversion but which were not converted. The person or persons whose names
appear on the certificate or certificates for shares to be issued shall each
be deemed to have become a stockholder of record on the effective date of
such conversion unless the transfer books of the Company are closed on that
date, in which event each such holder shall deemed to have become a
stockholder of record on the next succeeding date on which the transfer books
are open.
(c) NOTICE OF CONVERSION. Holders of Series B Stock electing to
convert their shares shall deliver a written notice of such election to the
Company on or prior to the effective date of such conversion. All notices of
conversion required to be given hereunder to the Company by the stockholders
shall set forth the number of shares being converted, the effective date of
such conversion, and shall be delivered by first class, certified mail,
postage prepaid and return receipt requested. Such notice shall be deemed
delivered when deposited in the United States mail.
(d) MANDATORY REDEMPTION. Notwithstanding any other provision set
forth herein, all shares of Series B Stock that have not been converted and
are outstanding on the day after the date that is five years from the date of
issuance of such shares of Series B Stock (the "Unconverted Stock"), shall
automatically be canceled and deemed redeemed back to the Company and the
holder of such shares of Unconverted Stock shall receive, from the Company,
the total of the par value price per share ($0.001) MULTIPLIED BY the
aggregate number of shares of Unconverted Stock.
(e) TRANSFER TAXES. The Company shall pay all documentary, stamp or
other transactional taxes attributable to the issuance or delivery of shares
of Common Stock of the Company upon conversion of any shares of Series B
Stock; provided, however, that the Company shall not be required to pay any
taxes which may be payable in respect of any transfer involved in the
issuance or delivery of any
2
<PAGE>
certificate for such shares in a name other than that of the holder of the
shares of Series B Stock in respect of which such shares are being issued.
(f) RESERVE SHARES. The Company shall reserve, free from preemptive
rights, out of its authorized but unissued shares of Common Stock, solely for
the purpose of effecting the conversion of the shares of Series B Stock,
sufficient shares of Common Stock to provide for the conversion of all
outstanding shares of Series B Stock.
(g) VALIDLY ISSUED SHARES. All shares of Common Stock which may be
issued in connection with the conversion provisions set forth herein will,
upon issuance by the Company, be validly issued, fully paid and
nonassessable, and free from all taxes, liens or charges with respect thereto.
5. ADJUSTMENTS.
(a) STOCK SPLITS AND COMBINATIONS. If the Company at any time or
from time-to-time, fixes a record date for a split, stock dividend or
subdivision of the outstanding shares of Common Stock, then, following such
record date (or the date of such split, stock dividend or subdivision if no
record date is fixed), the Series B Stock shall be appropriately adjusted so
that the number of shares of Common Stock issuable on conversion of each
share of Series B Stock shall be increased in proportion to such increase in
the number of outstanding shares of Common Stock. If the number of shares of
Common Stock outstanding at any time, is decreased by a combination of the
outstanding shares of Common Stock then, following the record date of such
combination, the Series B Stock shall be appropriately adjusted so that the
number of shares of Common Stock issuable on conversion of each share of
Series B Stock shall be decreased in proportion to such decrease in the
number of outstanding shares of Common Stock.
(b) SUCCESSIVE CHANGES. The above provisions of this Section 5 shall
similarly apply to successive subdivisions, combinations or recapitalization
of the Common Stock and successive mergers, consolidations or sales of the
Company or any successor thereof.
6. PREEMPTIVE RIGHTS.
The holders of Series B Stock shall not have any preemptive right to
subscribe for any additional shares of any class of stock of the Company, now
or hereafter authorized, or for any issue of bonds, notes or other securities
convertible into any class of stock of the Company.
7. LIMITATIONS.
(a) So long as any shares of Series B Stock are outstanding, the
Company shall not, without the affirmative vote or the written consent as
provided by law, of the holders of at least a majority of the outstanding
shares of such Series B Stock, voting as a class, change the rights,
preferences, privileges or restrictions with respect to such series in any
material respect prejudicial to the holders thereof.
3
<PAGE>
(b) The provisions of this Section 7 shall not in any way limit the
right and power of the Company to issue bonds, notes, mortgages, debentures
and other obligations, and to incur indebtedness to banks and to other
lenders."
IN WITNESS WHEREOF, the Company has caused this Certificate to be
signed by Irwin Meyer, its Chief Executive Officer, and attested by Arthur
Bernstein, its Secretary, as of the 15th day of July 1998.
The Producers Entertainment Group Ltd.
By: /s/ Irwin Meyer
---------------------------------------
Irwin Meyer
Chief Executive Officer
Attest:
By: /s/ Arthur Bernstein
---------------------------------------
Arthur H. Bernstein
Secretary
4
<PAGE>
CERTIFICATE OF DESIGNATIONS,
PREFERENCES, LIMITATIONS AND RELATIVE RIGHTS
OF SERIES C CONVERTIBLE PREFERRED STOCK
OF
THE PRODUCERS ENTERTAINMENT GROUP LTD.
THE PRODUCERS ENTERTAINMENT GROUP LTD., a corporation organized and
existing under the General Corporation Law of the State of Delaware (the
"Corporation"), does hereby certify that the following resolutions were
adopted by the Board of Directors of the Corporation (the "Board of
Directors") pursuant to authority conferred upon the Board of Directors in
the Restated Certificate of Incorporation and pursuant to the provisions of
Section 151 of the Delaware General Corporation Law:
RESOLVED, that, pursuant to the authority granted to and vested in the
Board of Directors, in accordance with the provisions of the Certificate of
Incorporation (as amended from time to time) of the Corporation, the Board of
Directors hereby creates out of the Corporation's previously authorized
preferred stock, $.001 par value per share, of the Corporation a series of
preferred stock to consist of not more than Three Million (3,000,000) shares,
and the Board of Directors hereby fixes the designation and the powers,
preferences and rights, and the qualifications, limitations or restrictions
of the shares of such series as follows:
1. DESIGNATION. This resolution shall provide for a single series of
convertible preferred stock, the designation of which shall be as follows:
Three Million (3,000,000) shares of convertible preferred stock are hereby
designated "Series C Preferred Stock." The stated value of each share of
Series C Preferred Stock is $.001 (the "Stated Value"). The number of
authorized shares of Series C Preferred Stock may be reduced or increased by
a further resolution duly adopted by the Board of Directors of the
Corporation and by the filing of an amendment to the Corporation's
Certificate of Incorporation pursuant to the provisions of the General
Corporation Law of the State of Delaware stating that such reduction or
increase has been so authorized.
2. VOTING. Except as expressly required by the laws of the State of
Delaware or as set forth herein, the holders of the Series C Preferred Stock
shall have no voting rights. Any corporate action that may require a vote of
the holders of the Series C Preferred Stock as a class shall be deemed to
have been approved by that class upon the affirmative vote by the holders of
a majority of the issued and outstanding Series C Preferred Stock unless a
higher voting requirement is imposed by the Delaware General Corporation Law.
If any corporate action shall require a vote of the holders of the Series C
Preferred Stock other than as a class, the Series C Preferred Stock shall
vote with the Corporation's common stock, $.001 par value per share (the
"Common Stock") as if the Series C Preferred Stock had been fully converted
three (3) business days prior to the date of the vote.
-1-
<PAGE>
3. DIVIDENDS.
3.1 RATE. Holders of Series C Preferred Stock shall be entitled to
receive, out of any funds of the Corporation legally available for that
purpose, non-cumulative dividends from the date of issuance at the rate of 8%
per year per share of Preferred Stock, payable quarterly (pro-rated for
partial quarters) in arrears in cash, or, at the option of the Corporation,
in shares of its Free-Trading Common Stock (as defined herein) at the
applicable Conversion Rate (as defined in Section 5.2 below), on the first
day of April, July, October and January of each year commencing July 1, 1999
(each such date being hereinafter individually referred to as the "Dividend
Payment Date" and collectively as the "Dividend Payment Dates"); PROVIDED,
HOWEVER, that such dividends will only be paid to holders of Series C
Preferred Stock in the event the Corporation has earnings in any fiscal year
greater than $1.0 million. Notwithstanding the preceding sentence, should the
Corporation in its discretion determine to pay said dividends in shares of
Free Trading Common Stock, then all unpaid dividends shall be paid at the
time of each conversion of the Series C Preferred Stock, such that upon each
conversion of the Series C Preferred Stock by the holder thereof, the
Corporation shall pay all unpaid dividends owed as of the date of such
conversion. Each such dividend shall be paid to the holders of record of the
Series C Preferred Stock as they appear on the books of the Corporation on
the record date which shall be not less than 30 days prior to the related
Dividend Payment Date. Dividends on the Series C Preferred Stock shall be
declared and paid to the extent the Corporation is legally able to do so and
shall be cumulative to the extent not declared and paid. Holders of Series C
Preferred Stock shall not be entitled to any dividends, whether payable in
cash, property or stock, in excess of full dividends as herein provided on
the Series C Preferred Stock. "Free-Trading Common Stock" shall mean shares
of Common Stock that are either "restricted securities" as defined in Rule
144 under the Securities Act of 1933 (the "Securities Act"), but the resales
of such shares have been registered under a registration statement filed with
the United States Securities and Exchange Commission or are otherwise freely
tradable without restriction.
3.2 DIVIDENDS ON COMMON STOCK. No dividends (other than those
payable solely in Common Stock) shall be paid with respect to the Common
Stock during any fiscal year of the Corporation unless all unpaid dividends
and the quarterly dividend on the shares of Series C Preferred Stock for the
then current dividend period shall have been declared and a sum sufficient
for the payment thereof set apart. No shares of Common Stock shall be
purchased, redeemed or acquired by the Corporation, and no funds shall be
paid into or set aside or made available for a sinking fund for the purchase,
redemption or acquisition thereof except (A) in transactions aggregating not
more than $100,000.00 per year, (B) in transactions resulting from a legal
obligation of the Corporation to redeem, purchase or otherwise acquire its
securities arising prior to the date hereof, or (C) pursuant to Section 5.1
herein.
4. REDEMPTION. Except as provided in Section 3.2 herein, the Series C
Preferred Stock shall not be redeemable at any time prior to January 1, 2004.
Thereafter, the Corporation, on the sole authority of its Board of Directors,
may, at its option and at any time prior to notice of conversion of the
Series C Preferred Stock by the holder thereof as hereinafter provided,
redeem all or any part of the Series C Preferred Stock at the time issued and
outstanding for an amount in cash equal to 110% of the Stated Value per share
plus any unpaid dividends. Except
-2-
<PAGE>
as provided in Section 3.2 herein, if less than all the Series C Preferred
Stock are to be redeemed, then such redemption shall be pro rata based on the
number of Series C Preferred Stock owned of record by each Preferred
Shareholder. Written notice of redemption stating the date and place of
redemption and the amount of the redemption price shall be mailed by the
Corporation not less than 30 days nor more than 60 days prior to the
redemption date to the record holders of the shares to be redeemed directed
to their last known address as shown by the Corporation's records. If notice
of redemption is given as provided above and if on the redemption date the
Corporation has set apart in trust for the purpose sufficient funds for such
redemption, then from and after the redemption date, notwithstanding that any
certificate for such shares has not been surrendered for cancellation, the
Series C Preferred Stock called for redemption shall no longer be deemed to
be outstanding and all rights with respect to such shares shall forthwith
cease and terminate, except only the right of the holders thereof to receive
the redemption price without interest upon surrender of certificates
representing the shares called for redemption. Any monies remaining in trust
after one year from the redemption date shall be returned to the Corporation
and thereafter holders of certificates for such shares shall look only to the
Corporation for the redemption price thereof. Upon conversion of any Series C
Preferred Stock called for redemption into Common Stock, then the portion of
the monies held in trust for redemption of such shares shall forthwith be
returned to the Corporation.
5. CONVERSION.
5.1 PROHIBITION AGAINST SHORT SALES. No holder of Series C
Preferred Stock shall directly or indirectly effect a short sale of the
Corporation's Common Stock for the holder's own account or for the account of
a Related Person. "Short sale" shall mean any sale of a security which the
seller does not beneficially own or any sale which is consummated by the
delivery of a security borrowed by, or for the account of, the seller, in
either case whether or not the seller is the owner of Common Stock at the
time of such sale. "Related Person" shall mean (A) any member of the holder's
immediate family; (B) any entity of which the holder is an officer, director,
or holder of a position having comparable duties or responsibilities; (C) any
entity in which the holder is the owner of an equity interest; and (D) any
person which would be deemed to be an "affiliate" of the holder as that term
is defined in the Securities Act of 1933 or the rules and regulations
promulgated thereunder.
5.2 CONVERSION RATE. So long as a holder of Series C Preferred
Stock is not in breach of Section 5 herein and subject to Section 5.8 herein,
such holder shall have the right to surrender the certificate or certificates
evidencing such shares and receive in lieu and in conversion thereof, and in
lieu of unpaid dividends thereon, shares of the Corporation's Common Stock.
Each share of Series C Preferred Stock may be converted, at any time at the
option of the holder in its sole and absolute discretion, into one share of
Common Stock, at a price of $0.50 per share.
5.3 MECHANICS OF CONVERSION.
(a) HOLDER'S DELIVERY REQUIREMENTS. To convert Series C
Preferred Stock into full shares of Common Stock, the holder thereof shall
(A) deliver or transmit by
-3-
<PAGE>
facsimile, for receipt on or prior to 5:00 p.m., New York time (the
"Conversion Notice Deadline") on the date of conversion, a copy of the fully
executed notice of conversion ("Notice of Conversion") to the Corporation at
the office of the Corporation or its designated transfer agent (the "Transfer
Agent") with a copy also delivered to the Corporation, and (B) surrender to a
common carrier for delivery to the office of the Corporation or the Transfer
Agent, the original certificates representing the Series C Preferred Stock
being converted (the "Preferred Stock Certificates"), duly endorsed for
cancellation. The holder of the Series C Preferred Stock shall have the right
to convert fewer than the full number of shares of Series C Preferred Stock
held at any given time.
(b) CORPORATION'S RESPONSE. Upon receipt by the Corporation or
the Transfer Agent of the Preferred Stock Certificates to be converted
pursuant to a Notice of Conversion (or an indemnification undertaking
reasonably satisfactory to the Corporation and the posting of a bond if and
as reasonably required by the Company's transfer agent with respect to such
shares in the case of their loss, theft or destruction) together with the
originally executed Notice of Conversion, the Corporation shall, within two
business days after the date of receipt (the "Deadline"), instruct the
Transfer Agent to issue and surrender to a common carrier for either
overnight or (if delivery is outside the United States) two (2) day delivery
to the address as specified in the Notice of Conversion, a certificate for
the number of shares of Common Stock to which the holder shall be entitled as
aforesaid, and the Corporation shall take all reasonable steps to ensure that
the Transfer Agent has complied with such instructions. In the case of a
dispute as to the calculation of the conversion rate, the Corporation shall
promptly issue to the holder the number of shares of Common Stock that is not
disputed and shall submit the disputed calculations to its outside accountant
via facsimile within one (1) day of receipt of such holder's Notice of
Conversion. The Corporation shall cause the accountant to perform the
calculations and notify the Corporation and the holder of the results no
later than twenty-four (24) hours from the time it receives the disputed
calculations. Such accountant's calculation shall be deemed conclusive absent
manifest error. Should the Notice of Conversion specify a smaller number of
Series C Preferred Stock to be converted than are represented by the
Preferred Stock Certificate surrendered to the Corporation, then the
Corporation shall immediately issue a new Preferred Stock Certificate
representing the number of Series C Preferred Stock not yet converted, and
deliver the same to the holder thereof along with the Common Stock as stated
above.
(c) DATE OF CONVERSION. The date on which conversion occurs
(the "Date of Conversion") shall be deemed to be the date set forth in such
Notice of Conversion, provided (A) that the advance copy of the Notice of
Conversion is faxed to the Corporation before 5:00 p.m., New York time, on
the Date of Conversion, and (B) that the original Preferred Stock Certificates
representing the Series C Preferred Stock to be converted, together with the
originally executed Notice of Conversion, are surrendered by depositing such
certificates and Notice with a common carrier, as provided above, and
received by the Transfer Agent or the Corporation on or prior to the second
(2nd) business day following the date set forth in the Notice of Conversion.
In the event the Preferred Stock Certificates and the originally executed
Notice of Conversion are not received on or prior to the second (2nd)
business day after the date of the Notice of Conversion, the Notice of
Conversion shall be deemed null and void and no conversion of Series C
Preferred Stock shall be effected thereby. The person or persons entitled to
receive the shares
-4-
<PAGE>
of Common Stock issuable upon such conversion shall be treated, as of the
Date of Conversion, for all purposes as the record holder or holders of such
shares of Common Stock on the Date of Conversion.
(d) Notwithstanding anything contained herein to the contrary,
if any action is required herein to be taken by the Corporation or the
Transfer Agent on a day which is not a business day, then such action shall
be deemed to be timely if taken on the next following business day.
5.4 OPTIONAL CONVERSION. At the option of the Corporation, if any
Series C Preferred Stock remain outstanding on June 30, 2005, then all or any
part of such Series C Preferred Stock as the Corporation elects shall be
converted in accordance with Section 5.3 as if the holders of such Series C
Preferred Stock had given the Notice of Conversion effective as of that date,
and the Date of Conversion had been fixed as of June 30, 2005 for all
purposes of Paragraph 5.3. Following notice by the Corporation to the
holders, all holders of Preferred Stock certificates shall within five (5)
business days after receipt of such notice surrender all Preferred Stock
certificates, duly endorsed for cancellation, to the Corporation or the
Transfer Agent, as the Corporation may direct. No person shall thereafter
have any rights in respect of Series C Preferred Stock, except the right to
receive shares of Common Stock on conversion thereof as provided in this
Section 5.
5.5 ADJUSTMENT FOR RECLASSIFICATION, EXCHANGE OR SUBSTITUTION. If
the Common Stock issuable upon the conversion of Series C Preferred Stock
shall be changed into the same or a different number of shares of any class
or classes of stock, whether by capital reorganization, reclassification or
otherwise (other than a reorganization, merger, consolidation or sale of
assets provided for below), then and in each such event, the holder of each
Preferred Share shall have the right thereafter to convert such share into
the kind and amount of shares of stock and other securities and property
receivable upon such reorganization, reclassification or other change by
holders of the number of shares of Common Stock into which such Series C
Preferred Stock might have been converted immediately prior to such
reorganization, reclassification or change, all subject to further adjustment
as provided herein.
5.6 MERGER OR OTHER TRANSACTIONS. In the event the Corporation, at
any time while any of the Series C Preferred Stock are outstanding, shall be
consolidated with or merged into any other corporation or corporations or
shall sell or lease all or substantially all of its property and business as
an entirety, then lawful provisions shall be made as part of the terms of
such consolidation, merger, sale or lease so that the holder of any Series C
Preferred Stock may thereafter receive in lieu of such Common Stock otherwise
issuable to him upon conversion of his Series C Preferred Stock, but at the
conversion rate which would otherwise be in effect at the time of conversion,
as hereinbefore provided, the same kind and amount of securities or assets as
may be issuable, distributable or payable upon such consolidation, merger,
sale or lease with respect to Common Stock of the Corporation.
5.7 FRACTIONAL SHARES. No fractional shares or scrip representing
fractional shares shall be issued upon conversion of Series C Preferred
Stock. If more than one certificate
-5-
<PAGE>
shall be surrendered for conversion at any one time by the same holder, the
number of full shares of Common Stock issuable upon conversion thereof shall
be computed on the basis of the aggregate number of shares so surrendered. In
lieu of any fractional shares of Common Stock which would otherwise be
issuable upon conversion of any shares of Series C Preferred Stock, the
number of shares of Common Stock issuable upon conversion shall be rounded up
to the nearest whole share.
5.8 RESERVATION OF COMMON SHARES. The Corporation shall at all
times reserve and keep available out of its authorized but unissued Common
Stock the number of shares of Common Stock deliverable upon conversion of all
the issued and outstanding Series C Preferred Stock and shall take such
action to obtain such permits or orders as may be necessary to enable the
Corporation lawfully to issue such Common Stock upon the conversion of the
Series C Preferred Stock.
6. RIGHTS ON LIQUIDATION. In the event of the liquidation, dissolution or
winding up of the Corporation, whether voluntary or involuntary, resulting in
any distribution of its assets to its shareholders, the holders of the Series
C Preferred Stock then issued and outstanding shall be entitled to receive
out of the assets of the Corporation available for distribution to its
shareholders, an amount equal to the Stated Value per Preferred Share, and no
more, before any payment or distribution of the assets of the Corporation is
made to or set apart for the holders of Common Stock. If the assets of the
Corporation distributable to the holders of Series C Preferred Stock are
insufficient for the payment to them of the full preferential amount
described above, such assets shall be distributed ratably among the holders
of the Series C Preferred Stock. The holders of the Common Stock shall be
entitled to the exclusion of the holders of the Series C Preferred Stock to
share in all remaining assets of the Corporation in accordance with their
respective interests. For purposes of this paragraph, a consolidation or
merger of the Corporation with any other corporation or corporations shall
not be deemed to be a liquidation, dissolution or winding up of the
Corporation. Notwithstanding anything in these Articles of Amendment to the
contrary, all shares of Series C Preferred Stock shall (i) rank senior to any
class or series of capital stock of the Corporation hereafter created (unless
otherwise agreed to by a majority of the holders of the Series C Preferred
Stock then outstanding), and (ii) shall rank junior to all of the preferred
stock of the Corporation issued and outstanding as of the date of execution
of this Certificate.
7. NOTICE. Any notice required to be given to the holders of Series C
Preferred Stock or any securities issued upon conversion thereof shall be
deemed to have been given upon the earlier of personal delivery or three days
after deposit in the United States mails by registered or certified mail,
return receipt requested, with postage fully prepaid, and addressed to each
holder of record at his address as it appears on the stock transfer records
of the Corporation. Any notice to the Corporation shall be in writing and
shall be deemed to have been given only upon actual receipt thereof.
8. LEGEND. All certificates representing the Series C Preferred Stock,
all shares of Common Stock issued upon conversion thereof and any and all
securities issued in replacement thereof or in exchange therefor shall bear
such legends (or not) as shall be required by law or contract.
-6-
<PAGE>
IN WITNESS WHEREOF, THE PRODUCERS ENTERTAINMENT GROUP LTD. has caused
its corporate seal to be affixed hereto and this certificate to be signed by
its President and Secretary this 20th day of May, 1999.
THE PRODUCERS ENTERTAINMENT GROUP LTD.
[S E A L] By: /s/ Irwin Meyer
---------------------------------------------------------
Irwin Meyer, Chief Executive Officer
ATTEST:
/s/ Arthur Bernstein
- ------------------------------
Arthur Bernstein, Secretary
-7-
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES
Infolocity Merger Sub, Inc
MWI Distribution, Inc.
Producers Entertainment Group, Inc.
Grosso-Jacobson Entertainment Corporation
Grosso-Jacobson Productions, Inc.
Grosso-Jacobson Music Company, Inc.
Tales of Midnite Productions, Inc.
In for Life, Inc.
Plan of Attack Productions, Inc.
Bobwhite Productions, Inc.
Floating Productions, Inc.
DSL Productions, Inc.
Home Green Home, Inc.
Out of Pocket Pictures, Inc.
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the incorporation of our report, dated October 8, 1999,
included in this Form 10-K in the previously filed Registration Statements
of IAT Resources Corporation on Form S-3 (No. 33-64595, 333-86167, 333-63897
and 333-62687) and Form S-8 (No. 333-71891 and 333-71885 and 333-68705).
/s/ SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
- --------------------------------------------
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
October 13, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM JUNE 30,
1999 FISCAL YEAR END FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 11,244
<SECURITIES> 0
<RECEIVABLES> 1,481,314
<ALLOWANCES> (562,830)
<INVENTORY> 471,762
<CURRENT-ASSETS> 1,051,091
<PP&E> 395,961
<DEPRECIATION> 295,118
<TOTAL-ASSETS> 3,320,644
<CURRENT-LIABILITIES> 1,399,530
<BONDS> 0
0
4,550
<COMMON> 11,976
<OTHER-SE> 1,904,589
<TOTAL-LIABILITY-AND-EQUITY> 3,320,014
<SALES> 2,216,718
<TOTAL-REVENUES> 2,216,718
<CGS> 926,295
<TOTAL-COSTS> 3,953,012
<OTHER-EXPENSES> (107,942)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (12,447)
<INCOME-PRETAX> (3,385,052)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,385,052)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,385,052)
<EPS-BASIC> (0.43)
<EPS-DILUTED> (0.43)
</TABLE>
