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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): September 30, 1997
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THE QUARTZ GROUP, INC.
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(Exact name of registrant as specified in its charter)
Colorado 33-31068 84-1067075
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(State or other jurisdiction (Commission (I.R.S. Employer
of incorporation File No.) Identification No.)
or organization)
3029 S. HARBOR BLVD., SANTA ANA, CALIFORNIA 92704
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:(714) 429-5984
(NOT APPLICABLE)
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(Former name or former address, if changed since last report)
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<PAGE>
THE QUARTZ GROUP, INC.
(formerly named Brown Disc Products Company, Inc.)
ITEM 1. CHANGES IN CONTROL OF REGISTRANT
PRIVATE PLACEMENT OF SECURITIES IN SEPTEMBER 1997
During the period from September 19, 1997 through September 30, 1997,
The Quartz Group, Inc. (the "Company") issued and sold in three related
private placement offerings for a total consideration of $900,000 in cash, the
following securities: (i) a limited recourse, non-interest bearing promissory
note of $750,000 (the "Limited Recourse Note"), (ii) 9,000,000 shares of the
Company's common stock and (iii) common stock purchase warrants exercisable at
$0.25 per share expiring on September 30, 2002 to purchase an additional
6,500,000 shares of the Company's common stock.
The securities sold during the period from September 19, 1997 through
September 30, 1997 were sold in three related offerings, as follows:
(A) For the cash purchase price of $50,000 paid by two investors, Donna Kull
and a corporate entity named Yes Corp., on September 19, 1997 the
Company sold a total of 1,000,000 shares of common stock.
(B) For the cash purchase price of $750,000 paid by one investor, John Kull,
on September 23, 1997 the Company sold (i) the $750,000 principal amount
Limited Recourse Note, (ii) 7,000,000 shares of common stock and (iii)
Class E common stock purchase warrants to purchase an additional
6,000,000 shares of common stock exercisable at $0.25 per share expiring
on September 30, 2002 (the "Class E Warrants").
(C) For the cash purchase price of $100,000 paid by Christina G. Etchison
and Donald P. Etchison, on September 30, 1997 the Company sold (i)
1,000,000 shares of common stock and (ii) Class F common stock purchase
warrants to purchase an additional 500,000 shares of common stock
exercisable at $0.25 per share expiring on September 30, 2002 (the
"Class F Warrants").
The Limited Recourse Note is payable by the Company only from the first
$750,000 in proceeds received from the exercise of Class E and Class F common
stock purchase warrants included in these offerings or any other common stock
purchase warrants of the Company that were outstanding at September 30, 1997.
The Company has the following common stock purchase warrants issued and
outstanding at September 30, 1997 (including the Class E and Class F Warrants
sold in September 1997) and its obligations under the Limited Recourse Note is
limited to proceeds, if any, received from the exercise of such warrants:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Common Stock Exercise Price
Designation of Class Subject to Warrants Per Share Expiration Date
- -------------------- ------------------- --------------- ---------------
Class C warrants 112,350 shares $0.01 per share 12/15/2000
Class D warrants 410,000 shares $0.25 per share 12/31/2001
Class E Warrants 6,000,000 shares $0.25 per share 9/30/2002
Class F Warrants 500,000 shares $0.25 per share 9/30/2002
</TABLE>
Each of the Class E Warrants and Class F Warrants sold by the Company in
September 1997 contain provisions for adjustment of the warrant exercise
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price and number of shares subject to the warrants to prevent dilution in the
event of stock splits, stock dividends or other events affecting outstanding
shares of common stock as a class. Class E and Class R Warrants include
certain "piggy-back" registration rights under the Securities Act of 1933 (the
"Securities Act"). Should the Company file a registration statement for an
offering of its securities during the life of the Warrants on Form SB-1, SB-2,
S-1, S-2 or S-3, or any form substituted therefor, the Company is obligated to
include in such registration (unless otherwise directed by the respective
Warrant holders) all of the Class E and Class F Warrants and shares of common
stock issued or issuable upon the exercise of such Warrants. In the event
such a registration statement covers a proposed underwritten public offering
of securities for the account of the Company, and the underwriter of the
offering determines that registration of the Warrants and underlying common
shares would interfere with the offering, the Warrant holders are obligated as
a condition of registration to agree to a "lock-up" commitment that they will
not sell their securities for a period of up to six months after registration
without the prior consent of the underwriter.
All of the instruments evidencing the securities issued by the Company
in its September 1997 private placement offering bear restrictive legends
under the Securities Act, and were issued in reliance upon an exemption from
the registration requirements of the Securities Act for transactions not
involving a public offering provided by Section 4(2) of the Securities Act.
No underwriting fees or commissions were paid by the Company in connection
with these transactions.
CHANGE IN CONTROL
Due to the transactions described above, there has been a change in
control of the Company. As of September 30, 1997, and after taking into
account all securities issued by the Company subsequent to March 31, 1997 (see
Item 5 of this Report), the Company had 16,079,800 shares of its common stock
issued and outstanding. Accordingly, the 7,000,000 shares of common stock
included in the securities purchased by John Kull on September 23, 1997
represent approximately 43.5% of the currently outstanding common stock; the
500,000 shares of common stock purchased by Donna Kull represent approximately
3.1% of the outstanding common stock; the 500,000 shares of common stock
purchased by Yes Corp. represent approximately 3.1% of the outstanding common
stock; and the 1,000,000 shares of common stock included in the securities
purchased by Christina G. Etchison and Donald P. Etchison represent
approximately 6.2% of the outstanding common stock.
The Company has been advised that Donna Kull is the spouse of John Kull
and that the President of Yes Corp., Andrew Kull, is the son of John Kull.
The business address of John Kull and Donna Kull is 15 Weatherstone Way,
Smithtown, New York 11787. The business address of Yes Corp. is 175-M
Commerce Drive, Hauppauge, New York 11788. The business address of Christina
G. Etchison and Donald P. Etchison is 552 Masalo Place, Lake Mary, Florida
32746.
If John Kull were to elect to exercise all of his 6,000,000 Class F
Warrants at a total cost of $1,500,000 (i.e., $0.25 per warrant), the total
pro forma shares of common stock outstanding, assuming no other shares of
common stock were issued, would increase to 22,079,800 shares. In such event
the ownership of outstanding common stock by John Kull would increase on a pro
forma basis as of September 30, 1997 to 13,000,000 shares, or approximately
58.9% of the shares outstanding on a pro forma basis, and the aggregate
ownership of outstanding common stock by John Kull, Donna Kull and Yes Corp.
would increase on a pro forma basis as of September 30, 1997 to 14,000,000
shares, or approximately 63.4% of the shares outstanding on a pro forma basis.
Due to the terms of the Limited Recourse Note described above, the Company
would be obligated to pay the first $750,000 in proceeds realized
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from the exercise of Class F Warrants by John Kull to repayment of the Limited
Recourse Note obligation (except to the extent the Limited Recourse Note had
been paid from proceeds of other warrants exercised, if any).
If Christina G. Etchison and Donald P. Etchison were to elect to
exercise all of their 500,000 Class E Warrants at a total cost of $125,000
(i.e., $0.25 per warrant), the pro forma total shares of common stock
outstanding, assuming no other shares of common stock were issued, would
increase to 16,579,800 shares and their ownership of the outstanding common
stock would increase on a pro forma basis as of September 30, 1997 to
1,500,000 shares, or approximately 9.0% of the shares outstanding on a pro
forma basis.
There are no arrangements or understandings among John Kull, Donna Kull,
Yes Corp. or Christina G. Etchison and Donald P. Etchison, on the one hand,
and either the Company or members of the Company's management, on the other
hand, with respect to the election of the Company's directors or other
matters. In view of the number of shares owned by John Kull and represented
by Class F Warrants owned by John Kull, Mr. Kull has the power to control the
election of directors and other matters that may be presented to shareholders
for a vote by outstanding shares of common stock.
ITEM 5. OTHER EVENTS.
SUMMARY OF SECURITIES ISSUED FROM APRIL 1, 1997 THROUGH SEPTEMBER 30, 1997
The following table summarizes equity securities of the Company that
were issued and outstanding at March 31, 1997 and September 30, 1997,
respectively:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Number of Shares or Warrants Outstanding
-------------------------------------------------
Changes
Outstanding During Outstanding
at the Period at
Class or Series March 31, 1997 (NOTE 1) Sept 30, 1997
----------------------------- -------------- ------------- -------------
Series A Redeemable Preferred
stock, no par value,
liquidation preference
$11.00 per share (NOTE 2) .... 12,613 -0- 12,613
10% Series B Convertible
Preferred stock, no par
value, liquidation
preference $5.00 per
share (NOTE 3) ............... 6,000 (4,000) 2,000
Common stock, no par value ...... 5,729,837 10,349,963 16,079,800
Common Stock Purchase Warrants:
Class A warrants (NOTE 4) .... 2,000,000 (2,000,000) -0-
Class B warrants (NOTE 5) .... 1,000,000 (1,000,000) -0-
Class C warrants (NOTE 6) .... 112,350 -0- 112,350
Class D warrants (NOTE 7) .... 410,000 -0- 410,000
Class E warrants (NOTE 8) .... -0- 6,000,000 6,000,000
Class F warrants (NOTE 9) .... -0- 500,000 500,000
</TABLE>
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<TABLE>
<S> <C>
(1) In addition to the changes shown in the table, during the period the
Company issued common stock purchase warrants to purchase up to 252,500
shares of its common stock exercisable at $0.01 per share expiring on
December 31, 2001. All of such warrants were exercised during the
period covered by the table.
(2) Holders of Series A redeemable preferred stock are entitled to be paid
the full liquidation preference of their shares prior to payment of any
dividends to holders of common stock. Additionally, holders of Series A
redeemable preferred stock have the option of converting such shares
into common stock at the rate of five shares of common stock for each
share of Series A redeemable preferred stock at any time after June 4,
1998. Under mandatory redemption provisions, the Company is required to
redeem the Series A redeemable preferred stock, based on earnings,
during the period June 30, 1994 through June 30, 1998. The number of
shares required to be redeemed in any one year is equal to 50% of the
Company's net income after taxes, less all debt service payments to
certain senior classes of debt holders, divided by a redemption price of
$11 per share. To date, the Company has not incurred any obligation to
redeem Series A redeemable preferred stock since it has incurred net
losses in each year since the Series A redeemable preferred stock was
issued.
(3) Holders of 10% Series B convertible preferred stock are entitled to be
paid cumulative dividends at the rate of $0.50 per share per annum prior
to payment of any dividends to holders of common stock. Holders of
Series B convertible preferred stock have the option, at any time prior
to redemption, of converting such shares into common stock at the rate
of ten shares of common stock for each share of Series B convertible
preferred stock. The Company has no mandatory redemption obligations as
to Series B preferred shares and may call the same for redemption, at
the Company's option, at $5.00 per share plus any accrued and unpaid
dividends. To date, the Company has not declared any dividends on
Series B preferred stock.
(4) Class A Warrants were exercisable at a price of $0.25 per share of
common stock until expiration on September 7, 2000. As noted below, all
Class A warrants have been surrendered for cancellation by the Company.
(5) Class B Warrants were exercisable at a price of $0.10 per share of
common stock until expiration on September 7, 2000. As noted below, all
Class B warrants have been surrendered for cancellation by the Company.
(6) Class C Warrants are exercisable at a price of $0.01 per share of common
stock until expiration on December 15, 2000.
(7) Class D Warrants are exercisable at a price of $0.25 per share of common
stock until expiration on December 31, 2001.
(8) Class E Warrants are exercisable at a price of $0.25 per share of common
stock until expiration on September 30, 2002.
(9) Class F Warrants are exercisable at a price of $0.25 per share of common
stock until expiration on September 30, 2002.
</TABLE>
The transactions that occurred during the period from April 1, 1997
through September 30, 1997 that resulted in the changes summarized in the
above table are as follows:
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ISSUANCE OF 838,200 SHARES OF COMMON STOCK
PURSUANT TO STOCK AWARD PLANS
In April 1997, the Company's Board of Directors adopted the Company's
1997 Stock Award Plan ("Award Plan I") covering up to 500,000 shares of the
Company's common stock. Under Award Plan I, the Board of Directors is
authorized to grant shares of the Company's common stock to selected officers,
directors, employees and consultants who satisfy the definition of "employee"
for purposes of an "employee benefit plan" as those terms are defined in Rule
405 under the Securities Act of 1933. The shares subject to Award Plan I were
registered under the Securities Act of 1933 pursuant to a Registration
Statement on Form S-8, Commission File number 333-25985, filed by the Company
on April 25, 1997. The effective date of Award Plan I was April 1, 1997.
Award Plan I will remain in effect until December 31, 2000 or until all
500,000 shares subject to that Plan have been awarded, whichever first occurs.
In August 1997, the Company's Board of Directors adopted the Company's
1997-II Stock Award Plan ("Award Plan II") covering up to 500,000 shares of
the Company's common stock. Under Award Plan II, the Board of Directors is
authorized to grant shares of the Company's common stock to selected officers,
directors, employees and consultants who satisfy the definition of "employee"
for purposes of an "employee benefit plan" as those terms are defined in Rule
405 under the Securities Act of 1933. The shares subject to Award Plan II
were registered under the Securities Act of 1933 pursuant to a Registration
Statement on Form S-8, Commission File number 333-33959, filed by the Company
on August 19, 1997. The effective date of Award Plan II was August 18, 1997.
Award Plan II will remain in effect until December 31, 2000 or until all
500,000 shares subject to that Plan have been awarded, whichever first occurs.
During the period from April 1, 1997 through September 30, 1997, the
Company issued 490,000 shares of common stock to officers, directors,
employees and consultants under Award Plan I and 348,200 shares of common
stock to officers, directors, employees and consultants under Award Plan II,
as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Dollar
Date of Number of Valuation
Stock Issuance Common Shares Type of Services Compensated of Award
- --------------- ------------- -------------------------------- -----------
AWARD PLAN I:
April 29, 1997 40,000 Management consulting services $ 8,000
April 29, 1997 20,000 Legal services 10,000
April 29, 1997 10,000 Legal services 5,710
April 29, 1997 10,000 Employee quality control manager 2,000
April 29, 1997 20,000 Legal services 10,000
April 29, 1997 300,000 Management consulting services 150,000
June 24, 1997 20,000 Legal services 10,000
June 10, 1997 10,000 Services of officer (NOTE A) 5,000
June 10, 1997 50,000 Services of former officer (NOTE B) 25,000
July 7, 1997 10,000 Sales representation services 2,000
---------- ----------
Totals 490,000 $ 227,710
========== ==========
AWARD PLAN II:
August 15, 1997 80,000 Management consulting services $ 50,000
August 18, 1997 4,000 Insurance agent services 2,000
August 28, 1997 25,000 Public relations services 12,000
Sept 5, 1997 12,600 Product pricing services 6,300
Sept 22, 1997 5,000 Employee bonus compensation 2,500
Sept 22, 1997 200,000 Public relations services 50,000
Sept 25, 1997 21,600 Management consulting services 10,000
---------- ----------
Totals 348,200 $ 132,800
========== ==========
</TABLE>
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(A) Such shares were issued to Daryl Silversparre, an officer and director
of the Company, in consideration of his services as an officer of the
Company for the period from January 1, 1997 through June 30, 1997.
(B) Such shares were issued to Ronald H. Cole, a former officer and director
of the Company. In connection with this transaction, Mr. Cole
surrendered 1,000,000 Class A common stock purchase warrants of the
Company for cancellation. See "Cancellation of 2,000,000 Class A
Warrants, 1,000,000 Class B Warrants and Issuance of 252,500 Restricted
Shares of Common Stock" below.
ISSUANCE OF 40,000 SHARES OF COMMON STOCK UPON EXERCISE OF CONVERSION
RIGHTS AS TO 4,000 SHARES OF SERIES B CONVERTIBLE PREFERRED STOCK
The Company has outstanding shares of its 10% Series B convertible
preferred stock (see NOTE 3 to the above table summarizing changes in
outstanding shares during the period from April 1, 1997 through September 30,
1997). Holders of Series B convertible preferred stock have the option, at
any time prior to redemption, of converting such shares into common stock at
the rate of ten shares of common stock for each share of Series B convertible
preferred stock.
During May and June, 1997, the Company issued 40,000 shares of common
stock upon the exercise of conversion rights by two holders of an aggregate
4,000 shares of Series B Convertible Preferred stock. The 40,000 shares of
common stock issued by the Company were released of resale restrictions under
the Securities Act in reliance upon Rule 144 promulgated under the Securities
Act.
CANCELLATION OF 2,000,000 CLASS A WARRANTS, 1,000,000 CLASS B WARRANTS
AND ISSUANCE OF 252,500 RESTRICTED SHARES OF COMMON STOCK
As noted in the Company's prior filings with the Securities and Exchange
Commission, the Company had outstanding an issue of Class A common stock
purchase warrants exercisable at a price of $0.25 per share expiring on
September 7, 2000 and an issue of Class B common stock purchase warrants
("Class B Warrants") exercisable at a price of $0.10 per share expiring on
September 7, 2000.
The Company previously reported in its Report on Form 10-QSB for the
quarter ended March 31, 1997 that the President of the Company, David J.
Lopes, agreed on March 17, 1997 to surrender for cancellation 500,000 Class A
Warrants as a contribution to the capital of the Company.
The Company's Report on Form 10-QSB for the quarter ended March 31, 1997
further noted that (i) Ronald H. Cole, a former officer and director of the
Company, agreed on March 19, 1997 to surrender for cancellation 1,000,000
Class A Warrants in exchange for the issuance by the Company of 50,000 shares
of the Company's common stock and the transfer to Mr. Cole of all of the
Company's rights to the trademark "Channel Soft", the Internet World Wide Web
URL address "channelsoft.com" and any software previously developed by the
Company for use with the Channel Soft tradename; and (ii) Daryl Silversparre,
an officer and director of the Company, agreed on March 19, 1997 to surrender
for cancellation 500,000 Class A Warrants and 1,000,000 Class B Warrants in
exchange for the issuance by the Company of 250,000 shares of the Company's
common stock.
The previously reported agreement with Ronald H. Cole was amended,
effective as of June 10, 1997, to provide that the Company would issue 50,000
shares of common stock to Mr. Cole under the Company's Award Plan I (described
above) as compensation for his services as a former officer and director. In
consideration of that stock issuance and the transfer to Mr. Cole of all of
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the Company's rights to the trademark "Channel Soft", the Internet World Wide
Web URL address "channelsoft.com" and any software previously developed by the
Company for use with the Channel Soft tradename, Mr. Cole surrendered for
cancellation 1,000,000 Class A Warrants.
The previously reported agreement with Daryl Silversparre was amended,
effective July 15, 1997, to provide that Mr. Silversparre would surrender for
cancellation 500,000 Class A Warrants and 1,000,000 Class B Warrants in
exchange for the issuance by the Company to Mr. Silversparre of common stock
purchase warrants covering 252,500 shares of the Company's common stock
exercisable at $0.01 per share and expiring on December 31, 2001. In
consideration of that amended agreement, Mr. Silversparre surrendered for
cancellation 500,000 Class A Warrants and 1,000,000 Class B Warrants. On July
15, 1997, Mr. Silversparre elected to exercise all of the $0.01 common stock
purchase warrants and paid the Company the applicable cash exercise price of
$2,525. The Company then issued 252,500 shares of its common stock to Mr.
Silversparre pursuant to the exercise of such warrants issued under the terms
of the amended agreement. The certificates evidencing the 252,500 shares of
common stock issued by the Company bear a restrictive legend under the
Securities Act, and were issued in reliance upon an exemption from the
registration requirements of the Securities Act for transactions not involving
a public offering provided by Section 4(2) of the Securities Act.
No underwriting fees or commissions were paid by the Company in
connection with the transactions involving Messrs. Lopes, Cole and
Silversparre.
ISSUANCE OF 219,263 RESTRICTED SHARES OF COMMON STOCK IN VARIOUS
PRIVATE PLACEMENT TRANSACTIONS
During the period from June through September 1997, the Company issued
and sold a total of 219,263 shares of its common stock in the following
private placement transactions:
A) A total of 40,000 shares were issued at a valuation of $10,000 ($0.25
per share) on June 9, 1997 to Gerald J. Werre, Dolores R. Werre, Diana
R. Clegg and Jack Werre, as tenants in common, in consideration of a
$60,000 short-term loan due on June 24, 1997 extended to the Company by
Gerald J. Werre and in payment of interest on the loan. The principal
amount of the loan was paid in full by a cash payment in October 1997.
B) 50,000 shares were issued at a valuation of $20,000 ($0.40 per share) on
June 9, 1997 for sales representation services over a period of one year
to be rendered by a consultant to the Company.
C) 100,000 shares were issued at a valuation of $10,000 ($0.40 per share)
on June 24, 1997 in satisfaction of financial consulting services to be
provided to the Company by Trinity Funding.
D) 4,263 shares were issued at a valuation of $2,002 ($0.47 per share) on
July 11, 1997 in payment of an accrued liability in that amount due to a
temporary staffing agency.
E) 25,000 shares were issued on September 3, 1997 upon the conversion into
common stock of a total of $10,000 in secured loans extended to the
Company by two individuals on September 1, 1997. Each of these loans
was for $5,000 maturing on September 1, 1998, was to bear interest at
the rate of 1.5% per month, and was secured by the accounts receivable
of the Company. The Company's obligations under these loans was fully
discharged by the conversion of the loans into common stock.
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All of the certificates representing 219,263 shares of common stock
described above bear restrictive legends under the Securities Act, and were
issued in reliance upon an exemption from the registration requirements of the
Securities Act for transactions not involving a public offering provided by
Section 4(2) of the Securities Act. No underwriting fees or commissions were
paid by the Company in connection with these transactions.
ISSUANCE OF 9,000,000 RESTRICTED SHARES OF COMMON STOCK, $750,000
LIMITED RECOURSE NOTE, 6,000,000 CLASS E WARRANTS AND 500,000 CLASS F
WARRANTS IN SEPTEMBER 1997 PRIVATE PLACEMENT TRANSACTION
Reference is made to the discussion in Item 1 of this Report under the
caption "Private Placement of Securities in September 1997".
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(c) EXHIBITS:
The following exhibits are filed with this Report:
** Designates exhibits incorporated by reference to prior filings with the
Securities and Exchange Commission.
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ ---------------------------------------------------
<S> <C>
10.25.1 Subscription Agreement for the sale by Registrant of 1,000,000
shares of Common Stock and 500,000 Class F Common Stock
Purchase Warrants for $100,000 to Christina G. Etchison and
Donald P. Etchison.
10.25.2 Form of Registrant's Class F Common Stock Purchase Warrants
covering 500,000 shares of common stock exercisable at $0.25
per share expiring on September 30, 2002.
10.26.1 Subscription Agreement for sale by Registrant of $750,000
Limited Recourse Promissory Note, 7,000,000 shares of Common
Stock and 6,000,000 Class E Common Stock Purchase Warrants for
$750,000 to John Kull.
10.26.2 Form of Registrant's Limited Recourse Promissory Note in the
principal amount of $750,000.
10.26.3 Form of Registrant's Class E Common Stock Purchase Warrants
covering 6,000,000 shares of common stock exercisable at $0.25
per share expiring on September 30, 2002.
10.27.1 Subscription Agreement for the sale by Registrant of 500,000
shares of Common Stock for $25,000 to Donna Kull.
10.27.2 Subscription Agreement for the sale by Registrant of 500,000
shares of Common Stock for $25,000 to Yes Corp.
** 10.28 Registrant's 1997 Stock Award Plan (incorporated by reference
to Exhibit 4.1 filed on April 25, 1997 with the Registrant's
Registration Statement on Form S-8, Commission File number
333-25985).
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** 10.29 Registrant's 1997-II Stock Award Plan (incorporated by
reference to Exhibit 4.1 filed on August 19, 1997 with the
Registrant's Registration Statement on Form S-8, Commission
File number 333-33959).
10.30.1 Agreement dated July 15, 1997 to Tender 1,000,000 Class B
Common Stock Purchase Warrants and 500,000 Class A Warrants In
Exchange for 252,500 Common Stock Purchase Warrants at $0.01
Per Share between the Registrant and Daryl Silversparre.
10.30.2 Form of $0.01 Common Stock Purchase Warrants issued by the
Registrant to Daryl Silversparre and exercised on July 15,
1997.
10.31 Promissory Note dated April 1, 1997 issued in the principal
amount of $60,000 by Registrant to Jerry Werre.
10.32 Promissory Note dated September 1, 1997 issued in the
principal amount of $5,000 by Registrant to Roger Rengler and
converted into 12,500 shares of Registrant's common stock.
10.33 Promissory Note dated September 1, 1997 issued in the
principal amount of $5,000 by Registrant to Sharon Ellis and
converted into 12,500 shares of Registrant's common stock.
</TABLE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: October 17, 1997
THE QUARTZ GROUP, INC.
(Registrant)
By: /s/ David J. Lopes
-----------------------------
David J. Lopes, President
Chief Executive Officer,
Chief Financial Officer
and Chief Accounting Officer
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Rev-97a
SUBSCRIPTION AGREEMENT for $100,000 in CASH
THE QUARTZ GROUP, INC.
3029 S. Harbor Blvd.
Santa Ana, California 92704
Telephone (714) 429-5984
FAX Number (714) 429-5987
SUBSCRIPTION AGREEMENT
Common Stock and Class F Common Stock Purchase Warrants
THE QUARTZ GROUP, INC.
Attention: David J. Lopes, President
3029 S. Harbor Blvd.
Santa Ana, California 92704
FAX No. (714) 429-5987
1. SUBSCRIPTION. The undersigned, an accredited investor within the
meaning of Regulation D promulgated under the Securities Act of 1933 (herein
called the "Accredited Investor"), hereby subscribes for the purchase of One
Million (1,000,000) shares (the "Shares") of common stock ("Common Stock")
and Five Hundred Thousand (500,000) Class F Common Stock Purchase Warrants
exercisable at $0.50 per share expiring on September 30, 2002 ("Class F
Warrants") in THE QUARTZ GROUP, INC., a Colorado corporation ("the "Company")
for the account of the Accredited Investor upon the terms and conditions set
forth in this Subscription Agreement. The subscription price shall be One
Hundred Thousand Dollars ($100,000) in United States funds, payable in cash
upon acceptance of this subscription by the Company. The form of Class F
Warrants offered hereby is attached as an Exhibit to this Subscription
Agreement and is incorporated by reference herein.
Investors in this Offering should review, among other information available
from the Company, the summary of certain risk factors described in Section 3
of this Subscription Agreement before making an investment decision.
2. DESCRIPTION OF OFFERINGS.
2.1. THE OFFERINGS. The Company is concurrently offering (i) to the
Accredited Investor, the Shares and Class F Warrants described above for the
sum of $100,000, (ii) to two other accredited investors, a total of 1,000,000
shares of common stock for the aggregate sum of $50,000, and (iii) to one
other accredited investor, a total of 7,000,000 shares of common stock and
6,000,000 Class E Warrants exercisable at $.25 per share expiring on September
30, 2002 in consideration of a limited recourse $750,000 loan payable by the
Company only from proceeds of the exercise of warrants issued by the Company
(herein collectively called the "Offerings"). The Offerings are being made on
a "best efforts" to a limited number of accredited investors in a private
placement offering of securities in accordance with Rule 505 of Regulation D
under the U.S. Securities Act of 1933, as amended (the "Securities Act").
Prospective investors should note that the classes of securities and
consideration per share being paid in the three separate offerings are not
proportionate to each other.
The Offerings will expire at the earlier of receipt and acceptance of
subscriptions to a total of $900,000 in subscriptions or on September 30, 1997
unless extended by the Company for an additional period not exceeding 30 days.
The Company reserves the right to terminate the Offerings at any earlier date.
Subscription Agreement -1-
<PAGE>
2.2. The Accredited Investor acknowledges that an investment in the
securities offered hereby is speculative, involves a high degree of risk, and
should not be purchased by persons who cannot afford the loss of their entire
investment, and represents that the Accredited Investor has relied only on the
information contained herein or otherwise provided in writing by duly
authorized representatives of the Company. The Accredited Investor
acknowledges receipt of the Company's current Business Plan. The Accredited
Investor has carefully read and reviewed this Subscription Agreement and all
of the Company's filings during the last two fiscal years with the Securities
and Exchange Commission which are incorporated by reference herein (including,
without limitation, the Company's Annual Report on Form 10-KSB for the fiscal
year ended June 30, 1995, its interim quarterly Reports on Form 10-QSB for the
Quarters ended September 30, 1996, December 31, 1996 and March 31, 1997, and
its Current Report on Form 8-K dated as of June 2, 1997, and has asked such
questions of management of the Company and received such additional
information as he, she or it deems necessary in order for the Accredited
Investor to make an informed decision with respect to an investment in the
Company's securities. The Accredited Investor represents and warrants that
he, she or it has received complete and satisfactory answers to all such
inquiries. The Accredited Investor is not relying on oral or written
representations or assurances from the Company or any representatives of the
Company, other than as set forth in this Agreement, the Company's current
Business Plan, reports filed by the Company with the Securities and Exchange
Commission and any documents in writing signed by David J. Lopes as the
President of the Company.
The Company further agrees to make available to each prospective
investor the opportunity to ask questions of, and receive written answers
from, David J. Lopes as the President of the Company concerning the terms and
conditions of this Offering, the business and financial status of the Company
and any other relevant matters, and to obtain any additional written informa-
tion, to the extent that the Company possesses such information or can acquire
it without unreasonable effort or expense, necessary to verify the accuracy of
the information set forth in the documents furnished to the Accredited
Investor in connection with this Offering.
2.3. SECURITIES LAW MATTERS. The Accredited Investor acknowledges
that the Shares have not been, and will not be, registered under the
Securities Act or qualified under applicable state securities laws. The
Company will rely on the representations of the accredited investors in the
Offerings for an exemption from registration under Rule 505 of the Securities
Act of 1933 (the "Securities Act") as to the securities issued pursuant to the
Offerings and any shares of common stock issued upon exercise of warrants
included in the Offerings. The transferability thereof will be restricted by
the registration or qualification provisions of the Securities Act and/or
state laws separate and apart from the provisions of the Securities Act.
2.4. OTHER.
2.4.1. This Subscription Agreement may be executed in one or more
counterparts and transmitted by facsimile telephonic transmission, each of
which shall be deemed to constitute an original and shall become effective
when one or more counterparts have been signed by each of the parties hereto
and delivered or transmitted by facsimile telephonic transmission to the other
party.
2.4.2. This Agreement may be executed in one or more counterparts
and it is not necessary that the signatures of all parties appear on the same
counterpart, but such counterparts together shall constitute but one and the
same agreement. The headings of the sections of this Agreement have been
inserted for convenience of reference only, and shall not be deemed to be a
part of this Agreement.
Subscription Agreement -2-
<PAGE>
2.3.3. Each of the undersigned agree this Agreement shall be
governed by and construed in accordance with the laws of the State of
California. Any dispute arising out of or relating to this Agreement and the
transactions contemplated herein or the breach of this Agreement or such
transactions shall be resolved by arbitration pursuant to the Rules of the
American Arbitration Association then in effect and shall take place in the
County of Orange, State of California. Any litigation, including litigation
arising out of or concerning such arbitration, shall be conducted exclusively
in the trials courts of general jurisdiction for the County of Orange, State
of California. All parties hereby consent to the jurisdiction of such court
for all such litigation.
2.3.4. Time shall be of the essence of this Agreement.
3. CERTAIN RISK FACTORS. The securities being offered hereby are
speculative and subject to a high degree of risk of loss of the investment.
Persons who cannot afford to lose their investment should not purchase the
securities offered hereby. Prospective investors should consider carefully,
among other factors described herein, the following matters:
HISTORY OF OPERATING LOSSES; ACCUMULATED DEFICIT; DEFICIENCY IN
STOCKHOLDERS' EQUITY; DEFICIT IN WORKING CAPITAL; AUDITOR'S QUALIFICATION;
PROPOSED JOINT VENTURE
The Company commenced operations in September 1987, was required to seek
the protection of Chapter 11 of the U.S. Bankruptcy Act in 1992, and has not
operated on a profitable basis. Net losses before extraordinary items were
$1,121,000 and $372,000 for the fiscal years ended June 30, 1996 and 1995,
respectively, and $604,000 for the nine months ended March 31, 1997. At March
31, 1997, the Company had an accumulated deficit from operations since its
inception of $3,331,000 and a $701,000 deficiency in its stockholders' equity.
Excluding the effect of commitment and continent liabilities, if any, total
liabilities at March 31, 1997 were $946,000 and there were also redeemable
Series A preferred stock outstanding of $136,000 which require mandatory
redemption from future net income, if any.
At March 31, 1997, the Company had limited cash resources of $26,000 and
a deficiency in working capital of $386,000; included in current liabilities,
however, is a contingent liability of $169,000 due the Company's former
President under a settlement agreement that is required to be paid only from
5% of proceeds realized from subsequent financings by the Company. There can
be no assurance that the Company will obtain additional financing.
THE REPORT OF STOCKMAN KAST RYAN & SCRUGGS, PC, ON THE FINANCIAL
STATEMENTS OF THE COMPANY FOR THE FISCAL YEAR ENDED JUNE 30, 1996 CONTAINS A
PARAGRAPH EXPRESSING SUBSTANTIAL DOUBT CONCERNING THE ABILITY OF THE COMPANY
TO CONTINUE AS A GOING CONCERN. Management's plan to address these matters
has been to dispose of its software media duplication and distribution
business and close all operations in Colorado. The Company, now
headquartered in Santa Ana, California, is focusing its available resources
and personnel on the development of a quartz glass business and sale of quartz
glass products. Initial sales have been obtained, with manufacturing
temporarily being contracted to third parties.
The Company has negotiated a joint venture agreement to acquire a
minority interest in a quartz glass manufacturing business based in Northern
California, but will be unable to participate in that venture unless it
receives proceeds from the sale of all securities included in the Offerings.
Historical operations of the business in Northern California have not been
profitable and the proposed joint venture will be
Subscription Agreement -3-
<PAGE>
largely dependent upon increases in sales stimulated by the participation of a
foreign company, which future sales increases have not been committed. There
can be no assurance that the Company will be able to successfully complete its
minority participation in the joint venture or that, if completed, that the
joint venture will become profitable. In addition, the Company will own a
minority equity position in the joint venture if it is able to complete the
proposed transaction, and may have only a limited influence in control of the
business operations and policies of the joint venture. Further information in
writing as to the proposed joint venture may be obtained on a confidential
basis by the Accredited Investor from the President of the Company.
Although increases in revenues are required for the Company to absorb
existing overhead, in view of historical losses from operations, negative
working capital and the Company's debt service obligations, the Company has
not been able to invest significantly in sales and marketing and accordingly
has generally limited these activities to telemarketing and selected trade
shows. Results of operations in the future will be influenced by numerous
factors, including the ability of the Company to successfully expand its
products and services and/or to negotiate the acquisition of another business
enterprise, the development and implementation of sales and marketing
programs, competitive factors and the ability of the Company to control costs.
As a result of these factors, the forecast of future business operations is
subject to numerous uncertainties. There can be no assurance that revenue
growth or profitability on a quarterly or annual basis will be attained. The
Company therefore is subject to all the risks incident to a business with a
limited history of operations including, among others, the possibility of
unforeseen expenses, difficulties, complications and delays, and it may be
difficult or impossible to obtain additional financing if required for the
Company's business.
DEPENDENCE ON GENERATING ADDITIONAL REVENUES. The Company's core business is
highly competitive and the Company is a recent entry to a mature market.
Improved cash flows will be dependent, among other factors, on increasing
sales, and there can be no assurance that sales levels will increase.
NEED FOR ADDITIONAL FINANCING. Management anticipates the Company will be
required to seek additional equity financing in the future, in addition to the
proceeds of this Offering, to sustain its operations, to support the
introduction of new products or services and/or to finance the acquisition of
another business if a suitable acquisition candidate is identified. The
Company's actual future capital requirements will depend on numerous factors,
including, but not limited to, the Company's progress in generating increased
revenues, the cost of marketing and advertising programs, management's ability
to control costs, inventory requirements, competing technological and market
developments. If the Company generates revenue increases, it may require
additional working capital to support increases in manufacturing capacity and
for additional capital required to finance receivable and inventory increases.
No assurance can be given that additional financing will be forthcoming or, if
available, would be sufficient to satisfy the Company's future operating
requirements. The Company has no commitment to obtain additional funds and
there can be no assurance it will be successful in the event management
determines the Company should initiate efforts to obtain additional financing.
Because of the Company's limited capital, it also may undertake
additional equity offerings whenever conditions are favorable, even if it does
not have an immediate need for additional capital at that time. There can be
no assurance that the Company will be able to obtain additional financing when
needed, or that any such financing, if available, will be obtainable on
reasonable terms. Any such additional financing may result in significant
dilution to existing stockholders. If adequate funds are not available, the
Company may be required to accept unfavorable alternatives, including the
delay, reduction or elimination of product introductions and expansion,
marketing and advertising and other operating expenses.
Subscription Agreement -4-
<PAGE>
DEPENDENCE ON KEY PERSONNEL. The success of the Company is substantially
dependent on the services of its officers, key employees and professional
consultants. The Company is dependent in particular upon the services of
David J. Lopes, its President and Chief Executive Officer. The Company also
relies, and for the foreseeable future will rely, on independent advisors and
consultants to provide certain services to the Company. There can be no
assurance that such services will continue to be available to the Company on a
timely basis when needed, or that the Company could find qualified
replacements. The Company's operations therefore are dependent upon a limited
number of key employees and consultants and the loss of the services of these
or other key personnel could have a material adverse effect upon the Company.
The Company does not maintain key man insurance on the lives of its executive
officers and key consultants.
CONFLICTS OF INTEREST. The Company in the past has engaged in a number of
material transactions with its directors and executive officers and/or their
affiliates, and may engage in such transactions in the future. All such
transactions have been in the past, and will be in the future, approved by a
majority of the Company's disinterested directors.
DILUTIVE EFFECT OF OUTSTANDING SECURITIES OR SECURITIES TO BE ISSUED; POSSIBLE
RISK OF MARKET OVERHANG. The Company has reserved shares of its Common Stock
for issuance upon exercise of outstanding warrants and upon exercise of
conversion rights for outstanding shares of convertible preferred stock.
Additional shares will be reserved for the Common Stock and warrants to be
issued in the Offerings. The 9,000,000 shares of Common Stock proposed to be
issued in the Offerings is more than the total number of shares of Common
Stock currently outstanding (approximately 6,800,000 shares), and warrants
included in the Offerings cover an additional 6,500,000 shares. In addition,
it is anticipated that the Company may issue additional Common Stock, warrants
or other securities convertible or exercisable into Common Stock in connection
with management's plan to seek the acquire additional assets and/or for future
equity financings. Exercise of warrants, the conversion of preferred stock or
the future issuance of equity securities could involve significant dilution to
holders of the Company's Common Stock. Holders of convertible securities and
warrants are likely to exercise them when, in all likelihood, the Company
could obtain additional capital on terms more favorable than those provided by
the convertible securities or warrants.
Shares issued upon exercise of warrants or conversion rights or future
issuance of securities, as well as the shares of Common Stock to be issued in
the Offerings and restricted shares previously issued by the Company in
private placement transactions, may become available for public sale under the
provisions of Rule 504 and/or Rule 144 of the Securities Act of 1933 or if the
Company elects to register its securities under the Securities Act of 1933.
As such, there may be a significant market overhang with respect to the
Company's Common Stock in the public market from time to time in the future,
and the existence thereof may have a depressive effect upon the market price
for the Company's Common Stock and securities convertible into Common Stock.
VOLATILITY OF MARKET PRICE FOR COMMON STOCK: The Company's Common Stock is
publicly traded in the over-the-counter market and quoted on the NASD
Electronic Bulletin Board under the trading symbol "QGRP". There has been
significant volatility in the market price of securities relating to the
computer industry generally and for the Company's Common Stock specifically.
Factors such as announcements by the Company, the Company's liquidity
problems, the terms of securities offerings, quarterly variations in operating
results, trading volume, general market trends, announcements of technological
innovations or new commercial products, announcements by competitors and
general market conditions may have a significant effect on the market price of
the Company's Common Stock.
Subscription Agreement -5-
<PAGE>
UNCERTAINTY OF PROJECTIONS. Certain projections may be provided on a
confidential basis to prospective investors in the Offerings with respect to
the Company's future operations. There may be material differences between
projected and actual results because events and circumstances frequently do
not occur as expected. No representation or warranty is given that actual
future results will be as projected.
COMPETITION. The business in which the Company is engaged is characterized by
intense competition, especially as to price. The Company competes with much
larger, well-established companies that have greater financial, technical,
manufacturing, marketing and research and development resources as well as a
wide variety of companies comparable in size to the Company.
NO SIGNIFICANT PROPRIETARY RIGHTS. The Company does not hold any patents or
significant proprietary rights as to any of its products. Accordingly, the
Company relies upon trade secrets to protect limited proprietary information
and customer data. There can be no assurance that trade secrecy obligations
will be honored or that others have or will not independently develop similar
or superior information.
UNDETERMINED EFFECT OF BLANK CHECK PREFERRED STOCK AND AUTHORIZED COMMON
STOCK; POSSIBLE CHANGE IN CONTROL: The Company's articles of incorporation
authorize the issuance of up to 50 million shares of "blank check preferred
stock" with such rights, preferences, privileges and limitations as may be
determined from time to time by the Board of Directors, and up to 50 million
shares of Common Stock. Accordingly, the Board has the power without prior
shareholder approval to issue additional shares of common stock and/or one or
more series of preferred stock with such rates of dividends, redemption
provisions, liquidation preferences, voting rights, conversion privileges and
any other characteristics as the Board may deem necessary. Any such
additional issuances of common stock and/or preferred stock may result in
substantial and material dilution to existing holders of the Company's
securities. In addition, the existence of a substantial amount of authorized
and unissued common stock and blank check preferred stock could discourage,
delay or prevent a takeover of the Company if any such transaction were to be
proposed. In view of the Company's current financial condition, the
acquisition of another business by the Company or additional financing
transactions may involve the issuance of additional equity securities that
could be significantly dilutive to the interests of current stockholders
and/or may result in a change in control of the Company.
4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
By its acceptance of any subscription from the Accredited Investor
hereunder, the Company represents and warrants to the Accredited Investor as
follows:
4.1. The Company is duly incorporated and validly existing as a
corporation in good standing under the laws of the State of Colorado with
corporate power to enter into this Agreement and to conduct its business as
presently conducted.
4.2. The securities of the Company covered by this Subscription
Agreement, when issued and delivered upon receipt of the subscription price,
will each be duly and validly authorized and issued, fully paid and
nonassessable securities of the Company and will not subject the holders
thereof to personal liability by reason of being such holders.
Subscription Agreement -6-
<PAGE>
4.3. This Agreement, upon its acceptance by the Company, has been duly
authorized, executed and delivered by the Company and is a valid and binding
agreement enforceable in accordance with its terms, subject only to
bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and
similar laws of general application to or affecting creditors' rights
generally and to general principles of equity. The Company has full power and
authority necessary to enter into this Agreement and to perform its
obligations hereunder.
4.4. The execution and delivery of this Agreement, and the consummation
of the transactions contemplated herein, do not and will not conflict with or
result in a breach by the Company of any of the terms or provisions of, or
constitute a default under, its articles of incorporation, its by-laws, any
action of its directors or shareholders, or any indenture, mortgage, deed of
trust or other agreement or instrument to which it is a party or by which it
or any of its properties or assets are bound, or any existing applicable law,
rule or regulation or any applicable decree, judgment or order of any court,
regulatory body, administrative agency or other governmental body having
jurisdiction over the undersigned or any of its properties or assets.
5. REPRESENTATIONS AND WARRANTIES OF THE ACCREDITED INVESTOR. In
connection with this Agreement and the transactions contemplated herein, the
Accredited Investor represents and warrants to the Company as follows:
5.1. The Accredited Investor has relied only on the information
provided in writing referenced in this Agreement or provided in writing by the
President of the Company in response to inquiries of the Accredited Investor.
The Accredited Investor has carefully read and reviewed this Subscription
Agreement and all other documentation provided by the Company in connection
with this Offering, and has asked such questions of management of the Company
and received from them such information as the Accredited Investor deems
necessary in order for the Accredited Investor to make an informed decision
with respect to the purchase of the securities offered hereby.
5.2. The Accredited Investor has sufficient knowledge and experience of
financial and business matters so that he, she or it is able to evaluate the
relative merits and risks of purchasing the securities offered hereby. The
Accredited Investor has not received any general solicitation or advertising
regarding this Offering. The Accredited Investor is aware that an investment
in the Shares is a speculative investment, may not be liquid due to the
matters described in Section 3 above, and involves a high degree of risk of
loss. The Accredited Investor has had substantial experience in previous
private and public purchases of speculative securities.
5.3. The Accredited Investor's commitment in direct participation in
investments in restricted securities is reasonable in relation to his, her or
its net worth. The investment of the Accredited Investor in the securities
offered hereby will in no event exceed 10% of the net worth of the Accredited
Investor. The Accredited Investor has the means to provide for his or her
personal needs, possesses the ability to bear the economic risk hereunder
indefinitely, and can afford a complete loss of his, her or its investment.
The Accredited Investor realizes that the securities offered hereby must not
be purchased unless the Accredited Investor has liquid assets sufficient to
assure that this investment will cause no undue financial difficulties and the
Accredited Investor can provide for current financial needs and possible
personal contingencies from other funds. The Accredited Investor understands
that the transfer of the securities comprising the Shares will be prohibited
absent full compliance with the Securities Act of 1933 and applicable state
securities laws.
5.4. The Accredited Investor is acquiring the securities offered hereby
for his, her or its own account for investment and not with a view to the
resale or other distribution thereof. The undersigned understands that a
restrictive legend will be placed on the securities referencing the Securities
Act.
Subscription Agreement -7-
<PAGE>
5.5. The undersigned has full power and authority necessary to enter
into this Agreement and to perform his, her or its obligations hereunder. All
information which the Accredited Investor has provided to the Company or its
representatives concerning the Accredited Investor's financial position and
knowledge of investment matters is correct and complete as of the date set
forth on the signature page below.
5.6. The Accredited Investor has reviewed carefully the definition of
Accredited Investor set forth below and is an Accredited Investor within that
definition.
Except as provided in this Subscription Agreement, the current Business Plan
and in any other written information, if any, furnished by the President the
Company expressly for the purposes of this Offering, the Accredited Investor
warrants that no other representations, statements or inducements were made to
the Accredited Investor to purchase the securities offered hereby. The
Accredited Investor acknowledges that projections so provided, if any, are
based upon certain assumptions as to future sales, expenses and operations of
the Company, and there can be no guarantee or assurance that future the
Company operations will attain the levels included in any such projections.
Definition of Accredited Investor
The term "Accredited Investor" is defined in Rule 501(a) of Regulation D
promulgated under the Securities Act as follows:
(1) Certain banks, savings and loan institutions, broker-dealers, investment
companies and other entities including an employee benefit plan within
the meaning of Title I of the Employee Retirement Income Security Act of
1974 with total assets in excess of $5,000,000;
(2) Any private business development company as defined in Section
202(a)(22) of the Investment Advisers Act of 1940;
(3) Any organization described in Section 501(c)(3) of the Internal Revenue
Code, corporation, Massachusetts or similar business trust, or
partnership, not formed for the specific purpose of acquiring the
Shares, with total assets in excess of $5,000,000;
(4) Any director, executive officer, or general partner of the issuer of the
securities being offered or sold, or any director, executive officer, or
general partner of a general partner of that issuer;
(5) Any natural person whose individual net worth, or joint net worth with
that person's spouse, at the time of his purchase exceeds $1,000,000;
(6) Any natural person who had an individual income in excess of $200,000
or, with that person's spouse a joint income in excess of $300,000, in
each of the two most recent years and who reasonably expects an income
in excess of $200,000 (or joint income with that person's spouse in
excess of $300,000) in the current year;
(7) Any trust, with total assets in excess of $5,000,000, not formed for the
specific purpose of acquiring the securities offered, whose purchase is
directed by a sophisticated person as described in Section
230.506(b)(2)(ii) of Regulation D, i.e. a person having such knowledge
and experience in financial and business matters that he is capable of
evaluating the merits and risks of the prospective investment; or
(8) Any entity in which all of the equity owners are accredited investors
under any of the paragraphs above.
In calculating "net worth," the value of a principal residence must be valued
at cost or at a written appraised value used by an institutional lender to
make a loan secured by the property, in either case net of current
encumbrances on the property.
Subscription Agreement -8-
<PAGE>
Signature Page
THE UNDERSIGNED SUBSCRIBER IS AN ACCREDITED INVESTOR BY REASON OF PARAGRAPH(S)
SET FORTH IN THE DEFINITION ABOVE.
- ------
The undersigned hereby agrees to purchase One Million (1,000,000) Shares of
Common Stock and Five Hundred Thousand (500,000) Class F Common Stock Purchase
Warrants in THE QUARTZ GROUP, INC., a Colorado corporation ("the "Company") in
accordance with this Subscription Agreement, and is tendering herewith a check
therefor in the amount of $100,000 payable to the account of THE QUARTZ GROUP,
INC.
Very truly yours,
DATE: Sept. 30, 1997
/s/ Christina G. Etchison /s/ Donald P. Etchison
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[Signature(s) and Title if a Corporation, Partnership or Trust]
Christina G. Etchison Donald P. Etchison
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[Please print name as it should appear on your certificates]
ADDRESS:
552 Masado Place TELEPHONE NUMBER: (407) 330-1490
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Lake Mary, FL 32746 FAX NUMBER: (407) 321-9701
- ------------------------------ ----------------------
SOCIAL SECURITY OR
- ------------------------------ IRS IDENTIFICATION NUMBER:
###-##-####
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###-##-####
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STATE IN WHICH REGISTERED TO VOTE, if an Individual: FL.
-------------------
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
ACCEPTED:
THE QUARTZ GROUP, INC.
By: /s/ David J. Lopes DATE: Sept. 27, 1997
------------------------- ----------------------------
Title: President
----------------------- Rev 97a
Subscription Agreement -9-
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933 (THE "ACT"). ACCORDINGLY, NO TRANSFER OF THESE
SECURITIES OR ANY INTEREST THEREIN MAY BE MADE EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE ACT UNLESS THE ISSUER HAS RECEIVED AN OPINION
OF COUNSEL SATISFACTORY TO IT THAT SUCH TRANSFER DOES NOT REQUIRE REGISTRATION
UNDER THE ACT.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
THE QUARTZ GROUP, INC.
(Incorporated under the laws of the State of Colorado)
CLASS F COMMON STOCK PURCHASE WARRANT
500,000 SHARES OF COMMON STOCK
Void After September 30, 2002 (the "Expiration Date")
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
This is to certify that, for value received, receipt of which is hereby
acknowledged, ,
or assigns (hereinafter called the "holder"), is entitled to purchase from THE
QUARTZ GROUP, INC., a Colorado corporation (hereinafter called the "Company"),
at the Warrant Price of FIFTY CENTS ($0.50) per share, subject to adjustment
as hereinafter provided (hereinafter called the "Warrant Price"), at any time
on or before 5:00 P.M. local California time on September 30, 2002 (the
"Expiration Date"), up to FIVE HUNDRED THOUSAND (500,000) fully paid and non-
assessable shares of Common Stock of the Company (hereinafter called "Common
Stock"), subject to the terms and conditions hereof, including such
adjustments as may be required under the terms hereof.
This Warrant was originally issued in September 1997 as part of a
private placement offering by the Company. This Warrant represents part of
an authorized issue of Class F Common Stock Purchase Warrants and is herein
called "this Warrant."
This Warrant may be exercised by the holder as hereinabove provided as
to the whole or any part of the shares of Common Stock covered hereby, by
surrender of this Warrant at the principal office of any transfer agent for
the Common Stock, or, if the Company shall not have any transfer agent for the
Common Stock, at the principal office of the Company (any such transfer agent,
or the Company acting hereunder, being hereinafter called the "Warrant
Agent"), with the statement of election to subscribe attached hereto duly
executed and upon payment to the Company of the Warrant Price for shares so
purchased in cash or by certified check or bank draft. Thereupon (except that
if, upon such date, the stock transfer books of the Company shall be closed,
then upon the next succeeding date on which such transfer books are open),
this Warrant shall be deemed to have been exercised and the person exercising
the same to have become a holder of record of shares of Common Stock (or of
the other securities or property to which such person is entitled upon such
exercise) purchased hereunder for all purposes, and certificates for such
shares so purchased shall be delivered to the purchaser within a reasonable
time (not exceeding five business days, except while the transfer books of the
Company are closed) after this Warrant shall have been exercised as set forth
hereinabove. If this Warrant shall be exercised in respect of a part only of
the shares of Common Stock covered hereby, the holder shall be entitled to
receive a similar warrant of like tenor and date covering the number of shares
in respect of which this Warrant shall not have been exercised.
<PAGE>
The Company covenants and agrees that all shares which may be issued
upon the exercise of the rights represented by this Warrant will, upon
issuance, be validly issued, fully paid and non-assessable and free from all
taxes, liens and charges with respect to the issue thereof (other than taxes
in respect of any transfer occurring contemporaneously with such issue). The
Company further covenants and agrees that, during the period within which the
rights represented by this Warrant may be exercised, the Company will at all
times have authorized and reserved a sufficient number of shares of Common
Stock to provide for the exercise of the rights represented by this Warrant.
The rights of the holder of this Warrant shall be subject to the
following terms and conditions:
SECTION 1. CERTAIN ADJUSTMENTS AND NOTICES
1.1. In case the Company shall hereafter at any time change as a whole,
by split-up, subdivision or combination in any manner or by the making of a
stock dividend, the number of outstanding shares of Common Stock into a
different number of shares of Common Stock with or without par value, (i) the
number of shares of Common Stock which immediately prior to such change the
holder of this Warrant shall have been entitled to purchase pursuant to this
Warrant shall be increased or decreased in direct proportion to the increase
or decrease, respectively, in the number of shares of Common Stock outstanding
immediately prior to such change, and (ii) the Warrant Price in effect
immediately prior to such change shall be increased or decreased, as the case
may be, in inverse proportion to such increase or decrease in the number of
such shares outstanding immediately prior to such change; in any such event,
the rights of the holder of this Warrant to an adjustment in the number of
shares of Common Stock purchasable on exercise of this Warrant as herein
provided shall continue and be preserved in respect of any shares, securities,
or assets which the holder of this Warrant becomes entitled to purchase
hereafter.
1.2. In case of any capital reorganization or any reclassification of
the capital stock of the Company or in case of the consolidation or merger of
the Company with another corporation, or in case of any sale, transfer or
other disposition to another corporation of all or substantially all the
property, assets, business and goodwill of the Company as an entirety, as the
case may be, the holder of this Warrant shall thereafter be entitled to
purchase (and it shall be a condition to the consummation of any such
reorganization, reclassification, consolidation, merger, sale, transfer or
other disposition, that appropriate provision shall be made so that such
holder shall thereafter be entitled to purchase) the kind and amount of shares
of stock and other securities and property receivable, upon such capital
reorganization, reclassification of capital stock, consideration, merger,
sale, transfer or other disposition, by a holder of the number of shares of
Common Stock which this Warrant entitled the holder thereof to purchase
immediately prior to such capital reorganization, reclassification of capital
stock, consolidation, merger, sale, transfer or other disposition; and in any
such case appropriate adjustments (as determined in good faith by the Board of
Directors of the Company or of such other corporation, as the case may be)
shall be made in the application of the provisions herein set forth with
respect to rights and interests thereafter of the holder of this Warrant, to
the end that the provisions set forth herein (including the specified changes
in and other adjustments of the Warrant Price) shall thereafter be applicable,
as near as reasonably may be, in relation to any shares or other property
thereafter purchasable upon the exercise of this Warrant.
1.3. In case the Company shall hereafter at any time declare a dividend
upon shares of Common Stock payable otherwise than out of retained earnings or
otherwise than in shares of Common
Class F Common Stock Purchase Warrant Page 2
<PAGE>
Stock or in stock or obligations directly or indirectly convertible into or
exchangeable for Common Stock, the holder of this Warrant shall, upon exercise
of this Warrant in whole or in part, be entitled to receive, in addition to
the number of shares of Common Stock deliverable upon such exercise against
payment of the Warrant Price therefor, but without further consideration, the
cash, stock or other securities or property which the holder of this Warrant
would have received as dividends (otherwise than out of such retained earnings
and otherwise than in shares of Common Stock or in such convertible or
exchangeable stock or obligations) if continuously since the date set forth at
the foot of this Warrant such holder (i) had been the holder of record of the
number of shares of Common Stock deliverable upon such exercise and (ii) had
retained all dividends in stock or other securities (other than shares of
Common Stock or such convertible or exchangeable stock or obligations) paid or
payable in respect of said number of shares of Common Stock or in respect of
any such stock or other securities so paid or payable as such dividends. For
purposes of this Section 1.3, a dividend payable otherwise than in cash shall
be considered to be payable out of retained earnings only to the extent of the
fair value of such dividend as determined by the Board of Directors of the
Company.
1.4. No certificates for fractional shares of Common Stock shall be
issued upon the exercise of this Warrant, but in lieu thereof the Company
shall, upon exercise in full of this Warrant, purchase out of funds legally
available therefor any such fractional interest for an amount in cash equal to
the current market value of such fractional interest calculated to the nearest
cent, computed on the basis of the closing sale price, as reported by the
National Quotation Bureau, of the Common Stock in the over-the-counter market
on the most recent day within ten days prior to the date of such exercise for
which such closing prices shall have been so reported, or, if the Common Stock
is listed on a stock exchange registered with the Securities and Exchange
Commission or traded on the NASDAQ Stock Market, the last reported sale price
on such day; and if there shall have been no sale on said day, then the
computation shall be made on the basis of the last reported sale price within
ten days prior to such date. If there have been no reported closing sale
prices, as the case may be, within such ten days, the current market value
shall be fixed in a manner determined in good faith by the Board of Directors
of the Company.
1.5. Whenever the Warrant Price is adjusted, as herein provided, the
Company shall forthwith file with the Warrant Agent a statement signed by the
President or any one of the Vice Presidents of the Company and by its
Treasurer or an Assistant Treasurer, stating the adjusted Warrant Price
determined as herein provided. Such statement shall show in detail the facts
requiring such adjustment, including a statement of the consideration received
by the Company for any additional securities issued. Whenever the Warrant
Price is adjusted, the Company will forthwith cause a notice stating the
adjustment and the Warrant Price to be mailed to the registered holder of this
Warrant at the address of such holder shown on the books of the Company.
SECTION 2. INVESTMENT INTENT
2.1. The holder of this Warrant, by acceptance hereof, agrees to give
written notice to the Company before exercising or selling this Warrant of
such holder's intention to do so, describing briefly the manner of any
proposed sale of this Warrant or such holder's intention as to the disposition
to be made of shares of Common Stock issuable upon such proposed exercise
hereof. Promptly upon receiving such written notice, the Company shall
present copies thereof to counsel for the Company for such counsel's opinion.
If in the opinion of such counsel, or upon receipt by the Company of a
reasonably satisfactory opinion from any other counsel, to the effect that the
proposed exercise or sale may be effected without registration under the
Securities Act of 1933, as amended ("Securities Act"), of this Warrant or the
shares of Common Stock issuable on the exercise hereof, the holder of this
Warrant shall
Class F Common Stock Purchase Warrant Page 3
<PAGE>
be entitled to sell this Warrant, or to exercise this Warrant in accordance
with its terms and dispose of the shares received upon such exercise, all in
accordance with the terms of the notice delivered by such holder to the
Company. If in the opinion of counsel the proposed exercise or sale described
in said written notice given by the holder of this Warrant may not be effected
without registration of this Warrant or the shares of Common Stock issuable on
the exercise hereof, the Company shall promptly give written notice of such
opinion to the holder of this Warrant. The holder of this Warrant agrees
that, if the proposed exercise or sale by such holder cannot, in the opinion
of counsel, be effected without such registration, the holder will not so
exercise or sell this Warrant or the shares of Common Stock issuable upon the
exercise hereof unless this Warrant or the shares of Common Stock issuable
upon the exercise hereof are registered by the Company as herein provided.
SECTION 3. REGISTRATION RIGHTS -- "PIGGY-BACK" REGISTRATION.
3.1. If, at any time during the term of this Warrant, the Company
shall file a registration statement or post-effective amendment to a
registration statement on Form SB-1, SB-2, S-1, S-2 or S-3, or any form
substituted therefor, with respect to any shares of its capital stock under
the Securities Act, the Company will give to each holder or holders of the
Warrants and/or shares of Common Stock acquired upon the exercise of the
Warrants at least ten (10) days prior written notice of its intention to file
such registration statement (the "Registration").
3.2. Unless any holder of Warrants shall direct otherwise, the Company
shall include all Warrants and shares of Common Stock evidenced by the
Warrants or issued upon the exercise thereof in any such registration
statement and will maintain the prospectus included in any registration state-
ment which may be so filed current for a period of at least nine (9) months
subsequent to the effective date of such registration statement.
3.3. Nothing in this Section 3 shall be deemed to obligate the Company
to proceed with any registration of its securities after giving the notice
herein provided.
3.4. The obligations of the Company under this Section 3.1 shall be
fully satisfied after it has notified the holders of the Warrants of one (1)
opportunity to participate in any registration statements under this Section 3
which shall have become effective under the Securities Act.
3.5. All costs and expenses of any such registration statement
incurred by the Company, including, without limitation, filing fees, and all
legal, accounting and printing costs and expenses, shall be paid by the
Company. The holder of the Warrants and/or shares issued upon exercise of the
Warrants shall pay all sales and brokerage commissions directly related to the
sale of securities for their account.
3.6. POSSIBLE LOCK-UP LIMITATIONS UPON "PIGGY-BACK" REGISTRATION
RIGHTS. If an investment banker engaged by the Company in connection with an
underwritten public offering of securities proposed for registration under the
Securities Act for the account of the Company determines in its sole
discretion that registration of such securities for the account of the holders
of the Warrants or shares of Common Stock acquired upon exercise of the
Warrants would interfere with or be detrimental to such offering for the
account of the Company, the Company shall give prompt written notice of such
determination to such holder or holders, setting forth in reasonable detail
the reasons for such determination. In such event the Company, upon written
notice to the holder of such securities, shall have the right to require, as a
condition of such registration, that the holder of such securities execute a
written agreement that such holder will not sell such securities for a period
of up to six (6) months after the effective date of the registration statement
without the prior consent of the underwriter.
Class F Common Stock Purchase Warrant Page 4
<PAGE>
3.7. AMENDMENT OR SUPPLEMENT TO PROSPECTUS. If at any time within nine
(9) months after a registration statement covering the Warrant and shares of
Common Stock subject to or acquired upon exercise of Warrants, as provided in
this Section 3, shall have become effective, to the knowledge of the Company
any event occurs as a result of which a prospectus included therein relating
to the Warrants or shares of Common Stock subject to or acquired upon exercise
of Warrants, as then amended or supplemented, would include any untrue
statement of a material fact, or would not state a material fact necessary to
make the statements therein, in the light of the circumstances then existing,
not misleading, the Company will promptly notify the holder or holders of
Warrants and/or shares of Common Stock covered by such prospectus thereof and
the Company will at its own cost and expense amend or supplement such
prospectus in order to correct such statement or omission in order that the
prospectus as so amended or supplemented will comply with the requirements of
Section 10(a) of the Securities Act.
3.8. UNDERTAKINGS. In connection with any registration statement or
post-effective amendment pursuant to this Section 3:
(a) The Company will comply with all applicable rules and regulations
of the Securities and Exchange Commission or any similar Federal commission
and will make available to its security holders, as soon as practicable, an
earnings statement (which need not be audited) covering a period of at least
12 months, but not more than 18 months, beginning with the first month after
the effective date of the registration statement or post-effective amendment,
as the case may be, which earnings statement will satisfy the provisions of
Section 11(a) of the Securities Act.
(b) Each holder of the Warrants and/or shares of Common Stock covered
by such registration statement, as the case may be, will furnish in writing to
the Company such information regarding such holder and its proposed plan of
distribution of such shares as the Company shall reasonably request and which
would be available to such holder without undue expenditure of time or cost in
order to have such registration statement declared effective.
(c) The Company agrees to furnish to the holders of the Warrants and
of the shares of Common Stock acquired upon the exercise thereof, a prospectus
(in such reasonable quantities as such holders shall request) containing cer-
tified financial statements and other information meeting the requirements of
the Securities Act and the rules and regulations thereunder and relating to
the Warrants and/or shares of Common Stock subject thereto and/or shares of
Common Stock acquired upon the exercise of the Warrants. The furnishing of
such prospectus shall be at the expense of the Company.
(d) The Company will use its best efforts to qualify the shares of
Common Stock covered by any registration statement or post-effective amendment
for public offering or sale on the effectiveness thereof in such jurisdictions
as the holders offering the same shall reasonably request and to maintain the
effectiveness of such qualification for a period not less than nine (9) months
after notification to holder; provided, however, that the Company shall not be
required to qualify as a foreign corporation in any jurisdiction or to give a
general consent to service of process in any jurisdiction except in connection
with matters arising from the sale of shares of Common Stock in such
jurisdiction, nor shall the Company be required to qualify the shares for sale
at the Company's expense in any states other than New York except with the
consent of the Company.
(e) Any new prospectus with respect to the shares of Common Stock
issuable upon exercise of the Warrants shall provide that such securities may
be offered or sold only upon such terms respecting the price or distribution
thereof, as the owners reasonably determine.
Class F Common Stock Purchase Warrant Page 5
<PAGE>
3.9. INDEMNIFICATION. In the event of any registration of Warrants or
shares of Common Stock subject or acquired upon exercise of Warrants, the
Company will indemnify and hold harmless each holder of Warrants and shares of
Common Stock being offered and each person, if any, who may be deemed to
control such holder within the meaning of Section 15 of the Securities Act
against any losses, claims, damages or liabilities, joint or several, to which
any of them may become subject under the Securities Act, or otherwise, in so
far as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained, on the effective date thereof, in
any registration statement or post-effective amendment under which such
Warrants and shares of Common Stock were registered under the Securities Act,
any preliminary prospectus or final prospectus contained therein, or any
amendment or supplement thereto, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, and
will reimburse each of them for any legal or any other expenses reasonably
incurred by them in connection with investigating, defending or settling any
such loss, claim, damage, liability or action; provided, however, that the
Company will not be liable in any such case to any of them to the extent that
any such loss, claim, damage, liability or expense arises out of or is based
upon any untrue statement of any material fact contained, or is based upon any
omission or alleged omission to state a material fact, on the effective date
thereof in such registration statement or post-effective amendment, such
preliminary prospectus or such final prospectus or any such amendment or
supplement in reliance upon and in conformity with information furnished in
writing by such persons to the Company expressly for use in the preparation
thereof.
The obligations of indemnification hereunder shall include any and all
losses, claims, damages, judgments, liabilities or costs, including related
attorneys' fees and other costs of investigation, preparation, defense and
providing evidence, whether or not in connection with litigation in which the
party to be indemnified is a party, as and when such losses, claims, damages,
judgments, liabilities or costs are incurred, which are directly or
indirectly caused by, relating to, based upon or arising out of any act or
omission on the part of the indemnifying party hereunder.
Each such person shall promptly give notice to the Company after such
person has actual knowledge of any such claim as to which indemnity may be
sought hereunder, or of the commencement of any legal proceedings against such
person as to such claim, whichever shall first occur, and (subject to clause
(c) below) the Company shall promptly assume the defense thereof, including
the employment of counsel reasonably satisfactory to such person and the
payment of all fees and expenses incurred in connection with the defense
thereof. Such person shall have the right to employ separate counsel in any
such action and to participate in the defense thereof if (a) such person shall
pay the fees and expenses of such separate counsel or (b) the Company shall
have failed promptly to assume the defense of such action or proceeding
through counsel reasonably satisfactory to such person or (c) the named
parties to any such action or proceeding (including any impleaded parties)
include both such person and the Company and such person shall have been
advised in writing by counsel that there may be one or more legal defenses
available to him which are different from or additional to those available to
the Company, in which case such person may elect in writing to employ separate
counsel at the expense of the Company (after which the Company shall not have
the right to defense of such action or proceeding on behalf of such person),
it being understood, however, that the Company shall not, in connection with
any one such action or proceeding or separate but substantially similar or
related actions or proceedings in the same jurisdiction arising out of the
same general allegations or circumstances, be liable for the fees and expenses
of more than one separate firm of attorneys (together with appropriate local
counsel) at any time, which firm shall be designated by agreement of all such
persons and, if no agreement is reached by all such persons and, if no
agreement is reached by all such persons within 15 days of the filing of the
relevant complaint, by
Class F Common Stock Purchase Warrant Page 6
<PAGE>
the Company. The Company shall not be liable for any settlement of any such
action or proceeding effected without its written consent (which shall not be
unreasonably withheld), but if any such action or proceeding is settled with
its written consent, the Company agrees to indemnify and hold harmless such
person from and against any loss, claim, damage, or liability (to the extent
stated above) by reason of such settlement or judgment.
SECTION 4. MISCELLANEOUS
4.1. The issue of any stock or other certificate upon the exercise of
this Warrant shall be made without charge to the registered holder hereof for
any tax in respect of the issue of such certificate. The Company shall not,
however, be required to pay any tax which may be payable in respect of any
transfer involved in the issue and delivery of any certificate in a name other
than that of the registered holder of this Warrant, and the Company shall not
be required to issue or deliver any such certificate unless and until the
person or persons requesting the issue thereof shall have paid to the Company
the amount of such tax or shall have established to the satisfaction of the
Company that such tax has been paid.
4.2. This Warrant and all rights hereunder or any portion thereof are
transferable on the books of the Company, upon surrender of this Warrant, with
the form of assignment attached hereto duly executed by the registered holder
hereof or by his attorney duly authorized in writing, to the Warrant agent at
its principal office hereinabove referred to, and thereupon there shall be
issued in the name of the transferee or transferees, in exchange for this
Warrant, a new Warrant or Warrants of like tenor and date, representing in the
aggregate the right to subscribe for and purchase the number of shares, or
such portion thereof as shall be so transferred, which may be subscribed for
and purchased hereunder and if there shall be any balance of such shares not
so transferred, there shall be issued in the name of the registered holder of
this Warrant, a new Warrant or Warrants of like tenor and date representing in
the aggregate the right to subscribe for and purchase the balance of the
number of shares which may be subscribed for and purchased hereunder.
4.3. If this Warrant shall be lost, stolen, mutilated or destroyed, the
Company may instruct the Warrant Agent, on such terms as to indemnify or
otherwise as the Company may in its discretion impose, to issue a new Warrant
of like denomination, tenor and date as the Warrant so lost, stolen, mutilated
or destroyed. Any such new Warrant shall constitute an original contractual
obligation of the Company, whether or not the allegedly lost, stolen,
mutilated or destroyed Warrant shall be at any time enforceable by anyone.
4.4. The Company and any Warrant Agent may deem and treat the
registered holder of this Warrant as the absolute owner of this Warrant for
all purposes and shall not be affected by any notice to the contrary.
4.5. This Warrant shall not entitle the holder to any rights of a
stockholder of the Company, either at law or in equity, including, without
limitation, the right to vote, to receive dividends and other distributions,
to exercise any preemptive rights or to receive any notice of meetings of
stockholders or of any other proceedings of the Company.
4.6. This Warrant shall be governed by the laws of the State of
California.
Class F Common Stock Purchase Warrant Page 7
<PAGE>
IN WITNESS WHEREOF, THE QUARTZ GROUP, INC. has caused this Warrant to be
signed in its corporate name by its duly authorized officer as of the day and
year written below.
Dated: September _____, 1997
THE QUARTZ GROUP, INC.
By
------------------------
David J. Lopes, President
Attest:
________________________________
Secretary
Class F Common Stock Purchase Warrant Page 8
Rev-97c
SUBSCRIPTION AGREEMENT for $750,000 in CASH
THE QUARTZ GROUP, INC.
3029 S. Harbor Blvd.
Santa Ana, California 92704
Telephone (714) 429-5984
FAX Number (714) 429-5987
SUBSCRIPTION AGREEMENT
Common Stock, Class E Common Stock Purchase Warrants
and Limited Recourse $750,000 Promissory Note
THE QUARTZ GROUP, INC.
Attention: David J. Lopes, President
3029 S. Harbor Blvd.
Santa Ana, California 92704
FAX No. (714) 429-5987
1. SUBSCRIPTION. The undersigned, an accredited investor within
the meaning of Regulation D promulgated under the Securities Act of 1933
(herein called the "Accredited Investor"), hereby subscribes for the purchase
of Seven Million (7,000,000) shares (the "Shares") of common stock ("Common
Stock"), Six Million (6,000,000) Class E Common Stock Purchase Warrants
exercisable at $0.25 per share expiring on September 30, 2002 ("Class F
Warrants") and a non-interest bearing Limited Recourse Promissory Note in the
principal amount of $750,000, all to be issued by THE QUARTZ GROUP, INC., a
Colorado corporation ("the "Company") for the account of the Accredited
Investor upon the terms and conditions set forth in this Subscription
Agreement. The subscription price shall be Seven Hundred Fifty Thousand
Dollars ($750,000) in United States funds, payable in cash upon acceptance of
this subscription by the Company. The form of Class E Warrants and Limited
Recourse Promissory Note offered hereby are each attached Exhibits to this
Subscription Agreement and are incorporated by reference herein. The
Investor acknowledges that the liability of the Company to pay the obligations
represented by the Limited Recourse Promissory Note is limited to proceeds
realized by the Company, if any, from the exercise of the Class E Warrants and
the exercise of any other common stock purchase warrants issued and sold by
the Company on or prior to September 30, 1997 which remain outstanding as of
September 30, 1997.
Investors in this Offering should review, among other information available
from the Company, the summary of certain risk factors described in Section 3
of this Subscription Agreement before making an investment decision.
2. DESCRIPTION OF OFFERINGS.
2.1. THE OFFERINGS. The Company is concurrently offering (i) to the
Accredited Investor for the sum of $750,000, the Shares, Class E Warrants and
Limited Recourse Promissory Note described above, (ii) to two other accredited
investors for the total sum of $50,000, a total of 1,000,000 shares of common
stock, and (iii) to one other accredited investor for a total sum of $100,000,
a total of 1,000,000 shares of common stock and 500,000 Class F Warrants
exercisable into common stock at $.50 per share expiring on September 30, 2002
(herein collectively called the "Offerings"). The Offerings are being made on
a "best efforts" to a limited number of accredited investors in a private
placement offering of securities in accordance with Rule 505 of Regulation D
under the U.S. Securities Act of 1933, as amended (the "Securities Act").
Prospective investors should note that the classes of securities and
consideration per share being paid in the separate offerings included in the
Offerings are not proportionate to each other.
<PAGE>
The Offerings will expire at the earlier of receipt and acceptance of
subscriptions to a total of $900,000 in subscriptions or on September 30, 1997
unless extended by the Company for an additional period not exceeding 30 days.
The Company reserves the right to terminate the Offerings at any earlier date.
2.2. The Accredited Investor acknowledges that an investment in the
securities offered hereby is speculative, involves a high degree of risk, and
should not be purchased by persons who cannot afford the loss of their entire
investment, and represents that the Accredited Investor has relied only on the
information contained herein or otherwise provided in writing by duly
authorized representatives of the Company. The Accredited Investor
acknowledges receipt of the Company's current Business Plan. The Accredited
Investor has carefully read and reviewed this Subscription Agreement and all
of the Company's filings during the last two fiscal years with the Securities
and Exchange Commission which are incorporated by reference herein (including,
without limitation, the Company's Annual Report on Form 10-KSB for the fiscal
year ended June 30, 1995, its interim quarterly Reports on Form 10-QSB for the
Quarters ended September 30, 1996, December 31, 1996 and March 31, 1997, and
its Current Report on Form 8-K dated as of June 2, 1997, and has asked such
questions of management of the Company and received such additional
information as he, she or it deems necessary in order for the Accredited
Investor to make an informed decision with respect to an investment in the
Company's securities. The Accredited Investor represents and warrants that
he, she or it has received complete and satisfactory answers to all such
inquiries. The Accredited Investor is not relying on oral or written
representations or assurances from the Company or any representatives of the
Company, other than as set forth in this Agreement, the Company's current
Business Plan, reports filed by the Company with the Securities and Exchange
Commission and any documents in writing signed by David J. Lopes as the
President of the Company.
The Company further agrees to make available to the Accredited Investor
the opportunity to ask questions of, and receive written answers from, David
J. Lopes as the President of the Company concerning the terms and conditions
of this Offering, the business and financial status of the Company and any
other relevant matters, and to obtain any additional written information, to
the extent that the Company possesses such information or can acquire it
without unreasonable effort or expense, necessary to verify the accuracy of
the information set forth in the documents furnished to the Accredited
Investor in connection with this Offering.
2.3. SECURITIES LAW MATTERS. The Accredited Investor acknowledges
that the Shares have not been, and will not be, registered under the
Securities Act or qualified under applicable state securities laws. The
Company will rely on the representations of the accredited investors in the
Offerings for an exemption from registration under Rule 505 of the Securities
Act of 1933 (the "Securities Act") as to the securities issued pursuant to the
Offerings and any shares of common stock issued upon exercise of warrants
included in the Offerings. The transferability thereof will be restricted by
the registration or qualification provisions of the Securities Act and may be
further restricted by state laws separate and apart from the provisions of the
Securities Act.
2.4. OTHER.
2.4.1. This Subscription Agreement may be executed in one or more
counterparts and transmitted by facsimile telephonic transmission, each of
which shall be deemed to constitute an original and shall become effective
when one or more counterparts have been signed by each of the parties hereto
and delivered or transmitted by facsimile telephonic transmission to the other
party.
Subscription Agreement -2-
<PAGE>
2.4.2. This Agreement may be executed in one or more counterparts
and it is not necessary that the signatures of all parties appear on the same
counterpart, but such counterparts together shall constitute but one and the
same agreement. The headings of the sections of this Agreement have been
inserted for convenience of reference only, and shall not be deemed to be a
part of this Agreement.
2.3.3. The Accredited Investor and the Company agree this Agreement
shall be governed by and construed in accordance with the laws of the State of
California. Any dispute arising out of or relating to this Agreement and the
transactions contemplated herein or the breach of this Agreement or such
transactions shall be resolved by arbitration pursuant to the Rules of the
American Arbitration Association then in effect and shall take place in the
County of Orange, State of California. Any litigation, including litigation
arising out of or concerning such arbitration, shall be conducted exclusively
in the trials courts of general jurisdiction for the County of Orange, State
of California. All parties hereby consent to the jurisdiction of such court
for all such litigation.
2.3.4. Time shall be of the essence of this Agreement.
3. CERTAIN RISK FACTORS. The securities being offered hereby are
speculative and subject to a high degree of risk of loss of the investment.
Persons who cannot afford to lose their investment should not purchase the
securities offered hereby. Prospective investors should consider carefully,
among other factors described herein, the following matters:
HISTORY OF OPERATING LOSSES; ACCUMULATED DEFICIT; DEFICIENCY IN
STOCKHOLDERS' EQUITY; DEFICIT IN WORKING CAPITAL; AUDITOR'S QUALIFICATION;
PROPOSED JOINT VENTURE
The Company commenced operations in September 1987, was required to seek
the protection of Chapter 11 of the U.S. Bankruptcy Act in 1992, and has not
operated on a profitable basis. Net losses before extraordinary items were
$1,121,000 and $372,000 for the fiscal years ended June 30, 1996 and 1995,
respectively, and $604,000 for the nine months ended March 31, 1997. At March
31, 1997, the Company had an accumulated deficit from operations since its
inception of $3,331,000 and a $701,000 deficiency in its stockholders' equity.
Excluding the effect of commitment and continent liabilities, if any, total
liabilities at March 31, 1997 were $946,000 and there were also redeemable
Series A preferred stock outstanding of $136,000 which require mandatory
redemption from future net income, if any.
At March 31, 1997, the Company had limited cash resources of $26,000 and
a deficiency in working capital of $386,000; included in current liabilities,
however, is a contingent liability of $169,000 due the Company's former
President under a settlement agreement that is required to be paid only from
5% of proceeds realized from subsequent financings by the Company. There can
be no assurance that the Company will obtain additional financing.
THE REPORT OF STOCKMAN KAST RYAN & SCRUGGS, PC, ON THE FINANCIAL
STATEMENTS OF THE COMPANY FOR THE FISCAL YEAR ENDED JUNE 30, 1996 CONTAINS A
PARAGRAPH EXPRESSING SUBSTANTIAL DOUBT CONCERNING THE ABILITY OF THE COMPANY
TO CONTINUE AS A GOING CONCERN. Management's plan to address these matters
has been to dispose of its software media duplication and distribution
business and close all operations in Colorado. The Company, now
headquartered in Santa Ana, California, is focusing its available resources
and personnel on the development of a quartz glass business and sale of quartz
glass products. Initial sales have been obtained, with manufacturing
temporarily being contracted to third parties.
Subscription Agreement -3-
<PAGE>
The Company has negotiated a joint venture agreement to acquire a
minority interest in a quartz glass manufacturing business based in Northern
California, but will be unable to participate in that venture unless it
receives proceeds from the sale of all securities included in the Offerings.
Historical operations of the business in Northern California have not been
profitable and the proposed joint venture will be largely dependent upon
increases in sales stimulated by the participation of a foreign company, which
future sales increases have not been committed. There can be no assurance
that the Company will be able to successfully complete its minority
participation in the joint venture or that, if completed, that the joint
venture will become profitable. In addition, since the Company will own only
a minority equity position in the joint venture if it is able to complete the
proposed transaction, the Company may have only a limited influence in control
of the business operations and policies of the joint venture. Further
information in writing as to the proposed joint venture may be obtained on a
confidential basis by the Accredited Investor from the President of the
Company.
Although increases in revenues are required for the Company to absorb
existing overhead, in view of historical losses from operations, negative
working capital and the Company's debt service obligations, the Company has
not been able to invest significantly in sales and marketing and accordingly
has generally limited these activities to telemarketing and selected trade
shows. Results of operations in the future will be influenced by numerous
factors, including the ability of the Company to successfully expand its
products and services and/or to negotiate the acquisition of another business
enterprise, the development and implementation of sales and marketing
programs, competitive factors and the ability of the Company to control costs.
As a result of these factors, the forecast of future business operations is
subject to numerous uncertainties. There can be no assurance that revenue
growth or profitability on a quarterly or annual basis will be attained. The
Company therefore is subject to all the risks incident to a business with a
limited history of operations including, among others, the possibility of
unforeseen expenses, difficulties, complications and delays, and it may be
difficult or impossible to obtain additional financing if required for the
Company's business.
DEPENDENCE ON GENERATING ADDITIONAL REVENUES. The Company's core business is
highly competitive and the Company is a recent entry to a mature market.
Improved cash flows will be dependent, among other factors, on increasing
sales, and there can be no assurance that sales levels will increase.
NEED FOR ADDITIONAL FINANCING. Management anticipates the Company will be
required to seek additional equity financing in the future, in addition to the
proceeds of this Offering, to sustain its operations, to support the
introduction of new products or services and/or to finance the acquisition of
another business if a suitable acquisition candidate is identified. The
Company's actual future capital requirements will depend on numerous factors,
including, but not limited to, the Company's progress in generating increased
revenues, the cost of marketing and advertising programs, management's ability
to control costs, inventory requirements, competing technological and market
developments. If the Company generates revenue increases, it may require
additional working capital to support increases in manufacturing capacity and
for additional capital required to finance receivable and inventory increases.
No assurance can be given that additional financing will be forthcoming or, if
available, would be sufficient to satisfy the Company's future operating
requirements. The Company has no commitment to obtain additional funds and
there can be no assurance it will be successful in the event management
determines the Company should initiate efforts to obtain additional financing.
Because of the Company's limited capital, it also may undertake
additional equity offerings whenever conditions are favorable, even if it does
not have an immediate need for additional capital at
Subscription Agreement -4-
<PAGE>
that time. There can be no assurance that the Company will be able to obtain
additional financing when needed, or that any such financing, if available,
will be obtainable on reasonable terms. Any such additional financing may
result in significant dilution to existing stockholders. If adequate funds
are not available, the Company may be required to accept unfavorable
alternatives, including the delay, reduction or elimination of product
introductions and expansion, marketing and advertising and other operating
expenses.
DEPENDENCE ON KEY PERSONNEL. The success of the Company is substantially
dependent on the services of its officers, key employees and professional
consultants. The Company is dependent in particular upon the services of
David J. Lopes, its President and Chief Executive Officer. The Company also
relies, and for the foreseeable future will rely, on independent advisors and
consultants to provide certain services to the Company. There can be no
assurance that such services will continue to be available to the Company on a
timely basis when needed, or that the Company could find qualified
replacements. The Company's operations therefore are dependent upon a limited
number of key employees and consultants and the loss of the services of these
or other key personnel could have a material adverse effect upon the Company.
The Company does not maintain key man insurance on the lives of its executive
officers and key consultants.
CONFLICTS OF INTEREST. The Company in the past has engaged in a number of
material transactions with its directors and executive officers and/or their
affiliates, and may engage in such transactions in the future. All such
transactions have been in the past, and will be in the future, approved by a
majority of the Company's disinterested directors.
DILUTIVE EFFECT OF OUTSTANDING SECURITIES OR SECURITIES TO BE ISSUED; POSSIBLE
RISK OF MARKET OVERHANG. The Company has reserved shares of its Common Stock
for issuance upon exercise of outstanding warrants and upon exercise of
conversion rights for outstanding shares of convertible preferred stock.
Additional shares will be reserved for the Common Stock and warrants to be
issued in the Offerings. The 9,000,000 shares of Common Stock proposed to be
issued in the Offerings is more than the total number of shares of Common
Stock currently outstanding (approximately 6,800,000 shares), and warrants
included in the Offerings cover an additional 6,500,000 shares. In addition,
it is anticipated that the Company may issue additional Common Stock, warrants
or other securities convertible or exercisable into Common Stock in connection
with management's plan to seek the acquire additional assets and/or for future
equity financings. Exercise of warrants, the conversion of preferred stock or
the future issuance of equity securities could involve significant dilution to
holders of the Company's Common Stock. Holders of convertible securities and
warrants are likely to exercise them when, in all likelihood, the Company
could obtain additional capital on terms more favorable than those provided by
the convertible securities or warrants.
Shares issued upon exercise of warrants or conversion rights or future
issuance of securities, as well as the shares of Common Stock to be issued in
the Offerings and restricted shares previously issued by the Company in
private placement transactions, may become available for public sale under the
provisions of Rule 504 and/or Rule 144 of the Securities Act of 1933 or if the
Company elects to register its securities under the Securities Act of 1933.
As such, there may be a significant market overhang with respect to the
Company's Common Stock in the public market from time to time in the future,
and the existence thereof may have a depressive effect upon the market price
for the Company's Common Stock and securities convertible into Common Stock.
VOLATILITY OF MARKET PRICE FOR COMMON STOCK: The Company's Common Stock is
publicly traded in the over-the-counter market and quoted on the NASD
Electronic Bulletin Board under
Subscription Agreement -5-
<PAGE>
the trading symbol "QGRP". There has been significant volatility in the
market price of securities relating to the computer industry generally and for
the Company's Common Stock specifically. Factors such as announcements by the
Company, the Company's liquidity problems, the terms of securities offerings,
quarterly variations in operating results, trading volume, general market
trends, announcements of technological innovations or new commercial products,
announcements by competitors and general market conditions may have a
significant effect on the market price of the Company's Common Stock.
UNCERTAINTY OF PROJECTIONS. Certain projections may be provided on a
confidential basis to prospective investors in the Offerings with respect to
the Company's future operations. There may be material differences between
projected and actual results because events and circumstances frequently do
not occur as expected. No representation or warranty is given that actual
future results will be as projected.
COMPETITION. The business in which the Company is engaged is characterized by
intense competition, especially as to price. The Company competes with much
larger, well-established companies that have greater financial, technical,
manufacturing, marketing and research and development resources as well as a
wide variety of companies comparable in size to the Company.
NO SIGNIFICANT PROPRIETARY RIGHTS. The Company does not hold any patents or
significant proprietary rights as to any of its products. Accordingly, the
Company relies upon trade secrets to protect limited proprietary information
and customer data. There can be no assurance that trade secrecy obligations
will be honored or that others have or will not independently develop similar
or superior information.
UNDETERMINED EFFECT OF BLANK CHECK PREFERRED STOCK AND AUTHORIZED COMMON
STOCK; POSSIBLE CHANGE IN CONTROL: The Company's articles of incorporation
authorize the issuance of up to 50 million shares of "blank check preferred
stock" with such rights, preferences, privileges and limitations as may be
determined from time to time by the Board of Directors, and up to 50 million
shares of Common Stock. Accordingly, the Board has the power without prior
shareholder approval to issue additional shares of common stock and/or one or
more series of preferred stock with such rates of dividends, redemption
provisions, liquidation preferences, voting rights, conversion privileges and
any other characteristics as the Board may deem necessary. Any such
additional issuances of common stock and/or preferred stock may result in
substantial and material dilution to existing holders of the Company's
securities. In addition, the existence of a substantial amount of authorized
and unissued common stock and blank check preferred stock could discourage,
delay or prevent a takeover of the Company if any such transaction were to be
proposed. In view of the Company's current financial condition, the
acquisition of another business by the Company or additional financing
transactions may involve the issuance of additional equity securities that
could be significantly dilutive to the interests of current stockholders
and/or may result in a change in control of the Company.
4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
By its acceptance of any subscription from the Accredited Investor
hereunder, the Company represents and warrants to the Accredited Investor as
follows:
4.1. The Company is duly incorporated and validly existing as a
corporation in good standing under the laws of the State of Colorado with
corporate power to enter into this Agreement and to conduct its business as
presently conducted.
Subscription Agreement -6-
<PAGE>
4.2. The securities of the Company covered by this Subscription
Agreement, when issued and delivered upon receipt of the subscription price,
will each be duly and validly authorized and issued, fully paid and
nonassessable securities of the Company and will not subject the holders
thereof to personal liability by reason of being such holders.
4.3. This Agreement, upon its acceptance by the Company, has been duly
authorized, executed and delivered by the Company and is a valid and binding
agreement enforceable in accordance with its terms, subject only to
bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and
similar laws of general application to or affecting creditors' rights
generally and to general principles of equity. The Company has full power and
authority necessary to enter into this Agreement and to perform its
obligations hereunder.
4.4. The execution and delivery of this Agreement, and the consummation
of the transactions contemplated herein, do not and will not conflict with or
result in a breach by the Company of any of the terms or provisions of, or
constitute a default under, its articles of incorporation, its by-laws, any
action of its directors or shareholders, or any indenture, mortgage, deed of
trust or other agreement or instrument to which it is a party or by which it
or any of its properties or assets are bound, or any existing applicable law,
rule or regulation or any applicable decree, judgment or order of any court,
regulatory body, administrative agency or other governmental body having
jurisdiction over the undersigned or any of its properties or assets.
5. REPRESENTATIONS AND WARRANTIES OF THE ACCREDITED INVESTOR. In
connection with this Agreement and the transactions contemplated herein, the
Accredited Investor represents and warrants to the Company as follows:
5.1. The Accredited Investor has relied only on the information
provided in writing referenced in this Agreement or provided in writing by the
President of the Company in response to inquiries of the Accredited Investor.
The Accredited Investor has carefully read and reviewed this Subscription
Agreement and all other documentation provided by the Company in connection
with this Offering, and has asked such questions of management of the Company
and received from them such information as the Accredited Investor deems
necessary in order for the Accredited Investor to make an informed decision
with respect to the purchase of the securities offered hereby.
5.2. The Accredited Investor has sufficient knowledge and experience of
financial and business matters so that he, she or it is able to evaluate the
relative merits and risks of purchasing the securities offered hereby. The
Accredited Investor has not received any general solicitation or advertising
regarding this Offering. The Accredited Investor is aware that an investment
in the Shares is a speculative investment, may not be liquid due to the
matters described in Section 3 above, and involves a high degree of risk of
loss. The Accredited Investor has had substantial experience in previous
private and public purchases of speculative securities.
5.3. The Accredited Investor's commitment in direct participation in
investments in restricted securities is reasonable in relation to his, her or
its net worth. The investment of the Accredited Investor in the securities
offered hereby will in no event exceed 10% of the net worth of the Accredited
Investor. The Accredited Investor has the means to provide for his or her
personal needs, possesses the ability to bear the economic risk hereunder
indefinitely, and can afford a complete loss of his, her or its investment.
The Accredited Investor realizes that the securities offered hereby must not
be purchased unless the Accredited Investor has liquid assets sufficient to
assure that this investment will cause no undue financial
Subscription Agreement -7-
<PAGE>
difficulties and the Accredited Investor can provide for current financial
needs and possible personal contingencies from other funds. The Accredited
Investor understands that the transfer of the securities comprising the Shares
will be prohibited absent full compliance with the Securities Act of 1933 and
applicable state securities laws.
5.4. The Accredited Investor acknowledges that he, she or it is
acquiring the securities offered hereby for his, her or its own account, for
investment purposes only, and not with a view to resale or other distribution
thereof, nor with the intention of selling, transferring or otherwise
disposing of all or any part of such securities based upon any particular
event or circumstance, except selling, transferring or disposing of them upon
full compliance with all applicable provisions of the Securities Act and any
applicable state securities laws. The Accredited Investor further understands
and agrees that the securities may be sold only if they are subsequently
registered under the Securities Act and qualified under any applicable state
securities laws or, in the opinion of counsel satisfactory to the Company, an
exemption from such registration and qualification is available. In the event
the Accredited Investor becomes eligible under Rule 144 promulgated under the
Securities Act to resell Common Stock sold hereunder or issued upon exercise
of the Class E Warrants sold hereunder, the Accredited Investor acknowledges
that he, she or it is familiar with the provisions of Rule 144, has consulted
with his, her or its own counsel as to the same, and recognizes that any
routine sales of securities made in reliance upon Rule 144 can be made only in
the amounts set forth in and pursuant to the other terms and conditions,
including applicable holding periods, volume limitations and current reporting
obligations of the Company, set forth in Rule 144. The undersigned
understands that a restrictive legend will be placed on the securities offered
hereby referencing the Securities Act.
5.5. The undersigned has full power and authority necessary to enter
into this Agreement and to perform his, her or its obligations hereunder. All
information which the Accredited Investor has provided to the Company or its
representatives concerning the Accredited Investor's financial position and
knowledge of investment matters is correct and complete as of the date set
forth on the signature page below.
5.6. The Accredited Investor has reviewed carefully the definition of
Accredited Investor set forth below and is an Accredited Investor within that
definition.
Except as provided in this Subscription Agreement, the current Business Plan
and in any other written information, if any, furnished by the President the
Company expressly for the purposes of this Offering, the Accredited Investor
warrants that no other representations, statements or inducements were made to
the Accredited Investor to purchase the securities offered hereby. The
Accredited Investor acknowledges that projections so provided, if any, are
based upon certain assumptions as to future sales, expenses and operations of
the Company, and there can be no guarantee or assurance that future the
Company operations will attain the levels included in any such projections.
Subscription Agreement -8-
<PAGE>
DEFINITION OF ACCREDITED INVESTOR
The term "Accredited Investor" is defined in Rule 501(a) of Regulation D
promulgated under the Securities Act as follows:
(1) Certain banks, savings and loan institutions, broker-dealers, investment
companies and other entities including an employee benefit plan within
the meaning of Title I of the Employee Retirement Income Security Act of
1974 with total assets in excess of $5,000,000;
(2) Any private business development company as defined in Section
202(a)(22) of the Investment Advisers Act of 1940;
(3) Any organization described in Section 501(c)(3) of the Internal Revenue
Code, corporation, Massachusetts or similar business trust, or
partnership, not formed for the specific purpose of acquiring the
Shares, with total assets in excess of $5,000,000;
(4) Any director, executive officer, or general partner of the issuer of the
securities being offered or sold, or any director, executive officer, or
general partner of a general partner of that issuer;
(5) Any natural person whose individual net worth, or joint net worth with
that person's spouse, at the time of his purchase exceeds $1,000,000;
(6) Any natural person who had an individual income in excess of $200,000
or, with that person's spouse a joint income in excess of $300,000, in
each of the two most recent years and who reasonably expects an income
in excess of $200,000 (or joint income with that person's spouse in
excess of $300,000) in the current year;
(7) Any trust, with total assets in excess of $5,000,000, not formed for the
specific purpose of acquiring the securities offered, whose purchase is
directed by a sophisticated person as described in Section
230.506(b)(2)(ii) of Regulation D, i.e. a person having such knowledge
and experience in financial and business matters that he is capable of
evaluating the merits and risks of the prospective investment; or
(8) Any entity in which all of the equity owners are accredited investors
under any of the paragraphs above.
In calculating "net worth," the value of a principal residence must be valued
at cost or at a written appraised value used by an institutional lender to
make a loan secured by the property, in either case net of current
encumbrances on the property.
Subscription Agreement -9-
<PAGE>
SIGNATURE PAGE
THE UNDERSIGNED SUBSCRIBER IS AN ACCREDITED INVESTOR BY REASON OF PARAGRAPH(S)
5 SET FORTH IN THE DEFINITION ABOVE.
- ------------
The undersigned hereby agrees to purchase Seven Million (7,000,000) Shares of
Common Stock, Six Million (6,000,000) Class E Common Stock Purchase Warrants,
and $750,000 in principal amount of non-interest bearing Limited Recourse
Promissory Notes to be issued by THE QUARTZ GROUP, INC., a Colorado
corporation ("the "Company") in accordance with this Subscription Agreement,
and is tendering herewith a check therefor in the amount of $750,000 payable
to the account of THE QUARTZ GROUP, INC.
Very truly yours,
DATE: 9/20/ , 1997
-------------------
/s/ John W. Kull
- --------------------------------------------------------------------------
[Signature(s) and Title if a Corporation, Partnership or Trust]
John W. Kull
- --------------------------------------------------------------------------
[Please print name as it should appear on your certificates]
ADDRESS:
15 Weatherstone Way TELEPHONE NUMBER: (516) 382-7463
- ------------------------------ ------------------
FAX NUMBER: (516) 366-0775
- ------------------------------ -----------------------
SOCIAL SECURITY OR
- ------------------------------ IRS IDENTIFICATION NUMBER:
###-##-####
- --------------------------------------------------------------------------
STATE IN WHICH REGISTERED TO VOTE, if an Individual: N.Y.
--------------------
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
ACCEPTED:
THE QUARTZ GROUP, INC.
By: /s/ David J. Lopes DATE: Sept. 20, 1997
------------------------- ------------------------------
Title: President
----------------------- Rev 97c
Subscription Agreement -10-
September __, 1997 $750,000.00
Santa Ana, California
THE QUARTZ GROUP, INC.
Limited Recourse Promissory Note
THE SECURITIES REPRESENTED BY THIS NOTE HAVE NOT BEEN REGISTERED UNDER THE
UNITED STATES SECURITIES ACT OF 1933, AS AMENDED, OR QUALIFIED UNDER THE TRUST
INDENTURE ACT OF 1939, AS AMENDED (THE "ACTS"). ACCORDINGLY, NO TRANSFER OF
THIS NOTE OR ANY INTEREST HEREIN MAY BE MADE EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE ACTS UNLESS THE ISSUER HAS RECEIVED A
SATISFACTORY OPINION OF COUNSEL THAT SUCH TRANSFER DOES NOT REQUIRE
REGISTRATION UNDER THE ACTS.
THE QUARTZ GROUP, INC., a Colorado corporation (herein called the
"Company"), for value received, hereby promises to pay to
(the "Payee"), or order, at the principal office of the
Company in the State of California, the principal sum of SEVEN HUNDRED FIFTY
THOUSAND DOLLARS ($750,000.00) in United States funds, without interest on the
unpaid principal amount of this Note, payable only from the first $750,000 in
proceeds realized by the Company, if any, from the exercise of those certain
Class E Common Stock Purchase Warrants issued and originally sold to the Payee
concurrently with the original issuance of this Note and from the exercise of
any other common stock purchase warrants issued and sold by the Company on or
prior to September 30, 1997 which remained outstanding as of September 30,
1997 (the Class E warrants and any other warrants referenced herein are
collectively called the "Warrants"). Any payment of principal becoming due
hereunder as a result of the exercise of Warrants shall be due and payable to
the Payee within one business day after the Company has received unconditional
payment in good U.S. funds of the applicable Warrant exercise price for
Warrants so exercised. At the election of the Payee (provided that Payee
shall then be the registered holder of a sufficient number of unexercised
Class E common stock purchase warrants), the Payee may elect in writing to
exercise Class E common stock purchase warrants by crediting the Company with
payment for the account of the Company of that portion of the principal amount
of this Note which is then equal to the exercise price required for the
Payee's exercise of such Class E common stock purchase warrants.
The Payee, by its acceptance of this Note, acknowledges that all of the
Warrants issued by the Company will expire on or before December 31, 2002, and
the Company's obligations under this Note will accordingly expire (except to
the extent of any obligations arising from the exercise of Warrants) on either
December 31, 2002 or, if earlier, upon payment in full to the Payee of the
principal amount of this Note without interest.
1. NOTES. This Note is one of a duly authorized issue of Limited
Recourse Promissory Notes (herein called the "Notes") made by the Company in
an aggregate principal amount not exceeding $750,000 U.S. funds and originally
issued by the Company pursuant to a private placement of securities in 1997.
All of the Notes are issuable substantially in the form of this Note.
2. NON-RECOURSE EXCEPT AS TO PROCEEDS FROM EXERCISE OF WARRANTS.
This Note is issued upon the express condition, to which the Payee and each
successive holder by receiving the same agrees hereby assents, that no
recourse under or upon any obligation, covenant or agreement of this Note, or
for the payment of the obligations of this Note, or for any claim based on
this Note or otherwise in respect thereof, shall be had against the Company
(except as to proceeds from the exercise of Warrants or in the event of a
default by the Company under Section 4 as to costs of collection only) or in
any event against the assets of any stockholder, creditor, officer, director
or
-1-
<PAGE>
other representative of this Company as a result of their relationship as such
to the Company, except to the extent of any proceeds from the exercise of
Warrants, whether by virtue of any constitution, statute or rule of law, or by
any assessment or penalty or otherwise howsoever, all such liability being
hereby expressly waived and released as a condition of and as part of the
consideration for the execution and issue of this Note.
The Payee, by acceptance of this Note, further acknowledges that the
Company cannot predict whether, or the extent to which, any holder of Warrants
may or may not elect to exercise Warrants, and accordingly there is no
assurance of the payment of this Note unless Warrants are exercised.
3. INVESTMENT INTENT; RESTRICTIONS ON TRANSFER. The holder of this
Note, by acceptance hereof, represents and warrants that this Note has been
acquired by said holder for its own account for investment, and acknowledges
that any proposed sale, assignment or transfer of this Note is prohibited
unless such sale, assignment or transfer will not require the prior registra-
tion of this Note under the Securities Act of 1933, as amended, or the
qualification of this Note under the Trust Indenture Act of 1939, as amended.
4. COSTS OF COLLECTION. The Company covenants that, if default be
made in any payment of the principal of this Note as the same shall become due
and payable in accordance with its terms, the Company will pay the holder of
this Note such further amount as shall be sufficient to cover the costs and
expenses of collection, including without limitation reasonable attorneys'
fees of such holder and all other costs incurred for court filings, witnesses,
preparation, prosecution and enforcement of collection.
5. MISCELLANEOUS.
5.1. Any notice or demand which by any provision of this Note is
required or provided to be given or served to or upon the Company shall be
deemed to have been sufficiently given or served for all purposes by being
sent as registered or certified mail, postage prepaid, addressed to the
Company at its principal office in the State of California, marked for the
attention of its Chief Executive Officer.
5.2. No course of dealing between the Company and the holder of this
Note or any delay on the part of the holder in exercising any rights under
this Note shall operate as a waiver of any rights of any holder of this Note.
5.3. This Note shall be governed by the laws of the State of
California.
IN WITNESS WHEREOF, the Company has caused this Note to be signed in its
corporate name by an thereunder duly authorized, and to be dated as of the day
and year first above written.
THE QUARTZ GROUP, INC.
By:
--------------------------
President
ATTEST:
- ---------------------------
Secretary
-2-
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933 (THE "ACT"). ACCORDINGLY, NO TRANSFER OF THESE
SECURITIES OR ANY INTEREST THEREIN MAY BE MADE EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE ACT UNLESS THE ISSUER HAS RECEIVED AN OPINION
OF COUNSEL SATISFACTORY TO IT THAT SUCH TRANSFER DOES NOT REQUIRE REGISTRATION
UNDER THE ACT.
THE QUARTZ GROUP, INC.
(Incorporated under the laws of the State of Colorado)
CLASS E COMMON STOCK PURCHASE WARRANT
1,000,000 SHARES OF COMMON STOCK
Void After September 30, 2002 (the "Expiration Date")
This is to certify that, for value received, receipt of which is hereby
acknowledged, , or assigns (hereinafter
called the "holder"), is entitled to purchase from THE QUARTZ GROUP, INC., a
Colorado corporation (hereinafter called the "Company"), at the Warrant Price
of TWENTY-FIVE CENTS ($0.25) per share, subject to adjustment as hereinafter
provided (hereinafter called the "Warrant Price"), at any time on or before
5:00 P.M. local California time on September 30, 2002 (the "Expiration Date"),
up to SIX MILLION (6,000,000) fully paid and non-assessable shares of Common
Stock of the Company (hereinafter called "Common Stock"), subject to the terms
and conditions hereof, including such adjustments as may be required under the
terms hereof.
This Warrant was originally issued in September 1997 as part of a
private placement offering by the Company. This Warrant represents part of
an authorized issue of Class E Common Stock Purchase Warrants and is herein
called "this Warrant."
This Warrant may be exercised by the holder as hereinabove provided as
to the whole or any part of the shares of Common Stock covered hereby, by
surrender of this Warrant at the principal office of any transfer agent for
the Common Stock, or, if the Company shall not have any transfer agent for the
Common Stock, at the principal office of the Company (any such transfer agent,
or the Company acting hereunder, being hereinafter called the "Warrant
Agent"), with the statement of election to subscribe attached hereto duly
executed and upon payment to the Company of the Warrant Price for shares so
purchased in cash or by certified check or bank draft. Thereupon (except that
if, upon such date, the stock transfer books of the Company shall be closed,
then upon the next succeeding date on which such transfer books are open),
this Warrant shall be deemed to have been exercised and the person exercising
the same to have become a holder of record of shares of Common Stock (or of
the other securities or property to which such person is entitled upon such
exercise) purchased hereunder for all purposes, and certificates for such
shares so purchased shall be delivered to the purchaser within a reasonable
time (not exceeding five business days, except while the transfer books of the
Company are closed) after this Warrant shall have been exercised as set forth
hereinabove. If this Warrant shall be exercised in respect of a part only of
the shares of Common Stock covered hereby, the holder shall be entitled to
receive a similar warrant of like tenor and date covering the number of shares
in respect of which this Warrant shall not have been exercised.
<PAGE>
The Company covenants and agrees that all shares which may be issued
upon the exercise of the rights represented by this Warrant will, upon
issuance, be validly issued, fully paid and non-assessable and free from all
taxes, liens and charges with respect to the issue thereof (other than taxes
in respect of any transfer occurring contemporaneously with such issue). The
Company further covenants and agrees that, during the period within which the
rights represented by this Warrant may be exercised, the Company will at all
times have authorized and reserved a sufficient number of shares of Common
Stock to provide for the exercise of the rights represented by this Warrant.
The rights of the holder of this Warrant shall be subject to the
following terms and conditions:
SECTION 1. CERTAIN ADJUSTMENTS AND NOTICES
1.1. In case the Company shall hereafter at any time change as a whole,
by split-up, subdivision or combination in any manner or by the making of a
stock dividend, the number of outstanding shares of Common Stock into a
different number of shares of Common Stock with or without par value, (i) the
number of shares of Common Stock which immediately prior to such change the
holder of this Warrant shall have been entitled to purchase pursuant to this
Warrant shall be increased or decreased in direct proportion to the increase
or decrease, respectively, in the number of shares of Common Stock outstanding
immediately prior to such change, and (ii) the Warrant Price in effect
immediately prior to such change shall be increased or decreased, as the case
may be, in inverse proportion to such increase or decrease in the number of
such shares outstanding immediately prior to such change; in any such event,
the rights of the holder of this Warrant to an adjustment in the number of
shares of Common Stock purchasable on exercise of this Warrant as herein
provided shall continue and be preserved in respect of any shares, securities,
or assets which the holder of this Warrant becomes entitled to purchase
hereafter.
1.2. In case of any capital reorganization or any reclassification of
the capital stock of the Company or in case of the consolidation or merger of
the Company with another corporation, or in case of any sale, transfer or
other disposition to another corporation of all or substantially all the
property, assets, business and goodwill of the Company as an entirety, as the
case may be, the holder of this Warrant shall thereafter be entitled to
purchase (and it shall be a condition to the consummation of any such
reorganization, reclassification, consolidation, merger, sale, transfer or
other disposition, that appropriate provision shall be made so that such
holder shall thereafter be entitled to purchase) the kind and amount of shares
of stock and other securities and property receivable, upon such capital
reorganization, reclassification of capital stock, consideration, merger,
sale, transfer or other disposition, by a holder of the number of shares of
Common Stock which this Warrant entitled the holder thereof to purchase
immediately prior to such capital reorganization, reclassification of capital
stock, consolidation, merger, sale, transfer or other disposition; and in any
such case appropriate adjustments (as determined in good faith by the Board of
Directors of the Company or of such other corporation, as the case may be)
shall be made in the application of the provisions herein set forth with
respect to rights and interests thereafter of the holder of this Warrant, to
the end that the provisions set forth herein (including the specified changes
in and other adjustments of the Warrant Price) shall thereafter be applicable,
as near as reasonably may be, in relation to any shares or other property
thereafter purchasable upon the exercise of this Warrant.
1.3. In case the Company shall hereafter at any time declare a dividend
upon shares of Common Stock payable otherwise than out of retained earnings or
otherwise than in shares of Common
Class E Common Stock Purchase Warrant Page 2
<PAGE>
Stock or in stock or obligations directly or indirectly convertible into or
exchangeable for Common Stock, the holder of this Warrant shall, upon exercise
of this Warrant in whole or in part, be entitled to receive, in addition to
the number of shares of Common Stock deliverable upon such exercise against
payment of the Warrant Price therefor, but without further consideration, the
cash, stock or other securities or property which the holder of this Warrant
would have received as dividends (otherwise than out of such retained earnings
and otherwise than in shares of Common Stock or in such convertible or
exchangeable stock or obligations) if continuously since the date set forth at
the foot of this Warrant such holder (i) had been the holder of record of the
number of shares of Common Stock deliverable upon such exercise and (ii) had
retained all dividends in stock or other securities (other than shares of
Common Stock or such convertible or exchangeable stock or obligations) paid or
payable in respect of said number of shares of Common Stock or in respect of
any such stock or other securities so paid or payable as such dividends. For
purposes of this Section 1.3, a dividend payable otherwise than in cash shall
be considered to be payable out of retained earnings only to the extent of the
fair value of such dividend as determined by the Board of Directors of the
Company.
1.4. No certificates for fractional shares of Common Stock shall be
issued upon the exercise of this Warrant, but in lieu thereof the Company
shall, upon exercise in full of this Warrant, purchase out of funds legally
available therefor any such fractional interest for an amount in cash equal to
the current market value of such fractional interest calculated to the nearest
cent, computed on the basis of the closing sale price, as reported by the
National Quotation Bureau, of the Common Stock in the over-the-counter market
on the most recent day within ten days prior to the date of such exercise for
which such closing prices shall have been so reported, or, if the Common Stock
is listed on a stock exchange registered with the Securities and Exchange
Commission or traded on the NASDAQ Stock Market, the last reported sale price
on such day; and if there shall have been no sale on said day, then the
computation shall be made on the basis of the last reported sale price within
ten days prior to such date. If there have been no reported closing sale
prices, as the case may be, within such ten days, the current market value
shall be fixed in a manner determined in good faith by the Board of Directors
of the Company.
1.5. Whenever the Warrant Price is adjusted, as herein provided, the
Company shall forthwith file with the Warrant Agent a statement signed by the
President or any one of the Vice Presidents of the Company and by its
Treasurer or an Assistant Treasurer, stating the adjusted Warrant Price
determined as herein provided. Such statement shall show in detail the facts
requiring such adjustment, including a statement of the consideration received
by the Company for any additional securities issued. Whenever the Warrant
Price is adjusted, the Company will forthwith cause a notice stating the
adjustment and the Warrant Price to be mailed to the registered holder of this
Warrant at the address of such holder shown on the books of the Company.
SECTION 2. INVESTMENT INTENT
2.1. The holder of this Warrant, by acceptance hereof, agrees to give
written notice to the Company before exercising or selling this Warrant of
such holder's intention to do so, describing briefly the manner of any
proposed sale of this Warrant or such holder's intention as to the disposition
to be made of shares of Common Stock issuable upon such proposed exercise
hereof. Promptly upon receiving such written notice, the Company shall
present copies thereof to counsel for the Company for such counsel's opinion.
If in the opinion of such counsel, or upon receipt by the Company of a
reasonably satisfactory opinion from any other counsel, to the effect that the
proposed exercise or sale may be effected without registration under the
Securities Act of 1933, as amended ("Securities Act"), of this Warrant or the
shares of Common Stock issuable on the exercise hereof, the holder of this
Warrant shall
Class E Common Stock Purchase Warrant Page 3
<PAGE>
be entitled to sell this Warrant, or to exercise this Warrant in accordance
with its terms and dispose of the shares received upon such exercise, all in
accordance with the terms of the notice delivered by such holder to the
Company. If in the opinion of counsel the proposed exercise or sale described
in said written notice given by the holder of this Warrant may not be effected
without registration of this Warrant or the shares of Common Stock issuable on
the exercise hereof, the Company shall promptly give written notice of such
opinion to the holder of this Warrant. The holder of this Warrant agrees
that, if the proposed exercise or sale by such holder cannot, in the opinion
of counsel, be effected without such registration, the holder will not so
exercise or sell this Warrant or the shares of Common Stock issuable upon the
exercise hereof unless this Warrant or the shares of Common Stock issuable
upon the exercise hereof are registered by the Company as herein provided.
2.2 During the term of this Warrant, and for at least three (3) years
after any exercise of this Warrant, the Company covenants and agrees to file
on a timely basis all reports required to be filed on behalf of the Company
with the Securities and Exchange Commission, and to use its best efforts to
otherwise comply with any regulatory provisions applicable to the Company so
that the Common Stock issuable upon exercise of this Warrant will be eligible
for resale after the applicable holding period in accordance with the
exemption from registration provided by Rule 144 promulgated under the
Securities Act, or any successor to such Rule 144.
SECTION 3. REGISTRATION RIGHTS -- "PIGGY-BACK" REGISTRATION.
3.1. If, at any time during the term of this Warrant, the Company
shall file a registration statement or post-effective amendment to a
registration statement on Form SB-1, SB-2, S-1, S-2 or S-3, or any form
substituted therefor, with respect to any shares of its capital stock under
the Securities Act, the Company will give to each holder or holders of the
Warrants and/or shares of Common Stock acquired upon the exercise of the
Warrants at least ten (10) days prior written notice of its intention to file
such registration statement (the "Registration").
3.2. Unless any holder of Warrants shall direct otherwise, the Company
shall include all Warrants and shares of Common Stock evidenced by the
Warrants or issued upon the exercise thereof in any such registration
statement and will maintain the prospectus included in any registration state-
ment which may be so filed current for a period of at least nine (9) months
subsequent to the effective date of such registration statement.
3.3. Nothing in this Section 3 shall be deemed to obligate the Company
to proceed with any registration of its securities after giving the notice
herein provided.
3.4. The obligations of the Company under this Section 3.1 shall be
fully satisfied after it has notified the holders of the Warrants of one (1)
opportunity to participate in any registration statements under this Section 3
which shall have become effective under the Securities Act.
3.5. All costs and expenses of any such registration statement
incurred by the Company, including, without limitation, filing fees, and all
legal, accounting and printing costs and expenses, shall be paid by the
Company. The holder of the Warrants and/or shares issued upon exercise of the
Warrants shall pay all sales and brokerage commissions directly related to the
sale of securities for their account.
3.6. POSSIBLE LOCK-UP LIMITATIONS UPON "PIGGY-BACK" REGISTRATION
RIGHTS. If an investment banker engaged by the Company in connection with an
underwritten public offering of securities proposed for registration under the
Securities Act for the account of the Company determines in its sole
discretion
Class E Common Stock Purchase Warrant Page 4
<PAGE>
that registration of such securities for the account of the holders of the
Warrants or shares of Common Stock acquired upon exercise of the Warrants
would interfere with or be detrimental to such offering for the account of the
Company, the Company shall give prompt written notice of such determination to
such holder or holders, setting forth in reasonable detail the reasons for
such determination. In such event the Company, upon written notice to the
holder of such securities, shall have the right to require, as a condition of
such registration, that the holder of such securities execute a written
agreement that such holder will not sell such securities for a period of up to
six (6) months after the effective date of the registration statement without
the prior consent of the underwriter.
3.7. AMENDMENT OR SUPPLEMENT TO PROSPECTUS. If at any time within nine
(9) months after a registration statement covering the Warrant and shares of
Common Stock subject to or acquired upon exercise of Warrants, as provided in
this Section 3, shall have become effective, to the knowledge of the Company
any event occurs as a result of which a prospectus included therein relating
to the Warrants or shares of Common Stock subject to or acquired upon exercise
of Warrants, as then amended or supplemented, would include any untrue
statement of a material fact, or would not state a material fact necessary to
make the statements therein, in the light of the circumstances then existing,
not misleading, the Company will promptly notify the holder or holders of
Warrants and/or shares of Common Stock covered by such prospectus thereof and
the Company will at its own cost and expense amend or supplement such
prospectus in order to correct such statement or omission in order that the
prospectus as so amended or supplemented will comply with the requirements of
Section 10(a) of the Securities Act.
3.8. UNDERTAKINGS. In connection with any registration statement or
post-effective amendment pursuant to this Section 3:
(a) The Company will comply with all applicable rules and regulations
of the Securities and Exchange Commission or any similar Federal commission
and will make available to its security holders, as soon as practicable, an
earnings statement (which need not be audited) covering a period of at least
12 months, but not more than 18 months, beginning with the first month after
the effective date of the registration statement or post-effective amendment,
as the case may be, which earnings statement will satisfy the provisions of
Section 11(a) of the Securities Act.
(b) Each holder of the Warrants and/or shares of Common Stock covered
by such registration statement, as the case may be, will furnish in writing to
the Company such information regarding such holder and its proposed plan of
distribution of such shares as the Company shall reasonably request and which
would be available to such holder without undue expenditure of time or cost in
order to have such registration statement declared effective.
(c) The Company agrees to furnish to the holders of the Warrants and
of the shares of Common Stock acquired upon the exercise thereof, a prospectus
(in such reasonable quantities as such holders shall request) containing cer-
tified financial statements and other information meeting the requirements of
the Securities Act and the rules and regulations thereunder and relating to
the Warrants and/or shares of Common Stock subject thereto and/or shares of
Common Stock acquired upon the exercise of the Warrants. The furnishing of
such prospectus shall be at the expense of the Company.
(d) The Company will use its best efforts to qualify the shares of
Common Stock covered by any registration statement or post-effective amendment
for public offering or sale on the effectiveness thereof in such jurisdictions
as the holders offering the same shall reasonably request and to maintain the
effectiveness of such qualification for a period not less than nine (9) months
after notification to holder; provided, however, that the Company shall not be
required to qualify as a foreign corporation in any
Class E Common Stock Purchase Warrant Page 5
<PAGE>
jurisdiction or to give a general consent to service of process in any
jurisdiction except in connection with matters arising from the sale of shares
of Common Stock in such jurisdiction, nor shall the Company be required to
qualify the shares for sale at the Company's expense in any states other than
New York except with the consent of the Company.
(e) Any new prospectus with respect to the shares of Common Stock
issuable upon exercise of the Warrants shall provide that such securities may
be offered or sold only upon such terms respecting the price or distribution
thereof, as the owners reasonably determine.
3.9. INDEMNIFICATION. In the event of any registration of Warrants or
shares of Common Stock subject or acquired upon exercise of Warrants, the
Company will indemnify and hold harmless each holder of Warrants and shares of
Common Stock being offered and each person, if any, who may be deemed to
control such holder within the meaning of Section 15 of the Securities Act
against any losses, claims, damages or liabilities, joint or several, to which
any of them may become subject under the Securities Act, or otherwise, in so
far as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained, on the effective date thereof, in
any registration statement or post-effective amendment under which such
Warrants and shares of Common Stock were registered under the Securities Act,
any preliminary prospectus or final prospectus contained therein, or any
amendment or supplement thereto, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, and
will reimburse each of them for any legal or any other expenses reasonably
incurred by them in connection with investigating, defending or settling any
such loss, claim, damage, liability or action; provided, however, that the
Company will not be liable in any such case to any of them to the extent that
any such loss, claim, damage, liability or expense arises out of or is based
upon any untrue statement of any material fact contained, or is based upon any
omission or alleged omission to state a material fact, on the effective date
thereof in such registration statement or post-effective amendment, such
preliminary prospectus or such final prospectus or any such amendment or
supplement in reliance upon and in conformity with information furnished in
writing by such persons to the Company expressly for use in the preparation
thereof.
The obligations of indemnification hereunder shall include any and all
losses, claims, damages, judgments, liabilities or costs, including related
attorneys' fees and other costs of investigation, preparation, defense and
providing evidence, whether or not in connection with litigation in which the
party to be indemnified is a party, as and when such losses, claims, damages,
judgments, liabilities or costs are incurred, which are directly or indirectly
caused by, relating to, based upon or arising out of any act or omission on
the part of the indemnifying party hereunder.
Each such person shall promptly give notice to the Company after such
person has actual knowledge of any such claim as to which indemnity may be
sought hereunder, or of the commencement of any legal proceedings against such
person as to such claim, whichever shall first occur, and (subject to clause
(c) below) the Company shall promptly assume the defense thereof, including
the employment of counsel reasonably satisfactory to such person and the
payment of all fees and expenses incurred in connection with the defense
thereof. Such person shall have the right to employ separate counsel in any
such action and to participate in the defense thereof if (a) such person shall
pay the fees and expenses of such separate counsel or (b) the Company shall
have failed promptly to assume the defense of such action or proceeding
through counsel reasonably satisfactory to such person or (c) the named
parties to any such action or proceeding (including any impleaded parties)
include both such person and the Company and such person shall have been
advised in writing by counsel that there may be one or more legal defenses
Class E Common Stock Purchase Warrant Page 6
<PAGE>
available to him which are different from or additional to those available to
the Company, in which case such person may elect in writing to employ separate
counsel at the expense of the Company (after which the Company shall not have
the right to defense of such action or proceeding on behalf of such person),
it being understood, however, that the Company shall not, in connection with
any one such action or proceeding or separate but substantially similar or
related actions or proceedings in the same jurisdiction arising out of the
same general allegations or circumstances, be liable for the fees and expenses
of more than one separate firm of attorneys (together with appropriate local
counsel) at any time, which firm shall be designated by agreement of all such
persons and, if no agreement is reached by all such persons and, if no
agreement is reached by all such persons within 15 days of the filing of the
relevant complaint, by the Company. The Company shall not be liable for any
settlement of any such action or proceeding effected without its written
consent (which shall not be unreasonably withheld), but if any such action or
proceeding is settled with its written consent, the Company agrees to
indemnify and hold harmless such person from and against any loss, claim,
damage, or liability (to the extent stated above) by reason of such settlement
or judgment.
SECTION 4. MISCELLANEOUS
4.1. The issue of any stock or other certificate upon the exercise of
this Warrant shall be made without charge to the registered holder hereof for
any tax in respect of the issue of such certificate. The Company shall not,
however, be required to pay any tax which may be payable in respect of any
transfer involved in the issue and delivery of any certificate in a name other
than that of the registered holder of this Warrant, and the Company shall not
be required to issue or deliver any such certificate unless and until the
person or persons requesting the issue thereof shall have paid to the Company
the amount of such tax or shall have established to the satisfaction of the
Company that such tax has been paid.
4.2. This Warrant and all rights hereunder or any portion thereof are
transferable on the books of the Company, upon surrender of this Warrant, with
the form of assignment attached hereto duly executed by the registered holder
hereof or by his attorney duly authorized in writing, to the Warrant agent at
its principal office hereinabove referred to, and thereupon there shall be
issued in the name of the transferee or transferees, in exchange for this
Warrant, a new Warrant or Warrants of like tenor and date, representing in the
aggregate the right to subscribe for and purchase the number of shares, or
such portion thereof as shall be so transferred, which may be subscribed for
and purchased hereunder and if there shall be any balance of such shares not
so transferred, there shall be issued in the name of the registered holder of
this Warrant, a new Warrant or Warrants of like tenor and date representing in
the aggregate the right to subscribe for and purchase the balance of the
number of shares which may be subscribed for and purchased hereunder.
4.3. If this Warrant shall be lost, stolen, mutilated or destroyed, the
Company may instruct the Warrant Agent, on such terms as to indemnify or
otherwise as the Company may in its discretion impose, to issue a new Warrant
of like denomination, tenor and date as the Warrant so lost, stolen, mutilated
or destroyed. Any such new Warrant shall constitute an original contractual
obligation of the Company, whether or not the allegedly lost, stolen,
mutilated or destroyed Warrant shall be at any time enforceable by anyone.
4.4. The Company and any Warrant Agent may deem and treat the
registered holder of this Warrant as the absolute owner of this Warrant for
all purposes and shall not be affected by any notice to the contrary.
Class E Common Stock Purchase Warrant Page 7
<PAGE>
4.5. This Warrant shall not entitle the holder to any rights of a
stockholder of the Company, either at law or in equity, including, without
limitation, the right to vote, to receive dividends and other distributions,
to exercise any preemptive rights or to receive any notice of meetings of
stockholders or of any other proceedings of the Company.
4.6. This Warrant shall be governed by the laws of the State of
California.
IN WITNESS WHEREOF, THE QUARTZ GROUP, INC. has caused this Warrant to be
signed in its corporate name by its duly authorized officer as of the day and
year written below.
Dated: September , 1997
THE QUARTZ GROUP, INC.
By:
--------------------------
President
Attest:
- --------------------------
Secretary
Class E Common Stock Purchase Warrant Page 8
THE QUARTZ GROUP, INC.
3029 S. Harbor Blvd.
Santa Ana, California 92704
Telephone (714) 429-5984
FAX Number (714) 429-5987
SUBSCRIPTION AGREEMENT
Common Stock
THE QUARTZ GROUP, INC.
Attention: David J. Lopes, President
3029 S. Harbor Blvd.
Santa Ana, California 92704
FAX No. (714) 429-5987
1. SUBSCRIPTION. The undersigned, an accredited investor within
the meaning of Regulation D promulgated under the Securities Act of 1933
(herein called the "Accredited Investor"), hereby subscribes for the purchase
of Five Hundred Thousand (500,000) shares (the "Shares") of common stock
("Common Stock") in THE QUARTZ GROUP, INC., a Colorado corporation ("the
"Company") for the account of the Accredited Investor upon the terms and
conditions set forth in this Subscription Agreement. The subscription price
shall be Twenty Five Thousand Dollars ($25,000) in United States funds,
payable in cash upon acceptance of this subscription by the Company.
Investors in this Offering should review, among other information available
from the Company, the summary of certain risk factors described in Section 3
of this Subscription Agreement before making an investment decision.
2. DESCRIPTION OF OFFERINGS.
2.1. THE OFFERINGS. The Company is concurrently offering (i) to the
Accredited Investor for the sum of $25,000, a total of 500,000 shares of
common stock, (ii) to one other accredited investor for the sum of $25,000, a
total of 500,000 shares of common stock, (iii) to one other accredited
investor for the sum of $100,000, 1,000,000 shares of common stock and 500,000
Class F Warrants exercisable into common stock at $.50 per share expiring on
September 30, 2002, and (iv) to one other accredited investor for the sum of
$750,00, a total of 7,000,000 shares of common stock, 6,000,000 Class E
Warrants exercisable into common stock at $.25 per share expiring on September
30, 2002 and a limited recourse $750,000 promissory note payable by the
Company only from proceeds of the exercise of warrants issued by the Company
(herein collectively called the "Offerings"). The Offerings are being made on
a "best efforts" basis to a limited number of accredited investors in a
private placement offering of securities in accordance with Rule 505 of
Regulation D under the U.S. Securities Act of 1933, as amended (the
"Securities Act"). Prospective investors should note that the classes of
securities and consideration per share being paid in the separate offerings
included in the Offerings are not proportionate to each other.
The Offerings will expire at the earlier of receipt and acceptance of
subscriptions to a total of $900,000 in subscriptions or on September 30, 1997
unless extended by the Company for an additional period not exceeding 30 days.
The Company reserves the right to terminate the Offerings at any earlier date.
2.2. The Accredited Investor acknowledges that an investment in the
securities offered hereby is speculative, involves a high degree of risk, and
should not be purchased by persons who cannot
<PAGE>
afford the loss of their entire investment, and represents that the Accredited
Investor has relied only on the information contained herein or otherwise
provided in writing by duly authorized representatives of the Company. The
Accredited Investor acknowledges receipt of the Company's current Business
Plan. The Accredited Investor has carefully read and reviewed this
Subscription Agreement and all of the Company's filings during the last two
fiscal years with the Securities and Exchange Commission which are
incorporated by reference herein (including, without limitation, the Company's
Annual Report on Form 10-KSB for the fiscal year ended June 30, 1995, its
interim quarterly Reports on Form 10-QSB for the Quarters ended September 30,
1996, December 31, 1996 and March 31, 1997, and its Current Report on Form 8-K
dated as of June 2, 1997, and has asked such questions of management of the
Company and received such additional information as he, she or it deems
necessary in order for the Accredited Investor to make an informed decision
with respect to an investment in the Company's securities. The Accredited
Investor represents and warrants that he, she or it has received complete and
satisfactory answers to all such inquiries. The Accredited Investor is not
relying on oral or written representations or assurances from the Company or
any representatives of the Company, other than as set forth in this Agreement,
the Company's current Business Plan, reports filed by the Company with the
Securities and Exchange Commission and any documents in writing signed by
David J. Lopes as the President of the Company.
The Company further agrees to make available to each prospective
investor the opportunity to ask questions of, and receive written answers
from, David J. Lopes as the President of the Company concerning the terms and
conditions of this Offering, the business and financial status of the Company
and any other relevant matters, and to obtain any additional written informa-
tion, to the extent that the Company possesses such information or can acquire
it without unreasonable effort or expense, necessary to verify the accuracy of
the information set forth in the documents furnished to the Accredited
Investor in connection with this Offering.
2.3. SECURITIES LAW MATTERS. The Accredited Investor acknowledges
that the securities included in the Offerings have not been, and will not be,
registered under the Securities Act or qualified under applicable state
securities laws. The Company will rely on the representations of the
accredited investors in the Offerings for an exemption from registration under
Rule 505 of the Securities Act of 1933 (the "Securities Act") as to the
securities issued pursuant to the Offerings and any shares of common stock
issued upon exercise of warrants included in the Offerings. The
transferability thereof will be restricted by the registration or
qualification provisions of the Securities Act and/or state laws separate and
apart from the provisions of the Securities Act.
2.4. OTHER.
2.4.1. This Subscription Agreement may be executed in one or more
counterparts and transmitted by facsimile telephonic transmission, each of
which shall be deemed to constitute an original and shall become effective
when one or more counterparts have been signed by each of the parties hereto
and delivered or transmitted by facsimile telephonic transmission to the other
party.
2.4.2. This Agreement may be executed in one or more counterparts
and it is not necessary that the signatures of all parties appear on the same
counterpart, but such counterparts together shall constitute but one and the
same agreement. The headings of the sections of this Agreement have been
inserted for convenience of reference only, and shall not be deemed to be a
part of this Agreement.
Subscription Agreement -2-
<PAGE>
2.3.3. Each of the undersigned agree this Agreement shall be
governed by and construed in accordance with the laws of the State of
California. Any dispute arising out of or relating to this Agreement and the
transactions contemplated herein or the breach of this Agreement or such
transactions shall be resolved by arbitration pursuant to the Rules of the
American Arbitration Association then in effect and shall take place in the
County of Orange, State of California. Any litigation, including litigation
arising out of or concerning such arbitration, shall be conducted exclusively
in the trials courts of general jurisdiction for the County of Orange, State
of California. All parties hereby consent to the jurisdiction of such court
for all such litigation.
2.3.4. Time shall be of the essence of this Agreement.
3. CERTAIN RISK FACTORS. The securities being offered hereby are
speculative and subject to a high degree of risk of loss of the investment.
Persons who cannot afford to lose their investment should not purchase the
securities offered hereby. Prospective investors should consider carefully,
among other factors described herein, the following matters:
HISTORY OF OPERATING LOSSES; ACCUMULATED DEFICIT; DEFICIENCY IN
STOCKHOLDERS' EQUITY; DEFICIT IN WORKING CAPITAL; AUDITOR'S QUALIFICATION;
PROPOSED JOINT VENTURE
The Company commenced operations in September 1987, was required to seek
the protection of Chapter 11 of the U.S. Bankruptcy Act in 1992, and has not
operated on a profitable basis. Net losses before extraordinary items were
$1,121,000 and $372,000 for the fiscal years ended June 30, 1996 and 1995,
respectively, and $604,000 for the nine months ended March 31, 1997. At March
31, 1997, the Company had an accumulated deficit from operations since its
inception of $3,331,000 and a $701,000 deficiency in its stockholders' equity.
Excluding the effect of commitment and continent liabilities, if any, total
liabilities at March 31, 1997 were $946,000 and there were also redeemable
Series A preferred stock outstanding of $136,000 which require mandatory
redemption from future net income, if any.
At March 31, 1997, the Company had limited cash resources of $26,000 and
a deficiency in working capital of $386,000; included in current liabilities,
however, is a contingent liability of $169,000 due the Company's former
President under a settlement agreement that is required to be paid only from
5% of proceeds realized from subsequent financings by the Company. There can
be no assurance that the Company will obtain additional financing.
THE REPORT OF STOCKMAN KAST RYAN & SCRUGGS, PC, ON THE FINANCIAL
STATEMENTS OF THE COMPANY FOR THE FISCAL YEAR ENDED JUNE 30, 1996 CONTAINS A
PARAGRAPH EXPRESSING SUBSTANTIAL DOUBT CONCERNING THE ABILITY OF THE COMPANY
TO CONTINUE AS A GOING CONCERN. Management's plan to address these matters
has been to dispose of its software media duplication and distribution
business and close all operations in Colorado. The Company, now
headquartered in Santa Ana, California, is focusing its available resources
and personnel on the development of a quartz glass business and sale of quartz
glass products. Initial sales have been obtained, with manufacturing
temporarily being contracted to third parties.
The Company has negotiated a joint venture agreement to acquire a
minority interest in a quartz glass manufacturing business based in Northern
California, but will be unable to participate in that venture unless it
receives proceeds from the sale of all securities included in the Offerings.
Historical operations of the business in Northern California have not been
profitable and the proposed joint venture will be
Subscription Agreement -3-
<PAGE>
largely dependent upon increases in sales stimulated by the participation of a
foreign company, which future sales increases have not been committed. There
can be no assurance that the Company will be able to successfully complete its
minority participation in the joint venture or that, if completed, that the
joint venture will become profitable. In addition, the Company will own a
minority equity position in the joint venture if it is able to complete the
proposed transaction, and may have only a limited influence in control of the
business operations and policies of the joint venture. Further information in
writing as to the proposed joint venture may be obtained on a confidential
basis by the Accredited Investor from the President of the Company.
Although increases in revenues are required for the Company to absorb
existing overhead, in view of historical losses from operations, negative
working capital and the Company's debt service obligations, the Company has
not been able to invest significantly in sales and marketing and accordingly
has generally limited these activities to telemarketing and selected trade
shows. Results of operations in the future will be influenced by numerous
factors, including the ability of the Company to successfully expand its
products and services and/or to negotiate the acquisition of another business
enterprise, the development and implementation of sales and marketing
programs, competitive factors and the ability of the Company to control costs.
As a result of these factors, the forecast of future business operations is
subject to numerous uncertainties. There can be no assurance that revenue
growth or profitability on a quarterly or annual basis will be attained. The
Company therefore is subject to all the risks incident to a business with a
limited history of operations including, among others, the possibility of
unforeseen expenses, difficulties, complications and delays, and it may be
difficult or impossible to obtain additional financing if required for the
Company's business.
DEPENDENCE ON GENERATING ADDITIONAL REVENUES. The Company's core business is
highly competitive and the Company is a recent entry to a mature market.
Improved cash flows will be dependent, among other factors, on increasing
sales, and there can be no assurance that sales levels will increase.
NEED FOR ADDITIONAL FINANCING. Management anticipates the Company will be
required to seek additional equity financing in the future, in addition to the
proceeds of this Offering, to sustain its operations, to support the
introduction of new products or services and/or to finance the acquisition of
another business if a suitable acquisition candidate is identified. The
Company's actual future capital requirements will depend on numerous factors,
including, but not limited to, the Company's progress in generating increased
revenues, the cost of marketing and advertising programs, management's ability
to control costs, inventory requirements, competing technological and market
developments. If the Company generates revenue increases, it may require
additional working capital to support increases in manufacturing capacity and
for additional capital required to finance receivable and inventory increases.
No assurance can be given that additional financing will be forthcoming or, if
available, would be sufficient to satisfy the Company's future operating
requirements. The Company has no commitment to obtain additional funds and
there can be no assurance it will be successful in the event management
determines the Company should initiate efforts to obtain additional financing.
Because of the Company's limited capital, it also may undertake
additional equity offerings whenever conditions are favorable, even if it does
not have an immediate need for additional capital at that time. There can be
no assurance that the Company will be able to obtain additional financing when
needed, or that any such financing, if available, will be obtainable on
reasonable terms. Any such additional financing may result in significant
dilution to existing stockholders. If adequate funds are not available, the
Company may be required to accept unfavorable alternatives, including the
delay, reduction or elimination of product introductions and expansion,
marketing and advertising and other operating expenses.
Subscription Agreement -4-
<PAGE>
DEPENDENCE ON KEY PERSONNEL. The success of the Company is substantially
dependent on the services of its officers, key employees and professional
consultants. The Company is dependent in particular upon the services of
David J. Lopes, its President and Chief Executive Officer. The Company also
relies, and for the foreseeable future will rely, on independent advisors and
consultants to provide certain services to the Company. There can be no
assurance that such services will continue to be available to the Company on a
timely basis when needed, or that the Company could find qualified
replacements. The Company's operations therefore are dependent upon a limited
number of key employees and consultants and the loss of the services of these
or other key personnel could have a material adverse effect upon the Company.
The Company does not maintain key man insurance on the lives of its executive
officers and key consultants.
CONFLICTS OF INTEREST. The Company in the past has engaged in a number of
material transactions with its directors and executive officers and/or their
affiliates, and may engage in such transactions in the future. All such
transactions have been in the past, and will be in the future, approved by a
majority of the Company's disinterested directors.
DILUTIVE EFFECT OF OUTSTANDING SECURITIES OR SECURITIES TO BE ISSUED; POSSIBLE
RISK OF MARKET OVERHANG. The Company has reserved shares of its Common Stock
for issuance upon exercise of outstanding warrants and upon exercise of
conversion rights for outstanding shares of convertible preferred stock.
Additional shares will be reserved for the Common Stock and warrants to be
issued in the Offerings. The 9,000,000 shares of Common Stock proposed to be
issued in the Offerings is more than the total number of shares of Common
Stock currently outstanding (approximately 6,800,000 shares), and warrants
included in the Offerings cover an additional 6,500,000 shares. In addition,
it is anticipated that the Company may issue additional Common Stock, warrants
or other securities convertible or exercisable into Common Stock in connection
with management's plan to seek the acquire additional assets and/or for future
equity financings. Exercise of warrants, the conversion of preferred stock or
the future issuance of equity securities could involve significant dilution to
holders of the Company's Common Stock. Holders of convertible securities and
warrants are likely to exercise them when, in all likelihood, the Company
could obtain additional capital on terms more favorable than those provided by
the convertible securities or warrants.
Shares issued upon exercise of warrants or conversion rights or future
issuance of securities, as well as the shares of Common Stock to be issued in
the Offerings and restricted shares previously issued by the Company in
private placement transactions, may become available for public sale under the
provisions of Rule 144 of the Securities Act of 1933 or if the Company elects
to register its securities under the Securities Act of 1933. As such, there
may be a significant market overhang with respect to the Company's Common
Stock in the public market from time to time in the future, and the existence
thereof may have a depressive effect upon the market price for the Company's
Common Stock and securities convertible into Common Stock.
VOLATILITY OF MARKET PRICE FOR COMMON STOCK: The Company's Common Stock is
publicly traded in the over-the-counter market and quoted on the NASD
Electronic Bulletin Board under the trading symbol "QGRP". There has been
significant volatility in the market price of securities relating to the
computer industry generally and for the Company's Common Stock specifically.
Factors such as announcements by the Company, the Company's liquidity
problems, the terms of securities offerings, quarterly variations in operating
results, trading volume, general market trends, announcements of technological
innovations or new commercial products, announcements by competitors and
general market conditions may have a significant effect on the market price of
the Company's Common Stock.
Subscription Agreement -5-
<PAGE>
UNCERTAINTY OF PROJECTIONS. Certain projections may be provided on a
confidential basis to prospective investors in the Offerings with respect to
the Company's future operations. There may be material differences between
projected and actual results because events and circumstances frequently do
not occur as expected. No representation or warranty is given that actual
future results will be as projected.
COMPETITION. The business in which the Company is engaged is characterized by
intense competition, especially as to price. The Company competes with much
larger, well-established companies that have greater financial, technical,
manufacturing, marketing and research and development resources as well as a
wide variety of companies comparable in size to the Company.
NO SIGNIFICANT PROPRIETARY RIGHTS. The Company does not hold any patents or
significant proprietary rights as to any of its products. Accordingly, the
Company relies upon trade secrets to protect limited proprietary information
and customer data. There can be no assurance that trade secrecy obligations
will be honored or that others have or will not independently develop similar
or superior information.
UNDETERMINED EFFECT OF BLANK CHECK PREFERRED STOCK AND AUTHORIZED COMMON
STOCK; POSSIBLE CHANGE IN CONTROL: The Company's articles of incorporation
authorize the issuance of up to 50 million shares of "blank check preferred
stock" with such rights, preferences, privileges and limitations as may be
determined from time to time by the Board of Directors, and up to 50 million
shares of Common Stock. Accordingly, the Board has the power without prior
shareholder approval to issue additional shares of common stock and/or one or
more series of preferred stock with such rates of dividends, redemption
provisions, liquidation preferences, voting rights, conversion privileges and
any other characteristics as the Board may deem necessary. Any such
additional issuances of common stock and/or preferred stock may result in
substantial and material dilution to existing holders of the Company's
securities. In addition, the existence of a substantial amount of authorized
and unissued common stock and blank check preferred stock could discourage,
delay or prevent a takeover of the Company if any such transaction were to be
proposed. In view of the Company's current financial condition, the
acquisition of another business by the Company or additional financing
transactions may involve the issuance of additional equity securities that
could be significantly dilutive to the interests of current stockholders
and/or may result in a change in control of the Company.
4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
By its acceptance of any subscription from the Accredited Investor
hereunder, the Company represents and warrants to the Accredited Investor as
follows:
4.1. The Company is duly incorporated and validly existing as a
corporation in good standing under the laws of the State of Colorado with
corporate power to enter into this Agreement and to conduct its business as
presently conducted.
4.2. The securities of the Company covered by this Subscription
Agreement, when issued and delivered upon receipt of the subscription price,
will each be duly and validly authorized and issued, fully paid and
nonassessable securities of the Company and will not subject the holders
thereof to personal liability by reason of being such holders.
Subscription Agreement -6-
<PAGE>
4.3. This Agreement, upon its acceptance by the Company, has been duly
authorized, executed and delivered by the Company and is a valid and binding
agreement enforceable in accordance with its terms, subject only to
bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and
similar laws of general application to or affecting creditors' rights
generally and to general principles of equity. The Company has full power and
authority necessary to enter into this Agreement and to perform its
obligations hereunder.
4.4. The execution and delivery of this Agreement, and the consummation
of the transactions contemplated herein, do not and will not conflict with or
result in a breach by the Company of any of the terms or provisions of, or
constitute a default under, its articles of incorporation, its by-laws, any
action of its directors or shareholders, or any indenture, mortgage, deed of
trust or other agreement or instrument to which it is a party or by which it
or any of its properties or assets are bound, or any existing applicable law,
rule or regulation or any applicable decree, judgment or order of any court,
regulatory body, administrative agency or other governmental body having
jurisdiction over the undersigned or any of its properties or assets.
5. REPRESENTATIONS AND WARRANTIES OF THE ACCREDITED INVESTOR. In
connection with this Agreement and the transactions contemplated herein, the
Accredited Investor represents and warrants to the Company as follows:
5.1. The Accredited Investor has relied only on the information
provided in writing referenced in this Agreement or provided in writing by the
President of the Company in response to inquiries of the Accredited Investor.
The Accredited Investor has carefully read and reviewed this Subscription
Agreement and all other documentation provided by the Company in connection
with this Offering, and has asked such questions of management of the Company
and received from them such information as the Accredited Investor deems
necessary in order for the Accredited Investor to make an informed decision
with respect to the purchase of the securities offered hereby.
5.2. The Accredited Investor has sufficient knowledge and experience of
financial and business matters so that he, she or it is able to evaluate the
relative merits and risks of purchasing the securities offered hereby. The
Accredited Investor has not received any general solicitation or advertising
regarding this Offering. The Accredited Investor is aware that an investment
in the Shares is a speculative investment, may not be liquid due to the
matters described in Section 3 above, and involves a high degree of risk of
loss. The Accredited Investor has had substantial experience in previous
private and public purchases of speculative securities.
5.3. The Accredited Investor's commitment in direct participation in
investments in restricted securities is reasonable in relation to his, her or
its net worth. The investment of the Accredited Investor in the securities
offered hereby will in no event exceed 10% of the net worth of the Accredited
Investor. The Accredited Investor has the means to provide for his or her
personal needs, possesses the ability to bear the economic risk hereunder
indefinitely, and can afford a complete loss of his, her or its investment.
The Accredited Investor realizes that the securities offered hereby must not
be purchased unless the Accredited Investor has liquid assets sufficient to
assure that this investment will cause no undue financial difficulties and the
Accredited Investor can provide for current financial needs and possible
personal contingencies from other funds. The Accredited Investor understands
that the transfer of the securities comprising the Shares will be prohibited
absent full compliance with the Securities Act of 1933 and applicable state
securities laws.
5.4. The Accredited Investor is acquiring the securities offered hereby
for his, her or its own account for investment and not with a view to the
resale or other distribution thereof. The undersigned understands that a
restrictive legend will be placed on the securities referencing the Securities
Act.
Subscription Agreement -7-
<PAGE>
5.5. The undersigned has full power and authority necessary to enter
into this Agreement and to perform his, her or its obligations hereunder. All
information which the Accredited Investor has provided to the Company or its
representatives concerning the Accredited Investor's financial position and
knowledge of investment matters is correct and complete as of the date set
forth on the signature page below.
5.6. The Accredited Investor has reviewed carefully the definition of
Accredited Investor set forth below and is an Accredited Investor within that
definition.
Except as provided in this Subscription Agreement, the current Business Plan
and in any other written information, if any, furnished by the President the
Company expressly for the purposes of this Offering, the Accredited Investor
warrants that no other representations, statements or inducements were made to
the Accredited Investor to purchase the securities offered hereby. The
Accredited Investor acknowledges that projections so provided, if any, are
based upon certain assumptions as to future sales, expenses and operations of
the Company, and there can be no guarantee or assurance that future the
Company operations will attain the levels included in any such projections.
DEFINITION OF ACCREDITED INVESTOR
The term "Accredited Investor" is defined in Rule 501(a) of Regulation D
promulgated under the Securities Act as follows:
(1) Certain banks, savings and loan institutions, broker-dealers, investment
companies and other entities including an employee benefit plan within
the meaning of Title I of the Employee Retirement Income Security Act of
1974 with total assets in excess of $5,000,000;
(2) Any private business development company as defined in Section
202(a)(22) of the Investment Advisers Act of 1940;
(3) Any organization described in Section 501(c)(3) of the Internal Revenue
Code, corporation, Massachusetts or similar business trust, or
partnership, not formed for the specific purpose of acquiring the
Shares, with total assets in excess of $5,000,000;
(4) Any director, executive officer, or general partner of the issuer of the
securities being offered or sold, or any director, executive officer, or
general partner of a general partner of that issuer;
(5) Any natural person whose individual net worth, or joint net worth with
that person's spouse, at the time of his purchase exceeds $1,000,000;
(6) Any natural person who had an individual income in excess of $200,000
or, with that person's spouse a joint income in excess of $300,000, in
each of the two most recent years and who reasonably expects an income
in excess of $200,000 (or joint income with that person's spouse in
excess of $300,000) in the current year;
(7) Any trust, with total assets in excess of $5,000,000, not formed for the
specific purpose of acquiring the securities offered, whose purchase is
directed by a sophisticated person as described in Section
230.506(b)(2)(ii) of Regulation D, i.e. a person having such knowledge
and experience in financial and business matters that he is capable of
evaluating the merits and risks of the prospective investment; or
(8) Any entity in which all of the equity owners are accredited investors
under any of the paragraphs above.
In calculating "net worth," the value of a principal residence must be valued
at cost or at a written appraised value used by an institutional lender to
make a loan secured by the property, in either case net of current
encumbrances on the property.
Subscription Agreement -8-
<PAGE>
SIGNATURE PAGE
THE UNDERSIGNED SUBSCRIBER IS AN ACCREDITED INVESTOR BY REASON OF PARAGRAPH(S)
5 SET FORTH IN THE DEFINITION ABOVE.
- -------
The undersigned hereby agrees to purchase Five Hundred Thousand (500,000)
Shares of Common Stock in THE QUARTZ GROUP, INC., a Colorado corporation ("the
"Company") in accordance with this Subscription Agreement, and is tendering
herewith a check therefor in the amount of $25,000 payable to the account of
THE QUARTZ GROUP, INC.
Very truly yours,
DATE: 9/19/ , 1997
-------------------
/s/ Donna M. Kull
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[Signature(s) and Title if a Corporation, Partnership or Trust]
Donna M. Kull
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[Please print name as it should appear on your certificates]
ADDRESS:
15 Weatherstone Way TELEPHONE NUMBER: (516) 361-9479
- ------------------------------ ------------------
Smithtown, N.Y. 11787 FAX NUMBER:
- ------------------------------ -----------------------
SOCIAL SECURITY OR
- ------------------------------ IRS IDENTIFICATION NUMBER:
###-##-####
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STATE IN WHICH REGISTERED TO VOTE, if an Individual: N.Y.
---------------------
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
ACCEPTED:
THE QUARTZ GROUP, INC.
By: /s/ David J. Lopes DATE: Sept. 19, 1997
------------------------- -------------------------------
Title: President
----------------------- Rev 97b
Subscription Agreement -9-
THE QUARTZ GROUP, INC.
3029 S. Harbor Blvd.
Santa Ana, California 92704
Telephone (714) 429-5984
FAX Number (714) 429-5987
SUBSCRIPTION AGREEMENT
Common Stock
THE QUARTZ GROUP, INC.
Attention: David J. Lopes, President
3029 S. Harbor Blvd.
Santa Ana, California 92704
FAX No. (714) 429-5987
1. SUBSCRIPTION. The undersigned, an accredited investor within
the meaning of Regulation D promulgated under the Securities Act of 1933
(herein called the "Accredited Investor"), hereby subscribes for the purchase
of Five Hundred Thousand (500,000) shares (the "Shares") of common stock
("Common Stock") in THE QUARTZ GROUP, INC., a Colorado corporation ("the
"Company") for the account of the Accredited Investor upon the terms and
conditions set forth in this Subscription Agreement. The subscription price
shall be Twenty Five Thousand Dollars ($25,000) in United States funds,
payable in cash upon acceptance of this subscription by the Company.
Investors in this Offering should review, among other information available
from the Company, the summary of certain risk factors described in Section 3
of this Subscription Agreement before making an investment decision.
2. DESCRIPTION OF OFFERINGS.
2.1. THE OFFERINGS. The Company is concurrently offering (i) to the
Accredited Investor for the sum of $25,000, a total of 500,000 shares of
common stock, (ii) to one other accredited investor for the sum of $25,000, a
total of 500,000 shares of common stock, (iii) to one other accredited
investor for the sum of $100,000, 1,000,000 shares of common stock and 500,000
Class F Warrants exercisable into common stock at $.50 per share expiring on
September 30, 2002, and (iv) to one other accredited investor for the sum of
$750,00, a total of 7,000,000 shares of common stock, 6,000,000 Class E
Warrants exercisable into common stock at $.25 per share expiring on September
30, 2002 and a limited recourse $750,000 promissory note payable by the
Company only from proceeds of the exercise of warrants issued by the Company
(herein collectively called the "Offerings"). The Offerings are being made on
a "best efforts" basis to a limited number of accredited investors in a
private placement offering of securities in accordance with Rule 505 of
Regulation D under the U.S. Securities Act of 1933, as amended (the
"Securities Act"). Prospective investors should note that the classes of
securities and consideration per share being paid in the separate offerings
included in the Offerings are not proportionate to each other.
The Offerings will expire at the earlier of receipt and acceptance of
subscriptions to a total of $900,000 in subscriptions or on September 30, 1997
unless extended by the Company for an additional period not exceeding 30 days.
The Company reserves the right to terminate the Offerings at any earlier date.
2.2. The Accredited Investor acknowledges that an investment in the
securities offered hereby is speculative, involves a high degree of risk, and
should not be purchased by persons who cannot
<PAGE>
afford the loss of their entire investment, and represents that the Accredited
Investor has relied only on the information contained herein or otherwise
provided in writing by duly authorized representatives of the Company. The
Accredited Investor acknowledges receipt of the Company's current Business
Plan. The Accredited Investor has carefully read and reviewed this
Subscription Agreement and all of the Company's filings during the last two
fiscal years with the Securities and Exchange Commission which are
incorporated by reference herein (including, without limitation, the Company's
Annual Report on Form 10-KSB for the fiscal year ended June 30, 1995, its
interim quarterly Reports on Form 10-QSB for the Quarters ended September 30,
1996, December 31, 1996 and March 31, 1997, and its Current Report on Form 8-K
dated as of June 2, 1997, and has asked such questions of management of the
Company and received such additional information as he, she or it deems
necessary in order for the Accredited Investor to make an informed decision
with respect to an investment in the Company's securities. The Accredited
Investor represents and warrants that he, she or it has received complete and
satisfactory answers to all such inquiries. The Accredited Investor is not
relying on oral or written representations or assurances from the Company or
any representatives of the Company, other than as set forth in this Agreement,
the Company's current Business Plan, reports filed by the Company with the
Securities and Exchange Commission and any documents in writing signed by
David J. Lopes as the President of the Company.
The Company further agrees to make available to each prospective
investor the opportunity to ask questions of, and receive written answers
from, David J. Lopes as the President of the Company concerning the terms and
conditions of this Offering, the business and financial status of the Company
and any other relevant matters, and to obtain any additional written informa-
tion, to the extent that the Company possesses such information or can acquire
it without unreasonable effort or expense, necessary to verify the accuracy of
the information set forth in the documents furnished to the Accredited
Investor in connection with this Offering.
2.3. SECURITIES LAW MATTERS. The Accredited Investor acknowledges
that the securities included in the Offerings have not been, and will not be,
registered under the Securities Act or qualified under applicable state
securities laws. The Company will rely on the representations of the
accredited investors in the Offerings for an exemption from registration under
Rule 505 of the Securities Act of 1933 (the "Securities Act") as to the
securities issued pursuant to the Offerings and any shares of common stock
issued upon exercise of warrants included in the Offerings. The
transferability thereof will be restricted by the registration or
qualification provisions of the Securities Act and/or state laws separate and
apart from the provisions of the Securities Act.
2.4. OTHER.
2.4.1. This Subscription Agreement may be executed in one or more
counterparts and transmitted by facsimile telephonic transmission, each of
which shall be deemed to constitute an original and shall become effective
when one or more counterparts have been signed by each of the parties hereto
and delivered or transmitted by facsimile telephonic transmission to the other
party.
2.4.2. This Agreement may be executed in one or more counterparts
and it is not necessary that the signatures of all parties appear on the same
counterpart, but such counterparts together shall constitute but one and the
same agreement. The headings of the sections of this Agreement have been
inserted for convenience of reference only, and shall not be deemed to be a
part of this Agreement.
Subscription Agreement -2-
<PAGE>
2.3.3. Each of the undersigned agree this Agreement shall be
governed by and construed in accordance with the laws of the State of
California. Any dispute arising out of or relating to this Agreement and the
transactions contemplated herein or the breach of this Agreement or such
transactions shall be resolved by arbitration pursuant to the Rules of the
American Arbitration Association then in effect and shall take place in the
County of Orange, State of California. Any litigation, including litigation
arising out of or concerning such arbitration, shall be conducted exclusively
in the trials courts of general jurisdiction for the County of Orange, State
of California. All parties hereby consent to the jurisdiction of such court
for all such litigation.
2.3.4. Time shall be of the essence of this Agreement.
3. CERTAIN RISK FACTORS. The securities being offered hereby are
speculative and subject to a high degree of risk of loss of the investment.
Persons who cannot afford to lose their investment should not purchase the
securities offered hereby. Prospective investors should consider carefully,
among other factors described herein, the following matters:
HISTORY OF OPERATING LOSSES; ACCUMULATED DEFICIT; DEFICIENCY IN
STOCKHOLDERS' EQUITY; DEFICIT IN WORKING CAPITAL; AUDITOR'S QUALIFICATION;
PROPOSED JOINT VENTURE
The Company commenced operations in September 1987, was required to seek
the protection of Chapter 11 of the U.S. Bankruptcy Act in 1992, and has not
operated on a profitable basis. Net losses before extraordinary items were
$1,121,000 and $372,000 for the fiscal years ended June 30, 1996 and 1995,
respectively, and $604,000 for the nine months ended March 31, 1997. At March
31, 1997, the Company had an accumulated deficit from operations since its
inception of $3,331,000 and a $701,000 deficiency in its stockholders' equity.
Excluding the effect of commitment and continent liabilities, if any, total
liabilities at March 31, 1997 were $946,000 and there were also redeemable
Series A preferred stock outstanding of $136,000 which require mandatory
redemption from future net income, if any.
At March 31, 1997, the Company had limited cash resources of $26,000 and
a deficiency in working capital of $386,000; included in current liabilities,
however, is a contingent liability of $169,000 due the Company's former
President under a settlement agreement that is required to be paid only from
5% of proceeds realized from subsequent financings by the Company. There can
be no assurance that the Company will obtain additional financing.
THE REPORT OF STOCKMAN KAST RYAN & SCRUGGS, PC, ON THE FINANCIAL
STATEMENTS OF THE COMPANY FOR THE FISCAL YEAR ENDED JUNE 30, 1996 CONTAINS A
PARAGRAPH EXPRESSING SUBSTANTIAL DOUBT CONCERNING THE ABILITY OF THE COMPANY
TO CONTINUE AS A GOING CONCERN. Management's plan to address these matters
has been to dispose of its software media duplication and distribution
business and close all operations in Colorado. The Company, now
headquartered in Santa Ana, California, is focusing its available resources
and personnel on the development of a quartz glass business and sale of quartz
glass products. Initial sales have been obtained, with manufacturing
temporarily being contracted to third parties.
The Company has negotiated a joint venture agreement to acquire a
minority interest in a quartz glass manufacturing business based in Northern
California, but will be unable to participate in that venture unless it
receives proceeds from the sale of all securities included in the Offerings.
Historical operations of the business in Northern California have not been
profitable and the proposed joint venture will be
Subscription Agreement -3-
<PAGE>
largely dependent upon increases in sales stimulated by the participation of a
foreign company, which future sales increases have not been committed. There
can be no assurance that the Company will be able to successfully complete its
minority participation in the joint venture or that, if completed, that the
joint venture will become profitable. In addition, the Company will own a
minority equity position in the joint venture if it is able to complete the
proposed transaction, and may have only a limited influence in control of the
business operations and policies of the joint venture. Further information in
writing as to the proposed joint venture may be obtained on a confidential
basis by the Accredited Investor from the President of the Company.
Although increases in revenues are required for the Company to absorb
existing overhead, in view of historical losses from operations, negative
working capital and the Company's debt service obligations, the Company has
not been able to invest significantly in sales and marketing and accordingly
has generally limited these activities to telemarketing and selected trade
shows. Results of operations in the future will be influenced by numerous
factors, including the ability of the Company to successfully expand its
products and services and/or to negotiate the acquisition of another business
enterprise, the development and implementation of sales and marketing
programs, competitive factors and the ability of the Company to control costs.
As a result of these factors, the forecast of future business operations is
subject to numerous uncertainties. There can be no assurance that revenue
growth or profitability on a quarterly or annual basis will be attained. The
Company therefore is subject to all the risks incident to a business with a
limited history of operations including, among others, the possibility of
unforeseen expenses, difficulties, complications and delays, and it may be
difficult or impossible to obtain additional financing if required for the
Company's business.
DEPENDENCE ON GENERATING ADDITIONAL REVENUES. The Company's core business is
highly competitive and the Company is a recent entry to a mature market.
Improved cash flows will be dependent, among other factors, on increasing
sales, and there can be no assurance that sales levels will increase.
NEED FOR ADDITIONAL FINANCING. Management anticipates the Company will be
required to seek additional equity financing in the future, in addition to the
proceeds of this Offering, to sustain its operations, to support the
introduction of new products or services and/or to finance the acquisition of
another business if a suitable acquisition candidate is identified. The
Company's actual future capital requirements will depend on numerous factors,
including, but not limited to, the Company's progress in generating increased
revenues, the cost of marketing and advertising programs, management's ability
to control costs, inventory requirements, competing technological and market
developments. If the Company generates revenue increases, it may require
additional working capital to support increases in manufacturing capacity and
for additional capital required to finance receivable and inventory increases.
No assurance can be given that additional financing will be forthcoming or, if
available, would be sufficient to satisfy the Company's future operating
requirements. The Company has no commitment to obtain additional funds and
there can be no assurance it will be successful in the event management
determines the Company should initiate efforts to obtain additional financing.
Because of the Company's limited capital, it also may undertake
additional equity offerings whenever conditions are favorable, even if it does
not have an immediate need for additional capital at that time. There can be
no assurance that the Company will be able to obtain additional financing when
needed, or that any such financing, if available, will be obtainable on
reasonable terms. Any such additional financing may result in significant
dilution to existing stockholders. If adequate funds are not available, the
Company may be required to accept unfavorable alternatives, including the
delay, reduction or elimination of product introductions and expansion,
marketing and advertising and other operating expenses.
Subscription Agreement -4-
<PAGE>
DEPENDENCE ON KEY PERSONNEL. The success of the Company is substantially
dependent on the services of its officers, key employees and professional
consultants. The Company is dependent in particular upon the services of
David J. Lopes, its President and Chief Executive Officer. The Company also
relies, and for the foreseeable future will rely, on independent advisors and
consultants to provide certain services to the Company. There can be no
assurance that such services will continue to be available to the Company on a
timely basis when needed, or that the Company could find qualified
replacements. The Company's operations therefore are dependent upon a limited
number of key employees and consultants and the loss of the services of these
or other key personnel could have a material adverse effect upon the Company.
The Company does not maintain key man insurance on the lives of its executive
officers and key consultants.
CONFLICTS OF INTEREST. The Company in the past has engaged in a number of
material transactions with its directors and executive officers and/or their
affiliates, and may engage in such transactions in the future. All such
transactions have been in the past, and will be in the future, approved by a
majority of the Company's disinterested directors.
DILUTIVE EFFECT OF OUTSTANDING SECURITIES OR SECURITIES TO BE ISSUED; POSSIBLE
RISK OF MARKET OVERHANG. The Company has reserved shares of its Common Stock
for issuance upon exercise of outstanding warrants and upon exercise of
conversion rights for outstanding shares of convertible preferred stock.
Additional shares will be reserved for the Common Stock and warrants to be
issued in the Offerings. The 9,000,000 shares of Common Stock proposed to be
issued in the Offerings is more than the total number of shares of Common
Stock currently outstanding (approximately 6,800,000 shares), and warrants
included in the Offerings cover an additional 6,500,000 shares. In addition,
it is anticipated that the Company may issue additional Common Stock, warrants
or other securities convertible or exercisable into Common Stock in connection
with management's plan to seek the acquire additional assets and/or for future
equity financings. Exercise of warrants, the conversion of preferred stock or
the future issuance of equity securities could involve significant dilution to
holders of the Company's Common Stock. Holders of convertible securities and
warrants are likely to exercise them when, in all likelihood, the Company
could obtain additional capital on terms more favorable than those provided by
the convertible securities or warrants.
Shares issued upon exercise of warrants or conversion rights or future
issuance of securities, as well as the shares of Common Stock to be issued in
the Offerings and restricted shares previously issued by the Company in
private placement transactions, may become available for public sale under the
provisions of Rule 144 of the Securities Act of 1933 or if the Company elects
to register its securities under the Securities Act of 1933. As such, there
may be a significant market overhang with respect to the Company's Common
Stock in the public market from time to time in the future, and the existence
thereof may have a depressive effect upon the market price for the Company's
Common Stock and securities convertible into Common Stock.
VOLATILITY OF MARKET PRICE FOR COMMON STOCK: The Company's Common Stock is
publicly traded in the over-the-counter market and quoted on the NASD
Electronic Bulletin Board under the trading symbol "QGRP". There has been
significant volatility in the market price of securities relating to the
computer industry generally and for the Company's Common Stock specifically.
Factors such as announcements by the Company, the Company's liquidity
problems, the terms of securities offerings, quarterly variations in operating
results, trading volume, general market trends, announcements of technological
innovations or new commercial products, announcements by competitors and
general market conditions may have a significant effect on the market price of
the Company's Common Stock.
Subscription Agreement -5-
<PAGE>
UNCERTAINTY OF PROJECTIONS. Certain projections may be provided on a
confidential basis to prospective investors in the Offerings with respect to
the Company's future operations. There may be material differences between
projected and actual results because events and circumstances frequently do
not occur as expected. No representation or warranty is given that actual
future results will be as projected.
COMPETITION. The business in which the Company is engaged is characterized by
intense competition, especially as to price. The Company competes with much
larger, well-established companies that have greater financial, technical,
manufacturing, marketing and research and development resources as well as a
wide variety of companies comparable in size to the Company.
NO SIGNIFICANT PROPRIETARY RIGHTS. The Company does not hold any patents or
significant proprietary rights as to any of its products. Accordingly, the
Company relies upon trade secrets to protect limited proprietary information
and customer data. There can be no assurance that trade secrecy obligations
will be honored or that others have or will not independently develop similar
or superior information.
UNDETERMINED EFFECT OF BLANK CHECK PREFERRED STOCK AND AUTHORIZED COMMON
STOCK; POSSIBLE CHANGE IN CONTROL: The Company's articles of incorporation
authorize the issuance of up to 50 million shares of "blank check preferred
stock" with such rights, preferences, privileges and limitations as may be
determined from time to time by the Board of Directors, and up to 50 million
shares of Common Stock. Accordingly, the Board has the power without prior
shareholder approval to issue additional shares of common stock and/or one or
more series of preferred stock with such rates of dividends, redemption
provisions, liquidation preferences, voting rights, conversion privileges and
any other characteristics as the Board may deem necessary. Any such
additional issuances of common stock and/or preferred stock may result in
substantial and material dilution to existing holders of the Company's
securities. In addition, the existence of a substantial amount of authorized
and unissued common stock and blank check preferred stock could discourage,
delay or prevent a takeover of the Company if any such transaction were to be
proposed. In view of the Company's current financial condition, the
acquisition of another business by the Company or additional financing
transactions may involve the issuance of additional equity securities that
could be significantly dilutive to the interests of current stockholders
and/or may result in a change in control of the Company.
4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
By its acceptance of any subscription from the Accredited Investor
hereunder, the Company represents and warrants to the Accredited Investor as
follows:
4.1. The Company is duly incorporated and validly existing as a
corporation in good standing under the laws of the State of Colorado with
corporate power to enter into this Agreement and to conduct its business as
presently conducted.
4.2. The securities of the Company covered by this Subscription
Agreement, when issued and delivered upon receipt of the subscription price,
will each be duly and validly authorized and issued, fully paid and
nonassessable securities of the Company and will not subject the holders
thereof to personal liability by reason of being such holders.
Subscription Agreement -6-
<PAGE>
4.3. This Agreement, upon its acceptance by the Company, has been duly
authorized, executed and delivered by the Company and is a valid and binding
agreement enforceable in accordance with its terms, subject only to
bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and
similar laws of general application to or affecting creditors' rights
generally and to general principles of equity. The Company has full power and
authority necessary to enter into this Agreement and to perform its
obligations hereunder.
4.4. The execution and delivery of this Agreement, and the consummation
of the transactions contemplated herein, do not and will not conflict with or
result in a breach by the Company of any of the terms or provisions of, or
constitute a default under, its articles of incorporation, its by-laws, any
action of its directors or shareholders, or any indenture, mortgage, deed of
trust or other agreement or instrument to which it is a party or by which it
or any of its properties or assets are bound, or any existing applicable law,
rule or regulation or any applicable decree, judgment or order of any court,
regulatory body, administrative agency or other governmental body having
jurisdiction over the undersigned or any of its properties or assets.
5. REPRESENTATIONS AND WARRANTIES OF THE ACCREDITED INVESTOR. In
connection with this Agreement and the transactions contemplated herein, the
Accredited Investor represents and warrants to the Company as follows:
5.1. The Accredited Investor has relied only on the information
provided in writing referenced in this Agreement or provided in writing by the
President of the Company in response to inquiries of the Accredited Investor.
The Accredited Investor has carefully read and reviewed this Subscription
Agreement and all other documentation provided by the Company in connection
with this Offering, and has asked such questions of management of the Company
and received from them such information as the Accredited Investor deems
necessary in order for the Accredited Investor to make an informed decision
with respect to the purchase of the securities offered hereby.
5.2. The Accredited Investor has sufficient knowledge and experience of
financial and business matters so that he, she or it is able to evaluate the
relative merits and risks of purchasing the securities offered hereby. The
Accredited Investor has not received any general solicitation or advertising
regarding this Offering. The Accredited Investor is aware that an investment
in the Shares is a speculative investment, may not be liquid due to the
matters described in Section 3 above, and involves a high degree of risk of
loss. The Accredited Investor has had substantial experience in previous
private and public purchases of speculative securities.
5.3. The Accredited Investor's commitment in direct participation in
investments in restricted securities is reasonable in relation to his, her or
its net worth. The investment of the Accredited Investor in the securities
offered hereby will in no event exceed 10% of the net worth of the Accredited
Investor. The Accredited Investor has the means to provide for his or her
personal needs, possesses the ability to bear the economic risk hereunder
indefinitely, and can afford a complete loss of his, her or its investment.
The Accredited Investor realizes that the securities offered hereby must not
be purchased unless the Accredited Investor has liquid assets sufficient to
assure that this investment will cause no undue financial difficulties and the
Accredited Investor can provide for current financial needs and possible
personal contingencies from other funds. The Accredited Investor understands
that the transfer of the securities comprising the Shares will be prohibited
absent full compliance with the Securities Act of 1933 and applicable state
securities laws.
5.4. The Accredited Investor is acquiring the securities offered hereby
for his, her or its own account for investment and not with a view to the
resale or other distribution thereof. The undersigned understands that a
restrictive legend will be placed on the securities referencing the Securities
Act.
Subscription Agreement -7-
<PAGE>
5.5. The undersigned has full power and authority necessary to enter
into this Agreement and to perform his, her or its obligations hereunder. All
information which the Accredited Investor has provided to the Company or its
representatives concerning the Accredited Investor's financial position and
knowledge of investment matters is correct and complete as of the date set
forth on the signature page below.
5.6. The Accredited Investor has reviewed carefully the definition of
Accredited Investor set forth below and is an Accredited Investor within that
definition.
Except as provided in this Subscription Agreement, the current Business Plan
and in any other written information, if any, furnished by the President the
Company expressly for the purposes of this Offering, the Accredited Investor
warrants that no other representations, statements or inducements were made to
the Accredited Investor to purchase the securities offered hereby. The
Accredited Investor acknowledges that projections so provided, if any, are
based upon certain assumptions as to future sales, expenses and operations of
the Company, and there can be no guarantee or assurance that future the
Company operations will attain the levels included in any such projections.
DEFINITION OF ACCREDITED INVESTOR
The term "Accredited Investor" is defined in Rule 501(a) of Regulation D
promulgated under the Securities Act as follows:
(1) Certain banks, savings and loan institutions, broker-dealers, investment
companies and other entities including an employee benefit plan within
the meaning of Title I of the Employee Retirement Income Security Act of
1974 with total assets in excess of $5,000,000;
(2) Any private business development company as defined in Section
202(a)(22) of the Investment Advisers Act of 1940;
(3) Any organization described in Section 501(c)(3) of the Internal Revenue
Code, corporation, Massachusetts or similar business trust, or
partnership, not formed for the specific purpose of acquiring the
Shares, with total assets in excess of $5,000,000;
(4) Any director, executive officer, or general partner of the issuer of the
securities being offered or sold, or any director, executive officer, or
general partner of a general partner of that issuer;
(5) Any natural person whose individual net worth, or joint net worth with
that person's spouse, at the time of his purchase exceeds $1,000,000;
(6) Any natural person who had an individual income in excess of $200,000
or, with that person's spouse a joint income in excess of $300,000, in
each of the two most recent years and who reasonably expects an income
in excess of $200,000 (or joint income with that person's spouse in
excess of $300,000) in the current year;
(7) Any trust, with total assets in excess of $5,000,000, not formed for the
specific purpose of acquiring the securities offered, whose purchase is
directed by a sophisticated person as described in Section
230.506(b)(2)(ii) of Regulation D, i.e. a person having such knowledge
and experience in financial and business matters that he is capable of
evaluating the merits and risks of the prospective investment; or
(8) Any entity in which all of the equity owners are accredited investors
under any of the paragraphs above.
In calculating "net worth," the value of a principal residence must be valued
at cost or at a written appraised value used by an institutional lender to
make a loan secured by the property, in either case net of current
encumbrances on the property.
Subscription Agreement -8-
<PAGE>
SIGNATURE PAGE
THE UNDERSIGNED SUBSCRIBER IS AN ACCREDITED INVESTOR BY REASON OF PARAGRAPH(S)
8 SET FORTH IN THE DEFINITION ABOVE.
- -------
The undersigned hereby agrees to purchase Five Hundred Thousand (500,000)
Shares of Common Stock in THE QUARTZ GROUP, INC., a Colorado corporation ("the
"Company") in accordance with this Subscription Agreement, and is tendering
herewith a check therefor in the amount of $25,000 payable to the account of
THE QUARTZ GROUP, INC.
Very truly yours,
DATE: 9/19/ , 1997
-------------------
/s/ A. Kull (Yes Corp / President)
- ----------------------------------------------------------------------------
[Signature(s) and Title if a Corporation, Partnership or Trust]
Andrew Kull
- ----------------------------------------------------------------------------
[Please print name as it should appear on your certificates]
ADDRESS:
175 Commerce Drive TELEPHONE NUMBER: 839-3747
- ------------------------------ --------------------
Hauppauge, N.Y. FAX NUMBER:
- ------------------------------ -------------------------
SOCIAL SECURITY OR
- ------------------------------ IRS IDENTIFICATION NUMBER:
###-##-####
- ----------------------------------------------------------------------------
STATE IN WHICH REGISTERED TO VOTE, if an Individual: N.Y.
---------------------
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
ACCEPTED:
THE QUARTZ GROUP, INC.
By: /s/ David J. Lopes DATE: Sept. 19, 1997
------------------------- -------------------------------
Title: President
----------------------- Rev 97b
Subscription Agreement -9-
AGREEMENT To Tender 1,000,000
Class B Common Stock Purchase Warrants
and 500,000 Class A Warrants
in
Brown Disc Products Company, Inc.
In exchange for
252,500 Common Stock Purchase Warrants at $0.01 per share
Due 2002
(REVISED)
TO: The Quartz Group, Inc. (F.K.A.) 15th July, 1997
Brown Disc Products Company, Inc.
3029 South Harbor Blvd.
Santa Aa, CA 92704
I, Daryl Silversparre a resident of Southern California with a mailing
address, 3649 El Caminito Street, La Crescenta, CA 91214, Being the holder of
1,000,000 Class B common stock purchase warrants and 500,000 Class A common
stock purchase warrants issued by BROWN DISC PRODUCTS, INC., a Colorado
corporation (THE "COMPANY"), evidenced by Warrants Certificate number B-01 and
A-01 respectfully (THE "WARRANTS") hereby tenders and offers all such Warrants
to the Company in full payment and consideration for the issuance of TWO
HUNDRED FIFTY-TWO THOUSAND FIVE HUNDRED (252,500) warrants at $0.01 per share.
The parties understand that the exercise price for the 1,000,000 Class B
warrants is $0.10 per share, and that the closing price for the Company's
common stock in the over-the-counter market on the date of this Agreement 15th
July, 1997, was $0.50. Based upon such closing price, the difference between
the market value at $0.50 per share of 1,000,000 shares less the warrant
exercise price of $0.10 warrants to be exercised, would be $400,000. In
comparison, the market value at $0.50 per share of 250,000 of the company's
stock would be $100,000.
The parties also understand that the exercise price for the Class A warrants
is $0.25, and that the closing price for the common stock in the over-the-
counter market on the date of this Agreement 15th July, 1997, was $0.50 per
share. Based upon the closing price, the difference between the market value
at $0.50 per share and 500,000 shares, less the warrants exercise price of
$0.25 warrants to be exercised, would be $125,000. In comparison, the market
value at $0.50 per share of 50,000 of the company's common stock would be
$25,000.
Daryl Silversparre has agreed to discount the value of the underlying shares
as a result of the size of the block and restrictions as to resale under
applicable securities laws. Should the fair value of the Warrants surrendered
exceed the fair value of 250,000 shares of Common Stock issued in exchange
therefore upon acceptance the Company of this Agreement, Daryl Silversparre
agrees that any such excess shall be deemed a contribution to the capital of
the Company. Upon acceptance of this Agreement, you are directed and
instructed to issue, register and deliver 252,500 Warrants at $0.01 as
follows:
Daryl Silversparre
3649 El Caminito Street
La Crescenta, CA 91214
This offer shall be deemed to have been made and executed, and all performance
shall be deemed to take place, upon its acceptance within the State of
Colorado.
<PAGE>
The offer contained in this Agreement will expire unless accepted in
accordance with its terms by the Company on or before the close of business
22nd July, 1997. Upon acceptance, a copy of this Agreement and the original
certificate with the number (B-01 & A-01) evidencing the Warrants shall be
promptly transmitted to the Company's counsel for preparation of appropriate
instructions for issuance of new warrants and for cancellation of the original
warrants.
Very Truly Yours,
Daryl Silversparre
By: /s/ Daryl Silversparre
-----------------------
SIGNED AND APPROVED
15th July, 1997
- ----------------------
The Quartz Group, Inc. FKA
Brown Disc Products Company, Inc.
By: /s/ David J. Lopes
--------------------------
David J. Lopes, President
Santa Ana, California
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933 (THE "ACT"). ACCORDINGLY, NO TRANSFER OF THESE
SECURITIES OR ANY INTEREST THEREIN MAY BE MADE EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE ACT UNLESS THE ISSUER HAS RECEIVED AN OPINION
OF COUNSEL SATISFACTORY TO IT THAT SUCH TRANSFER DOES NOT REQUIRE REGISTRATION
UNDER THE ACT.
- ----------------------------------------------------------------------------
THE QUARTZ GROUP, INC.
(Incorporated under the laws of the State of Colorado)
COMMON STOCK PURCHASE WARRANT
252,500 SHARES OF COMMON STOCK
Void After December 31, 2001 (the "Expiration Date")
- ----------------------------------------------------------------------------
This is to certify that, for value received, receipt of which is hereby
acknowledged, DARYL SILVERSPARRE, 3649 El Caminito Street, La Crescenta, CA
91214 (hereinafter called the "holder"), is entitled to purchase from THE
QUARTZ GROUP, INC., a Colorado corporation (hereinafter called the "Company"),
at the Warrant Price of ONE CENTS ($0.01) per share, subject to adjustment as
hereinafter provided (hereinafter called the "Warrant Price"), at any time on
or before 5:00 P.M. local Denver, Colorado time on December 31, 2001 (the
"Expiration Date"), up to TWO HUNDRED FIFTY TWO THOUSAND FIVE HUNDRED
(252,500) fully paid and non-assessable shares of Common Stock of the Company
(hereinafter called "Common Stock"), subject to the terms and conditions
hereof.
This Warrant was originally issued in 1997 as part of Common Stock
Purchase Warrants (the "Warrants") issued in consideration of certain
consulting services rendered to the Company. This Warrant represents part of
such issue of Common Stock Purchase Warrants and is herein called "this
Warrant." THIS WARRANT HAS BEEN PLEDGED WITH THE COMPANY AS COLLATERAL
SECURITY FOR PAYMENT OF A NON-TRANSFERABLE NOTE GIVEN TO THE COMPANY IN
PAYMENT OF THE PURCHASE PRICE FOR THE ISSUANCE OF THIS WARRANT, AND THE
EXERCISE OF THIS WARRANT SHALL BE CONDITIONED UPON THE PAYMENT OF SAID NON-
TRANSFERABLE NOTE IN ACCORDANCE WITH ITS TERMS.
This Warrant may be exercised by the holder as hereinabove provided as
to the whole or any part of the shares of Common Stock covered hereby, by
surrender of this Warrant at the principal office of any transfer agent for
the Common Stock, or, if the Company shall not have any transfer agent for the
Common Stock, at the principal office of the Company (any such transfer agent,
or the Company acting hereunder, being hereinafter called the "Warrant
Agent"), with the statement of election to subscribe attached hereto duly
executed and upon payment to the Company of the Warrant Price for shares so
purchased in cash or by certified check or bank draft. Thereupon (except that
if, upon such date, the stock transfer books of the Company shall be closed,
then upon the next succeeding date on which such transfer books are open),
this Warrant shall be deemed to have been exercised and the person exercising
the same to have become a holder of record of shares of Common Stock (or of
the other securities or property to which such person is entitled upon such
exercise) purchased hereunder for all purposes, and certificates for such
shares so purchased shall be delivered to the purchaser within a reasonable
time (not exceeding five business days, except while the transfer books of the
Company are closed) after this Warrant shall have been exercised as set forth
hereinabove. If this Warrant shall be exercised in respect of a part only of
the shares of Common Stock covered hereby, the holder shall be entitled to
receive a similar warrant of like tenor and date covering the number of shares
in respect of which this Warrant shall not have been exercised.
<PAGE>
Common Stock Purchase Warrants Page 2
The Company covenants and agrees that all shares which may be issued
upon the exercise of the rights represented by this Warrant will, upon
issuance, be validly issued, fully paid and non-assessable and free from all
taxes, liens and charges with respect to the issue thereof (other than taxes
in respect of any transfer occurring contemporaneously with such issue). The
Company further covenants and agrees that, during the period within which the
rights represented by this Warrant may be exercised, the Company will at all
times have authorized and reserved a sufficient number of shares of Common
Stock to provide for the exercise of the rights represented by this Warrant.
The rights of the holder of this Warrant shall be subject to the
following terms and conditions:
SECTION 1. CERTAIN ADJUSTMENTS AND NOTICES
1.1. In case the Company shall hereafter at any time change as a whole,
by split-up, subdivision or combination in any manner or by the making of a
stock dividend, the number of outstanding shares of Common Stock into a
different number of shares of Common Stock with or without par value, (i) the
number of shares of Common Stock which immediately prior to such change the
holder of this Warrant shall have been entitled to purchase pursuant to this
Warrant shall be increased or decreased in direct proportion to the increase
or decrease, respectively, in the number of shares of Common Stock outstanding
immediately prior to such change, and (ii) the Warrant Price in effect
immediately prior to such change shall be increased or decreased, as the case
may be, in inverse proportion to such increase or decrease in the number of
such shares outstanding immediately prior to such change; in any such event,
the rights of the holder of this Warrant to an adjustment in the number of
shares of Common Stock purchasable on exercise of this Warrant as herein
provided shall continue and be preserved in respect of any shares, securities,
or assets which the holder of this Warrant becomes entitled to purchase
hereafter.
1.2. In case of any capital reorganization or any reclassification of
the capital stock of the Company or in case of the consolidation or merger of
the Company with another corporation, or in case of any sale, transfer or
other disposition to another corporation of all or substantially all the
property, assets, business and goodwill of the Company as an entirety, as the
case may be, the holder of this Warrant shall thereafter be entitled to
purchase (and it shall be a condition to the consummation of any such
reorganization, reclassification, consolidation, merger, sale, transfer or
other disposition, that appropriate provision shall be made so that such
holder shall thereafter be entitled to purchase) the kind and amount of shares
of stock and other securities and property receivable, upon such capital
reorganization, reclassification of capital stock, consideration, merger,
sale, transfer or other disposition, by a holder of the number of shares of
Common Stock which this Warrant entitled the holder thereof to purchase
immediately prior to such capital reorganization, reclassification of capital
stock, consolidation, merger, sale, transfer or other disposition; and in any
such case appropriate adjustments (as determined in good faith by the Board of
Directors of the Company or of such other corporation, as the case may be)
shall be made in the application of the provisions herein set forth with
respect to rights and interests thereafter of the holder of this Warrant, to
the end that the provisions set forth herein (including the specified changes
in and other adjustments of the Warrant Price) shall thereafter be applicable,
as near as reasonably may be, in relation to any shares or other property
thereafter purchasable upon the exercise of this Warrant.
1.3. In case the Company shall hereafter at any time declare a dividend
upon shares of Common Stock payable otherwise than out of retained earnings or
otherwise than in shares of Common Stock or in stock or obligations directly
or indirectly convertible into or exchangeable for Common Stock, the holder of
this Warrant shall, upon exercise of this Warrant in whole or in part, be
entitled to receive, in addition to the number of shares of Common Stock
deliverable upon such exercise against payment of the Warrant Price therefor,
but without further consideration, the cash, stock or other securities or
property which the holder of this Warrant would have received as dividends
(otherwise than out of such retained earnings and otherwise than in shares of
Common Stock or in such convertible or exchangeable stock or obligations) if
continuously since the date set forth at the foot of this Warrant such holder
(i) had been the holder of record of the number of shares of Common Stock
deliverable upon such exercise and (ii)<PAGE>
Common Stock Purchase Warrants Page 3
had retained all dividends in stock or other securities (other than shares of
Common Stock or such convertible or exchangeable stock or obligations) paid or
payable in respect of said number of shares of Common Stock or in respect of
any such stock or other securities so paid or payable as such dividends. For
purposes of this Section 1.3, a dividend payable otherwise than in cash shall
be considered to be payable out of retained earnings only to the extent of the
fair value of such dividend as determined by the Board of Directors of the
Company.
1.4. No certificates for fractional shares of Common Stock shall be
issued upon the exercise of this Warrant, but in lieu thereof the Company
shall, upon exercise in full of this Warrant, purchase out of funds legally
available therefor any such fractional interest for an amount in cash equal to
the current market value of such fractional interest calculated to the nearest
cent, computed on the basis of the closing sale price, as reported by the
National Quotation Bureau, of the Common Stock in the over-the-counter market
on the most recent day within ten days prior to the date of such exercise for
which such closing prices shall have been so reported, or, if the Common Stock
is listed on a stock exchange registered with the Securities and Exchange
Commission or traded on the NASDAQ Stock Market, the last reported sale price
on such day; and if there shall have been no sale on said day, then the
computation shall be made on the basis of the last reported sale price within
ten days prior to such date. If there have been no reported closing sale
prices, as the case may be, within such ten days, the current market value
shall be fixed in a manner determined in good faith by the Board of Directors
of the Company.
1.5. Whenever the Warrant Price is adjusted, as herein provided, the
Company shall forthwith file with the Warrant Agent a statement signed by the
President or any one of the Vice Presidents of the Company and by its
Treasurer or an Assistant Treasurer, stating the adjusted Warrant Price
determined as herein provided. Such statement shall show in detail the facts
requiring such adjustment, including a statement of the consideration received
by the Company for any additional securities issued. Whenever the Warrant
Price is adjusted, the Company will forthwith cause a notice stating the
adjustment and the Warrant Price to be mailed to the registered holder of this
Warrant at the address of such holder shown on the books of the Company.
SECTION 2. INVESTMENT INTENT
2.1 The holder of this Warrant, by acceptance hereof, acknowledges
that this Warrant and shares of the Company's Common Stock issuable upon
exercise hereof have not been registered under the Securities Act of 1933.
Upon any exercise of this Warrant, the holder of this Warrant represents and
warrants that it will provide the Company with a written investment intent
letter by which the holder represents and warrants it is acquiring Common
Stock issuable on exercise for his or her own account for investment only and
without a view to the resale or other distribution thereof.
2.2. Before any transfer of this Warrant or the Common Stock issuable
upon exercise hereof shall be processed by the Company, the holder of this
Warrant agrees to give written notice to the Company before exercising or
selling such securities of such holder's intention to do so, describing
briefly the manner of any proposed sale of this Warrant or such holder's
intention as to the disposition to be made of shares of Common Stock issuable
upon such proposed exercise hereof. Promptly upon receiving such written
notice, the Company shall present copies thereof to counsel for the Company
for such counsel's opinion. If in the opinion of such counsel the proposed
exercise or sale may be effected without registration under the Securities Act
of 1933 of this Warrant or the shares of Common Stock issuable on the exercise
hereof, the Company, as promptly as practicable, shall notify such holder of
such opinion, whereupon such holder shall be entitled to sell this Warrant, or
to exercise this Warrant in accordance with its terms and dispose of the
shares received upon such exercise, all in accordance with the terms of the
notice delivered by such holder to the Company. If in the opinion of such
counsel the proposed exercise or sale described in said written notice given
by the holder of this Warrant may not be effected without registration of this
Warrant or the shares of Common Stock issuable on the exercise hereof, the
Company shall promptly give written notice of
<PAGE>
Common Stock Purchase Warrants Page 4
such opinion to the holder of this Warrant. The holder of this Warrant agrees
that, if the proposed exercise or sale by such holder cannot, in the opinion
of such counsel, be effected without such registration, the holder will not so
exercise or sell this Warrant or the shares of Common Stock issuable upon the
exercise hereof except in a transaction which in the opinion of counsel for
the Company has adequate representations and warranties for such transaction
to be exempt from the registration requirements of the Securities Act of 1993.
Section 3. Miscellaneous
3.1. The issue of any stock or other certificate upon the exercise of
this Warrant shall be made without charge to the registered holder hereof for
any tax in respect of the issue of such certificate. The Company shall not,
however, be required to pay any tax which may be payable in respect of any
transfer involved in the issue and delivery of any certificate in a name other
than that of the registered holder of this Warrant, and the Company shall not
be required to issue or deliver any such certificate unless and until the
person or persons requesting the issue thereof shall have paid to the Company
the amount of such tax or shall have established to the satisfaction of the
Company that such tax has been paid.
3.2. This Warrant and all rights hereunder or any portion thereof are
transferable on the books of the Company, upon surrender of this Warrant, with
the form of assignment attached hereto duly executed by the registered holder
hereof or by his attorney duly authorized in writing, to the Warrant agent at
its principal office hereinabove referred to, and thereupon there shall be
issued in the name of the transferee or transferees, in exchange for this
Warrant, a new Warrant or Warrants of like tenor and date, representing in the
aggregate the right to subscribe for and purchase the number of shares, or
such portion thereof as shall be so transferred, which may be subscribed for
and purchased hereunder and if there shall be any balance of such shares not
so transferred, there shall be issued in the name of the registered holder of
this Warrant, a new Warrant or Warrants of like tenor and date representing in
the aggregate the right to subscribe for and purchase the balance of the
number of shares which may be subscribed for and purchased hereunder.
3.3. If this Warrant shall be lost, stolen, mutilated or destroyed, the
Company may instruct the Warrant Agent, on such terms as to indemnify or
otherwise as the Company may in its discretion impose, to issue a new Warrant
of like denomination, tenor and date as the Warrant so lost, stolen, mutilated
or destroyed. Any such new Warrant shall constitute an original contractual
obligation of the Company, whether or not the allegedly lost, stolen,
mutilated or destroyed Warrant shall be at any time enforceable by anyone.
3.4. The Company and any Warrant Agent may deem and treat the
registered holder of this Warrant as the absolute owner of this Warrant for
all purposes and shall not be affected by any notice to the contrary.
3.5. This Warrant shall not entitle the holder to any rights of a
stockholder of the Company, either at law or in equity, including, without
limitation, the right to vote, to receive dividends and other distributions,
to exercise any preemptive rights or to receive any notice of meetings of
stockholders or of any other proceedings of the Company.
3.6. This Warrant shall be governed by the laws of the State of
Colorado.
<PAGE>
Common Stock Purchase Warrants Page 5
IN WITNESS WHEREOF, BROWN DISC PRODUCTS COMPANY, INC. has caused this
Warrant to be signed in its corporate name by its duly authorized officer as
of the day and year written below.
Dated: July 15, 1997
THE QUARTZ GROUP, INC.
By: /s/ David J. Lopes
-----------------------------
President/CEO
The Quartz Group, Inc.
BROWN DISC PRODUCTS COMPANY, INC.
PROMISSORY NOTE
Principal Amount: $60,000 Date: April 1, 1997
State of: California
FOR VALUE RECEIVED, the undersigned hereby, jointly and severally,
promise to pay to the order: Jerry Werre
19 Canyon Ridge
Irvine, CA 92612
the sum of Sixty-thousand dollars ($60,000) together with interest
thereon at the rate of ten (10)% per annum on the unpaid balance. Said sum
shall be paid in the following manner:
1. The principal shall be due and payable on June 24, 1997.
2. The note shall accrue a full years interest payable June 24, 1997.
3. In consideration of the loan, the Company shall issue to the
holder of the note 20,000 shares of the Company's common stock. The Company's
common stock (OTC: "BDPC") is traded under the name Brown Disc Products
Company, Inc., the parent of The Quartz Group, Inc., a manufacturer of Quartz
Glass products for the semiconductor industry. The shares issued in
connection with this bridge loan are restricted shares.
4. At the option of the lender, the interest earned in connection
with this loan may also be converted into common stock of the Company for
20,000 shares.
All payments shall be applied first to the principal and then to the
interest. This note may be prepaid at any time, in whole or in part, without
penalty.
Signed:
/s/ David J. Lopes
-----------------------
David J. Lopes
President/CEO
Brown Disc Products Company, Inc.
PROMISSORY NOTE
PRINCIPAL AMOUNT: $5,000 Date: September 1, 1997
State of: California
For Value received, the undersigned hereby jointly and severally promise
to pay to the order of:
Roger Rengler
4603 Grand Avenue
La Canada, CA 91011
(818) 790-7635
The sum of five thousand dollars ($5,000) together with interest thereon at
the rate of one and a half (1.5%) per month on the unpaid balance. Said sum
shall be paid in the following manner:
1: The principal shall be due and payable on September 1, 1998,
2: The note shall accrue interest at 1.5% per month payable monthly,
3: In consideration for the loan, the holder of the note shall have
the option to convert the balance or any portion thereof, into an equivalent
amount of common stock of the company calculated at a conversion price of
twenty percent (20%) below market value or forty cents ($0.40), whichever
results in a lower purchase price. The company's common stock (OTC: QGRP) is
traded under the name THE QUARTZ GROUP, INC., a manufacturer of quartz glass
products for the semiconductor industry. The shares issued in connection with
this bridge loan agreement will be subject to Rule 144 restrictions. (One
year hold from date of conversion.)
At the investor's option, the bridge loan can be rolled over for a further
ninety (90) day period on the same terms, or roll over a portion of the bridge
loan and receive cash or stock for the balance.
SECURITY: The loan shall be secured by the receivables of the Company. The
Quartz Group, Inc. currently has outstanding receivables of $207,766 or which
$132,107 are within 60 days. The company shall at all times during the term
of the loan maintain a "double coverage" of the loan balance with "current
receivables", that which has an aging of less than sixty (60) days. If at any
time during the term of the loan the company's receivables should drop below
this double coverage level, the company would repay sufficient principal to
correct the balance.
In the event of default, the company shall assign receivables in an
amount equal to the outstanding balance of the loan at that time of the
default.
Signed: /s/ David J. Lopes
-----------------------
David J. Lopes
President/CEO
The Quartz Group, Inc.
PROMISSORY NOTE
PRINCIPAL AMOUNT: $5,000 Date: September 1, 1997
State of: California
For Value received, the undersigned hereby jointly and severally promise
to pay to the order of:
Sharon F. Ellis
585 N. Holliston Avenue
Pasadena, CA 91106
(818) 796-7547
The sum of five thousand dollars ($5,000) together with interest thereon at
the rate of one and a half (1.5%) per month on the unpaid balance. Said sum
shall be paid in the following manner:
1: The principal shall be due and payable on September 1, 1998,
2: The note shall accrue interest at 1.5% per month payable monthly,
3: In consideration for the loan, the holder of the note shall have
the option to convert the balance or any portion thereof, into an equivalent
amount of common stock of the company calculated at a conversion price of
twenty percent (20%) below market value or forty cents ($0.40), whichever
results in a lower purchase price. The company's common stock (OTC: QGRP) is
traded under the name THE QUARTZ GROUP, INC., a manufacturer of quartz glass
products for the semiconductor industry. The shares issued in connection with
this bridge loan agreement will be subject to Rule 144 restrictions. (One
year hold from date of conversion.)
At the investor's option, the bridge loan can be rolled over for a further
ninety (90) day period on the same terms, or roll over a portion of the bridge
loan and receive cash or stock for the balance.
SECURITY: The loan shall be secured by the receivables of the Company. The
Quartz Group, Inc. currently has outstanding receivables of $207,766 or which
$132,107 are within 60 days. The company shall at all times during the term
of the loan maintain a "double coverage" of the loan balance with "current
receivables", that which has an aging of less than sixty (60) days. If at any
time during the term of the loan the company's receivables should drop below
this double coverage level, the company would repay sufficient principal to
correct the balance.
In the event of default, the company shall assign receivables in an
amount equal to the outstanding balance of the loan at that time of the
default.
Signed: /s/ David J. Lopes
-----------------------
David J. Lopes
President/CEO
The Quartz Group, Inc.
