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SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the registrant [x]
Filed by a party other than the registrant [ ]
Check the appropriate box:
[x] Preliminary proxy statement. [ ] Confidential, for use of the
Commission only (as permitted by
Rule 14a-6(e)(2).
[ ] Definitive proxy statement.
[ ] Definitive additional materials.
[ ] Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12.
INNOVATIVE GAMING CORPORATION OF AMERICA
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(Name of Registrant as Specified in Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement if Other Than the Registrant)
Payment of filing fee (check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.
(1) Title of each class of securities to which transaction applies:
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- --------------------------------------------------------------------------------
(5) Total fee paid:
- --------------------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
- --------------------------------------------------------------------------------
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the form or schedule and the date of its filing.
(1) Amount Previously Paid:
- --------------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
- --------------------------------------------------------------------------------
(3) Filing Party:
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(4) Date Filed:
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INNOVATIVE GAMING CORPORATION OF AMERICA
4725 Aircenter Circle
Reno, Nevada 89502
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD , 2000
To The Shareholders of Innovative Gaming Corporation of America:
Please take notice that a Special Meeting of the Shareholders (the "SPECIAL
MEETING") of Innovative Gaming Corporation of America (hereinafter referred to
as "IGCA" or the "COMPANY") will be held, pursuant to due call by the Board of
Directors of the Company, at the Company's offices at 4725 Aircenter Circle,
Reno, Nevada, on , 2000, at 9:00 a.m. local time, or at any
adjournment or postponement thereof, for the following purposes:
1. To consider and vote upon the adoption of the Asset Purchase
Agreement, dated as of February 1, 2000 (the "ASSET PURCHASE
AGREEMENT"), by and between the Company and Xertain, Inc. ("Xertain"),
pursuant to which Xertain will purchase substantially all of the
Company's gaming assets (the purchase and sale of the gaming assets is
hereinafter referred to as the "GAMING DIVESTITURE");
2. To consider and vote upon the adoption of the Agreement and Plan of
Merger dated as of December 31, 1999, as amended by Amendment No.1 to
Agreement and Plan of Merger dated as of February 1, 2000 (as amended,
the "MERGER AGREEMENT"), by and among nMortgage, Inc., a Delaware
corporation ("NMORTGAGE"), Equitex, Inc., a Delaware corporation
("EQUITEX"), the Company and IGCA Merger Subsidiary, a Minnesota
corporation and wholly-owned subsidiary of the Company ("MERGER
SUBSIDIARY"), pursuant to which (a) nMortgage will, contingent upon the
consummation of the Gaming Divestiture, be merged with and into Merger
Subsidiary (the "MERGER"), and (b) all outstanding shares of nMortgage
capital stock will be converted into the right to receive a pro rata
share of the greater of (i) an aggregate of Forty Six Million
(46,000,000) shares of common stock of the Company, or (ii) 75% of the
then outstanding shares of common stock of the Company on a
fully-diluted basis;
3. To consider and vote upon an amendment to the Company's Articles of
Incorporation to change the name of the Company, contingent upon
consummation of the Merger, to "nMortgage, Inc."; and
4. To transact any other business as may properly come before the
Special Meeting or any adjournments thereof.
The terms of the Merger Agreement and the Asset Purchase Agreement are each
described in detail in the accompanying Proxy Statement and the appendices
thereto, which form a part of this Notice. A copy of the Merger Agreement and
the Asset Purchase Agreement are attached to the Proxy Statement as APPENDIX A
and APPENDIX B, respectively. To ensure that your vote will be counted, please
complete, date and sign the enclosed proxy card and return it promptly in the
enclosed postage-paid envelope, whether or not you plan to attend the Special
Meeting. You may revoke your proxy in the manner described in the accompanying
Proxy Statement at any time before it is voted at the Special Meeting.
Under Minnesota law, shareholders of IGCA are eligible to exercise
dissenters' rights in connection with the Gaming Divestiture and the Merger, as
described in greater detail in the accompanying Proxy Statement.
Pursuant to due action of the Board of Directors, shareholders of record on
, 2000 (the "RECORD DATE") will be entitled to vote at the Special
Meeting or any adjournments thereof. Adoption of each proposal requires the
affirmative vote of the holders of a majority of the outstanding shares of IGCA
common stock present in person or represented by proxy at the Special Meeting,
except that approval of
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the Merger and the Gaming Divestiture each require the affirmative vote of the
holders of a majority of the shares of IGCA common stock outstanding on the
Record Date.
A PROXY FOR THE MEETING IS ENCLOSED HEREWITH. YOU ARE REQUESTED TO FILL IN
AND SIGN THE PROXY, WHICH IS SOLICITED BY THE BOARD OF DIRECTORS, AND MAIL IT
PROMPTLY IN THE ENCLOSED ENVELOPE.
By Order of the Board of Directors
/s/ Barrett V. Johnson
Secretary
, 2000
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INNOVATIVE GAMING CORPORATION OF AMERICA
4725 Aircenter Circle
Reno, Nevada 89502
----------------------------------------------
PROXY STATEMENT
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SPECIAL MEETING OF SHAREHOLDERS TO BE HELD
, 2000
VOTING AND REVOCATION OF PROXY
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of Innovative Gaming Corporation of America
(hereinafter referred to as "IGCA" or the "COMPANY") to be used at the special
meeting (the "SPECIAL MEETING") of the shareholders of the Company to be held at
the Company's offices at 4725 Aircenter Circle, Reno, Nevada, on ,
2000, at 9:00 a.m. local time, or at any adjournment or postponement thereof,
for the purposes set forth in the accompanying notice of meeting.
The approximate date on which this Proxy Statement and the accompanying
proxy were first sent or given to shareholders was , 2000. Each
shareholder who signs and returns a proxy in the form enclosed with this Proxy
Statement may revoke the same at any time prior to its use by giving notice of
such revocation to the Company in writing, in open meeting or by executing and
delivering a new proxy to the Secretary of the Company. Unless so revoked, the
shares represented by each proxy will be voted at the meeting and at any
adjournments thereof. Presence at the meeting of a shareholder who has signed a
proxy does not alone revoke that proxy. Only shareholders of record at the close
of business on , 2000 (the "RECORD DATE") will be entitled to vote at
the meeting or any adjournments thereof.
AVAILABLE INFORMATION
IGCA is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "EXCHANGE ACT"), and in accordance
therewith file reports, proxy statements and other information with the
Securities and Exchange Commission (the "SEC"). Copies of such reports, proxy
statements and other information filed by IGCA can be inspected and copied at
the public reference facilities maintained by the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the SEC's Regional Offices located at Citicorp
Center, 500 West Madison, 14th Floor, Chicago, Illinois 60661 and Seven World
Trade Center, 13th Floor, New York, New York 10048. Copies of such documents
also may be obtained, at prescribed rates, from the Public Reference Section of
the SEC at 450 Fifth Street, N.W., Washington, DC 20549. The SEC also maintains
a website (http://www.sec.gov) that contains reports, proxy statements and other
information regarding companies such as IGCA that file electronically with the
SEC. This Proxy Statement was filed electronically with the SEC.
FORWARD-LOOKING STATEMENTS
This Proxy Statement includes forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended (the "SECURITIES ACT")
and Section 21E of the Exchange Act. All statements regarding nMortgage, IGCA,
or the combined company's expected future financial position, business strategy,
projected costs and plans, and objectives of management for future operations
are forward-looking statements. Although nMortgage and IGCA believe that their
respective expectations reflected in such forward-looking statements are based
on reasonable assumptions, no assurance can be given that such expectations will
prove to have been correct. Important factors that could cause actual results to
differ materially from the expectations reflected in the forward-looking
statements herein include, among others, the factors set forth under the caption
"risk factors," general economic and business and market conditions, changes in
federal laws, increased competitive pressure in the combined company's industry,
costs or difficulties relating to the combined company's introduction into the
business of nMortgage and the ability of nMortgage and IGCA to achieve the goals
described under the caption "The Merger."
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SUMMARY
The following is a summary of certain information contained elsewhere in
this Proxy Statement. Reference is made to, and this summary is qualified in its
entirety by, the more detailed information contained elsewhere in this Proxy
Statement and the appendices hereto. IGCA shareholders are urged to read this
Proxy Statement and the appendices hereto carefully and in their entirety.
THE SPECIAL MEETING
Date, Time and Place of Special Meeting. The Special Meeting will be held
on , 2000, at 9:00 a.m. local time, at IGCA's offices at 4725
Aircenter Circle, Reno, Nevada.
Purpose of Special Meeting. At the Special Meeting, the holders of shares
of IGCA common stock will consider and vote upon:
(i) the adoption of the Asset Purchase Agreement, dated as of February 1,
2000 (the "ASSET PURCHASE AGREEMENT"), by and between the Company and
Xertain, Inc. ("Xertain"), pursuant to which Xertain will purchase
substantially all of the Company's Gaming Assets (the purchase and
sale of the Gaming Assets is hereinafter referred to as the "GAMING
DIVESTITURE");
(ii) the adoption of the Agreement and Plan of Merger dated as of December
31, 1999, as amended by Amendment No.1 to Agreement and Plan of
Merger dated as of February 1, 2000 (as amended, the "MERGER
AGREEMENT"), by and among nMortgage, Inc., a Delaware corporation
("NMORTGAGE"), Equitex, Inc., a Delaware corporation ("EQUITEX"), the
Company and IGCA Merger Subsidiary, a Minnesota corporation and
wholly-owned subsidiary of the Company ("MERGER SUBSIDIARY"),
pursuant to which (a) nMortgage will, contingent upon the
consummation of the Gaming Divestiture, be merged with and into
Merger Subsidiary (the "MERGER"), and (b) all outstanding shares of
nMortgage capital stock will be converted into the right to receive a
pro rata share of the greater of (i) an aggregate of Forty Six
Million (46,000,000) shares of common stock of the Company, or (ii)
75% of the then outstanding shares of common stock of the Company on
a fully-diluted basis;
(iii) an amendment to IGCA's Articles of Incorporation to change the name
of the Company, contingent upon consummation of the Merger, to
"nMortgage, Inc."; and
(iv) any other business as may properly come before the meeting or any
adjournments thereof (each of (i), (ii) and (iii) are each referred to
herein as a "PROPOSAL" and, collectively, as the "PROPOSALS").
Record Date. The Board of Directors of IGCA has fixed the close of
business on , 2000, as the record date for the determination of
holders of IGCA common stock entitled to notice of and to vote at the Special
Meeting (the "RECORD DATE"). On the Record Date, there were [ ] shares
of IGCA common stock outstanding, each entitled to one vote.
Required Vote; Revocation of Proxies. Adoption of each proposal requires
the affirmative vote of the holders of a majority of the outstanding shares of
IGCA common stock present in person or represented by proxy at the Special
Meeting, except that approval of the Merger and the Gaming Divestiture each
require the affirmative vote of the holders of a majority of the shares of IGCA
common stock outstanding on the Record Date.
Voting and Revocation of Proxies.
Shares of IGCA stock represented by a proxy properly signed and received at
or prior to the Special Meeting, unless subsequently revoked, will be voted in
accordance with the instructions thereon. IF A PROXY IS SIGNED AND RETURNED
WITHOUT INDICATING ANY VOTING INSTRUCTIONS, SHARES OF IGCA STOCK REPRESENTED BY
THE PROXY WILL BE VOTED FOR THE PROPOSALS AND TRANSACTIONS CONTEMPLATED THEREBY.
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Abstentions may be specified on all IGCA Proposals. Shares of IGCA common
stock represented at the Special Meeting for which proxies have been received,
but with respect to which holders of shares have abstained on any matter, will
be treated as present at the Special Meeting for purposes of determining the
presence or absence of a quorum for the transaction of all business.
For voting purposes at the Special Meeting, only shares affirmatively voted
in favor of a Proposal (including properly executed proxies not containing
voting instructions) will be counted as favorable votes for such Proposal. The
failure to submit a proxy (or to vote in person) or the abstention from voting
will have the same effect as a vote against such Proposal. Under Minnesota law,
shares represented by proxies that reflect "broker non-votes" (i.e., shares held
by a broker or nominee which are represented at the IGCA Special Meeting, but
with respect to which such broker or nominee is not empowered to vote on a
particular proposal) will be counted as shares that are present and entitled to
vote for purposes of determining the presence of a quorum for the transaction of
all business. Because broker non-votes will be treated as unvoted with respect
to the approval of the Merger and the Gaming Divestiture, they will also have
the same effect as votes against such Proposals. However, broker non-votes will
be treated as unvoted for purposes of determining approval of the change in IGCA
corporate name and will not be counted as votes for or against such proposal.
IGCA proxy holders may, in their discretion, vote shares to adjourn the
Special Meeting to solicit additional proxies in favor of such Proposals.
However, shares of IGCA stock with respect to which a proxy is signed and
returned indicating a vote against any Proposal will not be so voted to adjourn.
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before the proxy is voted by the filing of an instrument
revoking it or of a duly executed proxy bearing a later date with the Secretary
of IGCA, prior to or at the Special Meeting, or by voting in person at the
Special Meeting. All written notices of revocation and other communications with
respect to revocation of IGCA proxies should be addressed to IGCA at its
principal executive offices. Attendance at the Special Meeting will not in and
of itself constitute a revocation of a proxy.
The Board of Directors of IGCA is not currently aware of any business to be
acted upon at the Special Meeting other than as described herein. If, however,
other matters are properly brought before the Special Meeting, the persons
appointed as proxies will have discretion to vote or act thereon according to
their best judgment subject to applicable Securities and Exchange Commission
rules.
THE COMPANIES
Innovative Gaming Corporation of America, Inc. IGCA is a Minnesota
corporation headquartered in Reno, Nevada. IGCA currently develops, manufactures
and distributes gaming machines. The Company was formed in 1991 to develop,
manufacture, market and distribute group participation and other specialty
gaming machines. The Company manufactures, markets and distributes BJ Blitz(TM),
Hot Shot Dice(TM), Lightning Strike Roulette(TM), Supersuits Progressive
Blackjack(TM), Bonus Streak(TM) and Mythical Reels(TM) to certain gaming markets
worldwide. Since inception, the Company has focused most of its resources on the
development of games, the regulatory approval process and the sale and
installation of its games. The Company has begun to expand and diversify its
product line by developing and marketing single player games such as Bonus
Streak and Mythical Reels. The Company has also developed a new series of video
slot machines which incorporate a unique PC platform operating system.
The Company distributes its products directly and through distributors,
primarily on a cash sales basis. In Nevada, the Company directly places its
products under lease, sales (cash or extended payment terms) or participation
agreements where it retains ownership and shares in the net win of the games
with the casino.
IGCA's executive offices are located at 4725 Aircenter Circle, Reno, Nevada
89502 and its telephone number is (775) 823-3000.
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Xertain, Inc. Xertain, Inc., a private Delaware corporation ("XERTAIN") is
a Las Vegas, Nevada based corporation with its primary business predicated on
gaming-related technologies and international manufacturing.
Xertain's executive offices are located at 2700 East Sunset Road, Suite 38,
Las Vegas, Nevada, 89014, and its telephone number is (702) 895-7398.
IGCA Merger Subsidiary, Inc. IGCA Merger Subsidiary, Inc., a Minnesota
corporation, is a wholly-owned subsidiary of IGCA, formed by IGCA to effect the
Merger with nMortgage in accordance with the provisions of the Merger Agreement.
Merger Subsidiary has had no prior business.
nMortgage, Inc. nMortgage, Inc. is a Delaware corporation which, through
its wholly-owned subsidiary, First Bankers Mortgage Services, Inc., a Florida
corporation ("FBMS"), is a regional retail mortgage banking company engaged in
the business of originating, selling and brokering residential mortgage loans.
FBMS recently announced the debut of a new online mortgage system,
nMortgage.com, which offers mortgage loans online. This Internet mortgage
division enables consumers to access mortgage loan rates and programs, and to
apply online for mortgage loans. In the near future, nMortgage plans to provide
customers with the ability to track the status of their loans online as well as
offer interactive online customer service.
nMortgage's executive offices are located at 1700 N.W. 64(th) Street, Suite
100, Fort Lauderdale, Florida 33309, and its telephone number is (954) 493-9400.
THE GAMING DIVESTITURE
As a condition to the Merger (which is described herein in detail under the
"The Merger"), IGCA must divest substantially all of its gaming-related assets
(the "IGCA GAMING ASSETS"). If such assets were not sold prior to consummation
of the Merger, the parent corporation of nMortgage would be required to be
licensed and found suitable under various gaming jurisdictions. nMortgage does
not desire to undertake gaming licensing given its principle line of business.
Accordingly, on February 1, 2000, IGCA, Innovative Gaming, Inc., a Nevada
corporation and a wholly owned subsidiary of IGCA, and Xertain entered into an
Asset Purchase Agreement, pursuant to which IGCA would sell the gaming assets to
Xertain for an aggregate purchase price of $4,000,000 (the "PURCHASE PRICE") and
an accounts receivable promissory note.
Of the Purchase Price, $1,000,000 will be payable in cash at the closing of
the transaction, provided that prior to such time Xertain has obtained interim
approval to manufacture gaming machines from the Nevada gaming regulatory
authorities. If Xertain cannot obtain such interim approval prior to the
closing, Xertain will deliver either (i) a $1,000,000 unsecured promissory note
due upon Xertain's obtaining approval from the Nevada gaming regulatory
authorities (but in no event later then September 1, 2000) , or (ii) an
irrevocable letter of credit in the amount of $750,000.
The remaining $3,000,000 of the Purchase Price will be paid in the form of
an unsecured convertible promissory note which will have a 36-month term, bear
interest at 8.5% per annum, and have interest and principle payable upon the due
date. At IGCA's option, such promissory note will be convertible into Xertain
common stock at $4.50 per share upon the earlier of (a) twelve months from the
closing date of the Gaming Divestiture or (b) upon the initial public offering
of Xertain common stock. Additionally, Xertain will issue to IGCA a six-month
term note bearing interest at 8.5% with the principle amount equal to the
accounts receivable of IGCA outstanding at the closing of the Gaming
Divestiture, as adjusted for certain payments made by Xertain or IGCA pursuant
to the terms of the note. In addition to obtaining the purchase price for
substantially all the Gaming Assets of IGCA, Xertain will assume certain
contracts and liabilities of IGCA. Following consummation of the Gaming
Divestiture, IGCA will not own or have any interest in the Gaming Assets. In
addition to various standard conditions of closing, the Gaming Asset Divestiture
is subject to the simultaneous closing of the Merger, shareholder approval, and
the termination of various employment contracts of certain key employees of
IGCA.
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No executive officer, director, or shareholder of Xertain is an employee
officer, director or significant shareholder of IGCA. If the Gaming Divestiture
is terminated by IGCA because IGCA has accepted another proposal with respect to
the purchase of the Gaming Assets and the Asset Purchase Agreement has not been
terminated pursuant to the terms thereof, IGCA would be required to pay Xertain
$150,000.
THE MERGER
Effect of the Merger. If approved by the IGCA shareholders and the
shareholders of nMortgage, upon the terms and subject to the conditions of the
Merger Agreement, nMortgage will be merged with and into Merger Subsidiary at
the closing of the Merger (the time of such closing as the "EFFECTIVE TIME").
Merger Subsidiary will be the surviving corporation in the Merger, will be
renamed "nMortgage.com, Inc." and will continue to be a wholly-owned subsidiary
of the Company.
Conversion of nMortgage Shares. Subject to the satisfaction of the
conditions referenced below under the caption "Conditions to the Merger", at the
Effective Time, all outstanding shares of nMortgage capital stock, par value
$0.01 per share (collectively, the "NMORTGAGE SHARES"), will be automatically
converted into the right to receive a pro rata share of the greater of (i) an
aggregate of Forty Six Million (46,000,000) shares of common stock of the
Company, or (ii) 75% of the then outstanding shares of common stock of the
Company on a fully-diluted basis.
Conditions to the Merger. The Effective Time shall occur only upon the
satisfaction or waiver of the following conditions:
(i) the Merger has been approved by the requisite vote of the
shareholders of IGCA and, if required by applicable law, the
requisite vote of the stockholders of Equitex;
(ii) IGCA has consummated the Gaming Divestiture;
(iii) IGCA has net tangible assets in an amount equal to $2,000,000 at the
Effective Time;
(iv) Equitex shall have executed and delivered agreements pursuant to which
Equitex agrees to indemnify IGCA's directors for losses resulting from
nMortgage's breach of any representations and warranties contained in
the Merger Agreement and any claims bought by the stockholders of
nMortgage and IGLA relating to the Merger; and
(v) the execution and delivery by IGCA and nMortgage of certain
certificates and other documents which are customary in transactions
of this nature.
Interests of Certain Persons in the Merger.
Certain members of the Board of Directors and management, and former
management, of IGCA and nMortgage have interests in the Merger (described below
and under the Captions "The Merger-Interests of Certain Persons in the Merger")
that are different from and in addition to the interests generally of
shareholders of IGCA. IGCA's Board of Directors was aware of these interests and
considered them, among other matters, in approving the Merger Agreement and the
transactions contemplated thereby. Examples of these interests include:
- If the Merger is completed, up to two (2) directors of IGCA may become
directors of the surviving corporation to the Merger.
- Edward G. Stevenson, former Chairman and Chief Executive Officer of
IGCA, would receive $200,000 in severance from IGCA payable at the
Closing and an additional $100,000 in severance payable on the earlier
of (a) September 15, 2000, or (b) the date Xertain repays a promissory
note issued to IGCA.
- Four other executive officers would have their respective employment
agreements with IGCA terminated at Closing and would be entitled to
receive 12 months base salary as severance.
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- The outstanding but non-vested options held by the executive officers
and directors of IGCA will accelerate and vest automatically upon the
consummation of the Merger.
- Upon consummation of the Merger, each outside director of IGCA will
receive options to purchase up to 50,000 shares of IGCA common stock.
- Upon consummation of the Merger, Edward G. Stevenson, IGCA's former
Chairman and Chief Executive Officer, will be issued options to acquire
200,000 shares of IGCA common stock and Barrett V. Johnson, IGCA's
President and Chief Operating Officer, will be issued options to acquire
50,000 shares of IGCA common stock.
- Henry Fong, Chief Executive Officer, Chairman of the Board and a
substantial stockholder of Equitex, directly or indirectly owns [ ]
shares of IGCA common stock and holds promissory notes which obligate
IGCA to pay Mr. Fong or his affiliates an aggregate of $800,000.
- Certain directors of IGCA presently intend to resign from the Board
concurrently with or immediately following the consummation of the
Merger. Pursuant to Minnesota law and the IGCA bylaws, upon the
occurrence of such resignations, the remaining director or directors
would be entitled to fill the vacancies therefrom. Notwithstanding the
intention of certain directors to resign from the IGCA Board, no such
director is contractually obligated to do so. The IGCA shareholders are
not being asked to vote for the election of directors (or replacement
directors) at the Special Meeting.
Certain Other Agreements.
EQUITEX INDEMNIFICATION AGREEMENT. As a condition to closing the Merger,
Equitex will execute an Indemnification Agreement to become effective as of the
Effective Time, in which it agreed to indemnify IGCA and each of its officers,
directors, employees, affiliates and shareholders for any losses resulting from
any breaches of representations or warranties made by nMortage in the Merger
Agreement or from any claim brought by a stockholder of nMortgage relating to
the negotiation, approval or consummation of the Merger Agreement.
TERMINATION AGREEMENTS. Five executive officers of IGCA entered into
Termination Agreements which would, effective with the closing of the Merger,
terminate their respective employment agreements with IGCA and provide for the
payment of severance to such employees. See "The Merger -- Interests of certain
persons in the Merger."
NO SOLICITATION. Pursuant to the Merger Agreement, IGCA has agreed that it
will not initiate any discussions regarding a business combination with any
other party so long as the Merger Agreement is in effect.
TERMINATION FEES. The Merger Agreement generally requires IGCA to pay
nMortgage a termination fee of $350,000 if the Merger Agreement terminates under
certain circumstances.
Accounting Treatment. The Merger will be accounted for under the purchase
method of accounting under the generally accepted accounting principles
("GAAP"), with nMortgage treated as the acquiror. See "Unaudited Pro Forma
Combined Financial Statements."
Opinion of Financial Advisor. In deciding to approve the Merger, the IGCA
Board of Directors considered an opinion from IGCA's financial advisor,
Craig-Hallum Capital Group, Inc., which opinion was dated as of December 17,
1999. This opinion is attached as APPENDIX C to this Proxy Statement, and you
are encouraged to carefully read it in its entirety.
Craig-Hallum received a fee of $80,000 for rendering its opinion. The
opinion reflects an opinion as of a specific date and does not address
additional data arising subsequent to the data considered by Craig-Hallum in
reaching its opinion, including market prices of securities, reported results of
operation, publicly announced transactions and factors that may affect the
estimates and future earnings, which could alter its opinion if the opinion were
rendered as of a different date.
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No provision has been made in the Merger Agreement for IGCA to seek, and
IGCA does not intend to seek, an updated opinion from Craig-Hallum. If the
Merger Agreement were materially amended in a manner which affects the relevant
factors considered by Craig-Hallum in rendering its opinion, IGCA would consider
engaging Craig-Hallum to provide a supplemental opinion.
RECOMMENDATIONS OF THE BOARD OF DIRECTORS OF IGCA
The Board of Directors of IGCA has unanimously determined that the Gaming
Divestiture, the Merger, and the change of IGCA's name to "nMortgage.com, Inc."
are each in the best interests of the Company and its shareholders, and have
approved the Asset Purchase Agreement, the Merger Agreement, and the name
change. The IGCA Board recommends that the IGCA shareholders vote for each of
the Proposals.
RISK FACTORS
The matters set forth under the caption "Risk Factors" should be carefully
considered by IGCA shareholders in deciding whether to approve the Proposals.
APPRAISAL RIGHTS
IGCA is governed under the laws of the State of Minnesota, and,
accordingly, is governed by the provisions of the Minnesota Business Corporation
Act (the "MBCA"). Pursuant to the relevant sections of the MBCA, which sections
are attached as APPENDIX D to this Proxy Statement, the shareholders of IGCA are
entitled to dissent from and exercise appraisal rights in connection with the
Gaming Divestiture and the Merger.
MARKET PRICE DATA
The common stock of IGCA trades in the over-the-counter market and is
quoted on the Nasdaq National Market under the symbol "IGCA". The following
table sets forth the high and low daily bid prices of the common stock of IGCA
for the 1998 and 1999 calendar years and the current calendar year through May
5, 2000.
<TABLE>
<CAPTION>
IGCA
COMMON STOCK
----------------
HIGH LOW
------ ------
<S> <C> <C>
Calendar Year 1998
First Quarter............................. 4.0625 2.25
Second Quarter............................ 4.125 2.25
Third Quarter............................. 3.875 2
Fourth Quarter............................ 2 1
Calendar Year 1999
First Quarter............................. 1.375 1
Second Quarter............................ 2.3125 1
Third Quarter............................. 2.7188 1.50
Fourth Quarter............................ 2.6094 1.4062
Calendar Year 2000
First Quarter............................. 2.625 1.3125
Second Quarter(1)......................... 1.9375 .875
</TABLE>
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(1) Through May 5, 2000
IGCA has never declared or paid any cash dividends or distributions on its
common stock. IGCA does not intend to pay any cash dividends on its common stock
in the foreseeable future. Future declaration and payment of dividends, if any,
will be determined in light of then current conditions, including IGCA's
earnings, operations, capital requirements, financial condition, restrictions in
financing arrangements and other factors deemed relevant by IGCA's Board of
Directors.
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RISK FACTORS
The following risk factors should be carefully considered by IGCA
shareholders in deciding whether to approve the issuance of shares of common
stock of the IGCA in connection with the Merger, and the approval of the Merger:
RISKS ASSOCIATED WITH THE MERGER AND THE GAMING DIVESTITURE.
If we consummate the Gaming Divestiture and the Merger, we will be subject
to the following risk factors, many of which are related to the mortgage banking
industry in which nMortgage operates its business, which risk factors should be
carefully considered by IGCA shareholders:
CERTAIN PROMISSORY NOTES RECEIVED BY IGCA UPON THE SALE BY IGCA OF THE GAMING
ASSETS ARE UNSECURED AND WILL NOT BECOME DUE UNTIL THREE YEARS FOLLOWING THE
CONSUMMATION OF THE GAMING DIVESTITURE.
As consideration for the Gaming Divestiture, IGCA will receive a $3,000,000
unsecured convertible promissory note which will be due three years after the
closing of the Gaming Divestiture. If Xertain fails to obtain interim gaming
regulatory approval prior to the closing of the Gaming Divestiture, IGCA may
also receive a $1,000,000 unsecured promissory note which will be due upon the
earlier of September 1, 2000, or the date on which Xertain obtains licensing
approval from the Nevada Gaming Commission. Given the long-term and unsecured
nature of these promissory notes, there is a risk that IGCA will not receive
some or all of the principal and interest due on such notes when such amounts
are due, or at all.
THERE WILL BE SIGNIFICANT DILUTION OF INVESTORS' INTERESTS DUE TO THE MERGER.
If the Merger is completed, IGCA's current shareholders will experience
significant ownership dilution of approximately 75%.
NMORTGAGE REPRESENTS A NEW BUSINESS VENTURE IN WHICH WE HAVE NO EXPERIENCE.
If acquired, nMortgage's mortgage business would represent a significant
change from our historical business of developing, manufacturing, marketing and
distributing gaming machines. We and our present management have no experience
in the mortgage business and would rely upon the management of nMortgage to
operate the Company following the Merger.
RISKS ASSOCIATED WITH THE INTERNET MORTGAGE STRATEGY.
nMortgage is currently engaged in an activity to generate loan operations
using a web site called nMortgage.com. Risk factors related to this Internet
mortgage strategy which should be carefully considered by IGCA shareholders
include:
GENERATING MORTGAGE LOANS OVER THE INTERNET REPRESENTS A RELATIVELY NEW BUSINESS
VENTURE FOR NMORTGAGE FOR WHICH IT HAS LIMITED EXPERIENCE.
Our contemplated operation of an Internet based mortgage division will
represent a new business venture which departs even from nMortgage's historical
business operations of generating mortgage loans through more traditional means.
Neither our management nor the current management of nMortgage have experience
in generating mortgage loans over the Internet.
In addition, the "nMortgage.com" website is currently still under
development. Although nMortgage has estimated the amount of expenses that are
needed to complete the development of its website, additional costs may arise in
the development process. If substantial additional costs do arise, we cannot
guaranty that we the website will be developed to function in the manner
currently anticipated or even at all.
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THE INTERNET MARKET IS HIGHLY COMPETITIVE AND WE MAY NOT BE ABLE TO SUCCESSFULLY
COMPETE AGAINST INCREASED COMPETITION IN THIS MARKET.
The market for Internet products and services is highly competitive and
there are no substantial barriers to entry. We expect that competition will
continue to intensify. Many of nMortgage's Internet competitors have more
experience online and have greater brand recognition. We may not be able to
successfully compete in the Internet services market, which would prevent us
from effectively executing our business strategy.
Recent significant entrants into the online mortgage market include
Mortgage.com, E-Loan, Countrywide and iOwn. In addition, some of nMortgage's
competitors are partnering with Internet portals such as Yahoo! and America
Online.
ADDITIONAL PRICING PRESSURES RESULTING FROM INCREASED ONLINE COMPETITION COULD
REDUCE OUR REVENUES.
Pricing of mortgage loans on the Internet is highly competitive and
involves a number of factors, including the interest rate on the loan, up-front
origination fees and fees for processing, underwriting and document preparation.
Increased competition in the online arena may force us and other online mortgage
lenders to reduce prices to borrowers, thus reducing our revenue.
IF INTERNET GROWTH SLOWS OR BORROWERS ARE RELUCTANT TO CONDUCT FINANCIAL
BUSINESS THROUGH THE WEB, WE MAY BE UNABLE TO GENERATE SIGNIFICANT AMOUNTS OF
LOANS ONLINE.
Our ability to originate mortgage loans on the Internet and provide clients
with Internet-based mortgage services is dependent upon continued growth in
Internet usage. Web-based mortgage lending is relatively new, and we cannot
predict whether there will be growth in mortgage loans generated on the
Internet.
The Internet may not prove to be a viable commercial marketplace for a
number of reasons, including lack of acceptable security technologies,
inadequate development of the Internet infrastructure or slow or inadequate
development of performance improvements.
Mortgage borrowers are accustomed to traditional means of obtaining
mortgage financing. For us to be successful, these borrowers must accept the use
of the Internet to conduct financial transactions and exchange information
online.
INTERNET SYSTEM FAILURES AND SECURITY CONCERNS COULD MAKE BORROWERS RELUCTANT TO
USE OUR ONLINE SERVICES.
The performance of the nMortgage.com website and the websites we will
maintain for our clients will be important to our reputation, our ability to
attract customers and our ability to achieve market acceptance of our services.
Any system failure that causes an interruption or an increase in response time
of our services could result in fewer loan applications through our Web sites
and those we maintain for clients. System failures, if prolonged, could reduce
the attractiveness of our services to borrowers and clients.
WE FACE LEGAL UNCERTAINTIES ASSOCIATED WITH THE INTERNET AND ELECTRONIC COMMERCE
WHICH COULD INCREASE OUR COSTS OR REDUCE DEMANDS FOR OUR SERVICES.
Our contemplated operations on the Internet are not currently subject to
direct regulation by any government agency in the United States beyond
mortgage-related regulations and regulations applicable to businesses generally.
However, the adoption of new laws or the application of existing laws may
decrease the use of the Internet, which would decrease the demand for our
services and might increase our cost of doing business.
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A number of legislative and regulatory proposals under consideration by
federal, state, local and foreign governmental organizations may lead to laws or
regulations concerning various aspects of the Internet, including:
- online content;
- user privacy;
- taxation;
- access charges;
- liability for third-party activities; and
- jurisdiction.
In addition, the tax treatment of the Internet and electronic commerce is
currently unsettled. A number of proposals have been made that could impose
taxes on the sale of goods and services and other Internet activities. Recently,
the Internet Tax Information Act was signed into law placing a three-year
moratorium on new state and local taxes on Internet commerce. However, we cannot
assure you that future laws imposing taxes or other regulations would not
substantially impair the growth of our business and our financial condition.
Some local telephone carriers claim that the increasing popularity of the
Internet has burdened the existing telecommunications infrastructure and that
many areas with high Internet use are experiencing interruptions in telephone
service. These carriers have petitioned the Federal Communications Commission to
impose access fees on Internet service providers. If these access fees are
imposed, the costs of communicating on the Internet could increase, which could
decrease demand for our services and increase our cost of doing business.
IF WE ARE UNABLE TO ADAPT TO TECHNOLOGICAL CHANGES, OUR ABILITY TO COMPETE ON
THE INTERNET WILL BE IMPAIRED.
The market for Internet products and services is characterized by rapid
technological developments, evolving industry standards, and frequent new
products and enhancements. If faster Internet access becomes more widely
available through cable modems or other technologies, we may be required to make
significant changes to the design and content of our Web site and the Web sites
we maintain for clients to compete effectively.
As the number of Web pages and users increase, we will need to modify the
Internet infrastructure, our Web site and the Web sites we maintain for our
clients to accommodate increased traffic. If we cannot modify our computer
systems, we may experience:
- system disruptions;
- slower response times;
- impaired quality and speed of application processing; and
- delays in reporting accurate interest rate information.
If we fail to effectively adapt to increased usage of the Internet or new
technological developments, we will be unable to successfully compete online.
EFFORTS TO ENHANCE AWARENESS OF THE NMORTGAGE.COM BRAND MAY BE UNSUCCESSFUL,
WHICH WOULD AFFECT OUR FINANCIAL PERFORMANCE.
We believe that establishing and maintaining the nMortgage.com brand name
and its reputation is an important aspect of our efforts to attract and expand
our technology services and mortgage lending business. We also believe that the
importance of brand recognition will increase due to the growing number of
Internet sites and the relatively low barriers to entry. If we fail to
adequately promote and maintain our brand name, our financial performance will
suffer.
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To create, maintain and enhance the nMortgage.com brand, we must provide
high-quality products and services, particularly on the Internet. If any breach
or alleged breach of security or privacy involving our online services occurs,
or if we are unable to otherwise successfully promote and maintain our brand,
our business will suffer.
There are thousands of Internet Web site addresses, or "domain names,"
containing the word "mortgage," such as "mortgages.com" "1mortgage.com" and
"1mortgage1.com," that have been registered to other users. To the extent
consumers confuse other Web sites with ours, our reputation could be harmed and
our business could suffer.
ONLINE SECURITY RISKS MAY HARM OUR BUSINESS OPERATIONS.
A significant barrier to online commerce is the secure transmission of
confidential information over public networks. If any compromise of our security
occurs, it would injure our reputation, and could impact the success of our
business.
nMortgage relies on encryption and authentication technology licensed from
third parties to effect secure transmission of confidential information, such as
that required on a mortgage loan application. Advances in computer capabilities,
new discoveries in cryptography, or other developments may result in a breach of
the techniques nMortgage uses to protect customer data.
WE FACE RISKS THAT NMORTGAGE'S INTELLECTUAL PROPERTY IS NOT ADEQUATELY PROTECTED
AND THAT IT MAY BE SUBJECT TO CLAIMS FROM THIRD PARTIES FOR INFRINGEMENT.
nMortgage's copyrights, trademarks, trade dress, trade secrets, and similar
intellectual property are critical to its success. nMortgage has applied for
registration of the mark "nMORTGAGE". However, we may not be able to adequately
protect the intellectual property against infringement, which could damage our
reputation or create brand confusion in the market. Either of those events could
injure our financial performance if it took place on a large enough scale.
nMortgage protects its internally-developed technology through a
combination of copyright, trade secret and trademark law. However, nMortgage has
neither applied for or been issued patents for its technology. Unauthorized
parties may attempt to copy or to otherwise obtain and use nMortgage's services
or technology and we cannot be certain that the steps nMortgage has taken and
the steps we will take in the future will prevent them from misappropriating or
infringing upon such technology. The costs associated with enforcing our rights
to technology could increase our losses and depress our stock price.
Mortgage-related Internet technologies are rapidly being developed. As a
result, we believe that disputes regarding the ownership of these technologies
are likely to arise in the future. Third parties may assert infringement claims
against us or nMortgage. We may incur substantial costs in defending against
third-party infringement claims regardless of the merit of those claims. We also
cannot guarantee that we would be able to license comparable technology if our
use was found to infringe on someone else's rights. If we were unable to license
comparable technology, our business could suffer.
WE MAY NOT BE ABLE TO HIRE AND RETAIN SUFFICIENT TECHNICAL AND SUPPORT PERSONNEL
THAT WE NEED TO SUCCEED.
Competition for qualified technical and support personnel is intense, and
we may not be able to hire and retain sufficient numbers of qualified technical
and support personnel. If we fail to hire and retain sufficient numbers of
technical and support personnel, our business and results of operations would be
adversely affected.
RISKS RELATED TO THE MORTGAGE BANKING INDUSTRY.
If we consummate the Merger, we will be subject to the following risk
factors related to the mortgage banking industry in which nMortgage operates its
business, which risk factors should be carefully considered by IGCA
shareholders:
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WE WILL MOST LIKELY ORIGINATE AND FUND FEWER MORTGAGE LOANS IF INTEREST RATES
RISE.
In periods of rising interest rates, demand for mortgage loans typically
declines. During those periods, we will likely originate and fund fewer mortgage
loans and our revenues will decline. On addition, demand for refinancing
mortgages declines more significantly than for new home purchase mortgages
during periods of rising interest rates.
IF WE ARE UNABLE TO MAINTAIN ADEQUATE FINANCING SOURCES, OUR ABILITY TO
ORIGINATE AND FUND MORTGAGE LOANS WILL BE IMPAIRED AND OUR REVENUES WILL SUFFER.
Our ability to fund mortgage loans will depend to a large extent upon our
ability to secure financing on acceptable terms. We currently anticipate funding
most of the loans we will originate through large lines of credit known as
"warehouse lines of credit", or under collateralized loan repurchase agreements.
Several commercial banks and institutional investors provide these funding
sources. Most of these financing arrangements have one-year terms and some are
cancellable by the lenders at any time.
If we are not successful in renewing our borrowings or in arranging new
financing with terms as favorable as the terms of our current financing
arrangements, we may have to curtail our origination and funding activities,
which would reduce our revenue.
All of the financing arrangements we will use to fund mortgage loans
subject us to financial covenants and other restrictions. Because nMortgage is
an early stage company that is actively investing in growth, nMortgage at times
is in default under those covenants and restrictions and relies on waivers from
the various lenders. If we are unable to operate within the covenants or obtain
waivers, all amounts that we owe under the financing arrangements could become
immediately payable. The termination of a financing arrangement by a lender, or
the acceleration of our debt, would have a significant negative effect on our
business.
OUR GAINS AND LOSSES ON SALES OF MORTGAGE LOANS IN THE SECONDARY MARKET ARE
AFFECTED BY RISING INTEREST RATES AND ANY HEDGING STRATEGY WE IMPLEMENT MAY NOT
OFFSET THE RISK.
Our ability to generate net gains on the sale of loans in the secondary
market may be adversely affected by increases in interest rates. We will
typically establish interest rates on mortgage loans we originate at the same
time we obtain commitments from the anticipated purchasers of the loans. The
mortgage loan purchase commitments we will obtain will be contingent upon
delivery of the loans to the purchasers within specified periods. If we are
unable to deliver closed loans on time and interest rates increase, we may
experience no gain, or even a loss, on the sale of these loans.
IF WE ADOPT A HEDGING STRATEGY, WE MAY ALSO CHANGE THE WAY WE SELL LOANS IN THE
SECONDARY MARKET, WHICH WOULD EXPOSE US TO LOSSES IF INTEREST RATES DECLINE
SHARPLY.
Hedging strategies involve buying and selling mortgage-backed securities so
that if interest rates increase and we expect to suffer a loss on the sale of
those loans, our buying and selling of mortgage-backed securities will offset
the loss. An effective hedging strategy is complex and no hedging strategy can
completely eliminate risk. If we adopt a hedging strategy to manage our risks,
we may also begin selling more loans on a mandatory delivery basis. Selling on a
mandatory delivery basis means we are required to sell the loans to a secondary
market investor at a price we agree upon, regardless of whether the loans close.
This strategy potentially generates greater revenue for us because secondary
market investors are willing to pay more for this type of commitment. However,
it also exposes us to greater losses if interest rates decline sharply and
borrowers choose not to close on the higher interest rate loans that we promised
them prior to the decline in interest rates.
Any hedging strategy we adopt would help us manage the risk of selling
loans on a mandatory delivery basis. However, as with hedging strategies to
protect us against rising interest rates, no hedging strategy is perfect. To the
extent that we are unable to effectively match our purchases and sales of
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mortgage-backed securities with the sale of the loans we originate, the greater
risks associated with loans sold on a mandatory delivery basis may cause us to
lose money on the sale of those loans.
OUR NET INTEREST INCOME MAY BE REDUCED BY FLUCTUATIONS IN INTERMEDIATE-TERM AND
SHORT-TERM INTEREST RATES.
When intermediate-term interest rates approach or sink below short-term
interest rates, our net interest income will be reduced or we will net interest
losses. We will earn net interest income or suffer net interest losses from the
time we fund a mortgage loan until it is delivered to an investor in the
secondary market. That time period generally consists of 25-40 days. Whether we
earn net interest income or suffer net interest losses will depends on the
difference between the interest rates on mortgage loans we fund and the interest
rates on the money we borrow to fund those mortgage loans.
The interest rates on mortgage loans we will fund are affected by
intermediate-term rates in the United States. The interest rates on the money we
will borrow to fund mortgage loans are affected by short-term rates based on the
London Interbank Offered Rate (LIBOR). If the intermediate-term rates in the
United States approach the LIBOR rate, our net interest income will be reduced
or we will suffer net interest losses.
FLUCTUATIONS MAY OCCUR IN OUR OPERATING RESULTS DUE TO SEASONALITY AND OTHER
FACTORS, ANY OF WHICH MAY REDUCE THE PRICE OF OUR COMMON STOCK.
Our revenue will be subject to seasonal and other fluctuations. Due to
these factors, our operating results during any given period may suffer, which
could result in a reduction in the trading price of our common stock.
Home sales typically peak during the spring and fall seasons and decline in
the summer and winter. Our operating results may fluctuate significantly as a
result of a variety of other factors, many of which are outside our control.
These factors include, among others, (i) a decline in residential home buying
that decreases the demand for purchase mortgage loans, (ii) an increase in
interest rates that decreases the demand for refinancing existing mortgage
loans, and (iii) the number of applications generated through our Web site and
those sites we create and maintain for clients.
OUR COMPETITORS IN THE MORTGAGE BANKING MARKET ARE OFTEN LARGER, MORE
EXPERIENCED AND HAVE GREATER FINANCIAL RESOURCES THAN WE DO, WHICH WILL MAKE IT
DIFFICULT FOR US TO COMPETE SUCCESSFULLY.
We will be competing with other mortgage banking companies, commercial
banks, savings associations, credit unions, insurance companies and other
financial institutions in every aspect of our business. Many of these companies
and financial institutions are larger, more experienced and have greater
financial resources than we do. Accordingly, we may not be able to successfully
compete in the mortgage banking market. Our competitors may be able to respond
more quickly to take advantage of new or changing opportunities, technologies
and customer requirements. They also may be able to undertake more extensive
promotional activities, offer more attractive terms to borrowers and adopt more
aggressive pricing policies.
A DISCONTINUATION OR REDUCTION IN SECONDARY MARKET PROGRAMS WOULD HURT OUR
FINANCIAL PERFORMANCE.
Our ability to sell mortgage loans to institutional investors in the
secondary market will be largely dependent upon the continuation of programs
administered by Fannie Mae, Freddie Mac, Ginnie Mae and private mortgage
investors. These entities facilitate the sale of mortgage loans and
mortgage-backed securities through the secondary market. Any discontinuation of
or reduction in the operation of those programs or any significant impairment of
our eligibility to participate in those programs would hurt our financial
performance. Also, any significant adverse change in the secondary market level
of activity or the underwriting criteria of Fannie Mae, Freddie Mac, Ginnie Mae
or other private mortgage investors would reduce our revenues.
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IF WE ARE UNABLE TO COMPLY WITH MORTGAGE BANKING RULES AND REGULATIONS, OUR
ABILITY TO ORIGINATE AND FUND MORTGAGE LOANS MAY BE RESTRICTED.
Our mortgage banking business is subject to the rules and regulations of
various federal, state and local regulatory agencies in connection with
originating, processing, underwriting and selling mortgage loans. These rules
and regulations, among other things, impose licensing obligations on us,
prohibit discrimination, establish underwriting guidelines and mandate
disclosures and notices to borrowers. We also are required to comply with each
regulatory entity's financial requirements. If we do not comply with these
rules, regulations and requirements, the regulatory agencies may restrict our
ability to originate and fund mortgage loans.
We also must comply with state usury laws. If we fail to comply with these
laws, the states can impose civil and criminal liability and restrict our
ability to operate in those states. In addition, secondary market investors may
demand indemnification or require us to repurchase loans sold in the secondary
market. We also may be subject to class action lawsuits. Any of these events
could impair our ability to originate and fund loans, which would reduce our
revenue.
CHANGES IN REGULATORY REQUIREMENTS OR THE INTERPRETATIONS OF THOSE
REQUIREMENTS COULD INCREASE OUR COSTS OF DOING BUSINESS OR OTHERWISE HURT OUR
FINANCIAL PERFORMANCE.
Regulatory and legal requirements are subject to change and may become more
restrictive, making our compliance more difficult or expensive or otherwise
restricting our ability to conduct our business as it is now conducted. Changes
in these regulatory and legal requirements could increase our costs of doing
business.
Many states prohibit non-employees of a licensed mortgage company from
conducting business under that licensed mortgage company's name. Our clients
often hire us to provide back office functions, such as processing and
underwriting. Because providing these back office services is a relatively new
concept in the industry, most state regulations do not specifically address the
provision of back office services. As state regulators become more familiar with
these practices, it is possible that they may interpret current regulations or
enact new regulations to restrict our ability to perform these back office
services for our clients, either of which would adversely affect our financial
performance.
EARLY MORTGAGE LOAN PAYMENT DEFAULTS MAY CAUSE LOSSES.
If borrowers default in the first few months after the loan is originated,
we may be required to repurchase those loans from the secondary market investors
to whom we sold those loans. We may not be able to resell those loans in the
secondary market. Our financial performance may be adversely affected during
economic downturns when the frequency of loan defaults tends to increase.
WE MAY BE REQUIRED TO REPURCHASE LOANS OR INDEMNIFY INVESTORS IF WE BREACH
REPRESENTATIONS AND WARRANTIES.
When we sell a mortgage loan to a secondary market investor, we will make
representations and warranties about characteristics of the mortgage loan, the
borrower and the underlying property. If we breach any of these representations
and warranties, we may be required to repurchase the loan from the investor or
indemnify the investor for any damages caused by the breach.
With some loan sales, we may be required to return a portion of the premium
paid by the investor for the loan if the loan is prepaid within the first year
after its sale. If we are regularly required to repurchase loans, indemnify
investors or return loan premiums, it would have an adverse effect on our
financial performance.
A DELAY IN THE RECEIPT OF SERVICES FROM THIRD PARTIES MAY REDUCE OUR REVENUES.
We will rely on third party sources for some of the information used in the
mortgage loan underwriting process, including credit reports, appraisals and
title searches. Any interruptions or delays in
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obtaining these services may cause delays in our processing and closing of
mortgage loans, which could create customer dissatisfaction and injure our
market position.
RISKS ASSOCIATED WITH THE COMPANY GENERALLY.
OUR COMMON STOCK COULD BE DELISTED FROM THE NASDAQ NATIONAL MARKET, WHICH
DELISTING COULD HINDER YOUR ABILITY TO OBTAIN ACCURATE QUOTATIONS AS TO THE
PRICE OF OUR COMMON STOCK, OR DISPOSE OF OUR COMMON STOCK IN THE SECONDARY
MARKET.
Although our common stock is currently listed on the Nasdaq National
Market, we cannot guarantee that an active public market for our common stock
will continue to exist. We recently received a notice from the Nasdaq National
Market indicating that we no longer meet the not tangible assets requirement of
at least $4,000,000 and that Nasdaq is reviewing our eligibility for continued
listing. Although the Company responded to this notice, there can be no
assurance that Nasdaq would not delist our common stock for failure to meet the
net tangible assets requirements. The minimum bid price criteria required in
order to trade on the Nasdaq National Market is $1.00 per share. If we fail to
maintain the requisite bid price, our securities could be delisted from the
Nasdaq National Market. Additional factors giving rise to such delisting could
include, but might not be limited to (1) a reduction to one active market maker,
or (2) a reduction in the market value of the public float in our securities to
less than $5,000,000.
Additionally, Nasdaq could require IGCA to reapply to the Nasdaq National
Market immediately following the Merger. There is no assurance that we will be
able to meet the listing requirements either now or at the time of such
reapplication.
If our securities are delisted from the Nasdaq National Market, quotations,
if any, in our common stock would thereafter be available in the so-called "pink
sheets" or the National Association of Securities Dealer's "Electronic Bulletin
Board." Consequently, the liquidity of our common stock would likely be
impaired, not only in the number of shares which could be bought and sold, but
also through delays in the timing of the transactions, reduction in the coverage
of IGCA by security analysts and the news media, and lower prices for our
securities than might otherwise prevail. In addition, our common stock would
become subject to certain rules of the Securities and Exchange Commission
relating to "penny stocks." These rules require broker-dealers to make special
suitability determinations for purchasers other than established customers and
certain institutional investors and to receive the purchasers' prior written
consent for a purchase transaction prior to sale. Consequently, these "penny
stock rules" may adversely affect the ability of broker-dealers to sell our
common stock and may adversely affect your ability to sell shares of our common
stock in the secondary market.
WE MAY NOT PAY DIVIDENDS ON OUR COMMON STOCK, IN WHICH EVENT YOUR ONLY RETURN ON
INVESTMENT, IF ANY, WILL OCCUR ON THE SALE OF OUR STOCK.
To date, we have not paid any cash dividends on our common stock, and,
regardless of whether the Merger is consummated, we do not intend to do so in
the foreseeable future. Rather, we intend to use any future earnings to fund our
operations and the growth of our business. Accordingly, the only return on an
investment in our common stock will occur upon its sale.
PURSUANT TO ITS AUTHORITY TO DESIGNATE AND ISSUE SHARES OF OUR STOCK AS IT DEEMS
APPROPRIATE, OUR BOARD OF DIRECTORS MAY ASSIGN RIGHTS AND PRIVILEGES TO
CURRENTLY UNDESIGNATED SHARES WHICH COULD ADVERSELY AFFECT YOUR RIGHTS AS A
COMMON SHAREHOLDER.
Our Board of Directors, without any action by the shareholders, may
designate and issue shares in such classes or series (including classes or
series of preferred stock) as it deems appropriate and establish the rights,
preferences and privileges of such shares, including dividends, liquidation and
voting rights. Our authorized capital consists of 100,000,000 shares of capital
stock, of which 4,000 shares have been designated Series B Convertible Preferred
Stock, par value $0.01 per share, 2,000 shares have been designated Series C
Convertible Preferred Stock, par value $0.01 per share, and 3,000 shares have
been designated Series D Convertible Preferred Stock, par value $0.01 per share.
As of the Record Date, we
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had outstanding 8,952,366 shares of common stock, 280 shares of Series B
Convertible Preferred Stock, 900 shares of Series C Convertible Preferred Stock
and 1,612.5 share of Series D Convertible Preferred Stock. If the merger is
consummated, we will have outstanding approximately 46,000,000 additional shares
of common stock.
The rights of holders of preferred stock and other classes of common stock
that may be issued could be superior to the rights granted to holders of the
Units issued in our initial public offering. Our Board's ability to designate
and issue such undesignated shares could impede or deter an unsolicited tender
offer or takeover proposal. Further, the issuance of additional shares having
preferential rights could adversely affect the voting power and other rights of
holders of common stock.
MINNESOTA LAW MAY INHIBIT OR DISCOURAGE TAKEOVERS, WHICH COULD REDUCE THE MARKET
VALUE OF OUR STOCK.
Being a corporation organized under Minnesota law, we are subject to
certain Minnesota statutes which regulate business combinations and restrict the
voting rights of certain persons acquiring shares of our stock. By impeding a
merger, consolidation, takeover or other business combination involving IGCA or
discouraging a potential acquirer from making a tender offer or otherwise
attempting to obtain control of the Company, these regulations could adversely
affect the market value of our stock.
THE LIMITATIONS ON DIRECTOR LIABILITY CONTAINED IN OUR ARTICLES OF INCORPORATION
AND BYLAWS MAY DISCOURAGE SUITS AGAINST DIRECTORS FOR BREACH OF FIDUCIARY DUTY.
As permitted by Minnesota law, our Articles of Incorporation provide that
members of our Board of Directors are not personally liable to you or the
Company for monetary damages resulting from a breach of their fiduciary duties.
These limitations on director liability may discourage shareholders from suing
directors for breach of fiduciary duty and may reduce the likelihood of
derivative litigation brought against a director by shareholders on the
Company's behalf. Furthermore, our Bylaws provide for mandatory indemnification
of directors and officers to the fullest extent permitted by Minnesota law. All
of these provisions limit the extent to which the threat of legal action against
our directors for any breach of their fiduciary duties will prevent such breach
from occurring in the first instance.
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THE SPECIAL MEETING
DATE, TIME AND PLACE OF SPECIAL MEETING
The Special Meeting will be held on , 2000, at 9:00 a.m., local
time, at the Company's offices at 4725 Aircenter Circle, Reno, Nevada.
PURPOSE OF SPECIAL MEETING
At the Special Meeting, the holders of shares of IGCA common stock will
consider and vote upon proposals to: (i) adopt the Asset Purchase Agreement;
(ii) adopt the Merger Agreement; (iii) amend the Company's Articles of
Incorporation to change the name of the Company, contingent upon consummation of
the Merger, to "nMortgage, Inc."; and (iv) transact any other business as may
properly come before the meeting or any adjournments thereof (each of (i), (ii),
(iii) and (iv) are referred to herein as a "PROPOSAL", and collectively as the
"PROPOSALS").
RECORD DATE
The Board of Directors of IGCA has fixed the close of business on
, 2000 as the record date (the "RECORD DATE") for the determination of
holders of IGCA common stock entitled to notice of and to vote at the Special
Meeting. On the Record Date, there were [ ] shares of IGCA common stock
outstanding, each entitled to one vote.
REQUIRED VOTE; QUORUM; REVOCATION OF PROXIES
Required Vote; Revocation of Proxies. Each Proposal must be adopted by the
affirmative vote of the holders of a majority of the outstanding shares of IGCA
common stock present in person or represented by proxy at the Special Meeting,
except that approval of the Merger and the Gaming Divestiture each require the
affirmative vote of the holders of a majority of the shares of IGCA common stock
outstanding on the Record Date.
Voting and Revocation of Proxies.
Shares of IGCA stock represented by a proxy properly signed and received at
or prior to the Special Meeting, unless subsequently revoked, will be voted in
accordance with the instructions thereon. IF A PROXY IS SIGNED AND RETURNED
WITHOUT INDICATING ANY VOTING INSTRUCTIONS, SHARES OF IGCA STOCK REPRESENTED BY
THE PROXY WILL BE VOTED FOR THE PROPOSALS AND TRANSACTIONS CONTEMPLATED THEREBY.
Abstentions may be specified on all IGCA Proposals. Shares of IGCA common
stock represented at the Special Meeting for which proxies have been received,
but with respect to which holders of shares have abstained on any matter, will
be treated as present at the Special Meeting for purposes of determining the
presence or absence of a quorum for the transaction of all business.
For voting purposes at the Special Meeting, only shares affirmatively voted
in favor of a Proposal (including properly executed proxies not containing
voting instructions) will be counted as favorable votes for such Proposal. The
failure to submit a proxy (or to vote in person) or the abstention from voting
will have the same effect as a vote against such Proposal. Under Minnesota law,
shares represented by proxies that reflect "broker non-votes" (i.e., shares held
by a broker or nominee which are represented at the IGCA Special Meeting, but
with respect to which such broker or nominee is not empowered to vote on a
particular proposal) will be counted as shares that are present and entitled to
vote for purposes of determining the presence of a quorum for the transaction of
all business. Because broker non-votes will be treated as unvoted with respect
to the approval of the Merger and the Gaming Divestiture, they will also have
the same effect as votes against such Proposals. However, broker non-votes will
be treated as unvoted for purposes of determining approval of the change in IGCA
corporate name and will not be counted as votes for or against such proposal.
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IGCA proxy holders may, in their discretion, vote shares to adjourn the
Special Meeting to solicit additional proxies in favor of such Proposals.
However, shares of IGCA stock with respect to which a proxy is signed and
returned indicating a vote against any Proposal will not be so voted to adjourn.
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before the proxy is voted by the filing of an instrument
revoking it or of a duly executed proxy bearing a later date with the Secretary
of IGCA, prior to or at the Special Meeting, or by voting in person at the
Special Meeting. All written notices of revocation and other communications with
respect to revocation of IGCA proxies should be addressed to IGCA at its
principal executive offices. Attendance at the Special Meeting will not in and
of itself constitute a revocation of a proxy.
The IGCA Board of Directors is not currently aware of any business to be
acted upon at the Special Meeting other than as described herein. If however,
other matters are properly brought before the Special Meeting, the persons
appointed as proxies will have discretion to vote or act thereon according to
their best judgment subject to applicable Securities and Exchange Commission
rules.
SOLICITATION OF PROXIES AND EXPENSES
IGCA will bear all costs and expenses incurred in connection with the
printing and mailing of this Proxy Statement, and will bear the cost of
soliciting proxies for the Special Meeting. IGCA also will reimburse brokerage
houses and other custodians, nominees and fiduciaries for their reasonable
expenses in forwarding the soliciting material to beneficial owners of IGCA
common stock. Proxies are being solicited primarily by mail, but officers and
directors of IGCA may also solicit proxies personally, by telephone or by
special letter.
THE BOARD OF DIRECTORS OF IGCA HAS DETERMINED THAT THE GAMING DIVESTITURE
AND THE MERGER ARE EACH IN THE BEST INTERESTS OF IGCA AND ITS SHAREHOLDERS.
ACCORDINGLY, THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE ASSET PURCHASE
AGREEMENT AND THE MERGER AGREEMENT AND RECOMMENDS THAT ALL IGCA SHAREHOLDERS
VOTE "FOR" THE APPROVAL OF THE ASSET PURCHASE AGREEMENT, THE MERGER AGREEMENT
AND THE TRANSACTIONS CONTEMPLATED BY EACH SUCH AGREEMENT. THE BOARD OF DIRECTORS
ALSO UNANIMOUSLY RECOMMENDS THAT ALL IGCA SHAREHOLDERS VOTE "FOR" THE AMENDMENT
TO THE COMPANY'S ARTICLES OF INCORPORATION TO CHANGE THE NAME OF THE COMPANY,
CONTINGENT UPON THE CONSUMMATION OF THE MERGER, TO NMORTGAGE, INC.
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THE GAMING DIVESTITURE
GENERAL; BACKGROUND
As a condition to the Merger, IGCA must divest substantially all of its
gaming related assets (the "GAMING ASSETS"). If such assets were not sold prior
to consummation of the Merger, the parent corporation of nMortgage would be
required to be licensed and found suitable under various gaming jurisdictions.
nMortgage does not desire to undertake gaming licensing given its principle line
of business. Accordingly, on February 1, 2000, IGCA, Innovative Gaming, Inc., a
Nevada corporation and a wholly owned subsidiary of IGCA, and Xertain entered
into the Asset Purchase Agreement. If approved by the IGCA shareholders, upon
the terms and subject to the conditions contained in the Asset Purchase
Agreement, IGCA will sell and divest substantially all of the Gaming Assets to
Xertain in exchange for the consideration described below.
ASSET PURCHASE AGREEMENT; CONSIDERATION
Pursuant to the terms and subject to the provisions of the Asset Purchase
Agreement, a copy of which is attached as APPENDIX A to this Proxy Statement,
IGCA will sell the IGCA Gaming Assets to Xertain for an aggregate of $4,000,000
and a promissory note made by Xertain and payable to IGCA in an amount equal to
the accounts receivable of IGCA as of the closing date of the Gaming
Divestiture, as adjusted for certain payments to be made by Xertain and IGCA as
provided in the note (the "ACCOUNTS RECEIVABLE PROMISSORY NOTE"). The Accounts
Receivable Promissory Note will be secured by the accounts receivables of IGCA
which are being acquired by Xertain pursuant to the Gaming Divestiture.
Of the $4,000,000 referenced above as part of the purchase price,
$1,000,000 will be payable in cash at the closing of the transaction, provided
that prior to such time Xertain has obtained interim approval to manufacture
gaming machines from the Nevada gaming regulatory authorities. If Xertain cannot
obtain such interim approval prior to the closing, Xertain will deliver either
(i) a $1,000,000 unsecured promissory note due upon Xertain's obtaining approval
from the Nevada gaming regulatory authorities (but in no event later then
September 1, 2000) , or (ii) an irrevocable letter of credit in the amount of
$750,000.
The remaining $3,000,000 of the purchase price will be paid in the form of
an unsecured convertible promissory note which will have a 36-month term, bear
interest at 8.5% per annum, and have interest and principle payable upon the due
date. At the holder's option, such promissory note will be convertible into
Xertain common stock at $4.50 per share upon the earlier of (a) twelve months
from the closing date of the Gaming Divestiture or (b) upon initial public
offering of Xertain common stock. Additionally, Xertain will issue to IGCA a
six-month term note bearing interest at 8.5% with the principle amount equal to
the accounts receivable outstanding at the closing of the Gaming Divestiture, as
adjusted for certain payments to be made by Xertain or IGCA pursuant to the
terms of the note. In addition to paying the purchase price for substantially
all the Gaming Assets, Xertain will assume certain contracts and liabilities of
IGCA. Following consummation of the Gaming Divestiture, IGCA will not own or
have any interest in the Gaming Assets.
In addition to various standard conditions of closing, the Gaming
Divestiture is subject to the simultaneous closing of the Merger, shareholder
approval, and the termination of various employment contracts of certain key
employees of IGCA. If the Gaming Divestiture is terminated by IGCA because IGCA
has accepted another proposal with respect to the purchase of the Gaming Assets
and the Asset Purchase Agreement has not been terminated pursuant to the terms
thereof, IGCA would be required to pay Xertain $150,000.
DESCRIPTION OF THE GAMING ASSETS
The assets of IGCA set forth below will be included as part of the Gaming
Assets which, upon receipt of shareholder approval, will be sold by IGCA
pursuant to Asset Purchase Agreement.
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INTELLECTUAL PROPERTY
IGCA has exclusive ownership and licensing rights pertaining to its
blackjack, craps, roulette and SuperSuits Progressive Blackjack machines in
gaming markets worldwide. IGCA(R), BJ Blitz(TM), Hot Shot Dice(TM), Lightning
Strike Roulette(TM), Live Video Blackjack(R), Live Video Craps(R), Live Video
Roulette(R), Monster Money(TM), Bonus Streak(TM), Cascade of Diamonds(TM),
Mythical Reels(TM), and SuperSuits(R) are all trademarks of IGCA for which the
Company has federally registered or applied for federal registration. IGCA has
also been granted a Trademark and Design registration for Lightning Strike
Roulette in Australia. In addition, IGCA believes that the technical know-how,
trade secrets and creative skills of our employees and contract personnel are
substantial assets of the Company.
REAL PROPERTY LEASES
Our corporate office, which is located in Reno, Nevada, at 4925 Aircenter
Circle, is a 55,000 square foot two-story building which is comprised of
approximately 44,630 square feet of production/warehouse space and approximately
10,370 square feet of office space, break room and conference room. IGCA leases
this corporate office/building for $23,587 per month, with the lease expiring on
October 31, 2001. The Company also leases a satellite sales and service office
which is located in Las Vegas, Nevada, at 2300 East Patrick Lane, for $2,670 per
month. This sales and service office is a 2,420 square foot building consisting
of 1,868 square feet of office space and 552 square feet of production warehouse
space.
VEHICLES AND EQUIPMENT
The Company owns vehicles, office equipment, test and shop equipment, And
leasehold improvements with an approximate carrying value of $685,000.
INVENTORY
As of March 31, 2000, the approximate carrying value of the Company's
inventories totaled approximately $6,400,000.
NO RELATION BETWEEN PARTIES.
No executive officer, director, or shareholder of Xertain is an employee
officer, director or significant shareholder of IGCA.
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THE MERGER
GENERAL
If approved by the IGCA shareholders and the stockholders of nMortgage,
upon the terms and subject to the satisfaction of the conditions contained in
the Merger Agreement (including without limitation the conditions referenced
below under the caption "Conditions to the Merger"), nMortgage will be merged
with and into Merger Subsidiary at the Effective Time. Merger Subsidiary will be
the surviving corporation in the Merger, will be renamed "nMortgage.com, Inc."
and will continue to be a wholly-owned subsidiary of the IGCA.
At the Effective Time, all outstanding shares of nMortgage capital stock,
par value $0.01 per share (collectively, the "NMORTGAGE SHARES"), will be
automatically converted into the right to receive a pro rata share of the
greater of (i) an aggregate of Forty Six Million (46,000,000) shares of common
stock of IGCA, or (ii) 75% of the then outstanding shares of common stock of
IGCA on a fully-diluted basis.
BACKGROUND
Since IGCA's inception, revenues realized by the Company have generally
failed to meet or exceed the costs associated with operating its business. In
addition, the costs over time of obtaining the capital necessary to continue
operations have become prohibitively expensive and difficult to locate. In an
attempt to retain value for the IGCA shareholders, the Company began to explore
strategic alternatives to the continued operation of the Company. In 1998, IGCA
retained the investment banking firm of Gerald Klauer Mattison & Co., Inc. to
analyze the Company's strategic alternatives, including finding a strategic
partner for the Company for a potential sale, joint venture, merger or other
form of business combination. The Company has also contacted several private
entities interested in potentially acquiring the assets of IGCA. On September
15, 1999, Equitex contacted the Company to express an interest in merging with
and into IGCA contingent upon IGCA's divestiture of its gaming assets. After
further negotiations with Equitex and continued assessment other strategic
alternatives available to IGCA, Equitex and IGCA signed a non-binding letter of
intent on October 8, 1999, outlining the terms of a contemplated merger between
IGCA and nMortgage. On December 31, 1999, IGCA and nMortgage, along with Equitex
and IGCA Acquisition Corp., executed the Merger Agreement. The Merger Agreement
was amended by the parties thereto on February 11, 2000, in order to extend time
by which each of IGCA and nMortgage must have delivered to the other certain
schedules to the Merger Agreement and completed due diligence review to their
respective satisfaction.
CONDITIONS TO THE MERGER
The respective obligations of IGCA and nMortgage to consummate the Merger
are subject to the satisfaction or waiver of certain conditions on or prior to
the Effective Time, including (among other things) that: (i) the Merger has been
approved by the requisite vote of the shareholders of IGCA and, if required by
applicable law, the requisite vote of the stockholders of Equitex (ii) IGCA has
consummated the Gaming Divestiture, (iii) delivery of certain schedules to the
Merger Agreement on or prior to February 29, 2000, (iv) completion by each of
IGCA and nMortgage of due diligence to their respective satisfaction on or prior
to February 29, 2000, (v) IGCA has net tangible assets in an amount equal to
$2,000,000 at the Effective Time, and (vi) the execution and delivery by IGCA
and nMortgage of certain certificates and other documents which are customary in
transactions of this nature.
RECOMMENDATION OF THE COMPANY'S BOARD OF DIRECTORS; REASONS FOR THE MERGER
The Board of Directors of IGCA has unanimously determined that the Gaming
Divestiture and the Merger are each in the best interests of the Company and its
shareholders and have approved the Asset Purchase Agreement, the Merger
Agreement and the transactions contemplated by each such agreement. The Board of
IGCA believes that the Gaming Divestiture, in combination with the Merger,
offers its shareholders a unique opportunity to participate in the mortgage loan
industry during a period of potential
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growth based on nMortgage's Internet mortgage strategy. The Board of IGCA
approved the Gaming Divestiture and the Merger primarily because of the
opportunity for increased long-term value which it believes would be provided to
the IGCA shareholders as a result of the transactions.
During the course of its negotiations with nMortgage, the directors of IGCA
considered the alternative of continuing to operate the Company as a developer,
manufacturer, marketer and distributor of gaming machines. The Board of IGCA
determined to proceed with the nMortgage negotiations rather than to continue
its operations based upon the Company's high cost of capital, the character and
market position of IGCA, the current risks associated with the operations of
IGCA and its future prospects, and the likely prospects of IGCA as an
independent company. Other considerations leading to the decision by the Board
of IGCA to approve the transactions included, without limitation:
- the Board's understanding of the present and anticipated environment of
the gaming industry and the potential for further consolidation within
the industry that could adversely affect IGCA's competitive position;
- the market price of the IGCA common stock recently and over the past
several years;
- the terms of the Asset Purchase Agreement and the Merger Agreement,
including IGCA's "no solicitation" covenant which prohibits IGCA from
soliciting an acquisition proposal or, subject to the fiduciary duties
of the Board, from negotiating with any other parties with respect to an
acquisition proposal, and the obligation of IGCA to pay a termination
fee to nMortgage if an acquisition proposal were consummated or an
agreement were entered into with respect thereto following the
termination of the Merger Agreement; and
- the oral opinion of Craig Hallum Capital Group, Inc. delivered to the
Board on December 17, 1999, confirmed in Craig-Hallum's written opinion
dated December 17, 1999, to the effect that the consideration to be
received by the holders of the IGCA common stock pursuant to the Merger
is fair from a financial point of view to such holders.
In view of the number and disparate nature of the factors considered by the
IGCA Board, the IGCA Board did not assign relative weight to the factors
considered in reaching its conclusions. Rather, the Board viewed its conclusions
and recommendations to IGCA shareholders as being based on the totality of the
information being presented to and considered by it.
THE BOARD OF DIRECTORS OF IGCA RECOMMENDS THAT THE IGCA SHAREHOLDERS VOTE
FOR THE ADOPTION OF THE ASSET PURCHASE AGREEMENT AND THE MERGER AGREEMENT.
OPINION OF FINANCIAL ADVISOR TO IGCA
On December 17, 1999, Craig-Hallum Capital Group, Inc. delivered its oral
opinion to the IGCA Board of Directors that, as of such date, based on and
subject to the assumptions, factors and limitations set forth therein, the
consideration to be received by the holders of IGCA common stock pursuant to the
Merger Agreement is fair, from a financial point of view, to such holders.
Craig-Hallum subsequently confirmed its oral opinion by delivering to the IGCA
Board a written opinion dated as of December 17, 1999, that based on and subject
to the assumptions, factors and limitations set forth therein, the consideration
to be received by the holders of IGCA common stock pursuant to the Merger
Agreement is fair, from a financial point of view, to such holders.
A COPY OF CRAIG-HALLUM'S WRITTEN OPINION IS ATTACHED AS APPENDIX C TO THIS
PROXY STATEMENT AND IS INCORPORATED HEREIN BY REFERENCE. IGCA SHAREHOLDERS ARE
URGED TO READ THE OPINION IN ITS ENTIRETY FOR ASSUMPTIONS MADE, PROCEDURES
FOLLOWED AND OTHER MATTERS CONSIDERED BY CRAIG-HALLUM. THE SUMMARY OF
CRAIG-HALLUM'S OPINION SET FORTH IN THIS PROXY STATEMENT IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION.
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Craig-Hallum's opinion was delivered pursuant to its engagement by the IGCA
Board and was directed solely to the IGCA Board and solely for its benefit and
use in considering the Merger. Craig-Hallum's opinion was not rendered with a
view toward serving as or constituting a recommendation to any shareholder of
IGCA with respect to whether to vote in favor of the approval and the and
adoption of the Merger Agreement, and should not be relied upon by any
shareholder of IGCA as such.
In connection with rendering its review of the Merger Agreement, and in
arriving at its opinion, Craig-Hallum, among other things: (i) reviewed and
analyzed (A) the financial terms of the Merger Agreement, (B) certain publicly
available financial statements and other information of IGCA and Equitex, (C)
certain internal financial statements and other historical financial and
operating data concerning IGCA prepared by the management of IGCA, (D) certain
internal financial statements and other historical financial and operating data
concerning nMortgage prepared by the management of nMortgage, (E) certain
financial projections prepared by the management of each of IGCA and nMortgage,
(ii) performed site visits and conducted discussions with members of the senior
management of each of IGCA and nMortgage with respect to the business and
prospects of each, (iii) analyzed the pro-forma impact of the Merger Agreement
on the common stock of IGCA and Equitex, (iv) reviewed the reported prices and
trading activity for the common stock of each of IGCA and Equitex, (v) compared
the financial performance of IGCA and the price of its common stock with that of
certain other comparable publicly-traded companies and their securities, (vi)
compared the financial performance and pro-forma financial projections of
nMortgage with those of certain other comparable publicly-traded companies,
(vii) participated in discussions among representatives of IGCA and their
financial and legal advisors and (viii) conducted such other analyses and
examinations and considered such other financial, economic and market criteria
that it deemed necessary in arriving its opinion.
In rendering its opinion, Craig-Hallum assumed and relied on the accuracy,
completeness and fairness, without assuming any responsibility for the
independent verification of, the financial, legal, tax, operating and other
information that was provided it to by IGCA and nMortgage and each of their
accounting and legal advisors and all information that was otherwise reviewed by
it. Craig-Hallum did not make or receive an independent evaluation or appraisal
of any of the respective assets or liabilities of IGCA or nMortgage. With
respect to the financial forecasts and projections furnished to it, Craig-Hallum
assumed that they had been reasonably prepared on the bases reflecting the best
then currently available estimates and judgments of the management of IGCA and
nMortgage of the respective future financial performance of IGCA and nMortgage,
and Craig-Hallum expressed no view as to such projections or the assumptions on
which they were based. Craig-Hallum made no independent investigations of any
legal matters affecting IGCA or nMortgage and assumed the correctness of all
legal advise given to the Board of Directors of IGCA by its counsel.
Craig-Hallum's opinion was based on economic, market, financial and other
conditions as they existed and could be evaluated by it on, and on the
information made available to it as of, the date of its opinion. Although
subsequent developments could materially affect the assumptions used in
preparing its opinion, Craig-Hallum has no obligation to update, revise or
reaffirm its opinion. The Craig-Hallum opinion does not constitute an opinion as
to the price at which IGCA's common will trade at any time.
As part of its securities and investment banking business, Craig-Hallum is
regularly engaged in the valuation of businesses and securities, in connection
with mergers and acquisitions, secondary distributions of securities, private
placements and valuations for other purposes. Craig-Hallum has acted as
financial advisor to IGCA in connection with the Merger and will receive a fee
of approximately $80,000 from IGCA for its services.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain members of the Board of Directors and management of IGCA and
nMortgage have interests in the Merger (described below and under the Captions
"The Merger-Interests of Certain Persons in the Merger") that are different from
and in addition to the interests generally of shareholders of IGCA. IGCA's Board
of Directors was aware of these interests and considered them, among other
matters, in
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approving the Merger Agreement and the transactions contemplated thereby.
Examples of these interests include:
- If the Merger is completed, up to two (2) directors of IGCA may become
directors of the surviving corporation to the Merger.
- On May 12, 2000, IGCA entered into termination agreements with the five
executive officers, pursuant to which each executive officer would
terminate, prior or at the closing of the Merger, his employment
agreement in exchange for severance to be paid at or following the
closing of the Merger. Each of the employment agreements that would be
terminated provided for the payment of severance upon termination of
such executive's employment without cause. The termination agreements
also provide that the confidentiality and non-competition provisions
contained in each executive officer's employment agreement shall survive
the termination of thereof.
- Mr. Stevenson's employment agreement terminated May 12, 2000. Pursuant
to the terms of his termination agreement, IGCA is required to pay Mr.
Stevenson an aggregate of $300,000 in severance contingent upon the
consummation of the Merger. The $300,000 in severance payments is
approximately $100,000 less than the severance that would have been owed
pursuant to Mr. Stevenson's employment agreement by IGCA had Mr.
Stevenson been terminated in May 2000. $200,000 of such severance will
be payable at the closing of the Merger, with the remaining $100,000 to
be payable upon the earlier of (i) IGCA's receipt of the proceeds from
the unsecured promissory note of Xertain to be issued to IGCA in
connection with the Gaming Divestiture or (ii) September 15, 2000.
- The termination agreements covering IGCA's other four executive
officers, including Barrett V. Johnson, IGCA's President and Chief
Operating Officer, terminate such executive officers' employment
agreements as of the Closing of the Merger. These termination agreements
require IGCA to make severance payments, in twelve equal monthly
installments commencing on the one month anniversary of the Closing of
the Merger, to each such executive officer in an aggregate amount equal
to such executive officer's annual base salary. The aggregate severance
payments required to be made by IGCA to its executive officers, other
than Mr. Stevenson, is approximately $485,000. Of such amount, Xertain,
pursuant to the Asset Purchase Agreement, has agreed to reimburse IGCA
for the severance payments to be made to all of IGCA's executive
officers with the exception of Mr. Stevenson.
- The outstanding but non-vested options held by the executive officer's
and directors of IGCA will accelerate and vest automatically upon the
consummation of the Merger.
- Upon consummation of the Merger, each outside director of IGCA will
receive options to purchase up to 50,000 shares of IGCA common stock.
- Upon consummation of the Merger, Edward G. Stevenson, IGCA's Former
Chairman and Chief Executive Officer, will be issued options to acquire
200,000 shares of IGCA common stock and Barrett V. Johnson, IGCA's
President and Chief Operating Officer, will be issued options to acquire
50,000 shares of IGCA common stock.
- Henry Fong, Chief Executive Officer, Chairman of the Board and a
substantial stockholder of Equitex, directly or indirectly owns shares
of IGCA common stock and holds promissory notes which obligate IGCA to
pay Mr. Fong or his affiliates an aggregate of $800,000.
- Ronald R. Zideck and Leo V. Seevers, each intend to resign their
respective positions as members of IGCA's Board of Directors
concurrently with or immediately following the consummation of the
Merger. If any such director does resign, the remaining director or
directors (as the case may be) would be entitled, pursuant to Minnesota
law and Section (IV)(12) of the IGCA bylaws, to fill the vacancies
created by such resignations. Notwithstanding the present intention of
each of Mr. Zideck and Mr. Seevers to resign from the IGCA Board, none
of such directors is obligated,
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contractually or otherwise, to do so. The IGCA shareholders are not being
asked to vote for the election of directors (including any replacement
directors) at the Special Meeting.
ANTICIPATED ACCOUNTING TREATMENT
The Merger will be accounted for under the purchase method of accounting
under the generally accepted accounting principles ("GAAP"), with nMortgage
treated as the acquiror.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
Pursuant to the Merger Agreement, IGCA will acquire nMortgage in exchange
for approximately 75% of the outstanding common stock of IGCA. For federal
income tax purposes, no gain or loss will be recognized by IGCA or IGCA
shareholders as a result of the Merger.
THE MERGER AGREEMENT
The following is brief summary of certain provisions of the Merger
Agreement, which is attached as APPENDIX B to this Proxy Statement and is
incorporated herein by reference. The following summary is qualified in its
entirety by reference to the Merger Agreement.
TERMS OF THE MERGER
The Merger Agreement provides that following the approval of the Merger
Agreement and the Merger by the shareholders of IGCA and the satisfaction or
waiver of the other conditions to the Merger, nMortgage shall be merged with and
into Merger Subsidiary, the separate existence of nMortgage shall cease (except
as may be continued by operation of law) and Merger Subsidiary shall continue
its corporate existence as the surviving corporation to the Merger and a
subsidiary of IGCA. The Certificate of Incorporation and the Bylaws of Merger
Subsidiary, each as in effect immediately prior to the Effective Time, shall be
the Certificate of Incorporation and Bylaws of the Surviving Corporation, and
the directors and officers of Merger Subsidiary shall become the directors and
officers of the Surviving Corporation at and as of the Effective Time.
EFFECTIVE TIME
As soon as practicable after all of the conditions to the Merger as set
forth in ARTICLE VI of the Merger Agreement have been satisfied or waived by the
party or parties entitled to the benefit of the same, the parties to the Merger
Agreement will file Articles of Merger with the Secretary of State of the State
of Minnesota in accordance with the applicable provisions of the MBCA. The
Merger shall become effective at the time the Certificate of Merger is filed
with the Secretary of State of the State of Minnesota. Pursuant to the Delaware
General Corporation Law, the parties must also file a Certificate of Merger with
the Secretary of State of Delaware.
CONVERSION OF SHARES
At the Effective Time, (i) all of the issued and outstanding shares of the
capital stock of nMortgage shall be converted into the right to receive the
greater of an aggregate of 46,000,000 shares of IGCA common stock or 75% of the
shares of IGCA common stock then outstanding on a fully diluted basis (the
"MERGER CONSIDERATION"), and (ii) the shares of Merger Subsidiary common stock
outstanding immediately prior to the Merger shall be converted into one share of
the common stock of the Surviving Corporation, which share shall constitute all
of the issued and outstanding capital stock of the Surviving Corporation and
shall be owned by IGCA. The number of shares of IGCA common stock comprising the
Merger Consideration shall be subject to appropriate adjustment in the event of
a stock split, stock dividend or recapitalization after the date of the Merger
Agreement and prior to the Effective Time applicable to shares of IGCA common
stock. Each share of nMortgage capital stock held in the treasury
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of nMortgage shall be canceled as of the Effective Time and no Merger
Consideration shall be payable with respect thereto.
At and as of the Effective Time, the holders of certificates representing
shares of the capital stock of nMortgage at the Effective Time (collectively,
the "NMORTGAGE STOCKHOLDERS") shall cease to have any rights as stockholders of
nMortgage, except such rights, if any, as they may have pursuant to Delaware
law. Until certificates representing shares of nMortgage capital stock are
surrendered for exchange, each such certificate shall, after the Effective Time,
represent for all purposes only the right to receive the Merger Consideration.
EXCHANGE OF NMORTGAGE COMMON SHARES
After the Effective Time, each nMortgage stockholder shall be entitled,
upon surrender of a certificate or certificates which immediately prior to the
Effective Time represented outstanding shares of nMortgage capital stock, to
receive the Merger Consideration from IGCA pursuant to the procedures set forth
in detail in the Merger Agreement.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various representations and warranties
relating to, among other things: (a) the incorporation and corporate power of
IGCA, Merger Subsidiary, nMortgage and First Bankers Mortgage Services, Inc., a
subsidiary of nMortgage ("FBMS"); (b) the valid execution and delivery and the
binding nature of the Merger Agreement with respect to IGCA and nMortgage; (c)
the absence of certain conflicts with, violations of, or defaults under, the
organization documents and certain other documents of IGCA, nMortgage and FBMS;
(d) the absence of any requirement on the part of IGCA, nMortgage, or FBMS to
submit any notices or other filings with any governmental authority in
connection with the consummation of or the transactions contemplated by the
Merger Agreement; (e) the capital structure of the IGCA, nMortgage and FBMS; (f)
the accuracy of the financial statements of IGCA and FBMS; (g) the absence of
material undisclosed liabilities of IGCA, nMortgage and FBMS; (h) the absence of
material adverse changes, since September 30, 1999, in the assets, financial
condition, operating results, customer, employee or supplier relations, business
condition or prospects of nMortgage or FBMS; (i) the compliance by IGCA,
nMortgage and FBMS with all laws applicable to each (j) the possession by IGCA,
nMortgage and FBMS of, and the compliance by each with, all permits,
certificates, licenses, approvals and other authorizations required in
connection with the operation of their respective businesses; (k) certain
matters with respect to the legal title to certain properties owned or leased by
IGCA, nMortgage and FBMS; (l) the validity of the accounts receivable of each of
IGCA and FBMS as reflected on their respective balance sheets dated September
30, 1999; (m) the timely and accurate filing of tax returns by IGCA, nMortgage
and FBMS; (n) the validity and existence of certain material contracts of IGCA,
nMortgage and FBMS; (o) the existence and validity of certain intellectual
property rights of nMortgage and FBMS; (p) the existence of certain pending or
threatened litigation involving IGCA, nMortgage, or FBMS; (q) the status of
certain employees and related employee matters at IGCA nMortgage and FBMS; (r)
certain employee benefit plan matters applicable to IGCA, nMortgage and FBMS;
(s) the status and validity of certain insurance policies of IGCA, nMortgage and
FBMS; (t) the existence or nonexistence of certain transactions with affiliates
or other parties related to IGCA, nMortgage or FBMS; (u) the adoption and
implementation by each of nMortgage and FBMS of a Y2K compliance plan with
respect to the information and business systems or online operations of each;
(v) the nonexistence of brokers, finders or financial advisors who might claim a
right to payment for services rendered in connection with the Merger; (w) the
nonexistence of material misstatements or omissions by either IGCA or nMortgage
contained in the Merger Agreement or any other documents in connection
therewith.
CERTAIN COVENANTS
The Merger Agreement also contains various customary covenants, including
covenants of each of IGCA and nMortgage that, during the period from December
31, 1999, until the Effective Time, unless
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otherwise agreed to in writing, each shall: (a) conduct its business in the
ordinary course and consistent with past practice, preserve intact its business
organization, keep available the services of its officers and employees and
maintain satisfactory relationships with all persons with whom it does business;
(b) not (i) materially amend its certificate of incorporation or bylaws; (ii)
issue, sell or otherwise dispose of any shares of its capital stock (or, in the
case of nMortgage, the capital stock of FBMS) or any options, warrants, or
rights of any kind to acquire or sell any shares of the same (except for the
issuance of shares of stock pursuant to the exercise of stock options
outstanding on December 31, 1999, in accordance with their present terms); (iii)
split, combine or reclassify any shares of its capital stock (or, in the case of
nMortgage, the capital stock of FBMS) or declare, pay or set aside any dividend
or other distribution (whether in cash, stock or property) in respect of the
same (other than dividends or distributions to nMortgage or FBMS); (iv) redeem,
purchase or otherwise acquire or offer to acquire any shares of its capital
stock or other securities (and in the case of nMortgage, the capital stock of
FBMS); (v) other than in the ordinary course of business, (A) create, incur or
assume any debt (except the refinancing of existing obligations of nMortgage,
FBMS or IGCA on terms that are no less favorable to such entities than the
existing terms; (B) assume, guarantee, endorse or otherwise become liable or
responsible for the obligations of any Person; (C) make any capital expenditures
or make any loans, advances or capital contributions to, or investments in, any
other Person (other than customary travel, relocation or business advances to
employees); (D) acquire the stock or assets of, or merge or consolidate with,
any other Person; (E) voluntarily incur any material liability or obligation
(absolute, accrued, contingent or otherwise); or (F) sell, transfer, mortgage,
pledge or otherwise dispose of, or encumber, or agree to sell, transfer,
mortgage, pledge or otherwise dispose of or encumber any material assets or
properties, other than to secure permitted debt; (vi) increase the compensation
of any officers or employees or enter into, amend or terminate any employment,
consulting agreement or any arrangement for compensation or benefits, other than
as required pursuant to the terms of agreements in effect on December 31, 1999;
(vii) take or cause to be taken any action, whether before or after the
Effective Time, which would disqualify the Merger as a "reorganization" within
the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended;
and (c) use its reasonable commercial efforts to comply with all applicable laws
and maintain in full force and effect all the permits necessary for the conduct
of their respective businesses;
IGCA and nMortgage have also agreed that each of IGCA and nMortgage shall:
(a) promptly notify each other upon the occurrence of any of the following: (i)
receipt of any notice from any third party alleging that the consent of such
third party is or may be required in connection with the Merger; (ii) receipt of
any material notice from any governmental authority in connection with the
Merger; (iii) an event which would be reasonably likely to have a material
adverse effect on business, assets, conditions, liabilities, or results of
operations (iv) the commencement or threat of any litigation involving or
affecting it or any of its properties or assets; (b) grant each other access to
its offices and other facilities and to all contracts, agreements, commitments,
books and records for the purpose of making reasonable inspections, and furnish
each other with such financial and operating data as each may from time to time
reasonably request; (c) use its reasonable commercial efforts to take, or cause
to be taken, all actions and to do, or cause to be done, all things necessary,
to consummate the Merger and satisfy the conditions of the Closing set forth in
the Merger Agreement; (d) so long as the Merger Agreement is in effect, abstain
from issuing or causing the publication of any press release or any other
announcement with respect to the Merger without the obtaining the prior written
consent of the other, except where such release or announcement is required by
law; (e) comply in all material respects with the provisions of the Exchange Act
and the Securities Act and all other applicable laws; (f) notwithstanding any
"fair price," "moratorium," "control share acquisition" or other similar
antitakeover statute or regulation enacted under state or federal laws in the
United States that is or may become applicable to the Merger, take such actions
as are necessary to consummate the Merger on the terms contemplated in the
Merger Agreement.
Each of IGCA and nMortgage have agreed that they shall not, directly or
indirectly, through any officer, director, agent or otherwise, solicit,
initiate, or encourage the submission of any proposal or offer from any person
or entity (including any of its or their officers or employees) relating to any
liquidation, dissolution, recapitalization, merger, consolidation or acquisition
or purchase of all or a material portion of the assets of, or any equity
interest in either IGCA, nMortgage or FBMS, or any similar transaction or
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business combination involving IGCA, nMortgage, or FBMS, or participate in any
negotiations regarding, or furnish to any other person any information with
respect to, or otherwise cooperate in any way with, or assist or participate in,
facilitate or encourage, any effort or attempt by any other person or entity to
do or seek any of the foregoing. Each has further agreed to notify the other if
any such proposal or offer, or any inquiry from or contact with any person with
respect thereto, is made and promptly provide the other with such information
regarding such proposal, offer, inquiry or contact as the other may request.
Notwithstanding the foregoing, each may furnish information concerning its
business to a third party making an unsolicited proposal or offer and enter into
discussions, negotiations or agreements with such third party if it concludes
that an applicable fiduciary duty of any of its directors or officers require
such actions. In addition, IGCA shall be permitted to solicit offers and
proposals with respect to the Gaming Divestiture as contemplated by the Merger
Agreement.
IGCA has agreed that immediately prior to the Closing, it shall have, in
the aggregate, not more than Sixteen Million (16,000,000) shares of common stock
issued and outstanding on a fully diluted basis after giving effect to the
exercise, issuance or conversion securities convertible or exercisable for
shares of IGCA common stock, subscription agreements or any other agreement
which may require the issuance of IGCA common stock. Until the 2000 Annual
Meeting of the shareholders of IGCA, and until their successors are elected and
qualified, the board of directors of IGCA following the consummation of the
Merger shall consist of seven directors of which two shall be selected by IGCA
and five shall be selected by Equitex. The parties to the Merger Agreement have
also agreed that such directors shall stand for re-election as directors of IGCA
at the next annual meeting of the shareholders of IGCA following the Merger.
nMortgage has agreed to approve and adopt the Merger Agreement and the
transactions contemplated thereby as soon as practicable after the execution of
the Merger Agreement, and IGCA has agreed to take all steps necessary to duly
call, give notice of, convene and hold the Special Meeting in order to, among
other things, approve and adopt the Merger Agreement. In connection with the
Special Meeting, IGCA board of directors has agreed to use its best efforts to
obtain any necessary approval by the IGCA shareholders. Equitex has agreed to
execute an irrevocable proxy in favor of such person as the IGCA shall designate
with respect to all of the common stock of nMortgage beneficially owned by
Equitex to vote in favor of the Merger contemplated by this Agreement.
CONDITIONS
The respective obligations of IGCA and nMortgage to consummate the Merger
are subject to the satisfaction or waiver of certain conditions on or prior to
the Effective Time, including that: (a) the Merger has been approved by the
requisite vote of the shareholders of IGCA and, if required by applicable law,
the stockholders of Equitex; (b) no order, statute, rule, regulation, executive
order, stay, decree, judgment or injunction has been enacted, entered,
promulgated or enforced by any governmental authority which prohibits or
prevents the consummation of the Merger and which has not been vacated,
dismissed or withdrawn; (c) IGCA and Equitex have obtained or obviated the need
to obtain all consents, approvals or waivers from governmental bodies or
agencies, regulatory authorities and third parties, necessary for the
consummation of the Merger and the transactions contemplated by the Merger
Agreement; (d) any consents required to consummate the Merger or the
transactions contemplated by the Merger Agreement have been obtained and are in
full force and effect, except tor those the failure of which to obtain will not
have a material adverse effect on the business, assets, condition (financial or
otherwise), liabilities or the results of operations of IGCA or the Surviving
Corporation and its subsidiaries taken as a whole; (e) IGCA has consummated the
Gaming Divestiture; (f) IGCA has received all state securities law
authorizations necessary to consummate the Merger; (g) there has been no
material legal or governmental proceedings seeking to restrain, enjoin or
otherwise prohibit, nor has any court or governmental authority of competent
jurisdiction issued any order, restraining, enjoining or otherwise prohibiting,
the Merger; (h) each of IGCA and nMortgage has delivered certain schedules to
the Merger Agreement on or prior to February 10, 2000; and (i) each of IGCA and
nMortgage has completed due diligence to their respective satisfaction on or
prior to February 10, 2000.
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The obligation of nMortgage to consummate the Merger is further subject to
the satisfaction or waiver of certain other conditions on or before the
Effective Time, including that: (a) the representations and warranties of the
IGCA are be true and correct at and as of the Closing Date as though then made
and as though the Closing Date had been substituted for the date of the Merger;
(b) IGCA shall have materially performed and complied with all of the covenants
and agreements required to be performed and complied with by it and materially
satisfied all of the conditions required to be satisfied by it, each as set
forth in the Merger Agreement, prior to the Closing Date; (c) there shall not
occurred after the execution of the Merger Agreement, any event that would be
reasonably likely to have a material adverse effect on the on the business,
assets, condition (financial or otherwise), liabilities or the results of
operations of IGCA, taken as a whole; (d) IGCA shall have delivered, or caused
to be delivered, to nMortgage (i) a certificate executed on its behalf by an
authorized officer of nMortgage to the effect that the certain conditions set
forth in the Merger Agreement have been satisfied, (ii) a certificate of Good
Standing from the Secretary of State of the State of Minnesota stating that IGCA
is a validly existing corporation in good standing, (iii) a certificate of good
standing from the Secretary of State of Minnesota stating that Merger Subsidiary
is a validly existing corporation in good standing, and (iv) duly adopted
resolutions of the Board of Directors of IGCA and the Board of Directors and the
shareholder of Merger Subsidiary approving the execution, delivery and
performance of the Merger Agreement and the instruments contemplated thereby,
and of IGCA's shareholders approving the adoption of the Merger Agreement and
approval of the Merger, each certified by its respective Secretary; (e)
nMortgage shall have received an opinion from its tax counsel substantially to
the effect that, if the Merger is consummated in accordance with the provisions
of the Merger Agreement, the Merger will qualify as a reorganization within the
meaning of Section 368(a) of the Code for federal income tax purposes; and (f)
IGCA shall have net tangible assets in an amount equal to $2,000,000 at the
Effective Time.
The obligation of IGCA to consummate the Merger is further subject to the
satisfaction or waiver of certain other conditions on or before the Effective
Time, including that: (a) the representations and warranties of nMortgage are be
true and correct at and as of the Closing Date as though then made and as though
the Closing Date had been substituted for the date of the Merger; (b) nMortgage
shall have materially performed and complied with all of the covenants and
agreements required to be performed and complied with by it and materially
satisfied all of the conditions required to be satisfied by it, each as set
forth in the Merger Agreement, prior to the Closing Date; (c) there shall not
occurred after the execution of the Merger Agreement, any event that would be
reasonably likely to have a material adverse effect on the on the business,
assets, condition (financial or otherwise), liabilities or the results of
operations of nMortgage, taken as a whole; (d) Equitex shall have executed and
delivered an agreement pursuant to which Equitex agrees to indemnify IGCA for
losses resulting from nMortgage's breach of any representations and warranties
contained in the Merger Agreement and any claims bought by the stockholders of
nMortgage relating to the Merger; (e) nMortgage shall have delivered or caused
to be delivered, to IGCA (i) a certificate executed on its behalf by its
President or another duly authorized officer to the effect that certain
conditions set forth in the Merger Agreement have been satisfied, (ii) a
certificate of good standing from the Secretary of State of the State of
Delaware, stating that nMortgage is a validly existing corporation in good
standing, (iii) a certificate of good standing from the Secretary of State of
the State of Florida, stating that FBMS is a validly existing corporation in
good standing, (iv) duly adopted resolutions of the board of directors of
nMortgage approving the execution, delivery and performance of the Merger
Agreement and the instruments contemplated thereby, and of the stockholders of
nMortgage adopting the Merger agreement and approving the Merger, each certified
by the Secretary of the nMortgage; (v) certified copies of the articles of
incorporation and bylaws of nMortgage, Equitex and FBMS; and (v) other documents
and instruments as IGCA reasonably may request.
TERMINATION AND REMEDIES
The Merger Agreement may be terminated by the mutual written consent of
IGCA and nMortgage, and may be terminated by either IGCA or nMortgage if (a) the
Merger has not been consummated on or prior to July 31, 2000 (unless such date
is extended by the mutual agreement of each of the parties hereto), provided
such termination right shall not be available to any party whose failure to
perform any of
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its obligations under the Merger Agreement results in the failure of the Merger
to be consummated by such time; (b) the requisite approval for the Merger by the
shareholders of IGCA is not been obtained at the Special Meeting or at any
adjournment or postponement thereof; (c) the approval of the stockholders of
Equitex (if such approval is required by applicable law) is not obtained; or (d)
any governmental authority has issued an order, decree or ruling or taken any
other action permanently enjoining, restraining or otherwise prohibiting the
consummation of the Merger and such order, decree or ruling or other action
shall have become final and nonappealable.
IGCA may terminate the Merger Agreement if (a) nMortgage has materially
breached any of its representations, warranties, covenants or other agreements
contained in the Merger Agreement, which breach or failure to perform is
incapable of being cured or has not been cured within 20 days after the giving
of written notice to nMortgage of such breach; (b) the board of directors of the
nMortgage or any committee thereof has withdrawn or modified in a manner adverse
to IGCA its approval or recommendation of the Merger, failed to reconfirm its
recommendation within 15 business days after a written request to do so,
approved or recommended any proposal or offer made by a third party for an
acquisition of nMortgage or FBMS (whether involving the sale of equity or
assets), or has resolved to take any of the foregoing actions. In addition, IGCA
may terminate the Merger Agreement in the event that its board of directors
determines in good faith that the failure to terminate the Merger Agreement (and
concurrently with or after such termination, cause IGCA to enter into any
acquisition agreement or similar agreement with respect to any bona fide offer
or proposal for any business combination, liquidation, or similar transaction
involving IGCA, or the acquisition of any significant equity interest in, or a
substantial portion of the assets of IGCA (with the exception of offers and
proposals with respect to the Gaming Divestiture) which the board of directors
of IGCA determines in its good faith judgment to be more favorable to the IGCA
shareholders than the Merger) could create a reasonable possibility of a breach
of its fiduciary duties to IGCA's shareholders under applicable law.
nMortgage may terminate the Merger Agreement if (a) IGCA has breached in
any material respect any of its representations, warranties, covenants or other
agreements contained in the Merger Agreement, which breach or failure to perform
is incapable of being cured or has not been cured within 20 days after the
giving of notice to IGCA of such breach; (b) the board of directors of IGCA or
any committee thereof has withdrawn or modified in a manner adverse to nMortgage
its approval or recommendation of the Merger, failed to reconfirm its
recommendation within 15 business days after a written request to do so,
approved or recommended any proposal or offer made by a third party for an
acquisition of IGCA (whether involving the sale of equity or assets other than
in connection with the Gaming Divestiture), or resolved to take any of the
foregoing actions. In addition, nMortgage may terminate the Merger Agreement in
the event that its board of directors determines in good faith that the failure
to terminate the Merger Agreement (and concurrently with or after such
termination, cause nMortgage to enter into any acquisition agreement or similar
agreement with respect to any bona fide offer or proposal for any business
combination, liquidation, or similar transaction involving nMortgage or FBMS, or
the acquisition of any significant equity interest in, or a substantial portion
of the assets of nMortgage or FBMS which the board of directors of nMortgage
determines in its good faith judgment to be more favorable to the nMortgage
stockholders than the Merger) could create a reasonable possibility of a breach
of its fiduciary duties to nMortgage's stockholders under applicable law.
In the event of the termination of the Merger Agreement by either IGCA or
nMortgage, the Merger Agreement shall become void and, except as provided in the
Merger Agreement, there shall be no liability on the part of either IGCA or
nMortgage or their respective directors, officers, employees, agents, legal or
financial advisors or other representatives. Notwithstanding the foregoing, no
such termination shall relieve either IGCA or nMortgage from any liability for
any breach of the Merger Agreement prior to termination. In the event that a
bona fide proposal by a third party for an acquisition (whether involving the
sale of equity or assets other than in connection with the Gaming Divestiture)
of either IGCA or nMortgage (including any offer or proposal related to FBMS) is
made known to IGCA or nMortgage or has been made directly to their respective
shareholder and stockholders generally or any person or entity has publicly
announced an intention (whether or not conditional) to make such a proposal and
such
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proposal or announced intention shall not have been withdrawn, and thereafter
the Agreement is terminated by the IGCA or nMortgage as permitted under the
Merger Agreement, then the recipient of such proposal shall promptly pay the
other party an amount equal all reasonable out-of-pocket charges and expenses
incurred by such other party in connection with the Merger Agreement in an
amount not to exceed $350,000.
SURVIVAL; INDEMNIFICATION
The respective representations, warranties, covenants and agreements of
IGCA and nMortgage contained in the Merger Agreement or in any certificates or
other documents to be delivered prior to or at the Closing shall survive the
execution and delivery of the Merger Agreement, notwithstanding any
investigation made or information obtained by the other party, but shall
terminate at the Effective Time, except as otherwise provided in the Merger
Agreement.
MISCELLANEOUS
The Merger Agreement may be not be amended, modified or supplemented except
in a writing executed by all of the parties to the Merger Agreement. The Merger
Agreement is binding upon and will inure to the benefit of the parties thereto
and their respective successors and permitted assigns, except that neither the
Merger Agreement nor any of the rights, interests or obligations thereunder
shall be assigned by any of the parties thereto prior to the Effective Time
without the prior written consent of the other parties thereto, provided that
Equitex may assign its rights and obligations the Merger Agreement to a wholly
owned subsidiary owns all of the outstanding capital stock of nMortgage owned by
Equitex on December 31, 1999.
Except as otherwise expressly provided for in the Merger Agreement, all
costs and expenses incurred in connection with the Merger Agreement and the
transactions contemplated thereby shall be paid by the party incurring such
costs or expenses. The Merger Agreement will be deemed to be made in, and in all
respects shall be interpreted, construed and governed by and in accordance with
the internal laws of, the State of Minnesota.
APPRAISAL RIGHTS
IGCA is governed under the laws of the State of Minnesota, and,
accordingly, is governed by the provisions of the Minnesota Business Corporation
Act (the "MBCA"). Pursuant to the relevant sections of the MBCA, the
shareholders of IGCA have the right to an appraisal of the value of their share
in connection with the Gaming Divestiture and the Merger.
Sections 302A.471 and 302A.473 of the MBCA entitle any IGCA shareholder who
objects to the Merger and who follows the procedures prescribed by Section
302A.473, in lieu of receiving the consideration proposed under the Gaming
Divestiture and the Merger, to receive cash equal to the "fair value" of such
shareholder's shares of IGCA common stock. Set forth below is a summary of the
procedures relating to the exercise of such dissenters' rights. This summary
does not purport to be a complete statement of dissenters' rights and is
qualified in its entirety by reference to Sections 302A.471 and 302A.473 of the
MBCA, which are reproduced in full as APPENDIX D attached to this Proxy
Statement and to any amendments to such provisions as may be adopted after the
date of this Proxy Statement.
ANY IGCA SHAREHOLDER CONTEMPLATING THE POSSIBILITY OF DISSENTING FROM THE
GAMING DIVESTITURE AND/OR THE MERGER SHOULD CAREFULLY REVIEW THE TEXT OF
APPENDIX D (PARTICULARLY THE SPECIFIED PROCEDURAL STEPS REQUIRED TO PERFECT THE
DISSENTERS' RIGHTS, WHICH ARE COMPLEX) AND SHOULD ALSO CONSULT SUCH
SHAREHOLDER'S LEGAL COUNSEL. SUCH RIGHTS WILL BE LOST IF THE PROCEDURAL
REQUIREMENTS OF SECTION 302A.473 OF THE MBCA ARE NOT FULLY AND PRECISELY
SATISFIED.
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The MBCA provides dissenters' rights for any IGCA shareholder who objects
to the Gaming Divestiture and/or the Merger who meets the requisite statutory
requirements contained in the MBCA. Under the MBCA, any IGCA shareholder who (i)
files with IGCA a written notice of his, her or its intent to demand the fair
value of such shareholder's IGCA common stock if the Gaming Divestiture and/or
the Merger is consummated and becomes effective, which notice is filed with IGCA
on or before the vote is taken at the Special Meeting and (ii) does not vote
such shares of IGCA common stock at the Special Meeting in favor of the
proposal(s) to approve the Gaming Divestiture or the Merger, as applicable,
shall be entitled, if the Gaming Divestiture and/or the Merger is approved and
effected, to receive a cash payment of the fair value of such shareholder's
shares of IGCA common stock upon compliance with the applicable statutory
procedural requirements. A failure by any IGCA shareholder to vote against the
proposal(s) to approve the Gaming Divestiture and/or the Merger will not in and
of itself constitute a waiver of the dissenters' rights of such shareholder
under the MBCA. In addition, an IGCA shareholder's vote against the proposal(s)
to approve the Gaming Divestiture and/or the Merger will not satisfy the notice
requirement referred to in clause (i) above.
Any written notice of an IGCA shareholder's intent to demand payment for
such shareholder's shares of IGCA common stock if the Gaming Divestiture and/or
Merger is consummated must be filed with IGCA at 4725 Aircenter Circle, Reno,
Nevada 89502, Attention: Edward G. Stevenson, prior to the vote on the Gaming
Divestiture and/or the Merger at the Special Meeting. A shareholder who votes
for the Gaming Divestiture and/or the Merger will have no dissenters' rights
with respect to such Proposal. A shareholder who does not satisfy each of the
requirements of Sections 302A.471 and 302A.473 of the MBCA is not entitled to
payment for such shareholder's shares of IGCA common stock under the dissenters'
rights provisions of the MBCA and will be bound by the terms of the Gaming
Divestiture and the Merger Agreement.
After the proposed Gaming Divestiture and Merger have been approved, IGCA
must send written notice to all shareholders who have given written notice of
their intent to demand the fair value of their shares of IGCA Common Stock and
who have not voted in favor of the Gaming Divestiture and/or the Merger as
described above. The notice will contain: (i) the address where the demand for
payment and certificates representing shares of IGCA common stock (each a
"Certificate") must be sent and the date by which they must be received, (ii)
any restrictions on transfer of uncertificated shares that will apply after the
demand for payment is received, (iii) a form to be used to certify the date on
which the shareholder, or the beneficial owner on whose behalf the shareholder
dissents, acquired the shares (or an interest in them) and to demand payment,
and (iv) a copy of the provisions of the MBCA set forth in Appendix D with a
brief description of the procedures to be followed under those provisions. An
IGCA shareholder who is sent a notice and who wishes to assert dissenters'
rights must demand payment and deposit his or her Certificate or Certificates
within 30 days after such notice is given by IGCA. Prior to the Effective Time,
an IGCA shareholder exercising dissenters' rights retains all other rights of an
IGCA shareholder. From and after the Effective Time of the Gaming Divestiture
and/or the Merger, as applicable, dissenting shareholders will no longer be
entitled to any rights of an IGCA shareholder, including, but not limited to,
the right to receive notice of meetings, to vote at any meetings or to receive
dividends, and will only be entitled to any rights to appraisal as provided by
the MBCA.
After the Effective Time of the Gaming Divestiture or the Merger, as
applicable, or upon receipt of a valid demand for payment, whichever is later,
IGCA must remit to each dissenting shareholder who complied with the
requirements of the MBCA the amount IGCA estimates to be the fair value of such
shareholder's shares of IGCA common stock, plus interest accrued from the
Effective Time of the Gaming Divestiture and/or the Merger, as applicable, to
the date of payment. The payment also must be accompanied by certain financial
data relating to IGCA, IGCA's estimate of the fair value of the shares and a
description of the method used to reach such estimate, and a copy of the
applicable provisions of the MBCA with a brief description of the procedures to
be followed in demanding supplemental payment. The dissenting shareholder may
decline the offer and demand payment for the fair value of the IGCA common
stock. Failure to make such demand on a timely basis entitles the dissenting
shareholder only to the amount offered. If IGCA fails to remit payment within 60
days of the deposit of the Certificates or the
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imposition of transfer restrictions on uncertificated shares, it shall return
all deposited Certificates and cancel all transfer restrictions; however, IGCA
may again give notice regarding the procedure to exercise dissenters' rights and
require deposit or restrict transfer at a later time. If a dissenting
shareholder believes that the amount remitted is less than the fair value of the
IGCA common stock plus interest, such dissenting shareholder may give written
notice to IGCA of his or her own estimate of the fair value of the shares, plus
interest, within 30 days after IGCA mails its remittance, and demand payment of
the difference.
If IGCA receives a demand from a dissenting shareholder to pay such
difference, it shall, within 60 days after receiving the demand, either pay to
the dissenting shareholder the amount demanded or agreed to by the dissenting
shareholder after discussion with IGCA or file in court a petition requesting
that the court determine the fair value of the IGCA common stock.
The court may appoint one or more appraisers to receive evidence and make
recommendations to the court on the amount of the fair value of the shares. The
court shall determine whether the dissenting shareholder has complied with the
requirements of Section 302A.473 of the MBCA and shall determine the fair value
of the shares, taking into account any and all factors the court finds relevant,
computed by any method or combination of methods that the court, in its
discretion, sees fit to use. The fair value of the shares as determined by the
court is binding on all dissenting shareholders. If the court determines that
the fair value of the shares is in excess of the amount, if any, remitted by
IGCA, then the court will enter a judgment for cash in favor of the dissenting
shareholders in an amount by which the value determined by the court, plus
interest, exceeds such amount previously remitted. A dissenting shareholder will
not be liable to IGCA if the amount, if any, remitted to such shareholder
exceeds the fair value of the shares, as determined by the court, plus interest.
Costs of the court proceeding shall be determined by the court and assessed
against IGCA, except that part or all of the costs may be assessed against any
dissenting shareholders whose actions in demanding supplemental payments are
found by the court to be arbitrary, vexatious or not in good faith.
If the court finds that IGCA did not substantially comply with the relevant
provisions of the MBCA, the court may assess the fees and expenses, if any, of
attorneys or experts as the court deems equitable against IGCA. Such fees and
expenses may also be assessed against any party in bringing the proceedings if
the court finds that such party has acted arbitrarily, vexatiously or not in
good faith, and may be awarded to a party injured by those actions. The court
may award, in its discretion, fees and expenses of an attorney for the
dissenting shareholders out of the amount awarded to such shareholders, if any.
A shareholder of record may assert dissenters rights as to fewer than all
of the shares registered in such shareholder's name only if he or she dissents
with respect to all shares beneficially owned by any one beneficial shareholder
and notifies IGCA in writing of the name and address of each person on whose
behalf he or she asserts dissenters' rights. The rights of such a partial
dissenting shareholder are determined as if the shares as to which he or she
dissents and his or her other shares were registered in the names of different
shareholders.
Under Subdivision 4 of Section 302A.471 of the MBCA, an IGCA shareholder
has no right, at law or in equity, to set aside the approval of the Gaming
Divestiture or the Merger Agreement or the consummation of either except if such
adoption or consummation was fraudulent with respect to such shareholder or
IGCA.
35
<PAGE> 37
SELECTED FINANCIAL DATA
IGCA
The consolidated balance sheets of IGCA as of December 31, 1999 and
December 31, 1998, and the consolidated statements of operations, cash flows and
shareholders' equity for the fiscal years ended December 31, 1999, December 31,
1998 and December 31, 1997, each of which is set forth below, have been derived
from the audited financial statements of IGCA. The consolidated balance sheet of
IGCA as of March 31, 2000, and the consolidated statements of operations and of
cash flows for the three-month periods ended March 31, 2000 and March 31, 1999,
each of which is set forth below, have been derived from the unaudited financial
statements of IGCA.
IGCA
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, MARCH 31,
1999 1998 2000
------------ ------------ ---------
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents................................ $ 140 $ 1,617 $ 412
Total Current Assets..................................... $6,318 $13,465 $10,212
------ ------- -------
Total Assets............................................. $8,058 $17,093 $11,722
====== ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Total current liabilities................................ $2,287 $ 1,365 $ 6,168
Notes Payable, less Current Portion...................... $3,131 $ 856 $ 2,917
------ ------- -------
Total liabilities........................................ $5,418 $ 2,221 $ 9,085
------ ------- -------
Total shareholders' equity............................... $2,640 $14,872 $ 2,637
====== ======= =======
</TABLE>
IGCA
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS ENDED
--------------------------- ------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31,
1999 1997 1997 2000 1999
------------ ------------ ------------ --------- ---------
<S> <C> <C> <C> <C> <C>
Net Sales......................... $ 2,897 $ 8,509 $10,292 $ 0 $ 825
Cost of Sales..................... $ 4,239 $ 7,134 $ 7,189 $ 0 $ 1,029
Selling, General and
Administrative Expenses......... $ 5,134 $ 5,819 $ 5,285 $ 0 $ 1,459
Interest Income................... $ (73) $ 106 $ 247 $ 0 $ 15
Loss From Operations.............. $(11,131) $(4,444) $(2,182) $ 0 $(1,648)
-------- ------- ------- ------ -------
NET LOSS.......................... $(11,204) $(4,338) $(1,935) $ (444) $(1,677)
======== ======= ======= ====== =======
Basic & Diluted Net Loss per
Share........................... $ (1.87) $ (0.63) $ (0.43) $(0.05) $ (0.22)
</TABLE>
36
<PAGE> 38
IGCA
CONSOLIDATED STATEMENTS OF CASH FLOW
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS ENDED
-------------------------------------------- ----------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31,
1999 1998 1997 2000 1999
------------ ------------ ------------ --------- ---------
<S> <C> <C> <C> <C> <C>
Net Operating Loss........... $(13,425) $(4,338) $(1,935) $(6,350) $(2,494)
Net cash used in operating
activities................. $ (5,123) $(2,106) $(7,516) $ 434 $ (942)
Net cash provided by
investing activities....... $ (38) $ (92) $ 555 $ 0 $ (271)
Net cash provided by
financing activities....... $ 3,684 $ 3,297 $ 4,486 $ (162) $ (157)
-------- ------- ------- ------- -------
INCREASE (DECREASE) IN CASH &
CASH EQUIVALENTS........... $ (1,477) $ 1,099 $(2,475) $ (272) $(1,370)
======== ======= ======= ======= =======
Cash & Cash Equivalents,
beginning of period........ $ 1,617 $ 518 $ 2,993 $ 140 $ 1,617
Cash & Cash Equivalents, end
of period.................. $ 140 $ 1,617 $ 518 $ 412 247
</TABLE>
37
<PAGE> 39
IGCA
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
GAIN/LOSS
CONVERTIBLE ON
COMMON STOCK PREFERRED STOCK ADDITIONAL AVAILABLE
---------------- ---------------- PAID-IN ACCUMULATED FOR-SALE
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT SECURITIES TOTAL
------ ------ ------ ------ ---------- ----------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE 12/31/96............. 6,477 $ 65 -- $ -- $24,951 $ (9,559) (7) $ 15,450
====== ==== ===== ====== ======= ======== == ========
Series A preferred stock
issued..................... -- -- 4 3,122 622 -- -- 3,744
Preferred stock accretion
adjustment................. -- -- -- 878 -- (878) -- 0
Series A preferred stock
conversion to common
stock...................... 1,055 10 (4) (4,000) 3,990 -- -- 0
Preferred stock dividends
paid....................... 3 -- -- -- 12 (76) -- (64)
Unrealized gain on available
for-sale securities........ -- -- -- -- -- -- 7 7
Net loss..................... -- -- -- -- -- (1,935) -- (1,935)
------ ---- ----- ------ ------- -------- -- --------
BALANCE 12/31/97............. 7,535 $ 75 -- $ -- $29,575 $(12,448) -- $ 17,202
====== ==== ===== ====== ======= ======== == ========
Series B Preferred Stock
issued..................... -- -- 3,000 -- 2,804 -- -- 2,804
Preferred stock accretion
adjustment................. -- -- -- -- 297 (297) -- --
Preferred Stock dividends
paid....................... -- -- -- -- -- (76) -- (76)
Net Loss..................... -- -- -- -- -- (5,058) -- (5,058)
------ ---- ----- ------ ------- -------- -- --------
BALANCE 12/31/98............. 7,535 $ 75 3,000 $ -- $32,676 $(17,879) -- $ 14,872
====== ==== ===== ====== ======= ======== == ========
Series C preferred stock
issued..................... -- -- 1 -- 1,291 -- -- 1,291
Series D preferred stock
issued..................... -- -- 3 -- 2,389 -- -- 2,389
Series B preferred stock
conversions to common
stock...................... 1,410 14 (2) -- (14) -- -- 0
Series C preferred stock
conversions to common
stock...................... 388 4 -- -- (4) -- -- 0
Series D preferred stock
conversions to common
stock...................... 674 7 (1) -- (7) -- -- 0
Series B preferred stock
redemption................. -- -- (1) -- (1,100) -- -- (1,100)
Preferred stock accretion
adjustments................ -- -- -- -- 547 (547) -- 0
Preferred stock dividends.... 7 -- -- -- 9 (124) -- (115)
Repurchase of common stock... (1,100) (11) -- -- (1,302) -- -- (1,313)
Stock options exercised...... 38 1 -- -- 40 -- -- 41
Net loss..................... -- -- -- -- -- (13,425) -- (13,425)
------ ---- ----- ------ ------- -------- -- --------
BALANCE 12/31/1999........... 8,952 $ 90 3 $ -- $34,525 $(31,975) -- $ 2,640
====== ==== ===== ====== ======= ======== == ========
</TABLE>
38
<PAGE> 40
FBMS
The consolidated balance sheets of FBMS as of December 31, 1998 and
December 31, 1997, and the consolidated statements of operations, cash flows and
shareholders' equity for the fiscal years ended December 31, 1998 and December
31, 1997, each of which is set forth below along with the notes thereto, have
been derived from the audited consolidated financial statements of FBMS.
FIRST BANKERS MORTGAGE SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Cash........................................................ $ 403,294 $ 279,243
Mortgage loans held for sale................................ 60,407,432 59,711,231
Receivables due on mortgages sold........................... 1,011,868 1,232,150
Advances and other receivables.............................. 1,723,460 1,232,519
Prepaid expenses and deferred charges....................... 154,777 136,658
Deferred income taxes (Note 4).............................. 25,628 10,000
Property and equipment, net (Note 1)........................ 922,389 911,589
Related party advances (Note 6)............................. 0 329,000
----------- -----------
$64,648,848 $63,842,390
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
LIABILITIES
Warehouse loans and other notes payable (Note 2)............ $54,616,448 $55,331,758
Accounts payable and accrued expenses....................... 5,011,976 4,680,841
Dividends payable........................................... 45,535 29,732
Customer deposits........................................... 1,084,493 395,902
Federal and state tax liability (Note 4)
Current................................................... 283,725 20,000
Deferred.................................................. 0 232,000
----------- -----------
TOTAL LIABILITIES........................................... 61,042,177 60,690,233
=========== ===========
COMMITMENTS (NOTES 5 AND 8)
STOCKHOLDERS' EQUITY (NOTE 3)
Preferred stock, 12% cumulative, callable at par value, $10
par; 1,000,000 shares outstanding, 208,950 shares issued
and outstanding........................................... 2,089,500 1,752,000
Common stock, $.01 par; 10,000,000 shares authorized,
3,000,000 shares issued and outstanding................... 30,000 2,000
Additional paid-in capital.................................. 1,351,687 1,379,687
Retained earnings........................................... 135,484 18,470
TOTAL STOCKHOLDERS' EQUITY.................................. 3,606,671 3,152,157
----------- -----------
$64,648,848 $63,842,390
=========== ===========
</TABLE>
39
<PAGE> 41
FIRST BANKERS MORTGAGE SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
OPERATING REVENUES
Loan originations........................................... $ 3,461,348 $ 1,643,357
Sales of mortgage servicing rights.......................... 23,449,275 12,761,948
Interest from mortgage operations........................... 5,061,693 2,717,380
Commercial income........................................... 223,464 0
Appraisal services.......................................... 82,985 64,393
----------- -----------
TOTAL OPERATING REVENUES.................................... 32,278,765 17,187,078
=========== ===========
OPERATING EXPENSES
Personnel, including officers' salaries and employee
benefits.................................................. 6,743,825 5,205,653
Sales commissions and fees.................................. 15,539,598 7,134,896
General and administrative.................................. 4,961,827 1,906,198
Interest.................................................... 4,434,843 2,578,007
----------- -----------
TOTAL OPERATING EXPENSES.................................... 31,680,093 16,824,754
Income from operations...................................... 598,672 362,324
Provisions for income taxes (Note 4)........................ 173,465 165,000
----------- -----------
NET INCOME.................................................. $ 425,207 $ 197,324
=========== ===========
</TABLE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
--------------------- -------------------- PAID-IN RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS TOTAL
------- ---------- --------- ------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1996... 56,500 $ 565,000 200,000 $2,000 $1,379,687 $106,476 $2,053,163
Capital Contributions.......... 118,700 1,187,000 -- -- -- -- 1,187,000
Dividends declared............. -- -- -- -- -- (285,330) (285,330)
Net income for the year........ -- -- -- -- -- 197,324 197,324
------- ---------- --------- ------- ---------- -------- ----------
BALANCE AT DECEMBER 31, 1997... 175,200 $1,752,000 200,000 $2,000 $1,379,687 $18,470 $3,152,157
======= ========== ========= ======= ========== ======== ==========
Capital Contributions.......... 33,750 337,500 2,800,000 $28,000 (28,000) -- 337,500
Dividends declared............. -- -- -- -- -- (308,193) (308,193)
Net income for the year........ -- -- -- -- -- 425,207 425,207
------- ---------- --------- ------- ---------- -------- ----------
BALANCE AT DECEMBER 31, 1998... 208,950 $2,089,500 3,000,000 $30,000 $1,351,687 $135,484 $3,606,671
======= ========== ========= ======= ========== ======== ==========
</TABLE>
40
<PAGE> 42
FIRST BANKERS MORTGAGE SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1998 1997
---------- ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income.................................................. $ 425,207 $ 197,324
Adjustments to reconcile net income to net cash provided
(used) by operating activities:
Depreciation and amortization.......................... 324,533 164,518
Deferred income taxes.................................. (246,493) 296,000
Mortgage loan reserve.................................. 94,217 249,073
Decrease (Increase) in:
Mortgage loans held for sale......................... (854,418) (37,887,521)
Advances and other receivables....................... (490,775) 190,868
Prepaid expenses and deferred charges................ (18,285) (6,460)
Receivables due on mortgages sold.................... 220,282 (547,017)
Related party advances............................... 329,000 (329,000)
Increase in:
Accounts payable and accrued expenses................ 334,436 1,769,533
Customers deposits................................... 688,591 111,779
Income tax liability................................. 263,725 11,000
Net cash provided (used) by operating activities............ 1,070,020 (35,779,903)
INVESTING ACTIVITIES
Expenditures for property and equipment................... (239,691) (133,841)
Net cash used by investing activities....................... (239,691) (133,841)
FINANCING ACTIVITIES
Borrowings under credit lines, net........................ (751,388) 35,075,689
Capital contributions..................................... 337,500 1,187,000
Capital distributions -- cash............................. (292,390) (255,598)
Net cash (used) provided by financing activities............ (706,278) 36,007,091
Net increase in cash........................................ 124,051 93,347
Cash beginning of period.................................... 279,243 185,896
Cash, end of period......................................... $ 403,294 $ 279,243
Interest paid............................................... $2,034,000 $ 2,025,000
Income taxes paid........................................... 21,949 18,536
NON CASH INVESTING AND FINANCING ACTIVITIES
Capital lease obligations incurred For use of equipment... $ 61,186 $ 411,188
</TABLE>
41
<PAGE> 43
FIRST BANKERS MORTGAGE SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. PROPERTY AND EQUIPMENT. Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1997
--------- ---------
<S> <C> <C>
Furniture and fixtures............................... $ 162,568 $ 116,090
Office equipment..................................... 235,770 241,838
Leasehold improvements............................... 103,915 87,992
Computer software.................................... 58,973 39,402
Computer equipment................................... 310,484 155,018
Telecommunication equipment.......................... 85,646 77,322
957,356 717,662
Accumulated depreciation............................. (476,815) (297,759)
--------- ---------
$ 480,541 $ 419,903
========= =========
</TABLE>
CAPITALIZED LEASES
In 1997, the Company entered into a capital lease to purchase computer
equipment for its various branch locations. The term of the agreement does not
exceed a four year period and the asset is capitalized under the provisions of
Financial Accounting standards No. 13.
Property acquired under capital leases consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1997
--------- ---------
<S> <C> <C>
Equipment............................................ $ 662,297 $ 601,111
Accumulated amortization............................. (220,449) (109,425)
--------- ---------
$ 441,848 $ 491,686
========= =========
</TABLE>
The Company also has various equipment acquired under capital lease
agreements which require payments of principal and interest. There were no
capitalized interest costs related to these transactions for either 1998 or
1997. The total lease payments for 1998 and 1997 respectively were $203,356 and
$98,181 net of interest.
The future minimum lease payments under these financing agreements are as
follows:
<TABLE>
<CAPTION>
CAPITAL LEASES
- --------------
<S> <C>
1999........................................................ $204,578
2000........................................................ 122,205
2001........................................................ 75,855
2002........................................................ 39,791
Total minimum lease payment............................ 442,429
Less: imputed interest...................................... 52,222
--------
Present value of net minimum lease payments................. $390,207
========
</TABLE>
42
<PAGE> 44
2. BORROWINGS. BORROWINGS CONSIST OF THE FOLLOWING:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1997
---- ----
<S> <C> <C>
Warehouse credit line, $25,000,000 limit at December 31,
1998 bearing interest at the federal funds rate plus
1.625% (8.750% December 31, 1998), matures in February 28,
1999 requires certain equity and leverage ratios,
collateralized by first mortgage loans with a carrying
value of $23,219,229 and $29,119,936 for 1998 and 1997
respectively and is guaranteed by the Company's
stockholders.............................................. $21,834,671 $27,383,526
Loan financing credit line, $30,000,000 limit at December
31, 1997, bearing interest at the federal funds rate
(7.2168 at December 31, 1997), due on demand,
collateralized by first mortgage loans with a carrying
value of $27,846,089. This loan was converted in 1998 to a
repo loan................................................. -- $27,563,736
Warehouse credit line, $30,000,000 limit at December 31,
1998. Bearing interest at the Cooper River Funding rate
plus 1.9625% (7.15% December 31, 1998) matures in February
1999 requires certain equity and leverage ratios,
collateralized by first mortgage loans with a carrying
value of $27,846,089 for 1998 and is guaranteed by the
Company's stockholders.................................... 26,310,079 --
Working capital credit facility at December 31, 1998,
interest payable monthly at an annual rate equal to the
lender's prime rate plus 1% uncollateralized line of
credit matures August 1999................................ 477,000 180,000
Warehouse credit line, $7,5000,000 limit at December 31,
1998, bearing interest at the federal funds rate plus .50%
requires certain equity and leverage ratios,
collateralized by first mortgage loans with a carrying
value of $5,722,509 and is guaranteed by the Company's
stockholders.............................................. 5,398,593 --
Other notes payable at December 31, 1998, consists of bank
debt and notes with private investors, bearing interest
rates of 10.25% to 15.00%, with interest payable as agreed
upon...................................................... 596,105 204,496
----------- -----------
$54,616,448 $55,331,758
=========== ===========
</TABLE>
3. STOCKHOLDERS' EQUITY. The Company is required to maintain certain
regulatory net worth requirements. These requirements prohibit the Company from
paying dividends or other distributions which would reduce its regulatory net
worth below standards set by certain regulatory agencies. The Company's net
worth at December 31, 1998 and 1997 was in excess of the regulatory requirements
of $1,469,502 and $1,260,345, respectively.
Additionally, the company in accordance with requirements under a warehouse
loan agreement is required to maintain a minimum adjusted tangible net worth of
$2,500,000.
4. INCOME TAXES. The Company's provision for income taxes was as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Current................................................. $419,958 $(131,000)
Deferred................................................ (246,493) 296,000
-------- ---------
Total Provision for Income Taxes................... $173,465 $ 165,000
======== =========
</TABLE>
The deferred tax consequences of temporary differences in reporting items
for financial statement and income tax purposes are recognized if appropriate.
Realization of the future tax benefit of net operating loss carryforwards is
dependent on the Company's ability to generate taxable income within the net
operating loss carryforward period. Management has considered this in reaching
its conclusion that no valuation allowance is necessary for financial reporting
purposes.
43
<PAGE> 45
The income tax effect of temporary differences comprising the deferred tax
assets (liabilities) on the accompanying balance sheets is a result of the
following:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Deferred tax assets:
Federal tax operating
Loss carryforwards..................................... $25,628 $ 10,000
Other.................................................... -- --
Deferred tax liabilities:
Federal................................................ -- (152,000)
State.................................................. -- (80,000)
Valuation allowance...................................... -- --
------- ---------
Net deferred tax asset (liability).................. $25,628 $(232,000)
======= =========
</TABLE>
A reconciliation between the statutory federal income tax rate (34%) and
the effective rate of income tax expense for each of the two years during the
period ended December 31, 1998 and 1997 follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Statutory federal income tax rate........................... 34% 34%
Increase/(decrease) in taxes resulting from:
State tax average rates..................................... 9 9
Utilization of tax benefit (costs).......................... (14.0) (2.5)
Effective rate.............................................. 29.0% 45.5%
</TABLE>
5. COMMITMENTS. The Company leases one of its facilities under the terms of an
operating lease from an entity in which the principal stockholders of the
Company are partners. The lease contains an escalatory clause which is tied to
the consumer price index. Additionally, the Company leases office facilities and
equipment under operating leases with unrelated parties. Rent expense for 1998
and 1997 aggregated $425,000 and $390,490, respectively including $155,150 and
$121,430 on the related party lease.
The total future minimum lease commitments pursuant to these leases are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
1999........................................................ $395,631
2000........................................................ 212,069
2001........................................................ 71,998
</TABLE>
Minimum lease commitments terminate in year 2001.
6. RELATED PARTY TRANSACTIONS. Amounts due from an officer reflected as
related party advances were repaid during 1998 by the issuance of additional
compensation to the officer.
7. FAIR VALUE OF FINANCIAL INSTRUMENTS. Statement of Financial Accounting
Standards No. 107, "Disclosure About Fair Value of Financial Instruments" ("SFAS
No. 107"), requires that the Company disclose estimated fair value for its
financial instruments. Fair value estimates, methods and assumptions are set
forth below for the Company's financial instruments:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
-------------------------- --------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ----- -------- -----
<S> <C> <C> <C> <C>
Assets:
Mortgagee loans held for Sale......... $60,407,432 $61,257,892 $59,711,231 $60,539,512
Liabilities:
Warehouse Loans and Other Payables.... $54,616,448 $54,616,448 $55,331,758 $55,331,758
</TABLE>
44
<PAGE> 46
The fair value estimates are made at a distinct point in time based on
relevant market information and information about the financial instruments.
Because the Company's financial instruments are not quoted on a specific market,
fair value estimates are based on judgments regarding future expected loss
experience, current economic conditions, risk characteristics of various
financial instruments and other factors. These estimates are subjective in
nature and involve uncertainties and matters of significant judgment.
NMORTGAGE
The consolidated balance sheet of nMortgage as of December 31, 1999, and
the consolidated statements of operations, cash flows and shareholders' equity
for the period form August 23, 1999 (date of inception) through December 31,
1999, each of which is set forth below along with the notes thereto, have been
derived from the audited financial statements of nMortgage.
45
<PAGE> 47
NMORTGAGE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999
<TABLE>
<S> <C>
ASSETS
Cash and cash equivalents................................. $ 426,248
Mortgage loans held for sale, net (Note 3)................ 14,787,080
Mortgage loans, net (Note 3).............................. 317,400
Note receivable, related party (Note 3)................... 61,000
Furniture, fixtures and equipment, net (Note 4)........... 851,087
Foreclosed assets, net.................................... 299,400
Intangible and other assets, net (Note 5)................. 18,384,805
-----------
$35,127,020
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Warehouse loans (Note 6)............................... $18,582,351
Notes payable (Note 7):
Related parties........................................ 692,000
Other.................................................. 1,450,160
Accounts payable....................................... 1,311,422
Accrued liabilities.................................... 2,733,460
Obligations under capital leases (Note 8).............. 398,391
-----------
Total liabilities...................................... 25,167,784
-----------
Minority interest........................................... 2,507,000
-----------
Commitments and contingencies (Notes 8, 10, 11 and 13)
STOCKHOLDERS' EQUITY (Note 11):
Preferred stock:
Series A; 5%; par value $.01; 7,500,000 shares
authorized; 3,505,000 shares issued and outstanding
(liquidation preference $3,505,000)................... 35,050
Series B; par value $.01; 500,000 shares authorized;
40,000 shares issued and outstanding.................. 400
Series C; par value $.01; 1,500,000 shares authorized,
none issued and outstanding Series D; par value $10;
500,000 shares authorized, 460,656 shares issued and
outstanding........................................... 4,606,560
Common stock; par value $.01; 75,000,000 shares
authorized; 12,000,000 shares issued and outstanding... 120,000
Additional paid-in capital................................ 6,341,620
Accumulated deficit....................................... (3,651,394)
-----------
Total stockholders' equity............................. 7,452,236
-----------
$35,127,020
===========
</TABLE>
See notes to consolidated financial statements.
46
<PAGE> 48
NMORTGAGE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
AUGUST 23, 1999 (DATE OF INCEPTION) THROUGH DECEMBER 31, 1999
<TABLE>
<S> <C>
Revenues:
Loan production and processing revenues................... $ 352,811
Secondary marketing revenues, net......................... 395,034
Interest income........................................... 799,909
-----------
Total revenue..................................... 1,547,754
-----------
Expenses:
Loan production and processing............................ 728,501
Compensation and employee benefits........................ 1,879,501
General and administrative................................ 1,098,929
Depreciation and amortization............................. 737,629
Interest expense (Note 7):
Related parties........................................ 10,357
Other.................................................. 744,231
-----------
Total expenses.................................... 5,199,148
-----------
Net loss.................................................... $(3,651,394)
===========
</TABLE>
See notes to consolidated financial statements.
47
<PAGE> 49
NMORTGAGE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
AUGUST 23, 1999 (DATE OF INCEPTION) THROUGH DECEMBER 31, 1999
<TABLE>
<CAPTION>
SERIES A THROUGH D
PREFERRED STOCK COMMON STOCK ADDITIONAL
---------------------- --------------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
--------- ---------- ---------- -------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of 12,000,000
shares of common stock in
exchange for investment in
First Bankers Mortgage
Services, Inc. (FBMS)
stock..................... 12,000,000 $120,000 $2,411,000 $ 2,531,000
Issuance of 3,505,000 shares
of Series A preferred
stock for cash............ 3,505,000 $ 35,050 3,469,950 3,505,000
Issuance of 40,000 shares of
Series B preferred stock
to parent in satisfaction
of accounts payable....... 40,000 400 460,670 461,070
Issuance of 460,656 shares
of Series D preferred
stock in exchange for FBMS
preferred stock........... 460,656 4,606,560 4,606,560
Net loss.................... $(3,651,394) (3,651,394)
----------- -----------
Balances at December 31,
1999...................... 4,005,656 $4,642,010 12,000,000 $120,000 $6,341,620 $(3,651,394) $ 7,452,236
========= ========== ========== ======== ========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
48
<PAGE> 50
NMORTGAGE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
AUGUST 23, 1999 (DATE OF INCEPTION) THROUGH
DECEMBER 31, 1999
<TABLE>
<S> <C>
Cash flows used in operating activities:
Net loss.................................................... $ (3,651,394)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................. 737,629
Changes in assets and liabilities, net of business
acquisition:
Decrease in mortgage loans held for sale, net........... 3,545,354
Decrease in other assets................................ 277,797
Increase in accounts payable............................ 61,556
Decrease in accrued liabilities......................... (2,346,027)
------------
Net cash used in operating activities....................... (1,375,085)
------------
Cash flows from investing activities:
Cash acquired in business acquisition..................... 780,000
Capital expenditures...................................... (84,710)
Issuance of note receivable, related party................ (61,000)
------------
Net cash provided by investing activities................... 634,290
------------
Cash flows from financing activities:
Decrease in warehouse loans............................... (2,825,439)
Preferred stock issued for cash........................... 3,505,000
Proceeds from notes payable............................... 537,567
Payments of capital lease obligations..................... (50,085)
------------
Net cash provided by financing activities................... 1,167,043
------------
Increase in cash and cash equivalents....................... 426,248
Cash and cash equivalents, beginning........................
Cash and cash equivalents, ending........................... $ 426,248
============
Supplemental disclosure of cash flow information:
Cash paid for interest.................................... $ 925,400
============
Supplemental disclosure of non-cash investing and financing
activities:
Series B preferred stock issued in satisfaction of accounts
payable................................................... $ 461,070
============
Series D preferred stock issued to parent in exchange for
FBMS preferred stock...................................... $ 4,606,560
============
Equipment acquired by capital lease......................... $ 49,007
============
Acquisition of FBMS, net of cash acquired:
Fair value of assets acquired............................. $ 12,392,600
Intangible assets......................................... 18,525,000
Liabilities assumed....................................... (29,166,600)
Fair value of common stock issued......................... (2,531,000)
------------
Cash acquired............................................. $ (780,000)
============
</TABLE>
See notes to consolidated financial statements.
49
<PAGE> 51
NMORTGAGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 23, 1999 (DATE OF INCEPTION) THROUGH
DECEMBER 31, 1999
1. ORGANIZATION, BASIS OF PRESENTATION, AND MANAGEMENT'S PLANS:
ORGANIZATION AND BASIS OF PRESENTATION:
On August 23, 1999, Equitex, Inc., a publicly traded Delaware corporation
("Equitex"), through its subsidiary FBMS Acquisition Corp., entered into an
Agreement and Plan of Reorganization (the "Acquisition Agreement") with First
Bankers Mortgage Services, Inc., a Florida mortgage banking company ("FBMS"), to
acquire all of the outstanding common stock of FBMS in exchange for 250 shares
of Equitex preferred stock valued at $2,531,000. The acquisition was accounted
for as a purchase, and the total purchase price was allocated to the assets and
liabilities acquired based on their estimated fair values, including goodwill of
$18,525,000.
FBMS was incorporated in 1990 and is engaged in the origination and sale of
residential mortgages. In addition to conventional mortgage products, FBMS also
provides FHA and VA assisted mortgages under the United States HUD lending
program. Mortgages are originated through retail branches and wholesale lending
centers located principally in Florida.
In accordance with the terms of the Acquisition Agreement, FBMS Acquisition
Corp. was merged with and into FBMS subsequent to the acquisition. Equitex then
formed nMortgage, Inc., a Delaware corporation ("nMortgage"), as a subsidiary
holding company of FBMS, and transferred its common shares of FBMS to nMortgage
in exchange for 12,000,000 shares of nMortgage common stock. Effective December
31, 1999, nMortgage issued 460,656 shares of Series D preferred stock to Equitex
to acquire 460,656 shares of FBMS preferred stock (Note 11). The FBMS preferred
stock was originally issued to Equitex prior to the formation of nMortgage for
cash of $1,856,560 and in satisfaction of notes payable and related accrued
interest of $2,750,000.
The accompanying consolidated financial statements include the accounts of
nMortgage, FBMS, and FBMS' wholly-owned subsidiary United Appraisal Services,
Inc., a Florida corporation which provided appraisal services through September
1999 (collectively referred to as the "Company"). The results of operations of
FBMS and its subsidiary are included in the Company's consolidated statement of
operations from the date of the FBMS acquisition, August 23, 1999. Minority
interest at December 31, 1999, represents preferred stock of FBMS (Note 10). All
material intercompany transactions and balances have been eliminated in
consolidation.
MANAGEMENT'S PLANS:
From August 23, 1999, through December 31, 1999, the Company reported a net
loss of $3,651,394. In addition, FBMS is not in compliance with certain
regulatory capital requirements administered by banking agencies in certain
states in which FBMS is licensed to do business, which subjects FBMS to
potential mandatory and discretionary actions by regulators that, if undertaken,
could have a direct material effect on the Company's consolidated financial
position, results of operations, and/or cash flows.
The Company has developed plans and strategies to address these factors.
The Company has developed a business plan for 2000 and beyond, which includes
developing and introducing Internet mortgage technologies which are expected to
increase profitability. The Company's plans also include significantly altering
mortgage closing procedures, which are expected to reduce the Company's exposure
to certain economic risks. In addition, the Company has incorporated various
changes in its management structure, which the Company believes will improve and
strengthen operations.
In connection with these plans and strategies, the Company also intends to
continue negotiating proposed business transactions (Note 13) and obtaining
additional sources of equity and/or debt financing.
50
<PAGE> 52
2. SIGNIFICANT ACCOUNTING POLICIES:
USE OF ACCOUNTING ESTIMATES IN FINANCIAL STATEMENT PREPARATION:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates, and it is
reasonably possible that significant changes could occur in the near term.
CASH AND CASH EQUIVALENTS:
For purposes of the consolidated statement of cash flows, the Company
considers all highly liquid investments with an original maturity date of three
months or less to be cash equivalents.
MORTGAGE LOANS HELD FOR SALE, NET:
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of cost or estimated fair value in the aggregate. Net
unrealized losses, if any, are recognized through a valuation allowance by
charges to income. Gain or loss on sales of loans is recognized at the time of
the sale. Origination fees and loan origination costs on such loans are
recognized when the mortgage is sold, which is normally within 30 days of the
origination of the loan. Interest earned on these mortgages is recognized as
income from the time the mortgage is closed to the time the mortgage is sold.
The Company generally sells the servicing rights on mortgages. The Company
has adopted the provisions of Statement of Financial Accounting Standards
("SFAS") No. 122, Accounting for Mortgage Servicing Rights, and accordingly
capitalizes the fair value (quoted market price) of retained mortgage servicing
rights on loans sold. Capitalized mortgage servicing rights on such loans are
amortized in proportion to and over the period of estimated net servicing
income. The carrying amount of capitalized mortgage servicing rights is
evaluated for impairment based upon quoted market prices of similar loans. At
December 31, 1999, the Company has no retained mortgage servicing rights.
MORTGAGE LOANS:
The Company periodically grants mortgage loans to customers. Loans that
management has the intent and ability to hold for the foreseeable future or
until maturity or pay-off generally are reported at their outstanding unpaid
principal balances adjusted for charge-offs, the allowance for loan losses, and
any deferred fees or costs on originated loans. Interest income is accrued on
the unpaid principal balance. Loan origination fees, net of certain direct
origination costs, are deferred and recognized as an adjustment to the related
loan yield using the interest method.
The accrual of interest on mortgage loans is discontinued at the time the
loan is 90 days delinquent unless the credit is well-secured and in process of
collection. Loans are placed on non-accrual or charged-off status at an earlier
date if collection of principal or interest is considered doubtful. All interest
accrued but not collected for loans that are placed on non-accrual or
charged-off status is reversed against interest income. The interest on these
loans is accounted for on the cash-basis or cost-recovery method, until
qualifying for return to accrual. Loans are returned to accrual status when all
the principal and interest amounts contractually due are brought current and
future payments are reasonably assured.
ALLOWANCE FOR LOAN LOSSES:
The allowance for loan losses is evaluated on a regular basis by management
and is based upon management's periodic review of the collectibility of the
loans in light of historical experience, the nature and volume of the loan
portfolio, adverse situations that may affect the borrower's ability to repay,
estimated value of any underlying collateral and prevailing economic conditions.
This evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information
51
<PAGE> 53
becomes available. Loan losses are charged against the allowance when management
believes the uncollectibility of a loan balance is confirmed. Subsequent
recoveries, if any, are credited to the allowance.
A loan is considered impaired when, based on current information and
events, it is probable that the Company will be unable to collect the scheduled
payments of principal or interest when due according to the contractual terms of
the loan agreement. Factors considered by management in determining impairment
include payment status, collateral value, and the probability of collecting
scheduled principal and interest payments when due. Loans that experience
insignificant payment delays and payment shortfalls generally are not classified
as impaired. Management determines the significance of payment delays and
payment shortfalls on a case-by-case basis, taking into consideration all of the
circumstances surrounding the loan and the borrower, including the length of the
delay, the reasons for the delay, the borrower's prior payment record, and the
amount of the shortfall in relation to the principal and interest owed.
Impairment is measured on a loan by loan basis by either the present value of
expected future cash flows discounted at the loan's effective interest rate, the
loan's obtainable market price, or the fair value of the collateral if the loan
is collateral dependent.
FURNITURE, FIXTURES, EQUIPMENT AND DEPRECIATION:
Furniture, fixtures and equipment are stated at cost and depreciation is
provided by the use of the straight-line method over the estimated useful lives
of the assets. The cost of leasehold improvements is depreciated over the
estimated useful lives of the assets or the length of the respective leases,
whichever period is shorter. The estimated useful lives of furniture, fixtures
and equipment are as follows:
<TABLE>
<S> <C>
Office equipment and furniture.............................. 3 to 7 years
Computer hardware and software.............................. 3 to 5 years
Leasehold improvements...................................... 7 years
</TABLE>
IMPAIRMENT OF LONG-LIVED ASSETS:
The Company reviews long-lived assets and goodwill for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Based on
management's review, the Company does not believe that any impairments have
occurred on long-lived assets during the period ended December 31, 1999.
FORECLOSED ASSETS:
Assets acquired through, or in lieu of, loan foreclosure are held for sale
and are initially recorded at fair value at the date of foreclosure,
establishing a new cost basis. Subsequent to foreclosure, valuations are
periodically performed by management and the assets are carried at the lower of
carrying amount or fair value less cost to sell. Revenues and expenses from
operations and changes in the valuation allowance are included in general and
administrative expense. Foreclosed assets of $299,400 at December 31, 1999, are
presented net of an allowance for losses of $198,000.
RESTRICTED CASH:
Restricted cash represents cash pledged as collateral on a warehouse loan
held by a third-party financial institution (Notes 5 and 6).
COMPREHENSIVE INCOME:
SFAS No. 130, Reporting Comprehensive Income, establishes requirements for
disclosure of comprehensive income which includes certain items previously not
included in the statement of operations,
52
<PAGE> 54
including unrealized gains and losses on investments, among others. During the
period ended December 31, 1999, the Company had no items of comprehensive
income.
STOCK-BASED COMPENSATION:
SFAS No. 123, Accounting for Stock-Based Compensation, defines a fair-value
based method of accounting for stock-based employee compensation plans and
transactions in which an entity issues its equity instruments to acquire goods
or services from non-employees, and encourages but does not require companies to
record compensation cost for stock-based employee compensation plans at fair
value. The Company has chosen to continue to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB
No. 25") and related interpretations. Accordingly, compensation cost for stock
options is measured as the excess, if any, of the estimated fair value of the
Company's stock at the date of the grant over the amount an employee must pay to
acquire the stock.
RECENTLY ISSUED ACCOUNTING STANDARDS:
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. This statement is
effective for fiscal years beginning after June 15, 2000. Currently, the Company
does not have any derivative financial instruments and does not participate in
hedging activities. Therefore, management believes that SFAS No. 133 will not
have an impact on its consolidated financial position or results of operations.
RISKS AND UNCERTAINTIES:
During the period ended December 31, 1999, FBMS originated loans with
customers concentrated in the eastern United States, primarily in Florida,
Maryland, North Carolina, New Jersey and the District of Columbia. Loan
originations in these five areas collectively represented approximately 57% of
mortgage loan origination activity during the period ended December 31, 1999.
In the normal course of business, companies in the mortgage banking
industry encounter certain economic and regulatory risks. Economic risks include
interest rate risk, credit risk, and market risk. The Company is subject to
interest rate risk to the extent that in a rising interest rate environment, the
Company will generally experience a decrease in loan production, which may
negatively impact the Company's operations. Credit risk is the risk of default,
primarily in the Company's mortgage loans that result from the mortgagors'
inability or unwillingness to make contractually required payments. Market risk
reflects changes in the value of mortgage loans available for sale and in
commitments to originate loans.
At December 31, 1999, one warehouse facility accounted for 71% of the
Company's outstanding borrowings (Note 6). Loss of this credit facility in the
near term could severely impact the Company's ability to fund mortgage products.
3. MORTGAGE LOANS AND RELATED PARTY NOTE RECEIVABLE:
The Company's inventory of mortgage loans held for sale consists primarily
of first-trust deed mortgages on residential properties located throughout the
United States. At December 31, 1999, the Company has mortgage loans held for
sale of $14,787,080, which is net of an allowance for loan losses of $1,386,000,
and which are pledged as collateral on warehouse loans at December 31, 1999
(Note 6). In addition, mortgage loans of $317,400 at December 31, 1999, are net
of an allowance for loan losses of $57,100.
At December 31, 1999, the Company also has a $61,000 note receivable from
the president of FBMS. The note is unsecured, due on demand, and bears interest
at 10% per annum.
53
<PAGE> 55
4. FURNITURE, FIXTURES, AND EQUIPMENT:
Furniture, fixtures and equipment consist of the following at December 31,
1999:
<TABLE>
<S> <C>
Office equipment and furniture.............................. $ 732,249
Computer hardware and software.............................. 225,476
Leasehold improvements...................................... 13,491
---------
971,216
Less accumulated depreciation............................. (120,129)
---------
$ 851,087
=========
</TABLE>
5. INTANGIBLE AND OTHER ASSETS:
Intangible and other assets consist of the following at December 31, 1999:
<TABLE>
<S> <C>
Goodwill.................................................... $18,525,106
Restricted cash............................................. 210,169
Other....................................................... 267,030
-----------
19,002,305
Less accumulated amortization............................. (617,500)
-----------
$18,384,805
===========
</TABLE>
Goodwill represents the cost of the Company's investment in subsidiaries in
excess of the net tangible assets acquired. Goodwill is being amortized using
the straight-line method over ten years.
6. WAREHOUSE LOANS:
Under the terms of the Company's warehouse agreements, all mortgage loans
held for sale are pledged as collateral for the warehouse notes payable. The
weighted average interest rate for total warehouse loans was 9.7%. Warehouse
loans consist of the following at December 31, 1999:
<TABLE>
<S> <C>
Warehouse line with a mortgage lending group; total line,
$15,000,000; advances under the line bear interest at the
Wall Street Journal published prime rate of U.S. money
center commercial banks plus 1.5% (9.5% at December 31,
1999); the Company is required to maintain a cash pledging
account; restricted cash at December 31, 1999 under the
pledge agreement was $210,169............................. $13,014,121
Warehouse line with a bank; total line, $15,000,000;
advances under the line bear interest at the one month
LIBOR rate plus 4% (10.48% at December 31, 1999); matures
May 2000; renewable annually at the lender's discretion... 1,627,393
Warehouse line with a bank; total line, $500,000; advances
under the line bear interest at the note rate of the
originated mortgage (7.25% to 8.37% at December 31, 1999);
matures March 2000........................................ 481,723
Warehouse line with a bank; total line, $400,000; advances
under the line bear interest at the note rate of the
originated mortgage (8.5% at December 31, 1999); matures
May 2000.................................................. 84,211
Warehouse line with a bank; total line $10,000,000; advances
under the line bear interest at the lender's prime rate
plus a margin determined by the lender's fee and cost
schedule in effect on the closing date of the advance
(9.75% at December 31, 1999); line may be terminated by
the bank at bank's discretion............................. 488,569
</TABLE>
54
<PAGE> 56
<TABLE>
<S> <C>
Warehouse line with a bank; total line $2,886,334; advances
under the line bear interest at the lender's prime rate
plus the applicable margin determined by the lender's fee
schedule (9.5% at December 31, 1999); due on demand....... 2,886,334
-----------
$18,582,351
===========
</TABLE>
7. NOTES PAYABLE:
At December 31, 1999, notes payable, consist of the following:
<TABLE>
<S> <C>
Related parties:
Note payable to officer; unsecured; interest at 12%; due on
demand.................................................... $ 50,000
Notes payable to parent and affiliate; unsecured; interest
at 8%; maturing September through December 2000........... 642,000
----------
692,000
----------
Other:
Note payable to bank; interest at 18%; unsecured; due on
demand.................................................... 477,000
Notes payable to individuals; interest rates ranging from 8%
to 18%; unsecured; notes mature at various dates through
August 2000; at December 31, 1999, $454,473 of the notes
payable were in default................................... 723,160
Note payable to bank; interest at 1.5% over bank's prime
rate (10% at December 31, 1999); loan is collateralized by
property owned by FBMS's president and related lease
assignments; interest due monthly; principal balance and
any unpaid accrued interest due March 2000................ 250,000
----------
1,450,160
----------
$2,142,160
==========
</TABLE>
8. COMMITMENTS AND CONTINGENCIES:
LEASES:
The Company leases its corporate facilities from a limited partnership in
which the FBMS president and vice president have partnership interests. This
non-cancelable operating lease terminates in September 2003. The Company also
leases production offices in certain states under non-cancelable operating
leases expiring through December 2002.
Future minimum lease payments under these operating leases are as follows:
<TABLE>
<CAPTION>
RELATED
PARTY OTHERS TOTAL
-------- -------- ----------
<S> <C> <C> <C>
2000.......................................... $155,150 $234,350 $ 389,500
2001.......................................... 155,150 189,750 344,900
2002.......................................... 155,150 97,550 252,700
2003.......................................... 103,400 103,400
-------- -------- ----------
$568,850 $521,650 $1,090,500
======== ======== ==========
</TABLE>
Rent expense for the period ended December 31, 1999 was $166,000, of which
$51,700 was to the related party.
In addition, the Company has entered into certain capital lease agreements.
The capitalized cost of all assets acquired under capital lease obligations is
$511,907, less accumulated depreciation of $22,850 at December 31, 1999, and is
included in furniture, fixtures and equipment in the accompanying financial
55
<PAGE> 57
statements. Depreciation expense incurred on these assets during the period
ended December 31, 1999 was $22,850.
The future minimum lease payments under capital leases and the net present
value of the future minimum lease payments are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
2000...................................................... $225,013
2001...................................................... 205,117
2002...................................................... 39,073
--------
Total lease payments........................................ 469,203
Amount representing interest................................ (70,812)
--------
Present value of future minimum lease payments.............. $398,391
========
</TABLE>
EMPLOYEE BENEFIT PLAN:
FBMS has a 401(k) defined contribution plan (the "Plan") which covers all
full-time employees of FBMS who have three months of service and are at least
twenty-one years of age. Contributions are matched at the discretion of FBMS, as
defined in the Plan. For the period ended December 31, 1999, FBMS' matching
contribution was $4,928.
LITIGATION:
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse impact either
individually or in the aggregate on consolidated results of operations,
financial position or cash flows of the Company.
MINIMUM REGULATORY CAPITAL REQUIREMENTS:
The Company is subject to various regulatory capital requirements
administered by various state banking agencies in certain states in which the
Company is licensed to do business. Failure to meet minimum capital requirements
can initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Company's consolidated financial position, results of operations, and/or cash
flows. At December 31, 1999, the Company is not in compliance with all
regulatory requirements in certain states.
INDEMNIFICATIONS AND MORTGAGE LOAN REPURCHASES:
Under the terms of the Company's various agreements with third party
investors who purchase mortgage loans from the Company in the secondary market,
the Company may be required to indemnify the investor for certain losses as a
result of the mortgage loan borrower's non-performance. Additionally, under
certain circumstances, the Company may be required to repurchase loans
previously sold. Management believes it has made adequate provision for these
items, which is included in the mortgage loans held for sale loan loss reserve.
9. INCOME TAXES:
The Company recognizes deferred tax liabilities and assets for the expected
future tax consequences of events that have been recognized in the financial
statements or tax returns. Under this method, deferred tax liabilities and
assets are determined based on the difference between the financial statement
carrying amounts and tax bases of assets and liabilities using enacted tax rates
in effect in the years in which the differences are expected to reverse.
56
<PAGE> 58
At December 31, 1999, the Company's deferred tax assets consist of the
following:
<TABLE>
<S> <C>
Net operating loss carryforward............................. $ 6,732,000
Allowances for losses....................................... 558,000
Deferred loan fees and costs................................ 127,000
-----------
7,417,000
Valuation allowance......................................... (7,417,000)
-----------
Net deferred tax asset...................................... $ --
===========
</TABLE>
Net operating loss carryforwards of approximately $19.7 million may be
available to offset future taxable income, if any, through 2019. The net
operating loss carryforwards may be subject to certain limitations due to
ownership changes during 1999. A valuation allowance has been provided to
eliminate the deferred tax assets, as realization of the assets is not assured.
10. SUBSIDIARY STOCK TRANSACTIONS:
At December 31, 1999, minority interest of $2,507,000 consists of 250,700
shares of issued and outstanding FBMS Series A preferred stock. This Series A,
12%, cumulative preferred stock is callable at its par value of $10 per share.
11. STOCKHOLDERS' EQUITY:
SERIES A PREFERRED STOCK:
In 1999, the Company issued 3,505,000 shares of Series A, 5% convertible
preferred stock (the "Series A Preferred Stock") for $1 per share. The Series A
Preferred Stock has a liquidation preference of $1 per share, and no voting
rights.
The Series A Preferred Stock holders are entitled to 5% annual dividends,
calculated on the liquidation preference. At the option of the Company,
dividends may be paid either in cash or in additional shares of Series A
Preferred Stock. Each share of Series A Preferred Stock, plus any unpaid
dividends, will automatically convert on November 1, 2000 into one share of the
Company's common stock, or upon the merger of the Company with or into another
company, each share of Series A Preferred Stock will automatically convert into
two shares of common stock.
SERIES B PREFERRED STOCK:
In December 1999, the Company issued 40,000 shares of Series B convertible
preferred stock (the "Series B Preferred Stock") in exchange for the investors
assumption of $461,070 of the Company's accounts payable. The Series B Preferred
Stock holder is not entitled to dividends, does not have a liquidation
preference, and has no voting rights. The Series B Preferred Stock automatically
converts into 10 shares of common stock upon the merger of the Company with or
into another company.
SERIES D PREFERRED STOCK:
Effective December 31, 1999, the Company issued 460,656 shares of Series D
preferred stock (the "Series D Preferred Stock") to Equitex to acquire 460,656
shares of FBMS preferred stock. The FBMS preferred stock was originally issued
to Equitex prior to the formation of the Company for cash of $1,856,560 and in
satisfaction of notes payable and related accrued interest of $2,750,000.
STOCK OPTION PLAN:
In October 1999, the Company adopted the 1999 Stock Option Plan (the
"Plan"), which provides for the issuance to employees, officers, directors and
consultants of the Company, options to purchase up to 1,500,000 shares of the
Company's common stock, which has been reserved by the Company for issuance
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under the Plan. Options may be granted as incentive stock options or
non-statutory options. For options that are granted, the exercise period may not
exceed ten years.
In December 1999, the Company granted options to two officers/directors of
the Company to purchase up to 800,000 shares of the Company's common stock at
$1.00 per share, which was the estimated fair value of the common stock on the
date of grant, as determined by management. None of these options, which expire
in December 2004, were exercised during 1999.
Had compensation cost for the Company's stock options been determined on
the fair value of such awards at the grant date, consistent with the methods of
SFAS No. 123, the Company's net loss would have been $3,739,000. The fair value
of each option granted was estimated on the date of grant using the minimum
value pricing method utilizing the following assumptions: dividend yield, 0%;
weighted average expected option term, two years; risk free interest rate, 6%.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The fair value of a financial instrument is the current amount that would
be exchanged between willing parties, other than in a forced liquidation. Fair
value is best determined based upon quoted market prices. However, in many
instances, there are no quoted market prices for the Company's various financial
instruments. In cases where quoted market prices are not available, fair values
are based on estimates using present value or other valuation techniques. Those
techniques are significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. Accordingly, the fair value
estimates may not be realized in an immediate settlement of the instrument. SFAS
No. 107, Disclosures about Fair Values of Financial Instruments, excludes
certain financial instruments and all nonfinancial instruments from its
disclosure requirements. Accordingly, the aggregate fair value amounts presented
may not necessarily represent the underlying fair value of the Company.
The following methods and assumptions were used by the Company in
estimating fair value disclosures for financial instruments:
Mortgage loans held for sale:
The fair value of mortgage loans held for sale is based on commitments on
hand from investors or prevailing market prices. For variable-rate loans that
re-price frequently and with no significant change in credit risk, fair values
are based on carrying values. Fair values for certain mortgage loans are based
on quoted market prices of similar loans sold (adjusted for differences in loan
characteristics). Fair values for non-performing loans are estimated using
discounted cash flow analyses or underlying collateral values, where applicable.
The fair value of mortgage loans held for sale at December 31, 1999 was
$14,923,000 (carrying value of $14,787,080).
Warehouse loans and notes payable:
The fair values of warehouse loans and notes payable to non-related parties
approximates their carrying values because of the short maturities of the notes.
The fair values of notes payable to related parties are not practicable to
estimate, based upon the related party nature of the underlying transactions.
Other financial instruments:
The fair value of other financial instruments (cash and cash equivalents,
the note receivable, accounts payable, and accrued expenses) approximate their
carrying amounts because of the short maturities of those instruments.
13. PROPOSED SALE OF NMORTGAGE, INC.:
On September 22, 1999, the Company entered into a letter of intent, whereby
all of the
outstanding common stock of the Company is to be acquired by Innovative Gaming
Corporation of America ("IGCA"), an SEC reporting company whose common stock
trades on the Nasdaq SmallCap
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Market. Under the terms of this proposed transaction, the Company's shareholders
are to receive approximately 46,000,000 shares of IGCA common stock in exchange
for all outstanding shares of nMortgage, Inc., assuming that there will be
approximately 16,000,000 shares of IGCA common stock outstanding on a
fully-diluted basis, before the transaction.
IGCA was formed in 1991 to develop, manufacture, market and distribute
specialty video gaming machines. As a condition of the proposed transaction,
IGCA is to dispose of its gaming assets, resulting in nMortgage as the sole
business operation of IGCA.
There are a number of material conditions that must be satisfied prior to
the completion of this transaction, including any required approval by the
Company's shareholders, the disposal of IGCA's gaming assets, the negotiation
and execution of a definitive agreement between the Company and IGCA, and
approval from all governmental bodies or agencies and regulatory authorities.
There is no assurance that the conditions summarized above will be satisfied, or
that the transaction will occur consistent with the terms outlined above.
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<PAGE> 61
UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS
On December 31, 1999, nMortgage, Inc. (nMortgage or the Company) entered
into a definitive merger agreement with Innovative Gaming Corporation of America
(IGCA). At closing, nMortgage's stockholders will receive approximately
46,000,000 shares of IGCA common stock in exchange for their nMortgage common
stock. The Company plans to record this transaction as a reverse merger and
recapitalization. The following unaudited pro forma condensed statement of
operations for the year ended December 31, 1999 gives effect to the transaction
as if it had occurred effective January 1, 1999. The following unaudited
condensed balance sheet as of December 31, 1999 gives effect to the transaction
as if it occurred on December 31, 1999.
These financial statements do not purport to present results which would
actually have been obtained if the transaction had been in effect during the
period covered or any future results which may in fact be realized. These
financial statements should be read only in conjunction with the accompanying
notes and the separate historical financial statements and notes thereto of
Innovative Gaming Corporation of America and nMortgage, Inc.
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INNOVATIVE GAMING CORPORATION OF AMERICA
UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
DECEMBER 31, 1999
<TABLE>
<CAPTION>
INNOVATIVE INNOVATIVE
GAMING GAMING PRO FORMA
CORPORATION PRE-MERGER CORPORATION MERGER
OF AMERICA ADJUSTMENTS OF AMERICA NMORTGAGE ADJUSTMENTS
(HISTORICAL) (NOTE 3) (AS ADJUSTED) (HISTORICAL) (NOTE 4) PROFORMA
------------ ----------- ------------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....... $ 140 $ 1,000 (A) $ 1,140 $ 426 $ (200) (B) $ 1,366
Mortgage loans held for sale.... 0 0 15,105 15,105
Receivables due on mortgage..... 0 0 0 0
Accounts receivable, net........ 759 (759) (A) 0 0 0
Current portion of notes
receivable.................... 188 (188) (A) 0 61 61
Other receivables............... 0 0 0 0
Inventories..................... 4,576 (4,576) (A) 0 0 0
Other current assets............ 655 (655) (A) 0 0 0
-------- -------- -------- ------------ -------- -------
TOTAL CURRENT ASSETS............ 6,318 (5,178) 1,140 15,592 (200) 16,532
Property and equipment, net..... 707 (707) (A) 0 851 851
Notes receivable, less current
portion....................... 268 (268) (A) 3,759 0 3,759
3,000 (A)
759 (A)
OTHER ASSETS.................... 0 0 299 299
Intangible assets, net.......... 765 (765) 0 18,385 18,385
-------- -------- -------- ------------ -------- -------
$ 8,058 $ (3,159) $ 4,899 $ 35,127 $ (200) $39,826
======== ======== ======== ============ ======== =======
LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT)
CURRENT LIABILITIES:
Short-term warehouse
borrowings.................... $ 0 $ 0 $ 18,582 $18,582
Accounts payable................ 585 585 1,311 1,896
Federal and state tax
liabilities................... 0 0 0 0
Escrow liabilities.............. 0 0 0 0
Notes payable, current
portion....................... 592 (592) (A) 0 2,142 2,142
Obligations under capital lease,
current portion............... 0 211 211
Accrued liabilities............. 1,110 1,110 2,733 3,843
-------- -------- -------- ------------ -------- -------
Total current liabilities....... 2,287 (592) 1,695 24,979 0 26,674
LONG-TERM LIABILITIES:
Notes payable, less current
portion....................... 3,131 3,131 0 3,131
Capital lease obligations, less
current portion............... 0 0 187 187
-------- -------- -------- ------------ -------- -------
TOTAL LIABILITIES............... 5,418 (592) 4,826 25,166 0 29,992
-------- -------- -------- ------------ -------- -------
Minority interest............... 0 0 0 2,507 0 2,507
-------- -------- -------- ------------ -------- -------
STOCKHOLDERS' EQUITY:
Preferred stock................. 4,643 4,643
Common stock.................... 90 90 120 340 (D) 550
Additional paid-in capital...... 34,525 34,525 6,342 (33,100) (D) 7,767
(200) (B) (200)
RETAINED EARNINGS (DEFICIT)..... (31,975) (2,567) (A) (34,542) (3,651) 32,760 (D) (5,433)
-------- -------- -------- ------------ -------- -------
TOTAL SHAREHOLDERS' EQUITY...... 2,640 (2,567) 73 7,454 (200) 7,327
-------- -------- -------- ------------ -------- -------
$ 8,058 $ (3,159) $ 4,899 $ 35,127 $ (200) $39,826
======== ======== ======== ============ ======== =======
</TABLE>
See notes to condensed pro forma financial statements.
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INNOVATIVE GAMING CORPORATION OF AMERICA
UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999 (NOTE 3)
<TABLE>
<CAPTION>
INNOVATIVE
GAMING PRO FORMA
CORPORATION MERGER
OF AMERICA NMORTGAGE ADJUSTMENTS
(HISTORICAL) (HISTORICAL) (NOTE 4) PROFORMA
------------ ------------ ----------- --------
<S> <C> <C> <C> <C>
REVENUES........................................ $ 2,897 $ 1,548 $(2,897)(C) $ 1,548
COST OF SALES................................... 4,239 0 (4,239)(C) 0
-------- ------- ------- -------
GROSS PROFIT (LOSS)............................. (1,342) 1,548 1,342 1,548
OPERATING EXPENSES
Selling, general and administrative............. 5,134 1,099 (5,134)(C) 1,099
Write down of assets to market value............ 4,655 0 (4,655)(C) 0
Other operating expenses........................ 0 3,346 0(C) 3,346
-------- ------- ------- -------
Income (loss) from operations................... (11,131) (2,897) 11,131 (2,897)
OTHER INCOME (EXPENSE)
Interest expense, net........................... (73) (754) 73(C) (754)
-------- ------- ------- -------
INCOME (LOSS) BEFORE TAXES...................... (11,204) (3,651) 11,204 (3,651)
-------- ------- ------- -------
PROVISION FOR (BENEFIT OF) INCOME TAXES......... 0 0 0(C) 0
-------- ------- ------- -------
NET LOSS FROM OPERATIONS OF DISCONTINUED GAMING
EQUIPMENT MANUFACTURING....................... (11,204) (3,651) 11,204 (3,651)
LOSS ON DISPOSAL OF GAMING EQUIPMENT
MANUFACTURING, INCLUDING PROVISION OF $1,606
FOR OPERATING LOSSES DURING PHASEOUT.......... (2,221) 0 2,221 0
-------- ------- ------- -------
NET LOSS........................................ $(13,425) $(3,651) $13,425 $(3,651)
-------- ------- ------- -------
Preferred stock accretion adjustments........... 547 547
Preferred stock dividends....................... 124 124
-------- -------
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS.... (14,096) (4,322)
======== =======
LOSS FROM OPERATIONS OF DISCONTINUED GAMING
EQUIPMENT MANUFACTURING....................... $ (1.58) $ (0.08)
======== =======
LOSS ON DISPOSAL OF GAMING EQUIPMENT
MANUFACTURING, INCLUDING PROVISION FOR
OPERATING LOSSES DURING PHASE-OUT PERIOD...... $ (0.29) $ 0.00
======== =======
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS.... $ (1.87) $ (0.08)
======== =======
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING...... 7,525 53,525
======== =======
</TABLE>
See notes to condensed pro forma financial statements.
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INNOVATIVE GAMING CORPORATION OF AMERICA
NOTES TO UNAUDITED PROFORMA CONDENSED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(1) DESCRIPTION OF THE TRANSACTION
On December 31, 1999, nMortgage, Inc. (nMortgage or the Company) entered
into a definitive merger agreement with Innovative Gaming Corporation of America
(IGCA). At closing, nMortgage's stockholders will receive approximately
46,000,000 shares of IGCA common stock in exchange for their nMortgage common
stock. The Company plans to record this transaction as a reverse merger and
recapitalization. The following unaudited pro forma condensed statement of
operations for the year ended December 31, 1999 gives effect to the transaction
as if it had occurred effective January 1, 1999. The following unaudited
condensed balance sheet as of December 31, 1999 gives effect to the transaction
as if it occurred on December 31, 1999.
(2) NMORTGAGE, INC. PERIODS OF PRESENTATION
On August 23, 1999, nMortgage, Inc. through its wholly-owned subsidiary,
FBMS Acquisition Corp., merged with First Bankers Mortgage Services, Inc (FBMS).
FBMS continued as the surviving corporation. The transaction was recorded as a
purchase in accordance with APB No. 16. Accordingly, the Statement of Operations
for nMortage includes the activity for the period from August 23, 1999 (Date of
Inception) through December 31, 1999.
(3) DESCRIPTION OF PRE-MERGER ADJUSTMENTS
IGCA contemplates completing the following transactions in advance of the
merger transaction:
(A) To record the sale of substantially all of its gaming related assets to
Xertain by June 30, 2000 for $4,000,000 plus a promissory note payable
to IGCA in an amount equal to the accounts receivable of IGCA as of the
closing date, adjusted for certain payments to be made by Xertain and
IGCA as provided for in the note, and Xertain will assume certain
liabilities of IGCA. The accounts receivable promissory note will be
secured by the accounts receivable of IGCA which are being acquired by
Xertain. The $4,000,000 will be payable $1,000,000 in cash and
$3,000,000 in an unsecured promissory note of a 36-month term, payable
upon the due date, plus interest at 8.5% per annum.
(4) DESCRIPTION OF PROFORMA ADJUSTMENTS
(B) To record legal, accounting and banking fees and other costs of the
transaction.
(C) To reflect the reverse merger as if it had occurred on January 1, 1999.
Since IGCA will be a non-operating entity at the date of the
transaction, none of the revenues or expenses of IGCA would have
resulted during the period had the transaction occurred on January 1,
1999. Accordingly, the adjustment reflects the removal of these revenues
and expenses.
(D) To record the transaction as a reverse merger.
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CURRENT BUSINESS OF IGCA
GENERAL
IGCA and its wholly owned operating subsidiary, Innovative Gaming, Inc.
("IGI"), together (the "Company"), develop, manufacture, market and distribute
multi-station and other specialty gaming machines to regulated gaming markets
world-wide. The Company has four primary product lines: multi-
player/multi-station video table games; bonus "top box" games that are placed on
top of slant top spinning reel slot machines; single player video slot machines
incorporating state of the art graphics and sound, and unique specialty gaming
machines such as "Mythical Reels(TM)", that projects the slot machine's spinning
reels out in front of the box as if spinning in space. The Company also owns the
world-wide patent rights to a unique machine that combines elements of roulette
play and pinball in a single player machine.
CONCEPT
The Company's primary target markets have been gaming jurisdictions in
North America. The Company has also engaged in substantial international sales
activity. The Company distributes its products directly and through
distributors, primarily on a cash sales basis. In Nevada, through its internal
sales force, the Company places its products under lease, sales (cash or
extended payment terms) or participation agreements. Under participation
agreements the Company retains ownership and shares in the net win of the games
with the casino. The Company believes that its gaming machines appeal to
casinos/clubs, lotteries and slot route operators seeking to enhance the
entertainment experience by providing new and unique forms of gaming.
PRODUCTS
The Company has four primary product lines: multi-player/multi-station
video table games; bonus "top box" games that are placed on top of slant top
spinning reel slot machines; single player video slot machines incorporating
state of the art graphics and sound, and unique specialty gaming machines such
as "Mythical Reels(TM)". The Company also owns the world-wide patent rights to a
unique machine that combines elements of roulette play and pinball in a single
player machine.
MULTI-PLAYER/MULTI-STATION VIDEO TABLE GAMES
BJ BLITZ(TM) AND LIVE VIDEO BLACKJACK(R) are electronic audio/video
multi-player blackjack games. Each blackjack machine consists of a central
"dealer" and three or five "player" stations that face the dealer in a
semicircle, in the same configuration as a live action blackjack table.
HOT SHOT DICE(TM) AND LIVE VIDEO CRAPS(R) are electronic craps machines
which consist of a rectangular table that is approximately half the size of a
live action craps table, with a lighted canopy. Each table accommodates six
players, two on each side, and one at each end. The game incorporates sound
effects such as rolling dice, and visual effects such as a croupier rake that
wipes away chips, in addition to electronically-generated voices, music and
flashing lights.
LIGHTNING STRIKE(TM) ROULETTE AND LIVE VIDEO ROULETTE(R) are roulette
machines which consist of a rectangular table that is approximately half the
size of a live action roulette table. The table accommodates five players, two
on each side and an additional player at one end.
BONUS "TOPBOX" GAMES
BONUS STREAK is used in conjunction with a slant top spinning reel slot
machine. The video bonus game was the first in the industry to utilize the
active, high resolution LCD display.
SINGLE PLAYER VIDEO SLOT MACHINES
This new series of slot machines incorporates a unique PC platform.
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UNIQUE SPECIALTY GAMES
MYTHICAL REELS is a spinning reels slot machine in an oversized or
"mini-bertha" cabinet. The spinning reels appear to float in space and are so
real in appearance that viewers feel that they can reach out and touch them.
REVOLVING RINGS(TM): This new product currently under development
incorporates a patented entirely different operational concept from any other
known gaming devices.
MANUFACTURING AND SUPPLY ARRANGEMENTS
The Company's primary products are assembled at its production facility in
Reno, Nevada, utilizing various parts and components from a large base of
vendors. Except for certain electronic components purchased from Japanese
vendors, the Company has identified alternate sources of supply for significant
parts and components should any of its current vendors fail to meet order
requirements by the Company.
INTELLECTUAL PROPERTY
On February 2, 1996, the Company acquired the balance of all remaining
intellectual property including patents, trademarks, picture rights and
copyrights for its games from its Japanese suppliers in exchange for an
aggregate 225,000 shares of IGCA common stock. The Company has exclusive
ownership and licenses pertaining to its blackjack, craps, roulette and
Supersuits Progressive Blackjack in gaming markets worldwide.
IGCA(R), BJ Blitz(TM), Hot Shot Dice(TM), Lightning Strike Roulette(TM),
Live Video Blackjack(R), Live Video Craps(R), Live Video Roulette(R), Bonus
Streak(TM), Cascade of Diamonds(TM), Mythical Reels(TM) and Supersuits(R) are
all trademarks of Innovative Gaming Corporation of America. The Company has
either Federally registered or applied for Federal registration of these
trademarks. In November 1997, IGCA received notification that it was granted a
Trademark and Design registration for Lightning Strike Roulette in Australia.
The Company believes that the technical know-how, trade secrets and
creative skills of its employees and contract personnel are substantial rights
of the Company.
DISTRIBUTORSHIP AND SALES AGENCY ARRANGEMENTS
The Company distributes and/or anticipates to distribute its products both
directly to gaming markets and through licensed distributors. In certain
jurisdictions the Company may use an existing licensed distributor to sell its
products pursuant to any necessary Tribal or regulatory transaction approvals.
COMPETITION
Many gaming equipment companies, several of which are large and
well-established, supply the casino and video lottery industries with video
gaming machines and other gaming equipment. Management believes that Aristocrat,
Alliance Gaming, International Game Technology and WMS Industries are among the
largest and most-established gaming machine suppliers. There can be no assurance
that these competitors, or another competitor, will not develop gaming machines
that are similar to the Company's gaming machines in the future. Furthermore,
the Company is developing games for the intensely competitive single player game
market. There can be no assurance that any single player games developed by the
Company will be accepted in such competitive markets.
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DESCRIPTION OF NMORTGAGE BUSINESS
GENERAL
nMortgage, through its wholly-owned subsidiary, First Bankers Mortgage
Services, Inc. ("FBMS"), is a retail and wholesale mortgage banking company
engaged in the business of originating, selling and brokering residential
mortgage loans. nMortgage was formed to hold all of the outstanding shares of
capital stock of FBMS, which was acquired by Equitex on August 23, 1999. FBMS
sells in the secondary market all of its mortgage loans and all of the servicing
rights associated with those mortgage loans. In connection with the mortgages it
originates, FBMS offers its clients ancillary services including insurance,
flood certification and property appraisal.
THE NMORTGAGE BUSINESS
LOAN GENERATION.
FBMS is an approved lender for Federal National Mortgage Associate (FNMA),
Federal Home Loan Mortgage Corporation (FHLMC), Federal Housing Authority (FHA),
Veterans Administration (VA) and Government National Mortgage Association (GNMA)
and is licensed to do business in 27 states, with 2 additional states pending.
FBMS offers mortgages on both a retail and wholesale level, with the
wholesale business representing approximately 80% of the company's loan
originations. FBMS's retail division was established in 1990 and currently has
four retail branch offices located in the states of Florida, New Jersey, New
York and Pennsylvania. The retail division completes and processes mortgage loan
applications directly from borrowers and prepares and organizes necessary
mortgage loan documents. The retail division then underwrites these mortgage
loans to conform to either agency or private investor guidelines and collects
origination fees and closing costs from the borrower.
FBMS's wholesale division was established in 1995. The wholesale division
closes and funds loans originated by mortgage brokers and correspondent lenders
and then selling the same mortgage loans to investors. FBMA obtains wholesale
mortgage loans through a network of more than 1,000 mortgage brokers,
correspondents and other financial intermediaries who are screened and approved
by FBMS.
FBMS also offers subprime loans ("B/C mortgages") to applicants whose
credit review does not qualify them for the best rates offered to those
applicants with "A" credit ratings.
ADMINISTRATION OF LOANS.
All mortgage loan applications must be underwritten and approved in
accordance with FBMS's underwriting standards and criteria which, for conforming
loans, is promulgated by FNMA. Non-conforming loans are underwritten subject to
credit and appraisal standards established by specific investors. In
underwriting mortgage loans, FBMS analyzes the borrower's credit standing,
financial resources and repayment ability, as well as the risk of the underlying
collateral.
FBMS originates and purchases all of its mortgage loans with the intent to
sell the mortgage loans and the related servicing rights into the secondary
market. The mortgage loans are sold primarily to institutional investors,
national banks and mortgage lenders. FBMS holds the originated or purchased
mortgage loan from the time that the mortgage loan application is submitted by
the borrower until the time the mortgage loan is sold to an investor. During
such time, the interest rate on the mortgage loan might be higher or lower than
the market rate at which FBMS can sell the mortgage loan to an investor.
Therefore, this market rate determines whether a market gain or loss results on
the mortgage loan. To protect against interest rate changes on mortgage loan
that are in the warehouse (mortgage loans that have closed but not been sold)
and pipeline loans (loans which are not yet closed but on which the interest
rate has been set), FBMS often commits to deliver mortgage loans at a specific
price for future delivery to investors through the use of commitments on a "best
efforts" basis.
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FBMS OBJECTIVES.
FBMS's objective is to capture an early market share of mortgage products
through the Internet. To support its growth, FBMS has five principal business
strategy elements. First, FBMS focuses primarily on the retail channel. This
channel allows FBMS to control the loan origination process and provides it with
direct access to the consumer. Second, FBMS leverages out banker/broker
structure in order to offer consumers low rates on a broad array of mortgage
products on a consistent basis. Third, FBMS provides consumers a "one-step"
source of mortgage-related products. These mortgage-related product sales allow
FBMS to increase revenues without significant capital investment. Fourth, FBMS
employs a commission and incentive system for its loan originators and an
incentive compensation system for its operation employees that is designed to
motivate such loan originators and employees to maximize loan volume and
profitability while simultaneously creating a variable cost structure for FBMS
which is adaptable to changes in origination volume. Last, FBMS recruits
highly-skilled employees with mortgage industry experience and seeks
technologies and process improvements that streamline the origination process to
ensure the continuous delivery of superior customer service.
INTERNET STRATEGY.
FBMS has implemented an online mortgage services system called
nMortgage.com. The strategy that FBMS intends to pursue is two-fold: (1) to
offer an interactive instant approval retail page, and (2) to private label its
technology to third party originators.
INTERACTIVE INSTANT APPROVAL RETAIL PAGE. When using the nMortgage
website, consumers will be afforded the opportunity to inspect rates, identify
how much they can afford and pre-qualify themselves for a loan. Once they
understand the product and how much they want or need, they can submit a loan
application online. Telephone support to answer questions or guide them through
the application process will be available as well. Once the loan is in process,
the customer can lock in the interest rate over the Internet and get real time
status updates on the loan. Conceivably, a loan can be processed in its entirety
without the need for a telephone call to the borrower.
FBMS has recently completed the development and the debut of its Internet
web site. FBMS's Phase I system enables consumers to access mortgage loan rates
and programs, and to apply online for mortgage loans. nMortgage is currently
testing its Phase II online mortgage system, which will enable customers to
track the status of their loans online as well as offer interactive online
customer service. FBMS anticipates that retail loan volume in the next
twenty-four months will shift from retail originators to Internet based
originators.
PRIVATE LABEL STRATEGY.
FBMS intends to implement a system by which it will manage electronically
the mortgage loan process. The goal of the private label strategy is to deliver
a customized Internet program to third parties that will enable such third
parties to receive a home page at a nominal price and "back office" support by
FBMS for all loans originated. The mortgage will be handled entirely by FBMS,
but the mortgage loan documents will bear the originating company's name. FBMS
will not only earn fees from the mortgage loans, but will become a fee based
Internet Service Provider to third parties. Through this private label strategy,
FBMS hopes to capture an under-served market in a significant way, and is
currently negotiating the terms of contracts to implement this program. In
addition, the private label strategy will leverage FBMS's experience with
brokers, community banks and credit unions.
INTELLECTUAL PROPERTY
nMortgage believes that its copyrights, trademarks, trade dress, trade
secrets, and similar intellectual property are critical to its success. By
attempting to protect its intellectual property against infringement, nMortgage
believes that it decreases the risk that such infringement could damage the
company's reputation or create brand confusion in the market.
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In an attempt to protect its intellectual property, nMortgage has applied
for registration of the mark "nMORTGAGE" In addition, nMortgage protects its
internally-developed technology through a combination of copyright, trade secret
and trademark law. However, nMortgage has no patents issued or applied for on
its technology.
COMPETITION
nMortgage, through FBMS, competes with other mortgage banking companies,
commercial banks, savings associations, credit unions, insurance companies and
other financial institutions in every aspect of our business. Many of these
companies and financial institutions are larger, more experienced and have
greater financial resources than nMortgage. Accordingly, nMortgage may not be
able to successfully compete in the mortgage banking market. Its competitors may
be able to respond more quickly to take advantage of new or changing
opportunities, technologies and customer requirements. They also may be able to
undertake more extensive promotional activities, offer more attractive terms to
borrowers and adopt more aggressive pricing policies.
CAPITAL STOCK OF NMORTGAGE
No established trading market exists for the shares of capital stock of
nMortgage.
LITIGATION
The following are descriptions of material pending legal proceedings to
which nMortgage is a party:
- GN MORTGAGE CORPORATION V. RAYMOND FRASER AND FIRST BANKERS MORTGAGES
SERVICES, INC., Case No. 99-01435-CA (Circuit Court, 4th Judicial
Circuit, Duval County, Florida). On or about September 24, 1999, GN
Mortgage commenced this action alleging, among other things, that (i)
FBMS conspired with Raymond Fraser, the Executive Vice President of
FBMS' Wholesale Markets division, in connection with the termination of
Fraser's employment with GN Mortgage, the corporation at which Fraser
was employed prior to accepting employment from FBMS, and (ii) that FBMS
intentionally interfered with GN Mortgages's business relationship with
certain mortgage brokers who formerly did business with GN Mortgage.
FBMS has denied all material allegations and believes that the claims
are without merit. No trial date has been set.
- ZUCK, ET AL. V. FIRST BANKERS MORTGAGE SERVICES, INC., ET AL. Case No
99-018815 (09) (Circuit Court, 17th Judicial Circuit, Broward County,
Florida). On or about November 3, 1999, the Zucks commenced this action
seeking to recover on a $200,000 investment in preferred stock of FBMS.
The Zucks claim that FBMS had previously agreed to repurchase the
preferred stock. A settlement of this matter has been negotiated and the
settlement documentation is in the process of being finalized.
In addition, four additional complaints have been filed naming nMortgage or
FBMS as parties. However, these actions are routine litigation incidental to the
mortgage lending business in which nMortgage operates.
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VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
IGCA has outstanding one class of voting securities, Common Stock, $0.01
par value, of which [9,526,319] shares were outstanding as of the close of
business on the Record Date. Each share of common stock is entitles to one vote
on all matters put to a vote of shareholders.
The following table sets forth certain information regarding beneficial
ownership of IGCA's common stock as of the Record Date, by (i) each person known
by the Company to be the beneficial owner of more than 5% of the outstanding
common stock, (ii) each director, (iii) each executive officer, and (iv) all
executive officers and directors as a group. Unless otherwise indicated, each of
the following persons has sole voting and investment power with respect to the
shares of Common Stock set forth opposite their respective names.
<TABLE>
<CAPTION>
PRIOR TO THE MERGER FOLLOWING THE MERGER
------------------------------ -------------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER(1) NUMBER % OF CLASS NUMBER % OF CLASS
- --------------------------------------- ------------ ---------- ------------- ----------
<S> <C> <C> <C> <C>
Edward G. Stevenson.................. 375,000(2) 3.80% 575,000(2)(3) 1.03%
Barrett V. Johnson................... 100,000(4) 1.05% 150,000(4)(5) *
Ronald R. Zideck..................... 25,000(6)(8) * 75,000(6)(7)(8) *
Ronald A. Johnson.................... 20,000(6) * 70,000(6)(7) *
Leo V. Seevers....................... 20,000(6) * 70,000(6)(7) *
Wayne Mills.......................... 1,383,333(9) 13.22% 1,383,333(9) 2.45%
The Colonnade, Suite 290
5500 Wayzata Blvd,
Golden Valley, MN 55436
Equitex, Inc. ....................... 0(10) * 46,000,000(10) 82.84%
315 East Peakview Avenue
Englewood, CO 80111
All Directors and Officers as a group
(5 people)......................... 540,000(11) 5.43% 940,000(11)(12) 1.67%
</TABLE>
- ---------------
* Less than 1%.
(1) Unless otherwise indicated, the address of each person is 4725 Aircenter
Circle, Reno, Nevada 89502.
(2) Includes 350,000 shares that such person has the right to acquire within 60
days.
(3) Includes 200,000 shares that such person will have the right to acquire
contingent upon the closing of the Merger.
(4) Includes 40,000 shares that such person has the right to acquire within 60
days.
(5) Includes 50,000 shares that such person will have the right to acquire
contingent upon the closing of the Merger.
(6) Includes 10,000 shares that such person has the right to acquire within 60
days.
(7) Includes 50,000 shares that such person will have the right to acquire
contingent upon the closing of the Merger.
(8) Includes 5,000 shares that such person owns indirectly in his capacity as
co-trustee of the Ronald A. Zideck Family Trust dated September 19, 1984.
Mr. Zideck has shared voting rights with his spouse.
(9) Includes 938,333 shares that such person has the right to acquire within 60
days.
(10) Does not include shares of IGCA common stock beneficially
owned by Henry Fong, Equitex's Chief Executive Officer.
(11) Includes 420,000 shares that such persons have the right to acquire within
60 days.
(12) Includes 400,000 shares that such person will have the right to acquire
contingent upon the closing of the Merger.
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<PAGE> 71
DESCRIPTION OF CAPITAL STOCK
CAPITAL STOCK
IGCA's authorized capital consists of 100,000,000 shares of capital stock,
of which 4,000 shares have been designated as Series B Convertible Preferred
Stock (the "Series B Stock"), $.01 par value per share, 2,000 shares have been
designated as Series C Convertible Preferred Stock, $.01 par value per share
(the "Series C Stock") and 3,000 shares have been designated as Series D
Convertible Preferred Stock, $.01 par value per share (the "Series D Stock").
IGCA's Board of Directors, without any action by the shareholders, may designate
and issue shares in such classes or series (including classes or series of
preferred stock) as it deems appropriate and establish the rights, preferences
and privileges of such shares, including par values, dividends, liquidation and
voting rights. As of the Record Date, IGCA had outstanding [ ] shares
of common stock, 30 shares of Series B Stock, 900 shares of Series C Stock and
1,337.5 shares of Series D Stock issued and outstanding.
COMMON STOCK
Each share of common stock is entitled to one vote for all purposes and
cumulative voting is not permitted in the election of directors. Significant
corporate transactions, such as amendments to the articles of incorporation,
mergers, sales of assets and dissolution or liquidation, require approval by the
affirmative vote of the majority of the outstanding shares of common stock.
Other matters to be voted upon by the holders of common stock normally require
the affirmative vote of a majority of the shares present at the particular
stockholders' meeting. There are no preemptive, subscription, conversion or
redemption rights pertaining to the common stock. The absence of preemptive
rights could result in a dilution of the interest of existing shareholders
should additional shares of common stock be issued. Holders of the common stock
are entitled to receive such dividends as may be declared by the Board of
Directors out of assets legally available therefor, and to share ratably in the
assets of the Company available upon liquidation.
The rights of holders of the shares of common stock may currently be, and
may in the future become, subject to prior and superior rights and preferences
in the event that the Board of Directors establishes one or more additional
classes of common stock or one or more series of preferred stock.
SERIES B CONVERTIBLE PREFERRED STOCK
On May 13, 1998, the Company issued 3,000 shares of Series B Convertible
Preferred Stock (the "Preferred Stock") at a price of $1,000 per share in a
private placement for total proceeds of $3,000,000 prior to any offering
expenses. The Company received net proceeds of approximately $2,804,000 after
the payment of fees and expenses associated with such private placement. An
annual dividend of 4% shall be paid quarterly in arrears either in Preferred
Stock of the Company or cash at the Company's discretion. Each share of
Preferred Stock is convertible into shares of the Company's common stock at a
conversion price of 91% of the three consecutive day average of the lowest
closing bid price of the Company's common stock over the twenty-day trading
period ending the day prior to conversion (the "Conversion Price"). The
Conversion Price may not exceed $5.16, which represents 135 % of the ten-day
average of the closing bid price of the Company's common stock ending on May 12,
1998. The maximum number of shares of common stock that may be issued upon
conversion is 1,505,000. In the event there is a holder of Preferred Stock that
is unable to convert shares of Preferred Stock into common stock at a discount
because either (a) 1,505,000 shares have been issued at a discount or (b) such
holder would beneficially own in excess of 4.9% of the Company's common stock,
then the Company may either (1) redeem any unconverted Preferred Stock for cash
at a price equal to 115% of the liquidation value of the shares or (2) convert
such unconverted shares without a discount into common stock and pay cash to the
holder of such unconverted shares equal to the economic value that would have
been received by such holder if able to convert at a discount. The Company has
the right to redeem the Preferred Stock at 115% of par in cash. As of December
31, 1999, all of the outstanding Preferred Stock was convertible into common
stock, at the election of the holder thereof. A holder of Preferred Stock may
not convert such stock into common
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<PAGE> 72
stock if, following such conversion, the holder beneficially owns in excess of
4.9% of the Company's common stock. As of December 31, 1999, no Preferred Stock
had been converted into common stock.
SERIES C CONVERTIBLE PREFERRED STOCK
On June 1, 1999, the Company issued 1,400 Series C Preferred Shares with a
stated value of $1,000 per share in a private placement for total proceeds of
$1,400,000 prior to any offering expenses.
The annual dividend of 4% on the Series C Preferred Shares is cumulative
and is payable quarterly in arrears either in cash or in registered shares of
our common stock. Each Series C Preferred Share is convertible into shares of
our common stock, at a conversion price equal to 91% of the average of the
lowest three consecutive day closing bid prices of our common stock as reported
on by Bloomberg, L.P. over a period of twenty trading days ending on the day
prior to which the holder of Series C Preferred Shares notifies us of such
holder's intent to convert a specified portion of such Series C Preferred
Shares, provided that the maximum conversion price shall not exceed $1.877. The
total number of shares of common stock issuable upon conversion of the Series C
Preferred Shares cannot exceed 1,331,500 shares (which represents 20% of the
number of outstanding shares of common stock on June 1, 1999), unless the
Company obtains shareholder approval as required by the Nasdaq National Market.
If a holder of Series C Preferred Shares is unable to convert shares of Series C
Preferred Shares into common stock because 1,331,500 shares have already been
issued as described in the preceding sentence, we must redeem any unconverted
Series C Preferred Shares presented for conversion for cash at a price equal to
115% of their stated value. We have the right to redeem the Series C Preferred
Shares in cash at 115% of their stated value plus accrued and unpaid dividends
at any time after July 31, 1999. All Series C Preferred Shares which are still
outstanding on June 1, 2001 are mandatorily converted at the conversion price.
We are not required to convert Series C Preferred Shares, whether upon
request for conversion by the holder or upon the June 1, 2001 mandatory
conversion date, if and to the extent that such holder or any affiliate of such
shareholder would then own in excess of 4.9% of our common stock. If,
notwithstanding the foregoing, such holder is deemed by a court to be the
beneficial owner of more than 4.9% of our common stock, we are required to
redeem for cash such number of shares of Series C Preferred Shares as will
reduce such holder's ownership to not more than 4.9% at a redemption price equal
to 115% of the stated value plus accrued and unpaid dividends. In the case of
mandatory conversion, we may elect to pay a redemption price in cash equal to
115% of the stated value plus accrued and unpaid dividends.
SERIES D CONVERTIBLE PREFERRED STOCK
During October 1999, the Company issued a total of 2,450 shares of Series D
Convertible Preferred Stock (the "Series D Preferred Stock") at a price of
$1,000 per share in a private placement for total proceeds of $2,450,000, prior
to any offering expenses, and warrants (the "Warrants") to acquire 245,000
shares of the Company's common stock at $2.75 per share. An annual dividend of
6% shall be paid quarterly in arrears either in common stock of the Company or
cash at the Company's discretion. Each share of Series D Preferred Stock is
convertible into shares of the Company's common stock at a conversion price of
the lesser of $3.00 or 75% of the average of closing bid price of the Company's
common stock for the five consecutive days immediately preceding the conversion
date. The Company has reserved 1,750,000 shares of common stock for issuance
upon conversion of the Series D Preferred Stock and 245,000 shares of common
stock to be issued upon the exercise of the Warrants. The Company has the right
to redeem the Series D Preferred Stock at 135% of par in cash if the market
price is lower than the market price on the date the Series D Preferred Stock
was issued. A Registration Statement related to the common stock to be issued
has been filed by, and at the expense of, the Company pursuant to obligations
contained in Registration Rights Agreements dated October 14 to 22, 1999.
All outstanding shares of Series D Preferred Stock will automatically be
converted into common stock on the fifth anniversary of its issuance. A holder
of Preferred Stock may not convert such stock into common stock if, following
such conversion, the holder beneficially owns in excess of 4.9% of the Company's
common stock.
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<PAGE> 73
AMENDMENT TO THE ARTICLES OF INCORPORATION TO CHANGE
THE NAME OF THE COMPANY TO "NMORTGAGE, INC."
Upon the approval of the Gaming Divestiture and the Merger, IGCA will no
longer be engaged in developing, manufacturing, marketing and distributing
gaming machines. In light of this change in strategic focus, the Board of
Directors believes that it will be in the best interest of the Company to amend
its Articles of Incorporation and change its name from Innovative Gaming
Corporation of America to "nMortgage.com, Inc." The Board believes that this new
name will better reflect the nature of the Company's business following the
Merger.
In conjunction with this action, IGCA's Board of Directors approved a
change in its corporate name from Innovative Gaming Corporation of America to
"nMortgage, Inc.", subject to and contingent upon (i) the receipt of shareholder
approval and (ii) the consummation of the Gaming Divestiture and the Merger.
The Board of Directors is requesting approval by the shareholders of an
amendment to Article I of IGCA's Articles of Incorporation changing the name of
the Company from Innovative Gaming Corporation of America to "nMortgage, Inc."
Approval of the resolution approving the issuance of additional stock
options to non-employee directors requires the affirmative vote of the holders
of a majority of the shares of the outstanding IGCA common stock represented in
person or by proxy and entitled to vote at the Special Meeting.
Shares of IGCA stock represented by a proxy properly signed and received at
or prior to the Special Meeting, unless subsequently revoked, will be voted in
accordance with the instructions thereon. If a proxy is signed and returned
without indicating any voting instructions, shares of IGCA stock represented by
the proxy will be voted for the Proposal and the transactions contemplated
thereby.
For voting purposes at the Special Meeting, only shares affirmatively voted
in favor of approving the issuance of additional options to each of the
Company's non-employee directors upon consummation of the Merger (including
properly executed proxies not containing voting instructions) will be counted as
favorable votes for such Proposal. The failure to submit a proxy (or to vote in
person) or the abstention from voting will have the same effect as a vote
against such proposal.
THE BOARD OF DIRECTORS RECOMMENDS APPROVAL OF THE GRANT OF ADDITIONAL STOCK
OPTIONS TO NON-EMPLOYEE DIRECTORS AND RECOMMENDS A VOTE FOR THIS PROPOSAL.
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OTHER MATTERS
INDEPENDENT ACCOUNTANTS
During October 1998, Arthur Andersen LLP resigned as independent public
accountants for the Company and the Company retained Kafoury & Armstrong & Co.
in their place. Representatives of Kafoury & Armstrong & Co. are expected to be
present at the Special Meeting, will have the opportunity to make a statement if
they desire to do so, and are expected to be available to respond to appropriate
questions. The Audit Committee of IGCA's Board of Directors participated in and
approved the decision to change independent accountants.
The reports of Arthur Andersen LLP on IGCA's financial statements for the
most recent two fiscal years for which that firm audited such financial
statements, the most recent of which was the fiscal year ended December 31,
1997, contained no adverse opinion or disclaimer of opinion and were not
qualified or modified as to uncertainty, audit scope or accounting principles.
During the 1996 and 1997 fiscal years and the subsequent period preceding the
resignation of that firm, there were no disagreements with Arthur Andersen LLP
on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreements if not resolved
to the satisfaction of Arthur Andersen LLP would have caused them to make
reference thereto in their report on the financial statements for such years.
During the 1996 and 1997 fiscal years and the subsequent period preceding the
resignation of that firm, there were no reportable events.
During IGCA's two most recent fiscal years prior to engaging Kafoury &
Armstrong & Co., IGCA did not consult with Kafoury & Armstrong & Co. on any item
regarding (1) the application of accounting principles to a specified
transaction, either completed or proposed, or the type of audit opinion that
might be rendered on IGCA's financial statements, or (2) the subject matter of a
disagreement or reportable event with the former independent accountants.
BENEFICIAL OWNERSHIP REPORTING COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES
EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than 10% of a registered class
of the Company's equity securities, to file reports of ownership and changes in
ownership of such securities with the Securities and Exchange Commission and
Nasdaq. Officers, directors and greater than ten per cent shareholders are
required by SEC regulations to furnish the Company with copies of all Section
16(a) forms they file.
Based solely on review of the copies of such forms furnished to the
Company, or written representations that no Forms 5 were required, the Company
believes that during the year ended December 31, 1999, all Section 16(a) filing
requirements applicable to its officers, directors and greater than ten percent
beneficial owners were complied with.
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WHERE YOU CAN FIND MORE INFORMATION
Federal securities law requires IGCA to file information with the
Securities and Exchange Commission concerning its business and operations.
Accordingly, we file annual, quarterly, and special reports, proxy statements
and other information with the Commission. You can inspect and copy this
information at the Public Reference Facility maintained by the Commission at
Judiciary Plaza, 450 5th Street, N.W., Room 1024, Washington, D.C. 20549. You
can also do so at the following regional offices of the Commission:
(1) New York Regional Office, 7 World Trade Center, Suite 1300, New York, New
York 10048
(2) Chicago Regional Office, Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661.
You can receive additional information about the operation of the
Commission's Public Reference Facilities by calling the Commission at
1-800-SEC-0330. The Commission also maintains a website at http://www.sec.gov
that contains reports, proxy and information statements and other information
regarding companies, like IGCA, that file information electronically with the
Commission.
The Commission allows us to "incorporate by reference" information that has
been filed with it, which means that we can disclose important information to
you by referring you to the other information we have filed with the Commission.
The information that we incorporate by reference is considered to be part of
this Proxy Statement, and related information that we file with the Commission
will automatically update and supersede information we have included in this
Proxy Statement. We also incorporate by reference any future filings we make
with the Commission under Sections 13(a), 13(c), 14 or 15(d) of the Securities
Exchange Act of 1934, as amended, until the date of the Special Meeting. The
following are specifically incorporated herein by reference:
1. Annual Report on Form 10-K405 for the fiscal year ended December 31,
1999; and
2. Amendment to Annual Report on Form 10-K405/A for the fiscal year
ended December 31, 1999;
You can request a free copy of the above filings or any filings
subsequently incorporated by reference into this prospectus by writing or
calling us at the Company's executive offices.
PROPOSALS OF SHAREHOLDERS
Any shareholder who desires to submit a proposal for action by the
stockholders at the next annual meeting must submit such proposal in writing to
President, Innovative Gaming Corporation of America, Inc., 4725 Aircenter
Circle, Reno, Nevada, 89502, by , 2000. Due to the complexity of the
respective rights of the shareholders and the Company in this area, any
shareholder desiring to propose such an action is advised to consult with his or
her legal counsel with respect to such rights. It is suggested that any such
proposal be submitted by certified mail, return receipt requested.
On May 21, 1998, the SEC adopted an amendment to Rule 14a-4, as promulgated
under the Securities and Exchange Act of 1934. The amendment to 14a-4(c)(1)
governs the Company's use of its discretionary proxy voting authority with
respect to a shareholder proposal which the shareholder has not sought to
include in the Company's proxy statement. The new amendment provides that if a
proponent of a proposal fails to notify the Company at least 45 days before the
date of mailing of the prior year's proxy statement, then the management proxies
will be allowed to use their discretionary voting authority when the proposal is
raised at the meeting, without any discussion of the matter in the proxy
statement.
With respect to the Company's 2000 Annual Meeting of Shareholders, if the
Company is not provided notice of a stockholder proposal which the stockholder
has not previously sought to include in the Company's proxy statement by
, 2000, the management proxies will be allowed to use their
discretionary authority as outlined above.
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<PAGE> 76
The Board of Directors does not intend to present to the meeting any other
matter not referred to above and does not presently know of any matters that may
be presented to the meeting by others. However, if other matters come before the
meeting, it is the intent of the persons named in the enclosed proxy to vote the
proxy in accordance with their best judgment.
By Order of the Board of Directors
/s/ Edward G. Stevenson
--------------------------------------
Secretary
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APPENDIX A
ASSET PURCHASE AGREEMENT
BY AND BETWEEN
XERTAIN, INC.
"BUYER"
INNOVATIVE GAMING, INC.,
AND
INNOVATIVE GAMING CORPORATION OF AMERICA
"SELLER"
FEBRUARY 1, 2000
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THIS ASSET PURCHASE AGREEMENT (this "Agreement"), dated as of February 1,
2000, by and between Xertain, Inc., a Delaware corporation ("Buyer"), and
Innovative Gaming Corporation of America, a Minnesota corporation, ("IGCA") and
Innovative Gaming, Inc., a Nevada corporation ("IGI" and collectively with IGCA,
"Seller");
RECITALS
WHEREAS, Seller is engaged in the business of designing, manufacturing and
selling gaming machines at its facility in Reno, Nevada (the "Business");
WHEREAS, the Seller and Mortgage, Inc., a Delaware corporation
("nMortgage") entered into a Agreement and Plan of Merger of even date hereof
pursuant to which the Seller would acquire all of the outstanding capital stock
of nMortgage in exchange for shares of the Seller's common stock (the "nMortgage
Transaction");
WHEREAS, as a condition to the nMortgage Transaction, Seller must sell and
divest substantially of its gaming assets utilized in the Business (the
"Assets");
WHEREAS, on the terms and subject to the conditions of this Agreement,
Seller desires to sell and Buyer desires to (i) purchase certain specifically
delineated assets of Seller utilized in, related to or arising from the Business
and (ii) assume certain specifically delineated liabilities of Seller relating
to or arising from the Business; and
NOW, THEREFORE, in consideration of the promises and of the mutual
covenants and conditions contained herein, the parties hereby agree as follows:
1. PURCHASE AND SALE OF ASSETS.
1.1 GENERALLY. On the terms and subject to the conditions of this
Agreement, Seller agrees to sell, transfer, convey and deliver to Buyer, and
Buyer agrees to purchase from Seller, on and as of the Closing Date (as defined
in Section 4 hereof), the property and assets (the "Assets") of Seller as
follows:
(1) The equipment, spare parts, tools, accessories, furniture and other
miscellaneous tangible personal property of Seller listed on SCHEDULE
1.1(A)hereto (collectively, the "Equipment");
(2) All rights of Seller under any warranty or guarantee by any
manufacturer, supplier or other transferor of the Assets;
(3) All rights of Seller to the finished goods, inventory, and all other
inventory (the "Inventory") as listed on SCHEDULE 1.1(C) hereto;
(4) All interests of Seller in any trade names, including the name
"Innovative Gaming", trade marks, certification marks, service names, service
marks, master works, designs, logos, inventions, know-how, technology, patents,
industrial designs, copyrights and applications therefor, domestic and foreign,
together with particulars of registration, if any registration with respect
thereto has been effected, and all other intellectual property, utilized in,
related to or arising from the Business, together with pending applications for
any of the foregoing (the "Intellectual Property"), including without
limitation, the Intellectual Property identified in SCHEDULE 1.1(D) hereto;
(5) All rights and obligations of Seller under the contracts, guarantees,
leases, (except for the Office Lease referred to in Section 7.9(a) commitments,
or other agreements (other than the Non-Assumed Contracts) listed IN SCHEDULE
1.1(E) hereto (the "Assigned Contracts") including the Distribution Agreements
(as defined herein);
(6) All goodwill and other general intangibles of Seller related to or
arising from that portion of the Business in which the Assets were associated;
(7) All sales records, purchase records, customer lists, supplier lists,
advertising and promotional materials, vendor records and information,
production records and other records relating to the Business or
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the Assets; all deeds and other instruments, maps, and profiles relating to the
Business; all records regarding the Occupational Safety and Health Act ("OSHA")
and other governmental examinations and clearances relating to the Business or
the Assets; and all personnel records of any employee that is employed by Buyer
following the Closing; provided, however, that Seller may make and retain copies
of any records transferred to Buyer;
(8) All rights of Seller under any insurance policies, claims, deposits,
prepayments, refunds, causes of action, chooses in action, rights of recovery,
rights of set off and rights of recoupment for Seller related to the Assets.
The Assets will be transferred by Seller to Buyer in accordance with this
Agreement with all required consents of any and all third parties free and clear
of all liens, security interests or encumbrances.
1.2 EXCLUDED ASSETS. The following property and assets of Seller are
excluded from sale to Buyer (the "Excluded Assets"), however, any asset or
property owned by Seller which is not listed below will not be deemed to have
been included in the definition of Assets unless such asset or property is
specifically referenced in Section 1. 1 of this Agreement:
(1) Cash;
(2) All accounts receivable of Seller existing on the Closing Date in
accordance with Section 11;
(3) All escrow accounts for the benefit of Seller;
(4) All stock in Seller's subsidiary, Innovative Gaming, Inc.;
(5) All gaming regulatory licenses;
(6) The corporate charter, qualifications to conduct business as a foreign
corporation, arrangements with registered agents relating to foreign
qualifications, taxpayer and other identification numbers, general ledgers, tax
returns, seals, minute books, stock transfer books and similar documents of
Seller relating to the organization, maintenance and existence of Seller as a
publicly traded corporation (provided that Buyer shall have access thereto to
the extent reasonably necessary for the operation of the Business and the
preparation of tax returns and financial statements of Buyer following the
Closing Date);
(7) The rights and obligations of Seller under the agreements set forth on
SCHEDULE 1.2 hereof (the "Non-Assumed Contacts"); and
(8) Any of the rights of Seller under this Agreement or any other agreement
between Seller and Buyer entered into on or after the date of this Agreement in
accordance with the terms hereof.
2. PURCHASE PRICE
2.1 GENERALLY. The total purchase price to be paid to Seller for the
Assets (hereinafter referred to as the "Purchase Price") shall be equal to FOUR
MILLION DOLLARS ($4,000,000) subject to adjustment as provided in Section 2.2
plus the Accounts Receivables Note as indicated in Section 11. Each party hereto
agrees to report to the Internal Revenue Service such information concerning the
allocation of the Purchase Price as may be required by Section 1060 of the
Internal Revenue Code as set forth below. Within ninety (90) days following
Closing, Buyer shall deliver to Seller Buyer's suggested allocation of the
Purchase Price. Seller shall have five (5) business days in which to notify
Buyer of any objection to such allocation. If the parties cannot agree on an
allocation of the purchase Price within thirty (30) days of Buyer's receipt of
Seller's objection, the parties shall jointly appoint an independent appraiser
whose determination of the allocation of the Purchase Price shall be final.
2.2 PAYMENT OF PURCHASE PRICE. At the Closing, Buyer shall pay the
Purchase Price as follows:
(1) LICENSING CONSIDERATION.
(A) ONE MILLION DOLLARS ($1,000,000) in cash payable at Closing (the "Cash
Portion") in the event that prior to Closing Buyer obtains necessary gaming
regulatory licensing in Nevada such that it
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<PAGE> 80
can manufacture gaming machines in Nevada on an interim basis ("Interim
Approval") prior to full approval of Nevada gaming regulatory authorities.
(B) In the event that Buyer cannot obtain Interim Approval prior to
Closing, Buyer shall deliver either, at the election of Buyer, which such
election shall be made pursuant to notice duly given to Seller no later than
thirty (30) days prior to the Closing:
(i) ONE MILLION DOLLARS ($1,000,000) evidenced by a promissory note
(the "Licensing Note") substantially in the form of EXHIBIT A.
(ii) an irrevocable letter of credit (the "Letter of Credit") in the
form and substance and from a bank reasonably acceptable to Seller in the
amount of $750,000, which shall be due on the earlier of (a) the date the
Buyer obtains necessary gaming regulatory licensing in Nevada such that it
can manufacture gaming machines in Nevada or (b) September 1, 2000.
(2) CONVERTIBLE NOTE. THREE MILLION DOLLARS ($3,000,000) in a convertible
promissory note (the "Convertible Note") substantially in the form attached
hereto as EXHIBIT B.
(3) ACCOUNTS RECEIVABLE NOTE. A six month term note (the "Accounts
Receivable Note") substantially in the form attached hereto as EXHIBIT C,
secured by the Sellers's account receivables.
3. ASSUMPTION OF LIABILITIES. Except as hereinafter specifically provided,
Buyer shall not assume any liabilities or obligations of Seller. Subject to the
terms and conditions of this Agreement, on the Closing Date Buyer shall assume
only the following liabilities and obligations of Seller (collectively, the
"Assumed Liabilities"):
(1) Obligations of Seller arising from and after the Closing Date under
Purchase Orders identified in SCHEDULE 3.1(C) hereto;
(2) Obligations of Seller arising from and after the Closing Date under the
Assigned Contracts identified in SCHEDULE 1.1(E) hereto;
(3) Obligations of Seller relating to the Finova financing (as defined in
SCHEDULE 1.1(E)), provided, however, that in the event that Nevada gaming law
prohibits Buyer from collecting "bucket sales", the Seller shall collect the
"bucket sales" and directly pay Finova, provided, that any such direct payment
from Seller to Finova would not relieve Buyer from its assumptions of the
liabilities hereunder.
(4) Obligations of Seller to IGT relating to "Bonus Streak" games.
4. CLOSING.
4.1 The closing of the transactions contemplated by this Agreement (the
"Closing") shall take place on the date all conditions to close are met pursuant
to Sections 9 and 10 and certified by each party as set forth below, or such
other date as Buyer and Seller may mutually agree (the "Closing Date") at the
Seller's offices in Reno, Nevada. At any time, but not more than twice each
month following the date of this Agreement, each party may request the other
party to provide a written list of the items needed to be completed, under
Section 9 for the Buyer and under Section 10 for the Seller, in order for such
party's conditions to close to have been satisfied, which list shall include a
detailed explanation of such items remaining unsatisfied. A party may waive its
own conditions to close in writing at any time.
4.2 At the Closing (a) Buyer shall (i) pay to Seller the Purchase Price as
specified in Sections 2.2 hereof, (ii) deliver to Seller the various
certificates, instruments and documents referred to in Section 10 hereof and
(iii) deliver to Seller an Assumption Agreement in the format of EXHIBIT D
hereto to evidence the assumption by Buyer of the Assumed Liabilities, and (b)
the Seller shall (1) deliver to Buyer such bills of sale, assignments, consents,
estoppels, warranties, and other documents of transfer reasonably required to
transfer to Buyer the interest of Seller in the Assets; (ii) an estoppel
certificate and consent from the lessor under the Office Lease; (iii) a sublease
in the form mutually agreed upon by the parties and (iv) deliver to Buyer the
various certificates instruments and documents referred to in Section 9 hereof.
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5. LABOR AND EMPLOYMENT MATTERS. Except as set forth in Sections 9.10 and 12
hereof, Buyer shall not assume any employment obligations, wage or salary
payment obligations, including without limitation those arising under any
pension, profit sharing, deferred compensation, severance, welfare, sick leave,
accrued or earned vacation, wage or other employee benefit plan, procedure,
policy or practice of Seller regardless of whether such plan, procedure, policy
or practice is disclosed in this Agreement. Seller shall afford Buyer a
reasonable opportunity to interview its employees for prospective employment by
Buyer if so requested by Buyer. Seller will furnish to Buyer such information in
its personnel files as Buyer may reasonably request in connection with
determining whether to employ a person presently employed by Seller. Buyer, at
its sole discretion, may offer employment to any employees of Seller as of the
Closing Date.
6. LOSS, DESTRUCTION, CONDEMNATION OR DAMAGE TO ASSETS. If between the date of
this Agreement and the Closing Date, the Assets are lost, destroyed or
condemned, or suffer any material damage and this Agreement shall not have been
terminated pursuant to Section 14 hereof, if applicable, then, either (a) the
Purchase Price shall be reduced by the excess of (i) the fair market value of
such Assets prior to such loss, destruction, condemnation or damage, over (ii)
the salvage value, if any, of such Assets following such loss, destruction,
condemnation or damage, or (b) no adjustment to the Purchase Price shall be made
and Seller shall, on the Closing Date, assign to Buyer all insurance and/or
condemnation proceeds payable to Seller on account of such loss, destruction,
condemnation or damage pursuant to an assignment in form and substance
satisfactory to Buyer and pay to Buyer the amount of any deductible under any
such insurance. The determination of whether clause (a) or (b) shall apply will
be in the sole control of Buyer.
7. REPRESENTATIONS AND WARRANTIES OF THE SELLER. IGCA and IGI hereby represent
and warrant to Buyer that:
7.1 CORPORATE ORGANIZATION. IGCA and IGI are duly organized, validly
existing and in good standing under the laws of the states of Minnesota and
Nevada, respectively, with full corporate power to carry on the Business as it
is now and has since its organization been conducted and to own, lease or
operate the Assets. Except for its ownership of Innovative Gaming, Inc., a
Nevada corporation ("IGI") and IGCA Acquisition Corp., a Minnesota corporation
formed for purposes of completing the nMortgage Transaction, Seller does not
own, directly or indirectly, any outstanding capital stock of any class of any
other corporation, nor is Seller a party to any partnership or joint venture
related to the Assets or the Business.
7.2 QUALIFICATION TO DO BUSINESS. Seller is qualified to do business and
is in good standing in each jurisdiction in which the nature of the Business
makes such qualification necessary.
7.3 CORPORATE POWER. Seller has the corporate power to execute and
deliver this Agreement and to consummate the transactions contemplated hereby.
7.4 CONFLICTING AGREEMENTS, GOVERNMENTAL CONSENTS. The execution and
delivery by Seller of this Agreement and all of the other agreements and
instruments to be executed and delivered pursuant hereto (collectively, the
"Transaction Documents"), the consummation of the transactions contemplated
hereby, pursuant to the terms and conditions hereof, and the performance or
observance by the Seller of any of the terms or conditions hereof or thereof,
will not (with or without notice or lapse of time) (a) conflict with, or result
in a breach or violation of the terms or conditions of, or constitute a default
under, or result in the creation of any lien on any of the Assets pursuant to,
the Articles of Incorporation or By-Laws of Seller, any award of any arbitrator,
or any indenture, contract or agreement, instrument, order, judgment or decree
to which Seller or the Assets is subject, or (b) except as set forth in SCHEDULE
7.4, require any filing or registration with, or any consent or approval of, any
federal, state, tribal, or local governmental agency or authority, or (c)
contravene, conflict with, or result in a violation or breach of any provision
of, or give any person or entity the right to declare a default or exercise any
remedy under, or to accelerate the maturity or performance of, or to cancel,
terminate, or modify, any contract or other arrangement to which Seller is a
party or by which Seller is bound or to which any of the Assets is subject (or
result in the imposition of any security interest upon any of such assets).
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7.5 CORPORATE AUTHORITY. Subject to the approval of the Seller's
Shareholders at a special meeting called for the purpose of approving this
Agreement and the transactions contemplated hereby, the execution and delivery
of this Agreement and the other Transaction Documents by Seller and the
consummation of the transactions contemplated hereby or thereby have been duly
authorized by all necessary corporate action. Subject to the foregoing, this
Agreement and the Transaction Documents are, or when delivered will be, legally
valid and binding obligations of the Seller, enforceable in accordance with
their respective terms.
7.6 ACTIONS, SUITS, PROCEEDINGS. There are no actions, suits or
proceedings pending or, to the knowledge of the Seller, threatened against any
of the Seller, or any of the Seller's property in any court or before any
federal, state, municipal or other governmental agency or before any other
private or public tribunal or quasi-tribunal which, (a) if decided adversely to
the Seller, would have a materially adverse effect upon the Business or Assets,
(b) seek to restrain or prohibit the transactions contemplated by this Agreement
or obtain any damages in connection therewith, or (c) in any way call into
question the validity of this Agreement or the other agreements and instruments
to be executed and delivered by the Seller; nor is the Seller in default with
respect to any order of any court or governmental agency entered against Seller
in respect of the Business or Assets.
7.7 NO MATERIAL VIOLATIONS. The Seller is not in violation of any
applicable law, rule or regulation relating to the Business that would
reasonably be expected to have a material adverse effect on the Business, and,
to the knowledge of the Seller, there are no requests, claims, notices,
investigations, demands, administrative proceedings, hearings or other
governmental claims against the Seller alleging the existence of any such
violation.
7.8 EMPLOYEES. SCHEDULE 7.8 hereto lists all employees of Seller as of
the date hereof engaged in operation of the Business and in the case of each
such employee sets forth the position, level of compensation, date of
employment, and years of employment recognized for determining eligibility for
participation in, and vesting and credited service under any employee plans.
7.9 OFFICE LEASE. (a) Seller is a party to a certain Lease Agreement (the
"Office Lease") between Seller and Dermody Properties, dated July 9, 1996.
Seller has good and marketable title to the leasehold interest under the Office
Lease, which is free and clear of all liens and encumbrances or charges of any
kind or character; there is no default under the Office Lease on the part of
Seller and/or on the part of the lessor under the Office Lease. There is no act,
event or happening or contingency which, with the passage of time or giving of
notice or both would be a default by lessor under the Office Lease, and the
Office Lease is in full force and effect and all obligations and conditions
thereof to be performed by lessor and Seller thereunder and necessary to the
enforceability of the Office Lease have been satisfied.
(a) To the best of Seller's knowledge, Seller is not in violation of any
applicable law regulating the uses that may be made of the premises leased
pursuant to the Office Lease or other law, regulation or requirement relating to
the operation of such leased premises, and Seller has not received any written
notice of any such violation, or of the existence of any condemnation proceeding
with respect to any of such leased premises.
(b) Seller has no knowledge of improvements made or contemplated to be made
by any public or private authority, the costs of which are to be assessed as
special taxes or charges under the Office Lease, and to the Selling Parties'
knowledge, there are no present assessments payable by Seller as lessee under
the Office Lease.
7.10 TITLE TO PERSONAL PROPERTY. Except as indicated on Schedule 10.12,
Seller has good title to all personal property included in the Assets, free and
clear of all mortgages, liens, pledges, charges and encumbrances.
7.11 CONDITION OF ASSETS. All of the tangible Assets are free from
defects, have been maintained in accordance with normal industry practice, and
are in good operating condition and repair (subject to normal wear and tear).
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7.12 INTELLECTUAL PROPERTY RIGHTS. SCHEDULE 1.1(D) hereto lists and
describes correctly all Intellectual Property included in the Assets, all of
which are solely registered in the name of Seller, of which Seller has all
right, title and interest, and have not been licensed or otherwise been made
available by Seller for use by others except as set forth on SCHEDULE 7.12
hereto. All such registered intellectual property rights are in full force and
effect and will not expire or require renewal until the date (if any) set forth
in SCHEDULE 1.1(D). Seller does not own or have any interest in or to any other
copyrights, patents, trademarks, service marks, trade names, master works,
logos, trade secrets, designs, and other intellectual property (or applications
therefor) and does not license from others the right to use any industrial or
intellectual property rights. Except as set forth on SCHEDULE 7.12, Seller owns
or possesses, is licensed under, or otherwise has lawful access to, all
copyrights, patents, trademarks, service marks, trade names, master works,
logos, trade secrets, designs, and other intellectual property (or applications
therefor) necessary for the lawful conduct of the Business as now conducted,
without any infringement of or conflict with the industrial or intellectual
property rights of others. To the best knowledge of the Seller there has been no
unauthorized use or disclosure or misappropriation of any of its intellectual
properties, and Seller has taken reasonable steps to protect against the
unauthorized use or disclosure of its intellectual property. Except as disclosed
in SCHEDULE 1.1(D), Seller has no reason to believe that (i) any of the
Intellectual Property listed in SCHEDULE 1.1(D) is invalid or unenforceable
(whether due to the existence of prior art, inequitable conduct such as patent
fraud or misuse, prior use or creation, or otherwise), (ii) any payments to
governmental agencies required to maintain the effectiveness of any of such
registered Intellectual Property have not been timely paid, or (iii) any of such
pending applications will be denied or will be materially restricted or
conditioned or any prior art exists which would cause such denial, restriction
or condition.
7.13 FINANCIAL INFORMATION. All financial statement filed with the
Securities and Exchange Commission, including the statements as of September 30,
1999, (the "Balance Sheet Date"), fairly present in all material respects the
financial condition of the Business at such date and the results of operations
for the period then ended and have been prepared in accordance with generally
accepted accounting principles, consistently applied. Since the Balance Sheet
Date, there has not been:
(1) any material adverse change in the financial condition of the Business,
the Assets or the liabilities of Seller;
(2) any damage, destruction or loss (whether or not covered by insurance)
materially and adversely affecting the Business or the Assets;
(3) any sale or transfer of any of the Assets used in or useful to the
Business, except in the ordinary course of business; or
(4) any transaction affecting the Business or the Assets entered into by
Seller, other than in the ordinary course of business, except this Agreement.
7.14 TAXES. Seller has paid all federal, state and local income, profits,
franchise, sales, use, property, excise, payroll, and other taxes and
assessments (including interest and penalties) relating to the Business, in each
case to the extent that such have become due and are not being contested in good
faith. No claims for additional taxes have been asserted against Seller and no
audits are pending with respect to any tax liabilities of Seller.
7.15 INSURANCE. Seller maintains property and casualty insurance on a
replacement costs basis on all tangible Assets and product liability insurance
with respect to the Business. All policies providing such insurance are in full
force and effect and Seller has not received any notice of impending
cancellation or non-renewal thereof.
7.16 BROKERS AND FINDERS. Seller has not retained or engaged any broker,
finder or other financial intermediary in connection with the transactions
contemplated by this Agreement.
7.17 PRODUCT LIABILITY. Seller has no knowledge of any liability arising
out of any injury to individuals or property as a result of the ownership,
possession, or use of any product manufactured, sold,
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or delivered by Seller, other than liabilities that both individually and in the
aggregate are not material to the Business and that are reasonably expected to
be fully covered by Seller's insurance.
8. REPRESENTATIONS AND WARRANTIES OF BUYER. Buyer hereby represents and
warrants to Seller as follows:
8.1 ORGANIZATION. Buyer is a corporation duly incorporated and existing
and in good standing under the laws of the State of Delaware and has the
corporate power to execute and deliver this Agreement and to consummate the
transactions contemplated hereby.
8.2 CONFLICTING AGREEMENTS, GOVERNMENTAL CONSENTS. The execution and
delivery by Buyer of this Agreement, the Transaction Documents, the consummation
of the transactions contemplated hereby or thereby, and the performance or
observance by Buyer of any of the terms or conditions hereof or thereof, will
not (a) conflict with, or result in a breach or violation of the terms or
conditions of, or constitute a default under, the Articles of Incorporation or
By-Laws of Buyer, any award of any arbitrator, or any indenture, contract or
agreement (including any agreement with stockholders), instrument, order,
judgment, decree, statute, law, rule or regulation to which Buyer is subject, or
(b) require any filing or registration with, or any consent or approval of, any
federal, state or local governmental agency or authority.
8.3 CORPORATE AUTHORITY. The execution and delivery of this Agreement,
and the Transaction Documents, and the consummation of transactions contemplated
hereby or thereby have been duly authorized by all necessary corporate action.
This Agreement and the Transaction Documents are, or when delivered will be,
legally, valid and binding obligations of Buyer, enforceable in accordance with
their respective terms.
8.4 BROKERS AND FINDERS. Buyer has not retained any broker, finder or
other financial intermediary in connection with the transactions contemplated by
this Agreement.
9. CONDITIONS TO OBLIGATION OF BUYER TO CLOSE. The obligation of Buyer to
effect the closing of the transactions contemplated by this Agreement is subject
to the satisfaction prior to or at the Closing of the following conditions:
9.1 REPRESENTATIONS AND WARRANTIES. All of the representations and
warranties of the Seller contained in this Agreement shall be true and correct
on the Closing Date, as if made on the Closing Date.
9.2 OBSERVANCE AND PERFORMANCE. The Seller shall have observed and
performed in all material respects all covenants and agreements required by this
Agreement to be observed or performed by the Seller on or prior to the Closing
Date.
9.3 OFFICER'S CERTIFICATE. Seller shall have delivered to Buyer a
certificate of the President or Chief Executive Officer of Seller, dated the
Closing Date, to the effects set forth in Sections 9.1 and 9.2 above.
9.4 CONSENTS OF THIRD PARTIES. Buyer shall have received duly executed
copies of any consents necessary to permit the assignment of the Assets, and the
Assigned Contracts without breach thereof.
9.5 REGULATORY APPROVALS AND GAMING LICENSING. Except with respect to
Nevada gaining licenses, Buyer shall have received all authorizations, consents
and approvals of governments and governmental agencies required, including
required gaming regulatory licensure of Buyer, its officers and directors or
waivers thereof from the appropriate gaming regulatory authority, in connection
with the purchase and sale contemplated by this Agreement.
9.6 BUYER FINANCING. Buyer shall have received to the satisfaction of
Seller, financing of the Licensing Note by February 22, 2000.
9.7 NO LEGAL ACTIONS. No court or governmental authority of competent
jurisdiction shall have issued an order restraining, enjoining or otherwise
prohibiting the consummation of the transactions contemplated by this Agreement,
and no person, fin-n, corporation or governmental agency shall have
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instituted an action or proceeding which shall not have been previously
dismissed seeking to restrain, enjoin or prohibit the consummation of the
transactions contemplated by this Agreement.
9.8 CLOSING DOCUMENTS. Buyer shall have received all necessary bills of
sale, assignment documents, an estoppel certificate from the lessor under the
Office Lease (in form satisfactory to Buyer), and the Office Lease lessor's
consent to execution of the Office SubLease, a non-disturbance agreement from
any lender of record, assignments and other documents of transfer reasonably
required to transfer to Buyer the interests of Seller in the Assets consistent
with the terms of this Agreement.
9.9 AMENDMENT OF NOTES. Certain Promissory Notes of the Seller issued
June 1, 1999, shall be amended to release the collateral securing such notes.
9.10 KEY EMPLOYEE SEVERANCE AGREEMENTS. The employment agreements by and
between the Seller and each of B.V. Johnson, Rex Stock, Nick Greenwood, and Eric
Bendell (collectively, the "Key Employees") shall be terminated and all
severance obligations thereunder shall be assumed by Seller pursuant to
severance agreements in accordance with Section 12.
9.11 INTELLECTUAL PROPERTY SCHEDULE. Seller shall deliver to Buyer:
(a) a schedule indicating all sources codes, object codes and
configurations relating to the Seller's gaming products (the "Source
Codes");
(b) a diskette and a print-out containing the Source Codes; and
(c) a copy of physical design drawings, manufacturer's and process
plans and drawings relating to the Seller's gaming products.
10. CONDITIONS TO OBLIGATION OF SELLER TO CLOSE. The obligation of Seller to
effect the transactions contemplated by this Agreement is subject to the
satisfaction prior to or at the Closing of the following conditions:
10.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties
of Buyer contained in this Agreement shall be true and correct in all material
respects on the Closing Date, as if made on the Closing Date.
10.2 OBSERVANCE AND PERFORMANCE. Buyer shall have observed and performed
in all material respects all covenants and agreements required by this Agreement
to be observed or performed by Buyer on or prior to or at the Closing Date,
including delivery of the following documents: (a) either (i) the Cash Portion,
(ii) the Licensing Note or (iii) the Letter of Credit, (b) the Convertible Note
and (c) the Accounts Receivable Note.
10.3 OFFICER'S CERTIFICATE. Buyer shall have delivered to Seller a
certificate of the President or Chief Executive Officer of Buyer, dated the
Closing Date, to the effects set forth in Sections 10.1 and 10.2 above.
10.4 REGULATORY APPROVAL AND GAMING LICENSING. Except with respect to
Nevada gaming licenses, Buyer shall have received all authorizations, consents
and approvals of governments and governmental agencies required in connection
with the purchase and sale contemplated by this Agreement.
10.5 NO LEGAL ACTIONS. No court or governmental authority of competent
jurisdiction shall have issued an order restraining, enjoining or otherwise
prohibiting the consummation of the transactions contemplated by this Agreement,
and no person, firm, corporation or governmental agency shall have instituted an
action or proceeding which shall not have been previously dismissed seeking to
restrain, enjoin or prohibit the consummation of the transactions contemplated
by this Agreement.
10.6 BUYER FINANCING. Buyer shall have received, to the satisfaction of
Seller, financing of the Licensing Note pursuant to terms acceptable to Seller
by February 22, 2000.
10.7 CLOSING OF NMORTGAGE TRANSACTION. The nMortgage Transaction shall
close contemporane-ously with the closing of the transactions contemplated by
this Agreement.
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10.8 SHAREHOLDER APPROVAL. This Agreement and the transactions
contemplated hereby shall be approved by Seller's Shareholders
10.9 SUBLEASE OF RENO FACILITY. Buyer and Seller shall enter into a sub
lease for the Seller's facility at 4725 Aircenter Circle, Reno, Nevada.
10.10 KEY EMPLOYEE SEVERANCE AGREEMENTS. The employment agreements by and
between the Seller and each of the Key Employees shall be terminated and all
severance obligations thereunder shall be assumed by Seller pursuant to
severance agreements in accordance with Section 12.
11. ACCOUNTS RECEIVABLES.
11.1 ACCOUNTS RECEIVABLES NOTE. Ten days prior to the Closing Date,
Seller shall estimate accounts receivables (the "Accounts Receivables") for the
180 days after Closing indicating the amount and of such Accounts Receivable
(the "Accounts Receivable Estimate") and Buyer shall issue at Closing to Seller
the Accounts Receivable Note substantially in the form of Exhibit C, with the
principal amount equal to:
a) the Accounts Receivables Estimate, plus
b) the aggregate of six months severance of base salary of the Key
Employees due to the Key Employees pursuant to the Severance Agreements,
minus
c) One Hundred Thousand Dollars ($100,000) which shall be considered a
subsidy for Reno rent payments.
The principal balance of the Accounts Receivables Note shall be further
decreased by any payments made by Buyer pursuant to Section 11.2 and increased
by the Reimbursement Shortfall pursuant to Section 12.
11.2 ACCOUNTS RECEIVABLES. During the term of the Accounts Receivable
Note:
a) Buyer shall provide to Seller, ten (10) days after month-end,
financial statements certified by the Buyer's President and Chief Financial
Officer for such month indicating all Accounts Receivable received in such
month, including the source and amount of such monies received.
b) Seller shall pay the Monthly Severance Payments in accordance with
the Severance Agreement as indicated in Section 12. Buyer shall reimburse
the Seller such amount of Monthly Severance Payment out of monthly Accounts
Receivables collections received for such month (the "Severance
Reimbursement").
c) Buyer shall remit to Seller 25% of Accounts Receivables collections
received for such month after subtracting the Severance Reimbursement
("Accounts Receivable Payoff") 15 days after month end and the principal
amount of the Accounts Receivables Note shall be reduced by the amount of
such Accounts Receivable Payoff.
d) The principal amount of such Note shall be reduced by fair and
reasonable payments made by Buyer to third parties to account for normal
software support for such six month period.
12. KEY EMPLOYEE SEVERANCE. Each Key Employee and Seller shall enter into a
severance agreement (individually, a "Severance Agreement") which will contain
the following terms:
a) the employment agreements (collectively, the "Employment
Agreement") between each Key Employee and the Seller shall be terminated.
b) Seller shall pay each key Employee 12 months base salary as
severance to be pursuant to the Employment paid monthly to the Key
Employees over a 12 month period by Seller (each such monthly payment, a
"Monthly Severance Payment").
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c) for the first six months following the Closing Date, the Buyer
shall reimburse Seller ("Severance Reimbursement") out of monthly Accounts
Receivables fifteen (15) days after each month end an amount equal to the
Monthly Severance Payments.
d) for the first six months following the Closing Date, to the extent
that the Accounts Receivables are insufficient to reimburse the Seller the
Monthly Severance Payments, the principal amount of the Accounts
Receivables Note shall be increased by the difference between the Monthly
Severance Payment and the Severance Reimbursement (the "Reimbursement
Shortfall").
13. OPERATION OF BUSINESS PRIOR TO CLOSING. The Seller agrees that, except
with the prior written consent of Buyer, from the date of this Agreement to the
Closing:
13.1 EMPLOYEES. Seller will not hire any new employees for the Business
or effect any increase in compensation or employee benefits for its employees
engaged in operating the Business except in the ordinary course of business.
13.2 NO DISPOSITION OF ASSETS. Seller will not sell, transfer, dispose of
or abandon any portion of the Assets, except in the ordinary course of business
and consistent with past practice.
13.3 NO ADDITIONAL LIENS. Seller will not permit any of the Assets to
become subject to any mortgage, lien, charge, or encumbrance.
13.4 NO MODIFICATION OF AGREEMENTS. Seller will not modify or amend any
Assigned Contract, any material contract, lease, commitment or agreement to be
assigned to or assumed by Buyer hereunder, or waive or assign to any third party
any of its rights under any such contract, lease, commitment or agreement or
under any Assigned Contract.
13.5 MAINTENANCE OF TANGIBLE ASSETS. Seller will maintain all tangible
Assets in good order and repair, ordinary wear and tear excepted.
13.6 MAINTENANCE OF INTANGIBLE ASSETS. Seller will maintain and protect
all material intangible Assets including but not limited to the Intellectual
Property.
13.7 NO EXTRAORDINARY AGREEMENTS. Seller will not enter into any contract
or agreement which relates to the Business or Assets and which contains terms or
conditions inconsistent with past business practices of Seller or the continued
operation of the Business as a going concern.
13.8 MAINTENANCE OF INSURANCE. Seller will continue to carry all existing
policies of insurance or will effect renewals or replacements thereof in
substantially the same form and amount, and providing substantially the same
coverage, as such existing policies.
13.9 INSPECTION RIGHTS. Prior to Closing, Seller will permit employees
and agents of Buyer during normal business hours to inspect the Assets and to
inspect all contracts, agreements, other documents and records reflecting or
reasonably relating to the Assets or the Business. All information and records
obtained by Buyer pursuant to this Section shall be maintained as confidential
and shall not be disclosed to any third party without the consent of Seller
except in response to legal process or to the extent required to comply with
applicable law. Buyer shall not be obligated to maintain as confidential any
information obtained from Seller which is publicly available, readily
ascertainable from public sources, known to Buyer at the time the information
was disclosed or which is rightfully obtained from a third party. The
obligations of confidentiality arising under this Section shall survive the
termination or abandonment of this Agreement.
14. TAXES, FEES AND OTHER EXPENSES.
14.1 TAXES AND FEES. Seller shall be responsible for and shall pay all
sales, transfer or similar taxes or governmental charges, if any, and all deed
taxes and recording fees with respect to the sale and purchase of the Assets,
whether levied against the Assets, Seller or Buyer.
14.2 EXPENSES. Each party shall pay all of the costs and expenses
incurred by it in negotiating and preparing this Agreement (and all other
agreements, certificates, instruments and documents executed in
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connection herewith), in performing its obligations under this Agreement, and in
otherwise consummating the transactions contemplated by this Agreement,
including without limitation its attorneys' fees and accountants' fees.
15. TERMINATION OF AGREEMENT. In addition to certain provisions contained in
this Agree-ment, this Agreement may be terminated at any time prior to the
Closing Date:
15.1 MUTUAL CONSENT. By mutual consent of Buyer and Seller.
15.2 BREACH OF AGREEMENT. By Buyer giving written notice to any of Seller
if Seller is in breach, or by Seller giving written notice to Buyer if Buyer is
in breach, in any material respect of any representation, warranty, covenant or
condition to closing contained in this Agreement.
15.3 GOVERNMENT ACTION. By Buyer or Seller if any court of competent
jurisdiction in the United States or other governmental body shall have issued
an order, decree or ruling or taken any other action restraining, enjoining or
otherwise prohibiting the consummation of the transactions contemplated by this
Agreement and such order, decree, ruling or other action shall have become final
and non-appealable.
16. ASSIGNMENT. This Agreement may not be assigned by either party hereto
without the prior written consent of the other. The terms and provisions of this
Agreement shall be binding upon and shall inure to the benefit of the parties
hereto, their permitted successors and assigns, and no person, firm or
corporation other than the parties, their permitted successors and assigns,
shall acquire or have any rights under or by virtue of this Agreement.
Notwithstanding the foregoing, Buyer may assign its rights and obligations under
this Agreement to a related or affiliated Person.
17. EXCLUSIVE DEALING. From the date hereof and until the later of the Closing
Date or the lawful termination of this Agreement, the Seller agrees that neither
it nor any of their subsidiaries, officers, directors, or the directors and
officers of its subsidiaries, shall (a) initiate, solicit or seek, directly or
indirectly, any inquiries or the making or implementation of any proposal or
offer (including, without limitation, any proposal or offer to its stockholders)
with respect to a Acquisition Proposal of Seller or any of its subsidiaries, or
(b) engage in any negotiations concerning, or provide any confidential
information or data to, or have any discussions with, any person relating to an
Acquisition Proposal, or (c) otherwise cooperate in any effort or attempt to
make, implement or accept an Acquisition Proposal. In the event that any of the
Selling Parties receives an Acquisition Proposal, such party shall immediately
(but not more than twenty-four (24) hours following receipt or knowledge of the
Acquisition Proposal) notify Buyer of the existence of such Acquisition
Proposal. Notwithstanding the foregoing, Seller may furnish information
concerning its business to a third party making an unsolicited Acquisition
Proposal and enter into discussions, negotiations or agreement with such third
party if Sellers concludes after due consideration, which shall include
consultation with legal counsel and other advisors, that an applicable fiduciary
duty of any of Sellers directors or officers require such actions. The term
"Acquisition Proposal" as used herein means any offer or proposal for, or any
indication of interest in, a merger or other business combination involving the
Seller (other than the nMortgage Transaction) or the acquisition of any
significant equity interest in, or a substantial portion of the Assets hereto,
other than the transactions contemplated by this Agreement. In the event that
Seller accepts an Acquisition Proposal subsequent to the execution of this
Agreement and prior to the termination of this Agreement, Seller shall pay Buyer
ONE HUNDRED FIFTY THOUSAND DOLLARS ($150,000).
18. PUBLIC ANNOUNCEMENT. Except to the extent required by law, any and all
public announcements of any kind or nature whatsoever concerning the
transactions contemplated hereby made before, on or after the Closing Date shall
require the prior written approval of Buyer and Seller; provided, however,
either party may make any announcements required by securities or other
applicable law or NASDAQ rules.
19. ENTIRE AGREEMENT. This Agreement, including the exhibits and schedules
attached to this Agreement, constitutes the entire agreement and understanding
between the Seller and Buyer with respect to the sale and purchase of the Assets
and the other transactions contemplated by this Agreement. All prior
representations, understandings and agreements between the parties with respect
to the purchase and
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sale of the Assets and the other transactions contemplated by this Agreement are
superseded by the terms of this Agreement.
20. AMENDMENT AND WAIVER. Any provision of this Agreement may be amended or
waived by a writing signed by the party against which enforcement of the
amendment or waiver is sought.
21. CHOICE OF LAW. This Agreement shall be construed and interpreted in
accordance with the laws of the State of Nevada, without regard to its choice of
law provisions, as though all acts and omissions related to this Agreement
occurred in the State of Nevada; provided, however, that all disputes arising
under this agreement shall be resolved by arbitration pursuant to the commercial
rules of the American Arbitration Association then in effect in Reno, Nevada
with enforcement of any arbitration award or decision enforceable in Federal
District Court having jurisdiction in Nevada.
22. SEVERABILITY. The provisions of this Agreement shall, where possible, be
interpreted so as to sustain their legality and enforceability, and for that
purpose the provisions of this Agreement shall be read as if they cover only the
specific situation to which they are being applied. The invalidity or
unenforceability of any provision of this Agreement in a specific situation
shall not affect the validity or enforceability of that provision in other
situations or of other provisions of this Agreement.
23. COUNTERPARTS. This Agreement may be executed in counterparts, each of
which shall be considered an original.
24. FACSIMILE EXECUTION. This Agreement may be executed by one or more of the
parties by facsimile transmitted signature and all parties agree that the
reproduction of signatures by way of telecopying device will be treated as
though such reproductions were executed originals
25. INTERPRETATION. All references herein to Articles and Sections refer to
Articles and Sections of this Agreement. All Article and Section headings are
for reference purposes only and shall not affect the interpretation of this
Agreement. Within this Agreement, the singular shall include the plural and the
plural shall include the singular, and any gender shall include all other
genders, all as the meaning and the context of this Agreement shall require. The
parties acknowledge that this Agreement and the Transaction Documents were
mutually drafted by both parties and that the interpretation thereof will not
prejudice any one party due to control of the Agreement.
26. NEGOTIATIONS. Until all parties have fully executed this Agreement, this
Agreement constitutes nonbinding negotiations between the parties hereto and no
rights shall arise hereunder.
27. NOTICES. All notices given pursuant to this Agreement shall be delivered
in writing by overnight courier or sent by United States registered mail,
postage prepaid, or Telecopier, addressed as follows (or to another address or
person as a party may specify on notice to the other):
(i) If to the Seller:
Innovative Gaming Corporation of America
4725 Aircenter Circle
Reno, Nevada 89502
Attention: Edward G. Stevenson
Telecopier: (775) 823-3030
Telephone: (775) 823-3000
with a copy to:
Maslon, Edelman, Borman & Brand, LLP
3300 Norwest Center
Minneapolis, Minnesota 55402-4140
Attention: Douglas T. Holod, Esq.
Telecopier: (612) 672-8397
Telephone: (612) 672-8200
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(ii) If to the Buyer:
Xertain, Inc.
2700 East Sunset Road, Suite 38/39
Las Vegas, NV 89014
Telecopier: (702) 895-7713
Telephone: (702) 895-7373
with a copy to:
Johnson, Hamilton, Quigley, Twait & Foley, PLC
W1450 First National Bank Building
332 Minnesota Street
St. Paul, MN 55101
Attention, Kevin Quigley
Telecopier:(651) 602-9916
Telephone:(651) 602-6262
28. KNOWLEDGE CONVENTION. Whenever any statement herein or in any schedule,
exhibit, certificate or other document delivered to any party pursuant to this
Agreement is made "to Seller's, or Buyer's knowledge" or "to the best of
Seller's, or Buyer's knowledge" or words of similar intent or effect of any
party or its representative, such statement shall be deemed to be made to the
best knowledge of the party and, to the extent applicable, its senior management
and shall be deemed to include a representation that a reasonable investigation
of the subject matter thereof has been conducted.
29. INDEPENDENT ENTITIES. It is the intention of the parties hereto that
Seller and Buyer remain independent entities and that no joint venture,
partnership or similar arrangement exist among Buyer and Seller.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
and delivered by their duly authorized officers as of the date and year first
above written.
XERTAIN, INC.
By: /s/ Roland Thomas
------------------------------------
Roland Thomas, Chief Executive Officer
INNOVATIVE GAMING CORPORATION OF
AMERICA
By: /s/ Edward G. Stevenson
------------------------------------
Edward G. Stevenson, Chief Executive
Officer
INNOVATIVE GAMING, INC
By: /s/ Edward G. Stevenson
------------------------------------
Edward G. Stevenson, Chief Executive
Officer
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APPENDIX B
AGREEMENT AND PLAN OF MERGER
DATED AS OF DECEMBER 31, 1999
BY AND AMONG
NMORTGAGE, INC.,
EQUITEX, INC.
INNOVATIVE GAMING CORPORATION OF AMERICA
AND
IGCA ACQUISITION CORP.
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AGREEMENT AND PLAN OF MERGER
This AGREEMENT AND PLAN OF MERGER (this "AGREEMENT") is made and entered
into as of December 31, 1999, by and among nMortgage, Inc., a Delaware
corporation (the "COMPANY"), EQUITEX, INC., a Delaware corporation, (the
"COMPANY PARENT"), INNOVATIVE GAMING CORPORATION OF AMERICA, a Minnesota
corporation ("PURCHASER"), and IGCA ACQUISITION CORP., a Minnesota corporation
and wholly owned subsidiary of Purchaser ("MERGER SUB").
WHEREAS, the respective Boards of Directors of the Company, Merger Sub and
Purchaser have approved the merger (the "MERGER") of Merger Sub with and into
the Company in accordance with the laws of the States of Minnesota and Delaware
and the provisions of this Agreement.
WHEREAS, the Company, Merger Sub, Company Parent and Purchaser desire to
make certain representations, warranties and agreements in connection with, and
establish various conditions precedent to, the Merger.
NOW, THEREFORE, in consideration of the premises and the representations,
warranties, covenants and agreements hereinafter set forth in the parties hereto
agree as follows:
ARTICLE I.
TERMS OF THE MERGER
1.1. THE MERGER. Upon the terms and subject to the conditions of this
Agreement, the Merger shall be consummated in accordance with the Minnesota
Business Corporation Act (the "MBCA"). At the Effective Time (as defined below),
upon the terms and subject to the conditions of this Agreement, the Company
shall be merged with and into Merger Sub in accordance with the MBCA and the
separate existence of the Company shall thereupon cease, and Merger Sub, as the
surviving corporation in the Merger (the "SURVIVING CORPORATION"), shall
continue its corporate existence under the laws of the State of Minnesota as a
subsidiary of Purchaser. The parties shall prepare and execute articles of
merger (the "ARTICLES OF MERGER") in order to comply in all respects with the
requirements of the MBCA and with the provisions of this Agreement.
1.2. EFFECTIVE TIME. The Merger shall become effective at the time of the
filing of the Articles of Merger with the Secretary of State of the State of
Minnesota in accordance with the applicable provisions of the MBCA or at such
later time as may be specified in the Articles of Merger (the "EFFECTIVE TIME").
As soon as practicable after all of the conditions set forth in Article VI of
this Agreement have been satisfied or waived by the party or parties entitled to
the benefit of the same, the parties hereto shall cause the Merger to become
effective. Purchaser and the Company shall mutually determine the time of such
filing and the place where the closing of the Merger (the "CLOSING") shall
occur. The date on which the Effective Time occurs is herein referred to as the
"CLOSING DATE."
1.3. MERGER CONSIDERATION.
(a) Subject to the provisions of this Agreement, all of the issued and
outstanding shares (the "COMPANY SHARES") of the capital stock of the
Company (the "COMPANY CAPITAL STOCK") (as more specifically described in
Section 2.6), as of the Effective Time shall be converted into the right to
receive, and there shall be paid and issued as hereinafter provided, in
exchange for the Company Shares, an aggregate of amount 46,000,000 shares
of the common stock of Purchaser (the "PURCHASER STOCK"), par value $.01
per share (the "MERGER CONSIDERATION"). Notwithstanding the foregoing, it
is understood by the parties hereto that at the Closing, the Merger
Consideration shall, represent , in the aggregate, no less than
seventy-five percent (75%) of the shares of Purchaser Stock issued and
outstanding on a fully diluted basis after giving effect to the exercise,
issuance or conversion of any stock options, warrants, securities
convertible or exercisable for shares of Purchaser Stock, subscription
agreements or any other agreement which may require the issuance of
Purchaser Stock. The number of shares of Purchaser Stock comprising the
Merger Consideration shall be subject to appropriate
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adjustment in the event of a stock split, stock dividend or
recapitalization after the date of this Agreement and prior to the
Effective Time applicable to shares of the Purchaser Stock. Furthermore,
the Purchaser Stock does not include 2,000,000 shares of common stock of
Purchaser that will be reserved for issuance at Closing for the assumption
of the nMortgage Stock Option Plan (as defined herein).
(b) Each share of Company Stock held in the treasury of the Company
shall be canceled as of the Effective Time and no Merger Consideration
shall be payable with respect thereto.
(c) Subject to the provisions of this Agreement, at the Effective
Time, the shares of Merger Sub common stock outstanding immediately prior
to the Merger shall be converted, by virtue of the Merger and without any
action on the part of the holder thereof, into one share of the common
stock of the Surviving Corporation (the "SURVIVING CORPORATION COMMON
STOCK"), which one share of the Surviving Corporation Common Stock shall
constitute all of the issued and outstanding capital stock of the Surviving
Corporation and shall be owned by Purchaser.
1.4. STOCKHOLDERS' RIGHTS UPON MERGER. Upon consummation of the Merger,
the certificates which theretofore represented the Company Shares (the
"CERTIFICATES") shall cease to represent any rights with respect thereto, and,
subject to applicable Law (as defined in Section 2.4 below) and this Agreement,
shall only represent the right to receive the Merger Consideration.
1.5 SURRENDER AND EXCHANGE OF SHARES.
(a) Prior to the Closing Date, Purchaser shall appoint an agent
reasonably acceptable to the Company to act as exchange agent (the
"EXCHANGE AGENT") for the Merger. Promptly after the Effective Time,
Purchaser shall make available, or cause to be made available, to the
Exchange Agent certificates evidencing the merger Consideration, and, when
necessary, aid the Exchange Agent in order to affect the exchange of such
certificates.
(b) On the Closing Date, Purchaser shall instruct the Exchange Agent
to mail to each holder of record of a Certificate, within five business
days of receiving from the Company list of such holders of record, (i) a
letter of transmittal (which shall specify that delivery shall be effected,
and risk of loss and title to the Certificates shall pass, only upon
delivery of the Certificates to the Exchange Agent and shall be in such
form and have such other provisions as Purchaser may reasonably specify)
and (ii) instructions for effecting the surrender of the Certificate in
exchange for certificates representing the Merger Consideration.
(c) After the Effective Time, the stockholders of the Company shall
surrender and deliver the Certificates to the Exchange Agent together with
a duly completed and executed transmittal letter. Upon such surrender and
delivery, each stockholder of the Company shall receive a certificate
representing such stockholder's pro rata portion of the Merger
Consideration. Until so surrendered and exchanged, the outstanding
Certificates after the Effective Time shall be deemed for all purposes to
evidence the right to receive the Merger Consideration; PROVIDED, HOWEVER,
that no dividends or other distributions, if any, in respect of the shares
of Purchaser Stock, declared after the Effective Time shall be paid to the
holders of any unsurrendered Certificates until such Certificates and
transmittal letters are surrendered and delivered are provided herein.
Subject to applicable Law (as defined below), after the surrender and
exchange of Certificates, the record holders thereof will be entitled to
receive any such dividends or other distributions without interest thereon,
which theretofore have become payable with respect to the Merger
Consideration. Holders of any unsurrendered Certificates shall not be
entitled to vote Purchaser Stock until such Certificates are exchanged
pursuant to this Agreement.
(d) At the Effective Time, the stock transfer books of the Company
shall be closed and no transfer of shares of Company Common Stock shall be
made thereafter, other than transfers of shares of Company Common Stock
that have occurred prior to the Effective Time. In the event that, after
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the Effective Time, Certificates are presented to the Surviving
Corporation, they shall be canceled and exchanged for shares of Purchaser
Stock as provided in SECTION 1.3 hereof.
(e) If consideration in respect of Company Shares is to be made to a
person other than the person in whose name a Certificate is registered, it
shall be a condition to such payment that such Certificate so surrendered
shall be properly endorsed or shall be otherwise in proper form for
transfer and that the person requesting such payment shall have paid any
transfer and other taxes required by reason of such payment in a name other
than that of the registered holder of the Certificate surrendered or shall
have established to the satisfaction of Purchaser that such tax either has
been paid or is not payable.
(f) None of the Company or Purchaser shall be liable to any holder of
Company Shares for any such shares of Purchaser Stock (or dividends or
distributions with respect thereto), or cash delivered to a public official
pursuant to any abandoned property, escheat or similar law, rule,
regulation, statute, order, judgment or decree.
1.6. CERTIFICATE OF INCORPORATION AND BYLAWS. Subject to SECTION 5.11
hereof, at and after the Effective Time, the certificate of incorporation and
the bylaws of the Surviving Corporation shall be identical to the certificate of
incorporation and the bylaws of Merger Sub in effect at the Effective Time
(subject to any subsequent amendments), which articles and bylaws shall be
substantially similar in form and substance as the articles and bylaws of the
Company as of the Effective Time.
1.7. STOCK OPTIONS. Each option to purchase shares of Company Common
Stock that is outstanding at the Effective Time (a "COMPANY OPTION") shall, by
virtue of the Merger and without any action on the part of the holder thereof,
be assumed by Purchaser. From and after the Effective Time, all references to
the Company in the Company Option shall be deemed to refer to Purchaser. The
Company Option assumed by Purchaser shall be exercisable upon the same terms and
conditions as under the Company Option except that the number of shares and
option exercise price per share shall be adjusted on a pro rata basis in
accordance with the Merger.
1.8. DIRECTORS AND OFFICERS. At and after the Effective Time the
directors of Merger Sub immediately prior to the Effective Time shall be the
initial directors of the Surviving Corporation, and the officers of the Merger
Sub immediately prior to the Effective Time shall be the initial officers of the
Surviving Corporation, in each case until their successors are elected or
appointed and qualified. If, at the Effective Time, a vacancy shall exist on the
board of directors or in any office of the Surviving Corporation, such vacancy
may thereafter be filled in the manner provided by law.
1.9. OTHER EFFECTS OF MERGER. The Merger shall have all further effects
as specified in the applicable provisions of the MBCA.
1.10. PROXY STATEMENT.
(a) For the purposes of holding the meeting of Purchaser's
shareholders to vote upon the issuance of Purchaser Stock to the holders of
the Company Shares in the Merger as contemplated by this Agreement (the
"PURCHASER PROPOSAL"), Purchaser and the Company will cooperate in the
preparation of a proxy statement (such proxy statement, together with any
and all amendments and supplements thereto, being herein referred to as the
"PROXY STATEMENT") satisfying all requirements of applicable state
securities Laws, the Securities Act of 1933, as amended, and the rules and
regulations thereunder (the "SECURITIES ACT"), and the Securities Exchange
Act of 1934, as amended, and the rules and regulations thereunder (the
"SECURITIES EXCHANGE ACT").
(b) The parties hereto will furnish each other with such information
concerning each other as is necessary in order to cause the Proxy
Statement, to comply with applicable Law. None of the information supplied
by either party for inclusion in the Proxy Statement will be false or
misleading with respect to any material fact or will omit to state any
material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they are
made, not misleading. The parties agree promptly to advise each other if,
at any time prior to the
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meeting of the shareholders of the parties hereto referenced herein, any
information provided by it in the Proxy Statement is or becomes incorrect
or incomplete in any material respect and to provide such party with the
information needed to correct such inaccuracy or omission. Each party
hereto will furnish such other party with such supplemental information as
may be necessary in order to cause the Proxy Statement, insofar as it
relates to such party, to comply with applicable Law after the mailing
thereof to the shareholders of such party.
(c) The Company and Purchaser agree to cooperate in making any
preliminary filings of the Proxy Statement with the Securities and Exchange
Commission (the "SEC"), as promptly as practicable, pursuant to Rule 14a-6
under the Securities Exchange Act.
(d) Purchaser shall provide the Company for its review a copy of the
Proxy Statement at least such amount of time prior to each filing thereof
as is customary in transactions of the type contemplated hereby and shall
not make any filing with the SEC without the prior written consent of the
Company, which consent shall not be unreasonably withheld or delayed. The
Company authorizes Purchaser to utilize the Proxy Statement and in all such
state filed materials, the information concerning the Company provided to
Purchaser in connection with, or contained in, the Proxy Statement.
1.11. TAX-FREE REORGANIZATION. The parties intend that the Merger qualify
as a reorganization within the meaning of Section 368(a) of the Internal Revenue
Code of 1986, as amended, and the regulations thereunder (the "CODE"). None of
the parties will knowingly take any action that would cause the Merger to fail
to qualify as a reorganization within the meaning of Section 368(a) of the Code.
1.12. ADDITIONAL ACTIONS. If, at any time after the Effective Time, the
Surviving Corporation shall consider or be advised that any deeds, bills of
sale, assignments, assurances or any other actions or things are necessary or
desirable to vest, perfect, or confirm of record or otherwise in the Surviving
Corporation its right, title or interest in, to or under any of the rights,
properties or assets of Merger Sub or the Company or otherwise carry out this
Agreement, the officers and directors of the other party of the Surviving
Corporation shall be authorized to execute and deliver, in the name and on
behalf of Merger Sub or the Company, all such deeds, bills of sale, assignments
and assurances and to take and do, in the name and on behalf of Merger Sub or
the Company, all such other actions and things as may be necessary or desirable
to vest, perfect or confirm any and all right, title and interest in, to and
under such rights, properties or assets in the Surviving Corporation or
otherwise to carry out this Agreement.
ARTICLE II.
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company (which for purposes hereof includes the subsidiaries of the
Company) and the Company Parent represent and warrant to Purchaser and Merger
Sub that, except as specifically set forth in the Schedules attached hereto and
delivered to Purchaser on the date hereof:
2.1. SUBSIDIARIES. The Company does not own any stock, partnership
interest, joint venture interest or any other security or ownership interest
issued by any other corporation, organization or entity other than First Bankers
Mortgage Services, Inc., a Florida corporation ("FBMS"). FBMS is duly organized,
validly existing and in good standing under the laws of the jurisdiction of its
incorporation, possesses all requisite corporate power and authority and all
material licenses, permits and authorizations necessary to own its properties
and to carry on its businesses as now being conducted and as presently proposed
to be conducted and is qualified to do business in every jurisdiction in which
its ownership of property or the conduct of business requires it to qualify. All
of the outstanding shares of capital stock of FBMS, including the FBMS Preferred
Shares (as hereinafter defined) and other securities convertible into capital
stock, are validly issued, fully paid and nonassessable, and, as of the Closing
Date, all such shares are owned by the Company free and clear of any lien and,
except as set forth on SCHEDULE 2.1, not subject to any option or right to
purchase any such shares. Except as set forth on SCHEDULE 2.1, neither the
Company nor any
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Subsidiary owns or holds the right to acquire any shares of stock or any other
security or interest in any other Person.
2.2. ORGANIZATION AND CORPORATE POWER. The Company is a corporation duly
incorporated, validly existing and in good standing under the laws of the State
of Delaware, and has the requisite corporate power and authority and all
authorizations, licenses, permits and certifications necessary to own, lease and
operate its properties and to carry on its business as now being conducted. The
Company is qualified to do business as a foreign corporation in every
jurisdiction in which the nature of its business or its ownership of property
requires it to be so qualified except for those jurisdictions in which the
failure to be so qualified would not, individually or in the aggregate, have a
material adverse effect on the business, assets, condition (financial or
otherwise), liabilities or the results of operations of the Company (a "COMPANY
MATERIAL ADVERSE EFFECT"). The copies of the Company's and FBMS' articles of
incorporation and bylaws, each of which will have been furnished by the Company
to Purchaser prior to January 15, 2000, reflect all amendments made thereto and
are correct and complete as of the date hereof.
2.3. EXECUTION, DELIVERY; VALID AND BINDING AGREEMENTS. The Company and
the Company Parent have the requisite corporate power and authority to execute
and deliver this Agreement and to consummate the transactions contemplated
hereby. The execution, delivery and performance of this Agreement by the Company
and the Company Parent and the consummation of the transactions contemplated
hereby have been duly and validly authorized and, with the exception of
obtaining the approval of the stockholders of Company Parent (if required by
applicable Law), no other proceedings on either of their parts are necessary to
authorize the execution, delivery and performance of this Agreement. This
Agreement has been, and the other agreements to be executed pursuant hereto will
be at Closing, duly and validly executed and delivered by the Company and the
Company Parent and constitutes the valid and binding obligations of each,
enforceable in accordance with their respective terms, except to the extent that
enforceability thereof may be limited by applicable bankruptcy, insolvency,
reorganization or other similar laws affecting the enforcement of creditors'
rights generally and by principles of equity regarding the availability of
remedies ("ENFORCEABILITY EXCEPTIONS").
2.4. NO VIOLATIONS. The execution and delivery of this Agreement, the
consummation of the transactions contemplated hereby and compliance by the
Company with any of the provisions hereof will not (i) conflict with or result
in any breach of any provision of the certificate of incorporation or bylaws or
other governing instruments of the Company or Company Parent, (ii) require any
Consent (as hereinafter defined) under or result in a violation or breach of, or
constitute (with or without due notice or lapse of time or both) a default (or
give rise to any right of termination, cancellation or acceleration) under any
of the terms, conditions or provisions of any contract to which the Company or
Company Parent is a party, (iii) result in the creation or imposition of any
lien or encumbrance of any kind upon any of the assets of the Company or Company
Parent or (iv) subject to obtaining the Consents from Governmental Authorities
referred to in Section 2.5 hereof, contravene any applicable provision of any
statute, law, rule or regulation or any order, decision, injunction, judgment,
award or decree ("LAW") to which the Company or Company Parent or its respective
assets or properties are subject, except, in the case of clauses (ii), (iii) and
(iv) above, for any deviations from the foregoing which would not be reasonably
likely to have a Company Material Adverse Effect.
2.5. GOVERNMENTAL APPROVALS. No consent, approval, waiver or
authorization of, notice to or declaration or filing ("CONSENT") with any nation
or government, any state or other political subdivision thereof, any entity,
authority or body exercising executive, legislative, judicial, regulatory or
administrative functions of or pertaining to government, including, without
limitation, any governmental or regulatory authority, agency, department, board,
commission, administration or instrumentality, any court, tribunal or arbitrator
and any self regulatory organization ("GOVERNMENTAL AUTHORITY") on the part of
the Company or FBMS is required in connection with the execution or delivery by
the Company of this Agreement or the consummation by the Company of the
transactions contemplated hereby other than (i) the filing of the Certificate of
Merger with the Secretary of State of Minnesota in accordance with the MBCA,
(ii) filings with the SEC, state securities laws administrators and the National
Association of Securities Dealers, Inc. ("NASD"), (iii) such filings as may be
required in any jurisdiction where the Company is qualified or
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authorized to do business as a foreign corporation in order to maintain such
qualification or authorization, (iv) such filings as may be required in any
jurisdiction where FBMS is licensed as a mortgage broker or banker with respect
to the transaction contemplated by this agreement, and (v) those Consents that,
if they were not obtained or made, would not be reasonably likely to have a
Company Material Adverse Effect.
2.6. CAPITALIZATION. The authorized shares of Company Capital Stock
consists of (i) Seventy-five Million (75,000,000) shares of common stock, par
value $.01 per share, (the "COMPANY COMMON STOCK"), of which Twelve Million
(12,000,000) shares are issued and outstanding, (ii) Seven Million, Five Hundred
Thousand (7,500,000) shares of Series A Preferred Stock, $.01 par value per
share (the "COMPANY SERIES A PREFERRED"), of which Three Million, Two Hundred
Thousand (3,200,000) shares are issued and outstanding, and (iii) Five Hundred
Thousand (500,000) shares of Series B Preferred Stock, $ par value per
share (the "COMPANY SERIES B PREFERRED", and collectively with the Company
Series A Preferred, as the "COMPANY PREFERRED STOCK"), of which [ ]
([ ]) shares are issued and outstanding. All shares of Company Capital
Stock will be automatically converted into shares of the Merger Consideration at
the Effective Time. The authorized capital stock of FBMS consists of (i)
10,000,000 shares of FBMS common stock, $.01 par value per share (the "FBMS
COMMON STOCK"), of which 3,000,000 shares are issued and outstanding, (ii)
1,000,000 shares of Series A Preferred Stock, par value $10.00 per share (the
"FBMS SERIES A PREFERRED"), of which 285,750 shares are issued and outstanding,
and (iii) Five Hundred Thousand (500,000) shares of FBMS Series B Preferred
Stock, par value $10.00 per share (the "FBMS SERIES B PREFERRED", and
collectively with the FBMS Series A Preferred, as the "FBMS PREFERRED STOCK"),
of which up to 500,000 shares are issued and outstanding and owned by the
Company Parent. As of the Closing, the Company shall own all of the issued and
outstanding Common Stock of FBMS. As of the Closing, all issued and outstanding
shares of FBMS Series A Preferred shall be either a) converted into Company
Series A Preferred; b) acquired by the Company Parent; or c) redeemed by the
Company or FBMS. No other capital stock of the Company or FBMS is authorized or
issued. All issued and outstanding shares of the Company Common Stock, Company
Preferred Stock, FBMS Common Stock and FBMS Preferred Stock are duly authorized,
validly issued, fully paid and non-assessable. Except as set forth in SCHEDULE
2.6, there are no outstanding rights, subscriptions, warrants, puts, calls,
unsatisfied preemptive rights, options or other agreements of any kind relating
to any of the outstanding, authorized but unissued, unauthorized or treasury
shares of the capital stock or any other security of the Company or FBMS, and
there is no authorized or outstanding security of any kind convertible into or
exchangeable, for any such capital stock or other security. There are no
agreements or other rights or arrangements existing which provide for the sale
or issuance of capital stock by the Company or FBMS and there are no rights,
subscriptions, warrants, options, conversion rights or agreements of any kind
outstanding to purchase or otherwise acquire from the Company or FBMS any shares
of capital stock or other securities of the Company or FBMS of any kind.
2.7. FBMS FINANCIAL STATEMENTS. The Company has delivered to Purchaser
copies of (a) the unaudited balance sheet, as of October 31, 1999, of FBMS (the
"LATEST BALANCE SHEET") and the unaudited statements of earnings, shareholders'
equity and cash flows of FBMS for the eleven-month period ended October 31,
1999, (such statements and the Latest Balance Sheet being herein referred to as
the "LATEST FINANCIAL STATEMENTS") and (b) the audited balance sheets, as of
December 31, 1998, December 31, 1997 and December 31, 1996, of FBMS and the
audited statements of earnings, shareholders' equity and cash flows of FBMS for
each of the years ended December 31, 1998, December 31, 1997 and December 31,
1996, (collectively, the "ANNUAL FINANCIAL STATEMENTS"). The Latest Financial
Statements and the Annual Financial Statements are true and correct, are based
upon the information contained in the books and records of FBMS and fairly
present the financial condition of FBMS as of the dates thereof and results of
operations, shareholders' equity and cash flows for the periods referred to
therein. The Annual Financial Statements have been prepared in accordance with
generally accepted accounting principles, consistently applied throughout the
periods indicated. The Latest Financial Statements have been prepared in
accordance with generally accepted accounting principles applicable to unaudited
interim financial statements (and thus may not contain all notes which are
required to be prepared in accordance with generally accepted accounting
principles) consistent with the Annual
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Financial Statements and reflect all adjustments other than normal and customary
year end adjustments necessary to fairly present the financial position, results
of operations and cash flows for the interim period(s) presented.
2.8. ABSENCE OF UNDISCLOSED LIABILITIES. Except as reflected in the
Latest Balance Sheet, neither the Company nor FBMS have material liabilities
(whether accrued, absolute, contingent, unliquidated or otherwise, whether due
or to become due, whether known or unknown, and regardless of when asserted)
arising out of transactions or events heretofore entered into, or any action or
inaction, or any state of facts existing, with respect to or based upon
transactions or events heretofore occurring, except (i) liabilities which have
arisen after the date of the Latest Balance Sheet in the ordinary course of
business (none of which is a material uninsured liability for breach of
contract, breach of warranty, tort, infringement, claim or lawsuit), or (ii) as
otherwise set forth in SCHEDULE 2.8.
2.9. NO MATERIAL ADVERSE CHANGES. Since October 31, 1999, there has not
been, and the Company has no reason to believe that from the date hereof through
the Closing Date, there will be, any material adverse change in the assets,
financial condition, operating results, customer, employee or supplier
relations, business condition or prospects of the Company or FBMS.
2.10. ABSENCE OF CERTAIN DEVELOPMENTS. Since the date of the Latest
Balance Sheet except as set forth on SCHEDULE 2.10 (or in the ordinary course of
the Company's or FBMS' business as a mortgage broker or mortgage banker),
neither the Company nor FBMS has:
(a) borrowed any amount or incurred or become subject to any
liability, except (i) current liabilities incurred in the ordinary course
of business and (ii) liabilities under contracts entered into in the
ordinary course of business;
(b) mortgaged, pledged or subjected to any lien, charge or any other
encumbrance, any of its assets, except (i) liens for current property taxes
not yet due and payable and (ii) liens imposed by law and incurred in the
ordinary course of business for obligations not yet due to carriers,
warehousemen, laborers, materialmen and the like;
(c) discharged or satisfied any lien or encumbrance or paid any
liability, other than current liabilities paid in the ordinary course of
business;
(d) sold, assigned or transferred (including, without limitation,
transfers to any employees, affiliates or shareholders) any tangible
assets, or canceled any debts or claims;
(e) sold, assigned or transferred (including, without limitation,
transfers to any employees, affiliates or shareholders) any patents,
trademarks, trade names, copyrights, trade secrets or other intangible
assets;
(f) disclosed, to any person other than Purchaser and authorized
representatives of Purchaser, any proprietary confidential information,
other than pursuant to confidentiality agreements prohibiting the use or
further disclosure of such information, which agreements are identified on
SCHEDULE 2.16 and are in full force and effect on the date hereof;
(g) waived any rights of value or suffered any extraordinary losses or
adverse changes in collection loss experience, whether or not in the
ordinary course of business or consistent with past practice;
(h) declared or paid any dividends or other distributions with respect
to any shares of the Company's or FBMS' capital stock or redeemed or
purchased, directly or indirectly, any shares of the Company's or FBMS'
capital stock or any options;
(i) issued, sold or transferred any of its equity securities,
securities convertible into or exchangeable for its equity securities or
warrants, options or other rights to acquire its equity securities, or any
bonds or debt securities;
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(j) taken any other action or entered into any other transaction other
than in the ordinary course of business and in accordance with past custom
and practice, or entered into any transaction with any "Insider" (as
defined in Section 2.22 hereof);
(k) suffered any material theft, damage, destruction or loss of or to
any property or properties owned or used by it, whether or not covered by
insurance;
(l) made or granted any bonus or any wage, salary or compensation
increase to any director, officer, employee or consultant or made or
granted any increase in any employee benefit plan or arrangement, or
amended or terminated any existing employee benefit plan or arrangement, or
adopted any new employee benefit plan or arrangement or made any commitment
or incurred any liability to any labor organization;
(m) made any capital expenditure or commitment therefor in excess of
$50,000 in the aggregate;
(n) made any loans or advances to, or guarantees for the benefit of,
any persons, with the exception of loans, advances, and guarantees made by
the Company in the ordinary course of business;
(o) made any charitable contributions or pledges; or
(p) made any change in accounting principles or practices or
accounting reserves from those utilized in the preparation of the Annual
Financial Statements.
2.11. COMPLIANCE WITH LAWS. The business of the Company and FBMS has been
operated in compliance with all Laws applicable thereto, except for any
instances of non-compliance which would not be reasonably likely to have a
Company Material Adverse Effect.
2.12. PERMITS. (i) To the knowledge of the Company or the Company Parent,
the Company and FBMS have all permits, certificates, licenses, approvals and
other authorizations required in connection with the operation of its business
(collectively, the "COMPANY PERMITS"), (ii) the Company and FBMS are not in
violation of any Company Permit, and (iii) no proceedings are pending or, to the
knowledge of the Company or the Company Parent, threatened, to revoke or limit
any Company Permit.
2.13. TITLE TO PROPERTIES. There is listed on SCHEDULE 2.13 (i) a
description of all real property owned by the Company and FBMS (the "Owned Real
Property") including the location of each parcel of the Owned Real Property, the
record owner thereof, the legal description thereof, (ii) a description of all
lease agreements under which the Company or FBMS is the lessor of the Owned Real
Property, and (iii) a description of all of the Company's and FBMS' lease and
sublease agreements (the "Leases") for real property (the "Leased Real
Property") (the Owned Real Property and the Leased Real Property are
collectively referred to herein as the "Real Property"). True and complete
copies of the Leases have been delivered to Purchaser, including all amendments,
supplements and modifications thereof. Except as indicated in SCHEDULE 2.13:
(a) The Real Property has access, sufficient for the conduct of the
Company's and FBMS' business as now conducted or as presently proposed to
be conducted, to public roads and to all utilities, including electricity,
sanitary and storm sewer, potable water, natural gas and other utilities,
used in the operation of the business of the Company and FBMS at those
locations.
(b) Either the Company or FBMS has good and marketable, indefeasible,
fee simple title to all of the owned Real Property;
(c) The Leases are in full force and effect, and the Company or FBMS
hold a valid and existing leasehold interest under each of the Leases in
the Leased Real Property. Neither the Company nor FBMS is in default, and
no circumstances exist which, if unremedied, would, either with or without
notice or the passage of time or both, result in such default under any of
the Leases; nor, to the knowledge of the Company or the Company Parent, is
any other party to any of the Leases in default.
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(d) Except as set forth on SCHEDULE 2.13(D), the Company or FBMS owns
good and marketable title to each of the tangible properties and tangible
assets reflected on the Latest Balance Sheet or acquired since the date
thereof, free and clear of all liens and encumbrances, except for (i) liens
for current taxes not yet due and payable, (ii) the properties subject to
the Leases, and (iii) liens imposed by law and incurred in the ordinary
course of business for obligations not yet due to carriers, warehousemen,
laborers and materialmen.
(e) All of the buildings, machinery, equipment and other tangible
assets necessary for the conduct of the Company's or FBMS' business are in
good condition and repair, ordinary wear and tear excepted, and are usable
in the ordinary course of business. The Company or FBMS owns, or leases
under valid leases, all buildings, machinery, equipment and other tangible
assets necessary for the conduct of their respective businesses.
(f) To the knowledge of the Company or the Company Parent, neither the
Company nor FBMS is in violation of any applicable zoning ordinance or
other law, regulation or requirement relating to the operation of any
properties used in the operation of its business, and neither the Company
nor FBMS has received any notice of, nor does it have any reason to believe
(i) any such violation exists, or (ii) any condemnation proceeding exists
with respect to any of the Real Property, except, in each case, with
respect to violations the potential consequences of which do not or will
not have a Company Material Adverse Effect.
(g) Neither the Company nor the Company Parent has any knowledge of
any improvements made or contemplated to be made by any public or private
authority, the costs of which are to be assessed as special taxes or
charges against any of the Real Property, and there are no present
assessments.
2.14. ACCOUNTS RECEIVABLE. Except as set forth on SCHEDULE 2.14, the
accounts receivable reflected on the Latest Balance Sheet are valid receivables,
are not subject to valid counterclaims or setoffs, and are collectible in
accordance with their terms, except to the extent of the bad debt reserve
reflected on the Latest Balance Sheet.
2.15. TAXES AND RETURNS. Except as set forth on SCHEDULE 2.15,
(a) The Company and FBMS have timely filed, or caused to be timely
filed all material Tax Returns (as defined below) required to be filed by
them, and have paid, collected or withheld, or caused to be paid, collected
or withheld, all material amounts of Taxes (as defined below) required to
be paid, collected or withheld, other than such Taxes for which adequate
reserves in the Latest Balance Sheet have been established or which are
being contested in good faith. There are no material claims or assessments
pending against the Company or FBMS for any alleged deficiency in any Tax,
and neither the Company nor FBMS has not been notified in writing of any
proposed Tax claims or assessments against the Company or FBMS (other than
claims or assessments for which adequate reserves in the Latest Balance
Sheet have been established or which are being contested in good faith or
are immaterial in amount). Neither the Company nor FBMS have any waivers or
extensions of any applicable statute of limitations to assess any material
amount of Taxes. There are no outstanding requests by the Company or FBMS
for any extension of time within which to file any Tax Return or within
which to pay any material amounts of Taxes shown to be due on any return.
To the knowledge of the Company or the Company Parent, there are no liens
for material amounts of Taxes on the assets of the Company or FBMS except
for statutory liens for current Taxes not yet due and payable.
(b) For purposes of this Agreement, the term "TAX" (and with the
corresponding meaning "Taxes" and "Taxable") shall mean any federal, state,
local, foreign or provincial income, gross receipts, property, sales, use,
license, excise, franchise, employment, payroll, alternative or added
minimum, ad valorem, transfer or excise tax, or any other tax, custom,
duty, governmental fee or other like assessment or charge of any kind
whatsoever, together with any interest or penalty imposed by any
Governmental Authority. The term "TAX RETURN" shall mean a report, return
or other
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information (including any attached schedules or any amendments to such
report, return or other information) required to be supplied to or filed
with a governmental entity with respect to any Tax, including an
information return, claim for refund, amended return or declaration or
estimated Tax.
2.16. CONTRACTS AND COMMITMENTS.
(a) SCHEDULE 2.16(A) lists each of the following agreements, whether
oral or written, to which either the Company or FBMS is a party, which are
currently in effect, and which relate to the operation of the business of
the Company or FBMS:
(i) collective bargaining agreement or contract with any labor
union;
(ii) bonus, pension, profit sharing, retirement or other form of
deferred compensation plan, other than as described on SCHEDULE 2.20 (or
excluded by such Section from inclusion thereon);
(iii) hospitalization insurance or other welfare benefit plan or
practice, whether formal or informal, other than as described on
SCHEDULE 2.20 (or excluded by such Section from inclusion thereon);
(iv) stock purchase or stock option plans;
(v) contract for the employment of any officer, individual employee
or other person on a full-time or consulting basis or relating to
severance pay for any such person;
(vi) confidentiality agreements;
(vii) contract, agreement or understanding relating to the voting
of shares of the capital stock of or the election of directors of the
Company or FBMS;
(viii) agreement or indenture relating to the borrowing of money or
to mortgaging, pledging or otherwise placing a lien on any of the assets
of the Company or FBMS;
(ix) guaranty of any obligation for borrowed money or otherwise;
(x) lease or agreement under which it is lessee of, or holds or
operates any property, real or personal, owned by any other party;
(xi) lease or agreement under which it is lessor of, or permits any
third party to hold or operate, any property, real or personal;
(xii) contract or group of related contracts with the same party
for the purchase of products or services under which the undelivered
balance of such products or services is in excess of $10,000 as of the
Latest Balance Sheet Date;
(xiii) contract which prohibits the Company or FBMS from freely
engaging in business anywhere in the world;
(xiv) license agreement or agreement providing for the payment or
receipt of royalties or other compensation by the Company or FBMS in
connection with the intellectual property rights listed on SCHEDULE
2.17;
(xv) contract or commitment for capital expenditures;
(xvi) agreement for the sale of any capital asset;
(xvii) contract with any affiliate which in any way relates to the
Company or FBMS (other than for employment on customary terms); or
(xviii) other agreement which is either material to the business of
the Company or FBMS or was not entered into in the ordinary course of
business.
(b) With the exception of those obligations listed on Schedule
2.16(b), the Company and/or FBMS, as appropriate, (i) has performed all
material obligations required to be performed by it in
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connection with the contracts or commitments listed on SCHEDULE 2.16(A),
(ii) is not in receipt of any claim of default under any such contract or
commitment, and (iii) has no present expectation or intention of not fully
performing any material obligation pursuant to any such contract or
commitment. Neither the Company nor the Company Parent has knowledge of any
breach or anticipated breach by any other party to any such contract or
commitment listed on SCHEDULE 2.16(A).
(c) Prior to the date of this Agreement, Purchaser has been supplied
with a true and correct copy of each written contract or commitment, and a
written description of each oral contract or commitment, listed on Schedule
2.16(a), together with all amendments, waivers or other changes thereto.
(d) To the knowledge of the Company or the Company Parent, and except
as set forth on SCHEDULE 2.16(D), all mortgage insurance premium payments
required to be paid by FBMS to any Government Authority in connection with
any loan requiring the payment of mortgage insurance, and all interest,
liabilities and penalties in connection with any prior delinquent payments
thereof, have been paid to the appropriate Government Authority. FBMS is
not subject to any liability or penalty related to any mortgage insurance
premium payment due on any loan with the exception of liabilities incurred
in the ordinary course of business for obligations not yet due.
(e) To the knowledge of the Company or the Company Parent, FBMS has
performed and satisfied all obligations required to be performed and
satisfied by it under all contracts and commitments between FBMS and GE
Capital Mortgage Services, Inc., including without limitation, removing all
aged loans from FBMS' credit line with GE Capital Mortgage Services, Inc.
and paying any and all delinquent interest amounts associated therewith.
2.17. INTELLECTUAL PROPERTY RIGHTS.
(a) SCHEDULE 2.17(A) sets forth a complete list of all rights in
patents, patent applications, trademarks, service marks, trade names,
corporate names, copyrights, mask works, trade secrets, know-how, Internet
Web sites, domain names and applications and registrations pertaining
thereto or other intellectual property rights owned by, licensed to or
otherwise controlled by the Company or FBMS or used in, developed for use
in, or necessary to the current conduct of the business of the Company or
FBMS as now conducted (the "INTELLECTUAL PROPERTY"). Except as set forth on
SCHEDULE 2.17(A), all of the Intellectual Property which is owned by the
Company or FBMS is owned free and clear of liens or encumbrances of any
nature.
(b) Except as set forth on SCHEDULE 2.17(B), the Company or FBMS owns,
or is licensed or otherwise possess legal enforceable rights to use all of
the Intellectual Property.
(c) To the knowledge of the Company or the Company Parent, except as
set forth on SCHEDULE 2.17(C), there are no conflicts with or infringements
of any Intellectual Property by any third party and the conduct of the
businesses as currently conducted does not conflict with or infringe any
proprietary right of a third party.
(d) SCHEDULE 2.17(D) sets forth a complete list of all material
licenses, sub-licenses and other agreements pursuant to which the Company
or FBMS has granted rights to use the Intellectual Property to any third
party. Except as set forth in SCHEDULE 2.17(D), neither the Company nor
FBMS will, as a result of the execution and delivery of this Agreement or
the performance of its obligations under this Agreement, be in breach of
any license, sublicense or other agreement relating to the Intellectual
Property.
(e) Neither the Company nor FBMS has received any notice of, nor are
there any facts known to either the Company or FBMS which indicate a
likelihood of, any infringement or misappropriation by, or conflict from,
any third party with respect to the Intellectual Property. No claim by any
third party contesting the validity of any rights of the Company or FBMS in
the Intellectual Property has been made, is currently outstanding or, to
the knowledge of the Company or the Company Parent, is
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threatened. Neither the Company nor FBMS has received any notice of any
infringement, misappropriation or violation by the Company or FBMS of any
intellectual property rights of any third parties and neither the Company
nor FBMS has infringed, misappropriated or otherwise violated any such
intellectual property rights. No infringement, illicit copying,
misappropriation or violation has occurred or will occur with respect to
the current conduct of the business of the Company or FBMS.
2.18. LITIGATION. Except as set forth on SCHEDULE 2.18, there is no suit,
action or proceeding ("LITIGATION") pending or, to the knowledge of the Company
or the Company Parent, threatened against the Company or FBMS, at law or in
equity, or before or by any Government Authority, which, individually or in the
aggregate, would be reasonably likely to have a Company Material Adverse Effect,
nor is there any judgment, decree, injunction, rule or order of any Governmental
Authority outstanding against the Company or FBMS which, individually or in the
aggregate, would be reasonably likely to have a Company Material Adverse Effect.
2.19. EMPLOYEES.
(a) To the knowledge of the Company or the Company Parent, no group of
the Company's or FBMS' employees has any plans to terminate his, her or its
employment.
(b) the Company and FBMS have complied with all laws relating to the
employment of labor, including provisions thereof relating to wages, hours,
equal opportunity, collective bargaining and the payment of social security
and other taxes;
(c) neither the Company nor FBMS has material labor relations problem
pending and its labor relations are satisfactory;
(d) there are no workers' compensation claims pending against the
Company or FBMS nor is the Company or FBMS aware of any facts that would
give rise to such a claim;
(e) no employee of the Company or FBMS is subject to any secrecy or
noncompetition agreement or any other agreement or restriction of any kind
that would impede in any way the ability of such employee to carry out
fully all activities of such employee in furtherance of the business of the
Company or FBMS; and
(f) no employee or former employee of the Company or FBMS has any
claim with respect to any rights of the Company or FBMS in the Intellectual
Property.
2.20. EMPLOYEE BENEFIT PLANS. SCHEDULE 2.20 contains a complete and
accurate list of all employee benefit plans maintained or contributed to by the
Company or FBMS ("COMPANY BENEFIT PLAN"). A "BENEFIT PLAN" shall include (i) an
employee benefit plan as defined in Section 3(3) of the Employee Retirement
Income Security Act of 1974, as amended, together with all regulations
thereunder ("ERISA"), even if, because of some other provision of ERISA, such
plan is not subject to any or all of ERISA's provisions, and (ii) whether or not
described in the preceding clause, any pension, profit sharing, stock bonus,
deferred or supplemental compensation, retirement, thrift, stock purchase or
stock option plan or any other compensation, welfare, fringe benefit or
retirement plan, program, policy or arrangement providing for benefits for or
the welfare of any or all of the current or former employees or agents of the
Company or any of its subsidiaries or their beneficiaries or dependents;
provided that Benefit Plans shall not include any multiemployer plan, as defined
in Section 3(37) of ERISA (a "MULTIEMPLOYER PLAN"). The Company has delivered or
made available to Purchaser a true, correct and complete copy of each Company
Benefit Plan. Each Company Benefit Plan has been maintained in compliance with
its terms and all applicable Law. Neither the Company nor FBMS contributes to,
or has any outstanding liability with respect to, any Multiemployer Plan.
2.21. INSURANCE. SCHEDULE 2.21 sets forth a true and complete list of all
insurance policies carried by, or covering the Company or FBMS with respect to
their respective businesses, assets and properties and with respect to which
records are maintained at the principal executive offices of the Company or
FBMS, together with, in respect of each such policy, the amount of coverage and
the deductible. The Company and FBMS maintain insurance policies against all
risk of a character, including without
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limitation, business interruption insurance, and in such amounts as are usually
insured against by similarly situated companies in the same or similar
businesses. Each insurance policy set forth on SCHEDULE 2.21 is in full force
and effect and all premiums due thereon have been paid in full. To the knowledge
of the Company or Company Parent, there has been no threatened termination of,
or premium increase whether retrospective or prospective with respect to, any of
such policies.
2.22. RELATED PARTY TRANSACTIONS. Except as set forth on SCHEDULE 2.22,
no officer, director or employee of the Company or FBMS or any member of the
immediate family of any such officer, director or employee, or any entity in
which any of such persons owns any beneficial interest (other than any
publicly-held corporation whose stock is traded on a national securities
exchange or in the over-the-counter market and less than one percent of the
stock of which is beneficially owned by any of such persons) (collectively
"INSIDERS"), has any agreement with the Company or FBMS (other than normal
employment arrangements) or any interest in any property, real, personal or
mixed, tangible or intangible, used in or pertaining to the business of the
Company or FBMS (other than ownership of capital stock of the Company). No
Insider has any direct or indirect interest in any competitor, supplier or
customer of the Company or FBMS or in any person, firm or entity from whom or to
whom the Company or FBMS leases any property, or in any other person, firm or
entity with whom the Company or FBMS transacts business of any nature. For
purposes of this Section 2.22, the members of the immediate family of an
officer, director or employee shall consist of the spouse, parents, children,
siblings, mothers- and fathers-in-law, sons- and daughters-in-law, and brothers-
and sisters-in-law of such officer, director or employee.
2.23. YEAR 2000 COMPLIANCE. The Company and FBMS have adopted and
implemented a commercially reasonable plan to provide (a) that the change of the
year from 1999 to the year 2000 will not materially and adversely affect the
information and business systems or online operations of the Company or FBMS and
(b) that the impacts of such change on the vendors and customers of the Company
will not have a Company Material Adverse Effect. In the Company's reasonable
best estimate, no expenditures materially in excess of currently budgeted items
previously disclosed to Purchaser will be required in order to cause the
information and business systems of the Company and FBMS to operate properly
following the change of the year 1999 to the year 2000. The Company reasonably
expects that it will resolve any issues related to such change of the year in
accordance with the timetable contemplated by such plan (and in any event on a
timely basis in order to be resolved before tho year 2000). Between the date of
this Agreement and the Closing Date, the Company and FBMS shall continue to use
all commercially reasonable efforts to implement such plan.
2.24. BROKERAGE. No third party shall be entitled to receive any
brokerage commissions, finder's fees, fees for financial advisory services or
similar compensation in connection with the transactions contemplated by this
Agreement based on any arrangement or agreement made by or on behalf of the
Company.
2.25. DISCLOSURE. Neither this Agreement, any of the Exhibits or
Schedules hereto, any of the documents delivered by or on behalf of the Company
pursuant to Article VI hereof, nor any of the financial statements referred to
in Section 2.7 hereof, contains any untrue statement of a material fact
regarding the Company or FBMS or their respective businesses or any of the other
matters dealt with in this Article II relating to the Company or FBMS or the
transactions contemplated by this Agreement or omit to state any material fact
necessary to make the statements contained herein or therein, in light of the
circumstances in which they were made, not misleading.
ARTICLE III.
REPRESENTATIONS AND WARRANTIES OF PURCHASER
Purchaser (which for the purposes hereof includes the subsidiaries of
Purchaser, except as otherwise indicated herein) represents and warrants to the
Company that, except as specifically set forth in the Schedules attached hereto
and delivered to the Company on the date hereof:
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3.1. ORGANIZATION AND CORPORATE POWER. Purchaser is a corporation duly
incorporated, validly existing and in good standing under the laws of the State
of Minnesota, has the requisite corporate power and authority and all
authorizations, licenses, permits and certifications necessary to own, lease and
operate its properties and to carry on its business as now being conducted. At
the Effective Time, Merger Sub shall be a corporation duly incorporated, validly
existing and in good standing under the laws of the State of Minnesota, and
shall have the requisite corporate power and authority and all authorizations,
licenses, permits and certifications necessary to own, lease and operate its
properties and to carry on its business as then contemplated. Purchaser is
qualified to do business as a foreign corporation in every jurisdiction in which
the nature of its business or its ownership of property requires it to be so
qualified except for those jurisdictions in which the failure to be so qualified
would not, individually or in the aggregate, have a material adverse effect on
the business, assets, condition (financial or otherwise), liabilities or the
results of operations of Purchaser (a "PURCHASER MATERIAL ADVERSE EFFECT"). The
copies of the articles of incorporation and bylaws of Purchaser which have been
furnished by Purchaser to the Company prior to the date hereof reflect all
amendments made thereto and are correct and complete as of the date hereof.
3.2. EXECUTION, DELIVERY; VALID AND BINDING AGREEMENTS. Purchaser has the
requisite corporate power and authority to execute and deliver this Agreement
and to consummate the transactions contemplated hereby. The execution, delivery
and performance of this Agreement by Purchaser and the consummation of the
transactions contemplated hereby have been duly and validly authorized and no
other proceedings on its part are necessary to authorize the execution, delivery
and performance of this Agreement. This Agreement has been and the other
agreements to be executed pursuant hereto will be at Closing duly and validly
executed and delivered by Purchaser and constitute the valid and binding
obligations of Purchaser, enforceable in accordance with their respective terms,
except to the extent that enforceability thereof may be limited by the
Enforceability Exceptions.
3.3. NO VIOLATIONS. The execution and delivery of this Agreement, the
consummation of the transactions contemplated hereby and compliance by Purchaser
with any of the provisions hereof will not (i) conflict with or result in any
breach of any provision of the certificate of incorporation or bylaws or other
governing instruments of Purchaser, (ii) require any Consent under or result in
a violation or breach of, or constitute (with or without due notice or lapse of
time or both) a default (or give rise to any right of termination, cancellation
or acceleration) under any of the terms, conditions or provisions of any
contract to which the Company is a party, (iii) result in the creation or
imposition of any lien or encumbrance of any kind upon any of the assets of
Purchaser or (iv) subject to obtaining the Consents from Governmental
Authorities referred to in Section 3.4 hereof, contravene any Law to which the
Company or its respective assets or properties are subject, except, in the case
of clauses (ii), (iii) and (iv) above, for any deviations from the foregoing
which would not be reasonably likely to have a Purchaser Material Adverse
Effect.
3.4. GOVERNMENTAL APPROVALS. Assuming divestiture of the Gaming Assets
(as defined herein) by the Closing Date, no Consent with any Governmental
Authority on the part of Purchaser is required in connection with the execution
or delivery by Purchaser of this Agreement or the consummation by Purchaser of
the transactions contemplated hereby other than (i) the filing of the
Certificate of Merger with the Secretary of State of Minnesota in accordance
with the MBCA, (ii) filings with the SEC, state securities laws administrators
and the National Association of Securities Dealers, Inc. ("NASD"), (iii) such
filings as may be required in any jurisdiction where Purchaser is qualified or
authorized to do business as a foreign corporation in order to maintain such
qualification or authorization and (iv) those Consents that, if they were not
obtained or made, would not be reasonably likely to have a Purchaser Material
Adverse Effect.
3.5. CAPITALIZATION. The authorized capital stock of Purchaser consists
of (i) One Hundred Thousand (100,000,000) shares of Capital Stock, of which, as
of the date hereof, ( ) shares of Common Stock are issued and
outstanding (ii) 4,000 shares have been designated Series B Convertible
Preferred Stock, par value $0.01 per share, of which 280 shares are issued and
outstanding on the date hereof, (iii) 2,000 shares have been designated Series C
Convertible Preferred Stock, par value $0.01 per share, of which 900 shares are
issued and outstanding on the date hereof and (iv) 3,000 shares
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have been designated Series D Convertible Preferred Stock, par value $0.01 per
share of which 1,612.5 are issued and outstanding as of the date hereof. No
other capital stock of the Company is authorized or issued. All issued and
outstanding shares of Purchaser Stock are duly authorized, validly issued, fully
paid and non-assessable. Except as set forth in SCHEDULE 3.5, there are no
outstanding rights, subscriptions, warrants, puts, calls, unsatisfied preemptive
rights, options or other agreements of any kind relating to any of the
outstanding, authorized but unissued, unauthorized or treasury shares of the
capital stock or any other security of Purchaser, and there is no outstanding
security of any kind convertible into or exchangeable, for any such capital
stock or other security. Except as set forth in SCHEDULE 3.5, there are no
agreements or other rights or arrangements existing which provide for the sale
or issuance of capital stock by Purchaser and there are no rights,
subscriptions, warrants, options, conversion rights or agreements of any kind
outstanding to purchase or otherwise acquire from Purchaser any shares of
capital stock or other securities of Purchaser of any kind. Except as set forth
in SCHEDULE 3.5, there are no agreements or other rights or arrangements
existing which obligate Purchaser register shares of its capital stock or any
other of its securities with the Security Exchange Commission.
3.6. SUBSIDIARIES. Purchaser does not own any stock, partnership
interest, joint venture interest or any other security or ownership interest
issued by any other corporation, organization or entity other than (i) Merger
Sub, which is a wholly-owned subsidiary of Purchaser, and (ii) Innovative
Gaming, Inc., a Nevada corporation ("IGI"). Each of Merger Sub and IGI is duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation, possesses all requisite corporate power and
authority and all material licenses, permits and authorizations necessary to own
its properties and to carry on its businesses as now being conducted and as
presently proposed to be conducted and is qualified to do business in every
jurisdiction in which its ownership of property or the conduct of business
requires it to qualify. All of the outstanding shares of capital stock of Merger
Sub and IGI are owned by Purchaser free and clear of any lien and not subject to
any option or right to purchase any such shares. Neither the Merger Sub nor IGI
owns or holds the right to acquire any shares of stock or any other security or
interest in any other Person.
3.7. PURCHASER FINANCIAL STATEMENTS. Purchaser has delivered to the
Company copies of (a) the unaudited balance sheet, as of October 31, 1999, of
Purchaser (the "PURCHASER LATEST BALANCE SHEET") and the unaudited statements of
earnings, shareholders' equity and cash flows of Purchaser for the eleven-month
period ended October 31, 1999, (such statements and the Purchaser Latest Balance
Sheet being herein referred to as the "PURCHASER LATEST FINANCIAL STATEMENTS")
and (b) the audited balance sheets, as of December 31, 1998, December 31, 1997
and December 31, 1996, of Purchaser and the audited statements of earnings,
shareholders' equity and cash flows of Purchaser for each of the years ended
December 31, 1998, December 31, 1997 and December 31, 1996, (collectively, the
"PURCHASER ANNUAL FINANCIAL STATEMENTS"). The Purchaser Latest Financial
Statements and the Purchaser Annual Financial Statements are true and correct,
are based upon the information contained in the books and records of Purchaser
and fairly present the financial condition of Purchaser as of the dates thereof
and results of operations, shareholders' equity and cash flows for the periods
referred to therein. The Purchaser Annual Financial Statements have been
prepared in accordance with generally accepted accounting principles,
consistently applied throughout the periods indicated. The Purchaser Latest
Financial Statements have been prepared in accordance with generally accepted
accounting principles applicable to unaudited interim financial statements (and
thus may not contain all notes which are required to be prepared in accordance
with generally accepted accounting principles) consistent with the Purchaser
Annual Financial Statements and reflect all adjustments necessary to fairly
present the financial position, results of operations and cash flows for the
interim period(s) presented.
3.8. ABSENCE OF UNDISCLOSED LIABILITIES. Except as reflected in the
Purchaser Latest Balance Sheet, Purchaser has no material liabilities (whether
accrued, absolute, contingent, unliquidated or otherwise, whether due or to
become due, whether known or unknown, and regardless of when asserted) arising
out of transactions or events heretofore entered into, or any action or
inaction, or any state of facts existing, with respect to or based upon
transactions or events heretofore occurring, except (i) liabilities which have
arisen after the date of the Purchaser Latest Balance Sheet in the ordinary
course of business (none of
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which is a material uninsured liability for breach of contract, breach of
warranty, tort, infringement, claim or lawsuit), or (ii) as otherwise set forth
in SCHEDULE 3.8.
3.9. ABSENCE OF CERTAIN DEVELOPMENTS. Since the date of the Purchaser
Latest Balance Sheet and except as set forth on SCHEDULE 3.9, Purchaser has not:
(a) borrowed any amount or incurred or become subject to any
liability, except (i) current liabilities incurred in the ordinary course
of business and (ii) liabilities under contracts entered into in the
ordinary course of business;
(b) mortgaged, pledged or subjected to any lien, charge or any other
encumbrance, any of its assets, except (i) liens for current property taxes
not yet due and payable and (ii) liens imposed by law and incurred in the
ordinary course of business for obligations not yet due to carriers,
warehousemen, laborers, materialmen and the like;
(c) discharged or satisfied any lien or encumbrance or paid any
liability, other than current liabilities paid in the ordinary course of
business;
(d) sold, assigned or transferred (including, without limitation,
transfers to any employees, affiliates or shareholders) any tangible
assets, or canceled any debts or claims;
(e) sold, assigned or transferred (including, without limitation,
transfers to any employees, affiliates or shareholders) any patents,
trademarks, trade names, copyrights, trade secrets or other intangible
assets;
(f) disclosed, to any person other than the Company and authorized
representatives of the Company, any proprietary confidential information,
other than pursuant to confidentiality agreements prohibiting the use or
further disclosure of such information, which agreements are identified on
SCHEDULE 3.15 and are in full force and effect on the date hereof;
(g) waived any rights of value or suffered any extraordinary losses or
adverse changes in collection loss experience, whether or not in the
ordinary course of business or consistent with past practice;
(h) declared or paid any dividends or other distributions with respect
to any shares of the Company's capital stock or redeemed or purchased,
directly or indirectly, any shares of the Company's capital stock or any
options;
(i) issued, sold or transferred any of its equity securities,
securities convertible into or exchangeable for its equity securities or
warrants, options or other rights to acquire its equity securities, or any
bonds or debt securities;
(j) taken any other action or entered into any other transaction other
than in the ordinary course of business and in accordance with past custom
and practice, or entered into any transaction with any Purchaser Insider
(as defined in Section 3.19 hereof);
(k) suffered any material theft, damage, destruction or loss of or to
any property or properties owned or used by it, whether or not covered by
insurance;
(l) made or granted any bonus or any wage, salary or compensation
increase to any director, officer, employee or consultant or made or
granted any increase in any employee benefit plan or arrangement, or
amended or terminated any existing employee benefit plan or arrangement, or
adopted any new employee benefit plan or arrangement or made any commitment
or incurred any liability to any labor organization;
(m) made any capital expenditure or commitment therefor in excess of
$50,000 in the aggregate;
(n) made any loans or advances to, or guarantees for the benefit of,
any persons, with the exception of loans, advances, and guarantees made by
Purchaser in the ordinary course of business;
(o) made any charitable contributions or pledges; or
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(p) made any change in accounting principles or practices or
accounting reserves from those utilized in the preparation of the Purchaser
Annual Financial Statements.
3.10. COMPLIANCE WITH LAWS. The business of the Purchaser has been
operated in compliance with all Laws applicable thereto, except for any
instances of non-compliance which would not be reasonably likely to have a
Purchaser Material Adverse Effect.
3.11. PERMITS. (i) The Purchaser has all permits, certificates, licenses,
approvals and other authorizations required in connection with the operation of
its business (collectively, the "PURCHASER PERMITS"), (ii) the Purchaser is not
in violation of any Purchaser Permit, and (iii) no proceedings are pending or,
to the knowledge of the Purchaser, threatened, to revoke or limit any Purchaser
Permit.
3.12. TITLE TO PROPERTIES. There is listed on SCHEDULE 3.12 (i) a
description of all real property owned by the Purchaser (the "OWNED REAL
PROPERTY") including the location of each parcel of the Purchaser Owned Real
Property, the record owner thereof, the legal description thereof, (ii) a
description of all lease agreements under which the Purchaser is the lessor of
the Purchaser Owned Real Property, and (iii) a description of all of the
Purchaser's lease and sublease agreements (the "PURCHASER LEASES") for real
property (the "PURCHASER LEASED REAL PROPERTY") (the Purchaser Owned Real
Property and the Purchaser Leased Real Property are collectively referred to
herein as the "PURCHASER REAL PROPERTY"). True and complete copies of the
Purchaser Leases have been delivered to the Company, including all amendments,
supplements and modifications thereof. Except as indicated in SCHEDULE 3.12:
(a) The Purchaser Real Property has access, sufficient for the conduct
of the Purchaser's business as now conducted or as presently proposed to be
conducted, to public roads and to all utilities, including electricity,
sanitary and storm sewer, potable water, natural gas and other utilities,
used in the operation of the business of the Purchaser at those locations.
(b) Purchaser has good and marketable, indefeasible, fee simple title
to all of the Purchaser Owned Real Property;
(c) The Purchaser Leases are in full force and effect, and the
Purchaser holds a valid and existing leasehold interest under each of the
Purchaser Leases in the Purchaser Leased Real Property. The Purchaser is
not in default, and no circumstances exist which, if unremedied, would,
either with or without notice or the passage of time or both, result in
such default under any of the Purchaser Leases; nor, to the knowledge of
the Purchaser, is any other party to any of the Purchaser Leases in
default.
(d) Except as set forth on Schedule 3.12(d), the Purchaser owns good
and marketable title to each of the tangible properties and tangible assets
reflected on the Purchaser Latest Balance Sheet or acquired since the date
thereof, free and clear of all liens and encumbrances, except for (i) liens
for current taxes not yet due and payable, (ii) the properties subject to
the Purchaser Leases, and (iii) liens imposed by law and incurred in the
ordinary course of business for obligations not yet due to carriers,
warehousemen, laborers and materialmen.
(e) All of the buildings, machinery, equipment and other tangible
assets necessary for the conduct of the Purchaser's business are in good
condition and repair, ordinary wear and tear excepted, and are usable in
the ordinary course of business. The Purchaser owns, or leases under valid
leases, all buildings, machinery, equipment and other tangible assets
necessary for the conduct of its business.
(f) To its knowledge, the Purchaser is not in violation of any
applicable zoning ordinance or other law, regulation or requirement
relating to the operation of any properties used in the operation of its
business, and the Purchaser has not received any notice of, nor does it
have any reason to believe (i) any such violation exists, or (ii) any
condemnation proceeding exists with respect to any of the Purchaser Real
Property, except, in each case, with respect to violations the potential
consequences of which do not or will not have a Purchaser Material Adverse
Effect.
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(g) The Purchaser has no knowledge of any improvements made or
contemplated to be made by any public or private authority, the costs of
which are to be assessed as special taxes or charges against any of the
Purchaser Real Property, and there are no present assessments.
3.13. ACCOUNTS RECEIVABLE. Except as set forth on SCHEDULE 3.13, the
accounts receivable reflected on the Purchaser Latest Balance Sheet are valid
receivables, are not subject to valid counterclaims or setoffs, and are
collectible in accordance with their terms, except to the extent of the bad debt
reserve reflected on the Purchaser Latest Balance Sheet.
3.14. TAXES AND RETURNS. Except as set forth on SCHEDULE 3.14, Purchaser
has timely filed, or caused to be timely filed all material Tax Returns required
to be filed by it, and has paid, collected or withheld, or caused to be paid,
collected or withheld, all material amounts of Taxes required to be paid,
collected or withheld, other than such Taxes for which adequate reserves in the
Purchaser Latest Balance Sheet have been established or which are being
contested in good faith. There are no material claims or assessments pending
against Purchaser for any alleged deficiency in any Tax, and Purchaser has not
been notified in writing of any proposed Tax claims or assessments against
Purchaser (other than claims or assessments for which adequate reserves in the
Purchaser Latest Balance Sheet have been established or which are being
contested in good faith or are immaterial in amount). Purchaser does not have
any waivers or extensions of any applicable statute of limitations to assess any
material amount of Taxes. There are no outstanding requests by Purchaser for any
extension of time within which to file any Tax Return or within which to pay any
material amounts of Taxes shown to be due on any return. To the knowledge of
Purchaser, there are no liens for material amounts of Taxes on the assets of
Purchaser except for statutory liens for current Taxes not yet due and payable.
3.15. CONTRACTS AND COMMITMENTS.
(a) SCHEDULE 3.15 lists each of the following agreements, whether oral
or written, to which Purchaser is a party, which are currently in effect,
and which relate to the operation of Purchaser's business:
(i) collective bargaining agreement or contract with any labor
union;
(ii) bonus, pension, profit sharing, retirement or other form of
deferred compensation plan, other than as described on SCHEDULE 3.17 (or
excluded by such Section from inclusion thereon);
(iii) hospitalization insurance or other welfare benefit plan or
practice, whether formal or informal, other than as described on
SCHEDULE 3.17 (or excluded by such Section from inclusion thereon);
(iv) stock purchase or stock option plans;
(v) contract for the employment of any officer, individual employee
or other person on a full-time or consulting basis or relating to
severance pay for any such person;
(vi) confidentiality agreements;
(vii) contract, agreement or understanding relating to the voting
of shares of the Purchaser Stock or the election of directors of
Purchaser;
(viii) agreement or indenture relating to the borrowing of money or
to mortgaging, pledging or otherwise placing a lien on any of the assets
of Purchaser;
(ix) guaranty of any obligation for borrowed money or otherwise;
(x) lease or agreement under which it is lessee of, or holds or
operates any property, real or personal, owned by any other party;
(xi) lease or agreement under which it is lessor of, or permits any
third party to hold or operate, any property, real or personal;
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(xii) contract or group of related contracts with the same party
for the purchase of products or services under which the undelivered
balance of such products or services is in excess of $10,000 as of the
Purchaser Latest Balance Sheet Date;
(xiii) contract which prohibits Purchaser from freely engaging in
business anywhere in the world;
(ix) contract or commitment for capital expenditures;
(x) agreement for the sale of any capital asset;
(xi) contract with any affiliate which in any way relates to
Purchaser (other than for employment on customary terms); or
(xii) other agreement which is either material to Purchaser's
business or was not entered into in the ordinary course of business.
(b) Purchaser (i) has performed all material obligations required to
be performed by it in connection with the contracts or commitments listed
on SCHEDULE 3.15, (ii) is not in receipt of any claim of default under any
such contract or commitment, and (iii) has no present expectation or
intention of not fully performing any material obligation pursuant to any
such contract or commitment. Purchaser has no knowledge of any breach or
anticipated breach by any other party to any such contract or commitment
listed on SCHEDULE 3.15.
(c) Prior to the date of this Agreement, the Company has been supplied
with or has had access to a true and correct copy of each written contract
or commitment, and a written description of each oral contract or
commitment, listed on SCHEDULE 3.15, together with all amendments, waivers
or other changes thereto.
3.16. LITIGATION. Except as set forth on SCHEDULE 3.16, there is no
Litigation pending or, to the knowledge of Purchaser, threatened against
Purchaser, at law or in equity, or before or by any Government Authority, which,
individually or in the aggregate, would be reasonably likely to have a Purchaser
Material Adverse Effect, nor is there any judgment, decree, injunction, rule or
order of any Governmental Authority outstanding against Purchaser which,
individually or in the aggregate, would be reasonably likely to have a Purchaser
Material Adverse Effect.
3.17. EMPLOYEE BENEFIT PLANS. SCHEDULE 3.17 contains a complete and
accurate list of all Benefit Plans (as defined in Section 2.20 hereof)
maintained or contributed to by Purchaser ("PURCHASER BENEFIT PLAN"). Purchaser
has delivered or made available to the Company a true, correct and complete copy
of each Purchaser Benefit Plan. Each Purchaser Benefit Plan has been maintained
in compliance with its terms and all applicable Law. Purchaser does not
contribute to, or has any outstanding liability with respect to, any
Multiemployer Plan.
3.18. INSURANCE. SCHEDULE 3.18 sets forth a true and complete list of all
insurance policies carried by, or covering Purchaser with respect to its
business, assets and properties and with respect to which records are maintained
at Purchaser's principal executive offices, together with, in respect of each
such policy, the amount of coverage and the deductible. Purchaser maintains
insurance policies against all risk of a character, including without
limitation, business interruption insurance, and in such amounts as are usually
insured against by similarly situated companies in the same or similar
businesses. Each insurance policy set forth on SCHEDULE 3.18is in full force and
effect and all premiums due thereon have been paid in full. To the knowledge of
Purchaser, there has been no threatened termination of, or premium increase
whether retrospective or prospective with respect to any of such policies.
3.19. RELATED PARTY TRANSACTIONS. Except as set forth on SCHEDULE 3.19,
no officer, director or employee of Purchaser or any member of the immediate
family of any such officer, director or employee, or any entity in which any of
such persons owns any beneficial interest (other than any publicly-held
corporation whose stock is traded on a national securities exchange or in the
over-the-counter market and less than one percent of the stock of which is
beneficially owned by any of such persons) (collectively
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"PURCHASER INSIDERS"), has any agreement with Purchaser (other than normal
employment arrangements) or any interest in any property, real, personal or
mixed, tangible or intangible, used in or pertaining to the business of
Purchaser (other than ownership of capital stock of Purchaser). No Purchaser
Insider has any direct or indirect interest in any competitor, supplier or
customer of Purchaser or in any person, firm or entity from whom or to whom
Purchaser leases any property, or in any other person, firm or entity with whom
Purchaser transacts business of any nature. For purposes of this Section 3.19,
the members of the immediate family of an officer, director or employee shall
consist of the spouse, parents, children, siblings, mothers- and fathers-in-law,
sons- and daughters-in-law, and brothers- and sisters-in-law of such officer,
director or employee.
3.20. INTELLECTUAL PROPERTY RIGHTS.
(a) Except as set forth on SCHEDULE 3.20(A), all rights of Purchaser
and IGI in any patents, patent applications, trademarks, service marks,
trade names, corporate names, copyrights, mask works, trade secrets,
know-how, Internet Web sites, domain names and applications and
registrations pertaining thereto or other intellectual property rights
owned by, licensed to or otherwise controlled by Purchaser or used in,
developed for use in, or necessary to the current conduct of the business
of Purchaser as now conducted (the "PURCHASER INTELLECTUAL PROPERTY") is
owned by the Purchaser free and clear of liens or encumbrances of any
nature.
(b) Except as set forth on SCHEDULE 3.20(B), the Purchaser owns, or is
licensed or otherwise possess legal enforceable rights to use all of the
Purchaser Intellectual Property.
(c) To the knowledge of Purchaser, except as set forth on SCHEDULE
3.20(C), there are no conflicts with or infringements of any Purchaser
Intellectual Property by any third party and the conduct of the businesses
as currently conducted does not conflict with or infringe any proprietary
right of a third party.
(d) SCHEDULE 3.20(D) sets forth a complete list of all material
licenses, sub-licenses and other agreements pursuant to which Purchaser has
granted rights to use the Purchaser Intellectual Property to any third
party. Except as set forth in SCHEDULE 3.20(D), Purchaser will not, as a
result of the execution and delivery of this Agreement or the performance
of its obligations under this Agreement, be in breach of any license,
sublicense or other agreement relating to the Purchaser Intellectual
Property.
(e) Purchaser has not received any notice of, nor are there any facts
known to Purchaser which indicate a likelihood of, any infringement or
misappropriation by, or conflict from, any third party with respect to the
Purchaser Intellectual Property. No claim by any third party contesting the
validity of any rights of Purchaser in the Purchaser Intellectual Property
has been made, is currently outstanding or, to the knowledge of Purchaser,
is threatened. Purchaser has not received any notice of any infringement,
misappropriation or violation by Purchaser of any intellectual property
rights of any third parties and Purchaser has not infringed,
misappropriated or otherwise violated any such intellectual property
rights. No infringement, illicit copying, misappropriation or violation has
occurred or will occur with respect to the current conduct of the business
of Purchaser.
3.21 PURCHASER LIABILITIES. Purchaser does not, and upon reasonable
investigation should not, have any liability of Purchaser which will be
outstanding to any third party after the Effective Time, other than those
liabilities set forth on SCHEDULE 3.21.
3.22. BROKERAGE. No third party shall be entitled to receive any
brokerage commissions, finder's fees, fees for financial advisory services or
similar compensation in connection with the transactions contemplated by this
Agreement based on any arrangement or agreement made by or on behalf of
Purchaser.
3.23. DISCLOSURE. Neither this Agreement, any of the Exhibits or
Schedules hereto, any of the documents delivered by or on behalf of Purchaser
pursuant to Article VI hereof, nor any of the financial statements referred to
in Section 3.7 hereof, contains any untrue statement of a material fact
regarding
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Purchaser or its business or any of the other matters dealt with in this Article
III relating to Purchaser or the transactions contemplated by this Agreement or
omit to state any material fact necessary to make the statements contained
herein or therein, in light of the circumstances in which they were made, not
misleading, and there is no fact which has not been disclosed to the Company
which could reasonably be anticipated to have a Purchaser Material Adverse
Effect.
ARTICLE IV.
ADDITIONAL COVENANTS OF THE COMPANY AND THE COMPANY PARENT
The Company covenants and agrees as follows:
4.1. CONDUCT OF BUSINESS OF THE COMPANY AND FBMS.
(a) Unless Purchaser and the Company shall otherwise agree in writing
and except as expressly contemplated by this Agreement or the Schedules
attached hereto, during the period from the date of this Agreement to the
Effective Time, (i) the Company and FBMS shall conduct its business in the
ordinary course and consistent with past practice, and the Company and FBMS
shall use its reasonable commercial efforts to preserve intact its business
organization, to keep available the services of its officers and employees
and to maintain satisfactory relationships with all persons with whom it
does business, and (ii) without limiting the generality of the foregoing,
the Company and FBMS will not:
(A) except in connection with the Company's Series A Preferred
Stock offering currently being undertaken by the Company or in
connection with the conversion of any currently outstanding debt or
equity securities of FBMS, amend or propose to amend its certificate of
incorporation or bylaws (or comparable governing instruments) in any
material respect;
(B) except in connection with (i) the preferred stock offering
currently being undertaken by the Company, (ii) in connection with the
conversion of any currently outstanding debt or equity securities of
FBMS, or (iii) and for issuances of up to 200,000 Company stock options
pursuant to the Company's 1999 Qualified Stock Option Plan, authorize
for issuance, issue, grant, sell, pledge, dispose of or propose to
issue, grant, sell, pledge or dispose of any shares of, or any options,
warrants, commitments, subscriptions or rights of any kind to acquire or
sell any shares of, the capital stock or other securities of the Company
or FBMS including, but not limited to, any securities convertible into
or exchangeable for shares of stock of any class of the Company or FBMS,
except for the issuance of Company Shares pursuant to the exercise of
stock options outstanding on the date of this Agreement in accordance
with their present terms;
(C) split, combine or reclassify any shares of its capital stock or
declare, pay or set aside any dividend or other distribution (whether in
cash, stock or property or any Combination thereof) in respect of its
capital stock, other than dividends or distributions to the Company or
FBMS or directly or indirectly redeem, purchase or otherwise acquire or
offer to acquire any shares of its capital stock or other securities;
(D) other than in the ordinary course of business consistent with
past practice, (a) create, incur or assume any debt, except refinancing
of existing obligations on terms that are no less favorable to the
Company or FBMS than the existing terms; (b) assume, guarantee, endorse
or otherwise become liable or responsible (whether directly, indirectly,
contingently or otherwise) for the obligations of any Person; (c) make
any capital expenditures or make any loans, advances or capital
contributions to, or investments in, any other Person (other than
customary travel, relocation or business advances to employees); (d)
acquire the stock or assets of, or merge or consolidate with, any other
Person; (e) voluntarily incur any material liability or obligation
(absolute, accrued, contingent or otherwise); or (f) sell, transfer,
mortgage, pledge or otherwise dispose of, or encumber, or agree to sell,
transfer, mortgage, pledge or otherwise dispose of or
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encumber, any assets or properties, real, personal or mixed material to
the Company taken as a whole other than to secure debt permitted under
(a) of this clause (D);
(E) increase in any manner the compensation of any of its officers
or employees or enter into, establish, amend or terminate any
employment, consulting, retention, change in control, collective
bargaining, bonus or other incentive compensation, profit sharing,
health or other welfare, stock option or other equity, pension,
retirement, vacation, severance, deferred compensation or other
compensation or benefit plan, policy, agreement, trust, fund or
arrangement with, for or in respect of, any stockholder, officer,
director, other employee, agent, consultant or affiliate other than as
required pursuant to the terms of agreements in effect on the date of
this Agreement and such as are in the ordinary course of business
consistent with past practice; or
(F) take or cause to be taken any action, whether before or after
the Effective Time, which would disqualify the Merger as a
"reorganization" within the meaning of Section 368(a) of the Code.
(b) The Company and FBMS shall use their respective reasonable
commercial efforts to comply in all material respects with all Laws
applicable to it or any of its properties, assets or business and maintain
in full force and effect all the Company Permits necessary for, or
otherwise material to, such business.
4.2. NOTIFICATION OF CERTAIN MATTERS. The Company shall give prompt
notice to Purchaser if any of the following occur after the date of this
Agreement: (i) receipt by the Company or FBMS of any notice or other
communication in writing from any third party alleging that the Consent of such
third party is or may be required in connection with the transactions
contemplated by this Agreement, provided that such Consent would have been
required to have been disclosed in this Agreement; (ii) receipt of any material
notice or other communication from any Governmental Authority in connection with
the transactions contemplated by this Agreement; (iii) the occurrence of an
event which would be reasonably likely to have a Company Material Adverse Effect
or (iv) the commencement or threat of any Litigation involving or affecting the
Company or FBMS, or any of the properties or assets of either, or, to the
knowledge of the Company, any employee, agent, director or officer, in his or
her capacity as such, of the Company or FBMS which, if pending on the date
hereof, would have been required to have been disclosed in this Agreement or
which relates to the consummation of the Merger.
4.3. ACCESS AND INFORMATION. Between the date of this Agreement and the
Effective Time, the Company will give, and shall direct its accountants and
legal counsel to give, Purchaser and its respective authorized representatives
(including, without limitation, its financial advisors, accountants and legal
counsel), at all reasonable times, access as reasonably requested to all offices
and other facilities and to all contracts, agreements, commitments, books and
records of or pertaining to the Company and FBMS, will permit the foregoing to
make such reasonable inspections as they may require and will cause its officers
promptly to furnish Purchaser with such financial and operating data and other
information with respect to the business and properties of the Company and FBMS
as Purchaser may from time to time reasonably request.
4.4. STOCKHOLDER APPROVAL. As soon as practicable, the Company and its
stockholders shall approve and adopt this Agreement and the transactions
contemplated hereby.
4.5. REASONABLE COMMERCIAL EFFORTS. Subject to the terms and conditions
herein provided, the Company agrees to use its reasonable commercial efforts to
take, or cause to be taken, all actions and to do, or cause to be done, all
things necessary, proper or advisable to consummate and make effective as
promptly as practicable the Merger and the transactions contemplated by this
Agreement, including, but not limited to, obtaining all Consents from
Governmental Authorities and other third parties required for the consummation
of the Merger and the transactions contemplated thereby. Upon the terms and
subject to the conditions hereof, the Company agrees to use reasonable
commercial efforts to take, or cause to be
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taken, all actions and to do, or cause to be done, all things necessary to
satisfy the other conditions of the Closing set forth herein.
4.6. PUBLIC ANNOUNCEMENTS. So long as this Agreement is in affect, the
Company shall not, and shall cause its affiliates not to issue or cause the
publication of any press release or any other announcement, whether written or
oral, with respect to the Merger or the transactions contemplated hereby without
the obtaining the prior written consent of Purchaser, except where such release
or announcement is required by applicable Law, in which case the Company, upon
learning of such requirement and prior to making such announcement, notifies
Purchaser in writing of such requirement and attempts in good faith to comply
with this Section 4.6.
4.7. COMPLIANCE. In consummating the Merger and the transactions
contemplated hereby, the Company shall comply in all material respects with the
provisions of the Securities Exchange Act and the Securities Act and shall
comply in all material respects, with all other applicable Laws.
4.8. NO SOLICITATION.
(a) The Company shall, and shall direct and use reasonable efforts to
cause its officers, directors, employees, investment bankers, brokers and
other representatives and agents to, immediately cease any discussions or
negotiations with any parties that may be ongoing with respect to a Company
Acquisition Proposal (as defined below). The Company shall not, nor shall
it authorize or permit any of its officers, directors, employees,
investment bankers, brokers and other representatives and agents to,
directly or, indirectly, (i) take any action to solicit, initiate or
encourage (including by way of furnishing information), or take any other
action designed or reasonably likely to facilitate, any inquiries or the
making of any proposal which constitutes, or may reasonably be expected to
lead to, any Company Acquisition Proposal, or (ii) engage in negotiations
with, or disclose any information relating to the Company or afford access
to the properties, books, or records of the Company to any Person that may
be considering making, or has made, an Company Acquisition Proposal. For
purposes of this Agreement, "COMPANY ACQUISITION PROPOSAL" means any offer
or proposal for, or any indication of interest in, any merger,
consolidation, share exchange, business combination, recapitalization,
liquidation, dissolution or similar transaction involving the Company or
FBMS, or the acquisition of any significant equity interest in, or a
substantial portion of the assets of the Company or FBMS, other than the
transactions contemplated by the Merger Agreement.
(b) Except as set forth in this Section 4.8, neither the board of
directors of the Company nor any committee thereof shall (i) withdraw or
modify, or propose publicly to withdraw or modify, in a manner adverse to
Purchaser, the approval or recommendation by such board of directors or
such committee of this Agreement and the transactions contemplated hereby,
(ii) approve or recommend, or propose publicly to approve or recommend, any
Company Acquisition Proposal, or (iii) cause the Company or FBMS to enter
into any letter of intent, agreement in principle, acquisition agreement or
other similar agreement (each, a "COMPANY ACQUISITION AGREEMENT") related
to any Company Acquisition Proposal. Notwithstanding the foregoing, in the
event that prior to the Effective Time the board of directors of the
Company determines in good faith that the failure to do so could create a
reasonable possibility of a breach of its fiduciary duties to the Company's
stockholders under applicable law, the board of directors of the Company
may (subject to this and the following sentences) (x) withdraw or modify
its approval or recommendation of this Agreement and the transactions
contemplated hereby, or (y) approve or recommend a Company Superior
Proposal (as defined below) or terminate this Agreement (and concurrently
with or after such termination, if it so chooses, cause the Company to
enter into any Company Acquisition Agreement with respect to any Company
Superior Proposal), but in each of the cases set forth in this clause (y),
only at a time that is after the second business day following Purchaser's
receipt of written notice advising Purchaser that the board of directors of
the Company has received a Company Superior Proposal, specifying the
material terms and conditions of such Company Superior Proposal and
identifying the person making such Company Superior Proposal. For purposes
of this Agreement, a "COMPANY SUPERIOR PROPOSAL" means any bona fide offer
or proposal for, or any indication of interest in, any merger,
consolidation,
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share exchange, business combination, recapitalization, liquidation,
dissolution or similar transaction involving the Company or FBMS, or the
acquisition of any significant equity interest in, or a substantial portion
of the assets of the Company or FBMS which the board of directors of the
Company determines in its good faith judgment (based on the advice of its
advisors) to be more favorable to the Company's stockholders than the
Merger (taking into account all factors relating to such proposed
transaction deemed relevant by the board of directors of the Company,
including, without limitation, the financing thereof and all other
conditions thereto).
(c) In addition to the obligations of the Company set forth in this
Section 4.8, the Company shall promptly notify Purchaser in writing after
receipt of any Company Acquisition Proposal or any request for information
relating to the Company by any Person that may be considering making, or
has made, a Company Acquisition Proposal, which notification shall describe
the material terms and conditions of such request or Company Acquisition
Proposal and the identity of the person making such request or Company
Acquisition Proposal.
(d) Notwithstanding the covenants contained in this Section 4.8, the
Company may furnish information concerning its business to a third party
making an unsolicited Company Acquisition Proposal and enter into
discussions, negotiations or agreements with such third party if the
Company concludes after due consideration, which shall include consultation
with legal counsel and other advisors, that an applicable fiduciary duty of
any of the Company's directors or officers require such actions.
4.9. TAKEOVER STATUTES. If any "fair price," "moratorium," "control share
acquisition" or other similar antitakeover statute or regulation enacted under
state or federal laws in the United States (each a "TAKEOVER STATUTE") is or may
become applicable to the Merger, the Company and the members of its board of
directors will grant such approvals, and take such actions as are necessary so
that the transactions contemplated by this Agreement may be consummated as
promptly as practicable on the terms contemplated hereby and otherwise act to
eliminate or minimize the effects of any Takeover Statute on any of the
transactions contemplated hereby.
4.10 PARENT COMPANY. Company shall call a special meeting of
shareholders, and, subject to the terms and conditions contained herein, Parent
Company shall, with respect to all Company Common Stock beneficially owned by
Parent Company, vote in favor of the Merger contemplated by this Agreement.
4.11 SCHEDULES. Any Schedule required to be supplied by the Company
pursuant to this Agreement shall be completed and delivered no later than
January 15, 2000.
4.12 FBMS SERIES A PREFERRED STOCK. Parent Company and Company shall
cause all outstanding shares of FBMS Series A Preferred Stock to either be a)
acquired by Parent Company, b) converted into shares of Company Series A
Preferred or c) redeemed by FBMS or the Company.
ARTICLE V.
ADDITIONAL COVENANTS OF PURCHASER
Purchaser covenants and agrees as follows:
5.1. PURCHASER OUTSTANDING SHARES. Immediately prior to the Closing,
Purchaser shall have, in the aggregate, not more than Sixteen Million
(16,000,000) shares of Purchaser Stock issued and outstanding on a fully diluted
basis after giving effect to the exercise, issuance or conversion of any stock
options, warrants, securities convertible or exercisable for shares of Purchaser
Stock, subscription agreements or any other agreement which may require the
issuance of Purchaser Stock. Commencing on the date hereof and continuing until
the earlier to occur of (i) the Closing, or (ii) the termination of this
Agreement pursuant to Article VII hereof, Purchaser shall not issue any
additional shares of Purchaser Stock, preferred stock of Purchaser, or any
securities exchangeable for or convertible into Purchaser Stock or enter into
any agreements which provide for any of the foregoing or the issuance of any
equity securities of Purchaser if,
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as a result of the foregoing, Purchaser would have more than Sixteen Million
(16,000,000) shares of Purchaser Stock outstanding on a fully-diluted basis as
contemplated by the first sentence of this Section.
5.2. CONDUCT OF BUSINESS OF PURCHASER.
(a) Unless the Company shall otherwise agree in writing and except as
expressly contemplated by this Agreement or Schedules attached hereto,
during the Period from the date of this Agreement to the Effective Time,
(i) Purchaser shall conduct its business in the ordinary course and
consistent with past practice, and Purchaser shall use its reasonable
commercial efforts to preserve intact its business organization, to keep
available the services of its officers and employees and to maintain
satisfactory relationships with all persons with whom it does business and
(ii) without limiting the generality of the foregoing, neither Purchaser
will not:
(A) amend or propose to amend its Certificate of Incorporation or
Bylaws (or comparable governing instruments) in any material respect;
(B) authorize for issuance issue, grant, sell, pledge, dispose of
or propose to issue, grant, sell, pledge or dispose of any shares of, or
any options, warrants, commitments, subscriptions or rights of any kind
to acquire or sell any shares of, the capital stock or other securities
of Purchaser, including, but not limited to, any securities convertible
into or exchangeable for shares of stock of any class of Purchaser,
except for the issuance of shares of Purchaser Stock pursuant to the
exercise of stock options outstanding on the date of this Agreement in
accordance with their present terms;
(C) split, combine or reclassify any shares of its capital stock or
declare, pay or set aside any dividend or other distribution (whether in
cash, stock or property or any combination thereof) in respect of its
capital stock, other than dividends or distributions to Purchaser, or
directly or indirectly redeem, purchase or otherwise acquire or offer to
acquire any shares of its capital stock or other securities;
(D) other than in the ordinary course of business consistent with
past practice, (a) create, incur or assume any debt, except refinancing
of existing obligations on terms that are no less favorable to Purchaser
or its subsidiaries than the existence terms; (b) assume, guarantee,
endorse or otherwise become liable or responsible (whether directly,
indirectly, contingently or otherwise) for the obligations of any
person; (c) make any capital expenditures or make any loans, advances or
capital contributions to, or investments in, any other person (other
than customary travel, relocation or business advances to employees);
(d) acquire the stock or assets of, or merge or consolidate with, any
other person; (e) voluntarily incur any material liability or obligation
(absolute, accrued, contingent or otherwise); or (f) sell, transfer,
mortgage, pledge or otherwise dispose of, or encumber, or agree to sell,
transfer, mortgage, pledge or otherwise dispose of or encumber, any
assets or properties, real, personal or mixed material to Purchaser
other than to secure debt permitted under (a) of this clause (D);
(E) increase in any manner the compensation of any of its officers
or employees or enter into, establish, amend or terminate any
employment, consulting, retention, change in control, collective
bargaining, bonus or other incentive compensation, profit sharing,
health or other welfare, stock option or other equity, pension,
retirement, vacation, severance, deferred compensation or other
compensation or benefit plan, policy, agreement, trust, fund or
arrangement with, for or in respect of, any stockholder, officer,
director, other employee, agent, consultant or affiliate other than as
required pursuant to the terms of agreements in effect on the date of
this Agreement and such as are in the ordinary course of business
consistent with past practice; or
(F) take or cause to be taken any action, whether before or after
the Effective Time, which would disqualify the Merger as a "pooling of
interests," for accounting purposes or as a "reorganization" within the
meaning of Section 368(a) of the Code.
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(b) Purchaser shall use its reasonable commercial efforts to comply in
all material respects with all Laws applicable to it or any of its
properties, assets or business and maintain in full force and effect all
the Purchaser Permits necessary for, or otherwise material to, such
business.
5.3. NOTIFICATION OF CERTAIN MATTERS. Purchaser shall give prompt notice
to the Company if any of the following occur after the date of this Agreement:
(i) receipt of any notice or other communication in writing from any third party
alleging that the Consent of such third party is or may be required in
connection with the transactions contemplated by this Agreement, provided that
such Consent would have been required to have been disclosed in this Agreement;
(ii) receipt of any material notice or other communication from any Governmental
Authority (including, but not limited to, the NASD or any securities exchange)
in connection with the transactions contemplated by this Agreement; (iii) the
occurrence of an event which would be reasonably likely to have a Purchaser
Material Adverse Effect or (iv) the commencement or threat of any Litigation
involving or affecting Purchaser or any of its properties or assets, or, to its
knowledge, any employee, agent, director or officer, in his or her capacity as
such, of Purchaser which, if pending on the date hereof, would have been
required to have been disclosed in this Agreement or which relates to the
consummation of the Merger.
5.4. ACCESS AND INFORMATION. Between the date of this Agreement and the
Effective Time, Purchaser will give, and shall direct its accountants and legal
counsel to give, the Company and its respective authorized representatives
(including, without limitation, its financial advisors, accountants and legal
counsel), at all reasonable times, access as reasonably requested to all offices
and other facilities and to all contracts, agreements, commitments, books and
records of or pertaining to Purchaser, will permit the foregoing to make such
reasonable inspections as they may require and will cause its officers promptly
to furnish the Company with (a) such financial and operating data and other
information with respect to the business and properties of Purchaser as the
Company may from time to time reasonably request and (b) a copy of each material
report, schedule and other document filed or received by Purchaser or any of its
subsidiaries pursuant to the requirements of applicable securities laws or the
NASD.
5.5. REASONABLE COMMERCIAL EFFORTS. Subject to the terms and conditions
herein provided, Purchaser agrees to use its reasonable commercial efforts to
take, or cause to be taken, all actions and to do, or cause to be done, all
things necessary, proper advisable to consummate and make effective as promptly
as practicable the Merger and the transactions contemplated by this Agreement.
including, but not limited to obtaining all Consents from Governmental
Authorities and other third parties required for the consummation of the Merger
and the transactions contemplated thereby. Upon the terms and subject to the
conditions hereof Purchaser agrees to use reasonable commercial efforts to take,
or cause to be taken, all actions and to do, or cause to be done, all things
necessary to satisfy the other conditions of the closing set forth herein.
5.6. PUBLIC ANNOUNCEMENTS. So long as this Agreement is in effect,
Purchaser shall not, and shall cause its affiliates not to, issue or cause the
publication of any press release or any other announcement, whether written or
oral, with respect to the merger or the transactions contemplated hereby without
obtaining the prior written consent of the Company, except where such release or
announcement is required by applicable Law or pursuant to any applicable listing
agreement with, or rules or regulations of, the NASD, in which case Purchaser,
upon learning of such requirement and prior to making such announcement,
notifies the Company in writing of such requirement and attempts in good faith
to comply with this Section 5.5.
5.7. COMPLIANCE. In consummating the Merger and the transactions
contemplated hereby, Purchaser shall comply in all material respects with the
provisions of the Securities Exchange Act and the Securities Act and shall
comply in all material respects with all other applicable Laws.
5.8. SEC AND STOCKHOLDER FILINGS. Purchaser shall send to the Company a
copy of all material public reports and materials as and when it sends the same
to its shareholders, the SEC or any state or foreign securities commission.
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5.9. SHAREHOLDER APPROVAL. As soon as practicable, Purchaser will take
all steps necessary to duly call, give notice of, convene and hold a meeting of
its shareholders for the purpose of approving the Purchaser Proposal and for
such other purposes as may be necessary or desirable in connection with
effectuating the transactions contemplated hereby. Except as otherwise
contemplated by this Agreement, the board of directors of Purchaser will use its
best efforts to obtain any necessary approval by Purchaser's shareholders of the
Purchaser Proposal. Notwithstanding the foregoing, unless the board of directors
of Purchaser, after consultation with outside legal counsel to Purchaser,
determines that to do so would likely breach the fiduciary duties of the board
of directors under applicable law, Purchaser, acting through its board of
directors, shall include in the Proxy Statement the recommendation of the board
of directors that the shareholders of Purchaser vote in favor of the Purchaser
Proposal.
5.10. NO SOLICITATION.
(a) Purchaser shall, and shall direct and use reasonable efforts to
cause its officers, directors, employees, investment bankers, brokers and
other representatives and agents to, immediately cease any discussions or
negotiations with any parties that may be ongoing with respect to a
Purchaser Acquisition Proposal (as defined below). Purchaser shall not, nor
shall it authorize or permit any of its officers, directors, employees,
investment bankers, brokers and other representatives and agents to,
directly or, indirectly, (i) take any action to solicit, initiate or
encourage (including by way of furnishing information), or take any other
action designed or reasonably likely to facilitate, any inquiries or the
making of any proposal which constitutes, or may reasonably be expected to
lead to, any Purchaser Acquisition Proposal, or (ii) engage in negotiations
with, or disclose any information relating to Purchaser or afford access to
the properties, books, or records of Purchaser to any Person that may be
considering making, or has made, an Purchaser Acquisition Proposal. For
purposes of this Agreement, "PURCHASER ACQUISITION PROPOSAL" means any
offer or proposal for, or any indication of interest in, any merger,
consolidation, share exchange, business combination, recapitalization,
liquidation, dissolution or similar transaction involving Purchaser, or the
acquisition of any significant equity interest in, or a substantial portion
of the assets of Purchaser, other than the transactions contemplated by the
Merger Agreement, provided, however, that nothing contained in this Section
5.10 shall prevent Purchaser from soliciting offers and proposals with
respect to the sale and divestiture of its gaming assets as contemplated by
Section 6.1(e) of this Agreement.
(b) Except as set forth in this Section 5.10, neither the board of
directors of Purchaser nor any committee thereof shall (i) withdraw or
modify, or propose publicly to withdraw or modify, in a manner adverse to
the Company, the approval or recommendation by such board of directors or
such committee of the Purchaser Proposal, (ii) approve or recommend, or
propose publicly to approve or recommend, any Purchaser Acquisition
Proposal or (iii) cause Purchaser to enter into any letter of intent,
agreement in principle, acquisition agreement or other similar agreement
(each, a "PURCHASER ACQUISITION AGREEMENT") related to any Purchaser
Acquisition Proposal. Notwithstanding the foregoing, in the event that
prior to the Effective Time the board of directors of Purchaser determines
in good faith that the failure to do so could create a reasonable
possibility of a breach of its fiduciary duties to Purchaser's shareholders
under applicable law, the board of directors of Purchaser may (subject to
this and the following sentences) (x) withdraw or modify its approval or
recommendation of the Purchaser Proposal or (y) approve or recommend a
Purchaser Superior Proposal (as defined below) or terminate this Agreement
(and concurrently with or after such termination, if it so chooses, cause
Purchaser to enter into any Purchaser Acquisition Agreement with respect to
any Purchaser Superior Proposal), but in each of the cases set forth in
this clause (y), only at a time that is after the second business day
following the Company's receipt of written notice advising Purchaser that
the board of directors of Purchaser has received a Purchaser Superior
Proposal, specifying the material terms and conditions of such Purchaser
Superior Proposal and identifying the person making such Purchaser Superior
Proposal. For purposes of this Agreement, a "PURCHASER SUPERIOR PROPOSAL"
means any bona fide offer or proposal for, or any indication of interest
in, any merger, consolidation, share exchange, business combination,
recapitalization, liquidation, dissolution or similar transaction involving
Purchaser, or the acquisition of any significant equity interest in, or a
substantial portion of
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the assets of Purchaser (with the exception of offers and proposals with
respect to the sale and divestiture of its gaming assets as contemplated by
Section 6.1(e) of this Agreement) which the board of directors of Purchaser
determines in its good faith judgment (based on the advice of its advisors)
to be more favorable to Purchaser's shareholders than the Merger (taking
into account all factors relating to such proposed transaction deemed
relevant by the board of directors of Purchaser, including, without
limitation, the financing thereof and all other conditions thereto).
(c) In addition to the obligations of Purchaser set forth in this
Section 5.10, Purchaser shall promptly notify the Company in writing after
receipt of any Purchaser Acquisition Proposal or any request for
information relating to Purchaser by any Person that may be considering
making, or has made, a Purchaser Acquisition Proposal, which notification
shall describe the material terms and conditions of such request or
Purchaser Acquisition Proposal and the identity of the person making such
request or Purchaser Acquisition Proposal.
(d) Notwithstanding the covenants contained in this Section 5.10,
Purchaser may furnish information concerning its business to a third party
making an unsolicited Purchaser Acquisition Proposal and enter into
discussions, negotiations or agreements with such third party if Purchaser
concludes after due consideration, which shall include consultation with
legal counsel and other advisors, that an applicable fiduciary duty of any
of Purchaser's directors or officers require such actions.
5.11. TAKEOVER STATUTES. If any Takeover Statute is or may become
applicable to the Merger, Purchaser and the members of its board of directors
will grant such approvals, and take such actions as are necessary so that the
transactions contemplated by this Agreement may be consummated as promptly as
practicable on the terms contemplated hereby and otherwise act to eliminate or
minimize the effects of any Takeover Statute on any of the transactions
contemplated hereby.
5.12. SCHEDULES. Any Schedule required to be supplied by Purchaser
pursuant to this Agreement shall be completed and delivered no later than
January 15, 2000.
5.13 CONTRACTS. With respect to the agreements indicated on Schedule
3.15, Purchaser shall use its best efforts to either 1) terminate such contracts
or 2) have such contracts expressly assumed by the purchaser of the Gaming
Assets (as defined herein). Contracts not so terminated or assumed by the
purchaser of the Gaming Assets shall be scheduled on Schedule 5.13 and delivered
to Company five (5) business days prior to Closing.
5.14. BOARD REPRESENTATION. Until the 2000 Annual Meeting of Shareholders
of Purchaser to be held on or before [ ], 2000, and until their
successors are elected and qualified, the Board of Directors of Purchaser
following the Closing Date shall consist of seven directors of which two shall
be selected by Purchaser and five shall be selected by the Company Parent. The
parties shall also agree that such directors shall stand for re-election as
directors of Purchaser at the next annual meeting of the shareholders of
Purchaser.
ARTICLE VI.
CONDITIONS
6.1. CONDITIONS TO EACH PARTY'S OBLIGATIONS. The respective obligations
of each party to effect the Merger shall be subject to the fulfillment or waiver
at or prior to the Effective Time of the following conditions:
(a) PURCHASER SHAREHOLDER APPROVAL. The Purchaser Proposal shall have
been approved at or prior to the Effective Time by the requisite vote of
the shareholders of Purchaser.
(b) COMPANY PARENT STOCKHOLDER APPROVAL. If required by applicable
Law, the Merger shall have been approved by the requisite vote of the
stockholders of the Company Parent
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(c) NO INJUNCTION OR ACTION. No order, statute, rule, regulation,
executive order, stay, decree, judgment or injunction shall have been
enacted, entered, promulgated or enforced by any court or other
Governmental Authority which prohibits or prevents the consummation of the
merger which has not been vacated, dismissed or withdrawn prior to the
Effective Time. The Company and Purchaser shall use their reasonable best
efforts to have any of the foregoing vacated, dismissed or withdrawn by the
Effective Time.
(d) GOVERNMENTAL CONSENTS. Purchaser and Company Parent shall have
obtained or, to the satisfaction of Purchaser and Company Parent, obviated
the need to obtain all consents, approvals or waivers from governmental
bodies or agencies, regulatory authorities (including the gaming
authorities of Nevada and other applicable jurisdictions) and third
parties, necessary for the consummation of the Merger and the transactions
contemplated by this Agreement
(e) REQUIRED CONSENTS. Any required Consents of any person to the
Merger or the transactions contemplated hereby shall have been obtained and
be in full force and effect, except tor those the failure of which to
obtain will not have a material adverse effect on the business, assets,
condition (financial or otherwise), liabilities or the results of
operations of the Surviving Corporation and its subsidiaries taken as a
whole ("SURVIVING CORPORATION MATERIAL ADVERSE EFFECT") or a Purchaser
Material Adverse Effect.
(f) DIVESTITURE OF GAMING ASSETS. Purchaser shall have either a)
divested the ("GAMING ASSET DIVESTITURE") substantially all of the assets
comprising its gaming operations (the "GAMING ASSETS") or b) the Gaming
Assets will be disposed of by Purchaser after Closing in a legal manner
such that neither Purchaser, the Company, nor the Company Parent will
require licensing with any gaming regulatory authority or subject to any
regulation by any such gaming regulatory authority that would adversely
impact the operations of Company or Company Parent.
(g) BLUE SKY. Purchaser shall have received all state securities law
authorizations necessary to consummate the transactions contemplated
hereby.
(h) LITIGATION. There shall have been no material legal or
governmental proceedings seeking to restrain, enjoin or otherwise prohibit,
nor shall any court or governmental authority of competent jurisdiction
have issued any order, restraining, enjoining or otherwise prohibiting, the
transaction contemplated by this Agreement. No person or entity shall have
instituted an action or proceeding which shall not have been previously
dismissed, seeking to restrain, enjoin or prohibit the consummation of the
transaction contemplated by this Agreement.
(i) SCHEDULES. Schedules required to be completed by the parties
hereto pursuant to Sections 4.11 and 5.12 shall have been completed by
January 15, 2000.
6.2. CONDITIONS TO OBLIGATIONS OF THE COMPANY. The obligation of the
Company to consummate the transactions contemplated by this Agreement shall be
subject to the satisfaction of the following conditions on or before Closing
Date, any one or more of which may be waive by Purchaser:
(a) DUE DILIGENCE. The Company shall have completed a full legal and
business due diligence examination of Purchaser prior to January 15, 1999,
the results of which shall be satisfactory to the Company in its sole
discretion.
(b) PURCHASER REPRESENTATIONS AND WARRANTIES. The representations and
warranties of the Purchaser set forth in Article III hereof shall be true
and correct at and as of the Closing Date as though then made and as though
the Closing Date had been substituted for the date of this Agreement
throughout such representations and warranties (without taking into account
any disclosures by Purchaser of discoveries, events or occurrences arising
on or after the date hereof, except that any such representation or
warranty made as of a specified date (other the date hereof) shall only
need have been true on and as of that date). For purposes of this Section
6.2(b), the Schedules referred to in Article III shall mean the Schedules
as amended to the Closing Date;
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provided, however, that any such amendment shall not be deemed to be a
Purchaser Material Adverse Effect.
(c) PERFORMANCE BY PURCHASER. Purchaser shall have performed and
complied with all the covenants and agreements in all material respects and
satisfied in all material respects all the conditions required by this
Agreement to be performed or complied with or satisfied by Purchaser at or
prior to the Closing Date.
(d) NO MATERIAL ADVERSE CHANGE. There shall not have occurred after
the date hereof any event that would be reasonably likely to have a
Purchaser Material Adverse Effect.
(e) DIVESTITURE OF GAMING ASSETS. Purchaser shall have either a)
divested the ("GAMING ASSET DIVESTITURE") substantially all of the assets
comprising its gaming operations (the "GAMING ASSETS") or b) the Gaming
Assets will be disposed of by Purchaser after Closing in a legal manner
such that neither Purchaser, the Company, nor the Company Parent will
require licensing with any gaming regulatory authority or subject to any
regulation by any such gaming regulatory authority that would adversely
impact the operations of Company or Company Parent.
(f) CERTIFICATES AND OTHER DELIVERIES. Purchaser shall have
delivered, or caused to be delivered, the following to the Company:
(i) a certificate executed on its behalf by its President or
another authorized officer to the effect that the conditions set forth
in SECTIONS 6.2(B), (C) AND (D) hereof have been satisfied;
(ii) a certificate of Good Standing from the Secretary of State of
the State of Minnesota stating that Purchaser is a validly existing
corporation in good standing;
(iii) a certificate of good standing from the Secretary of State of
Minnesota stating that Merger Sub is a validly existing corporation in
good standing;
(iv) duly adopted resolutions of the Board of Directors of
Purchaser and the Board of Directors and the shareholder of Merger Sub
approving the execution, delivery and performance of this Agreement and
the instruments contemplated hereby, and of Purchaser's shareholders
approving the Purchaser Proposal, each certified by its respective
Secretary;
(v) certified copies of the articles of incorporation and bylaws of
Purchaser; and
(vi) all other documents, instruments and writings required to be
delivered at or prior to the Closing Date pursuant to this Agreement or
otherwise reasonably requested by the Company in connection herewith.
(g) TAX OPINION. The Company shall have received an opinion (which
may include a reasons opinion) from its tax counsel substantially to the
effect that, if the Merger is consummated in accordance with the provisions
of this Agreement, under current Law, for federal income tax purposes, the
Merger will qualify as a reorganization within the meaning of Section
368(a) of the Code.
(h) TANGIBLE ASSET VALUE. Purchaser shall have net tangible assets in
an amount equal to or greater than Two Million Dollars ($2,000,000) which
amount shall include any promissory notes received by Purchaser pursuant to
the Gaming Asset Divesture.
6.3. CONDITIONS TO OBLIGATIONS OF PURCHASER. The obligations of Purchaser
to consummate the transactions contemplated by this Agreement shall be subject
to the satisfaction of the following conditions on or before Closing Date, any
one or more of which may be waive by Purchaser:
(a) DUE DILIGENCE. Purchaser shall have completed a full legal and
business due diligence examination of the Company and FBMS prior to January
15, 1999, the results of which shall be satisfactory to Purchaser in its
sole discretion.
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(b) COMPANY REPRESENTATIONS AND WARRANTIES. The representations and
warranties of the Company set forth in Article II hereof shall be true and
correct at and as of the Closing Date as though then made and as though the
Closing Date had been substituted for the date of this Agreement throughout
such representations and warranties and the Schedules referred to in
Article II (without taking into account any disclosures by the Company of
discoveries, events or occurrences arising on or after the date hereof,
except that any such representation or warranty made as of a specified date
(other the date hereof) shall only need have been true on and as of that
date). For purposes of this Section 6.3(b), the Schedules referred to in
Article II shall mean the Schedules as amended to the Closing Date;
provided, however, that any such amendment shall not be deemed to be a
Company Material Adverse Effect.
(c) PERFORMANCE BY THE COMPANY. The Company shall have performed and
complied with all the covenants and agreements in all material respects and
satisfied in all material respects all the conditions required by this
Agreement to be performed or complied with or satisfied by the Company at
or prior to the same. There shall not have occurred after the date hereof
any event that would be reasonably likely to have a Company Material
Adverse Effect or a Surviving Corporation Material Adverse Effect.
(d) COMPANY PARENT INDEMNIFICATION AGREEMENT. Company Parent shall
have executed and delivered an Indemnification Agreement in a form
reasonably acceptable to Company Parent, pursuant to which Company Parent
shall agree to indemnify Purchaser and each of its officers, directors,
employees, affiliates and shareholders for (i) any losses resulting from
any breach of the representations and warranties contained in Article II
hereof, and (ii) any claim brought by a shareholder of the Company relating
to the negotiation, approval, execution, delivery and performance of this
Agreement.
(e) CERTIFICATES AND OTHER DELIVERIES. The Company shall have
delivered or caused to be delivered, to Purchaser:
(i) a certificate executed on its behalf by its President or
another duly authorized officer to the effect that the conditions set
forth in Sections 6.3 (a) and (b) hereof have been satisfied;
(ii) a certificate of good standing from the Secretary of State of
the State of Delaware, stating that the Company is a validly existing
corporation in good standing;
(iii) a certificate of good standing from the Secretary of State of
the State of Florida, stating that FBMS is a validly existing
corporation in good standing;
(iv) duly adopted resolutions of the board of directors of the
Company approving the execution., delivery and performance of this
Agreement and the instruments contemplated hereby, and of the Company's
shareholders approving the company Proposals, each certified by the
Secretary of the Company;
(v) certified copies of the articles of incorporation and bylaws of
the Company, Company Parent and FBMS; and
(vi) all other documents, instruments and writings required to be
delivered at or prior to the Closing Date pursuant to this Agreement or
otherwise reasonably requested by Purchaser in connection herewith.
ARTICLE VII.
TERMINATION AND ABANDONMENT
7.1. TERMINATION. This Agreement may be terminated at any time prior to
the Effective Time, whether before or after approval of the Company Parent and
the shareholders of Purchaser described herein;
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(a) by mutual written consent of Purchaser and the Company;
(b) by either Purchaser or the Company if:
(i) the Merger shall not have been consummated on or prior to May
31, 2000 (unless such date is extended by the mutual agreement of each
of the parties hereto), provided, however, that the right to terminate
this Agreement pursuant to this Section 7.1(b)(i) shall not be available
to any party whose failure to perform any of its obligations under this
Agreement results in the failure of the Merger to be consummated by such
time;
(ii) the approval of Purchaser's shareholders required by SECTION
6.1(A) shall not have been obtained at a meeting duly convened therefor
or at any adjournment or postponement thereof;
(iii) the approval of either the Purchaser's or the Parent
Company's shareholders is not obtained; or
(iv) any Governmental Authority shall have issued an order, decree
or ruling or taken any other action permanently enjoining, restraining
or otherwise prohibiting the consummation of the Merger and such order,
decree or ruling or other action shall have become final and
nonappealable;
(c) by Purchaser if the Company shall have breached in any material
respect any of its representations, warranties, covenants or other
agreements contained in this Agreement, which breach or failure to perform
is incapable of being cured or has not been cured within 20 days after the
giving of written notice to the Company;
(d) by Purchaser if (i) the board of directors of the Company or any
committee thereof shall have withdrawn or modified in a manner adverse to
Purchaser its approval or recommendation of any of the Company Proposals,
or failed to reconfirm its recommendation within 15 business days after a
written request to do so, or approved or recommended any Company Takeover
Proposal, or (ii) the board of directors of the Company or any committee
thereof shall have resolved to take any of the foregoing actions;
(e) by Purchaser in accordance with SECTION 5.10(B) hereof, provided
that it complies with applicable requirements relating to the payment
(including the timing of any payment) of the Company Termination Fee (as
defined below).
(f) by the Company if Purchaser shall have breached in any material
respect any of its representations, warranties, covenants or other
agreements contained in this Agreement, which breach or failure to perform
is incapable of being cured or has not been cured within 20 days after the
giving of written notice to Purchaser;
(g) by the Company if (i) the board of directors of Purchaser or any
committee thereof shall have withdrawn or modified in a manner adverse to
the Company its approval or recommendation of the Purchaser Proposal, or
failed to reconfirm its recommendation within 15 business days after a
written request to do so, or approved or recommended any Company Takeover
Proposal, or (ii) the board of directors of Purchaser or any committee
thereof shall have resolved to take any of the foregoing actions; or
(h) by the Company in accordance with SECTION 4.8(B) hereof, provided
that it complies with applicable requirements relating to the payment
(including the timing of any payment) of the Company Termination Fee (as
defined below).
The party desiring to terminate this Agreement pursuant to the preceding
paragraphs shall give written notice of such termination to the other party in
accordance with SECTION 8.5 hereof.
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7.2. EFFECT OF TERMINATION AND ABANDONMENT.
(a) In the event of the termination of this Agreement and the
abandonment of the Merger pursuant to this ARTICLE VII, this Agreement
(other than SECTIONS 7.2, 8.1, 8.3, 8.5, 8.6, 8.7, 8.8, 8.10, 8.11, 8.12,
8.13, 8.14 AND 8.15 hereof) shall become void and of no effect with no
liability on the part of any party hereto (or of any of its directors,
officers, employees, agents, legal or financial advisors or other
representatives); provided, however, that no such termination shall relieve
any party hereto from any liability for any breach of this Agreement prior
to termination. If this Agreement is terminated as provided herein, each
party shall use its reasonable best efforts to redeliver all documents,
work papers and other material (including any copies thereof) of any other
party relating to the transactions contemplated hereby, whether obtained
before or after the execution hereof, to the party furnishing the same.
(b) In the event that a bona fide Company Acquisition Proposal shall
have been made known to the Company or has been made directly to its
stockholders generally or any Person shall have publicly announced an
intention (whether or not conditional) to make a bona fide Company
Acquisition Proposal and such Company Acquisition Proposal or announced
intention shall not have been withdrawn and thereafter this Agreement is
terminated (x) by the Company pursuant to Section 7.1(h) hereof or (y) by
Purchaser pursuant to Section 7.1(d) hereof, then the Company shall
promptly, but in no event later than two days after the date of such
termination, pay Purchaser an amount equal all reasonable out-of-pocket
charges and expenses incurred by Purchaser in connection with this
Agreement and the transactions contemplated hereby in an amount not to
exceed Three Hundred and Fifty Thousand Dollars ($350,000) (the "COMPANY
TERMINATION FEE") payable by wire transfer of same day funds. The Company
acknowledges that the agreements contained in this SECTION 7.2(B) are an
integral part of the transactions contemplated by this Agreement and that,
without these agreements, Purchaser would not enter into this Agreement.
Notwithstanding the foregoing, no fee or expense reimbursement shall be
paid pursuant to this Section 7.2(b) if Purchaser shall be in material
breach of its obligations hereunder.
(c) In the event that a bona fide Purchaser Acquisition Proposal shall
have been made known to Purchaser or has been made directly to its
shareholders generally or any Person shall have publicly announced an
intention (whether or not conditional) to make a bona fide Purchaser
Acquisition Proposal and such Purchaser Acquisition Proposal or announced
intention shall not have been withdrawn and thereafter this Agreement is
terminated (x) by the Purchaser pursuant to Section 7.1(f) hereof or (y) by
the Company pursuant to Section 7.1(g) hereof, then Purchaser shall
promptly, but in no event later than two days after the date of such
termination, pay the Company an amount equal to all reasonable
out-of-pocket charges and expenses incurred by the Company in connection
with this Agreement and the transactions contemplated hereby in an amount
not to exceed Three Hundred and Fifty Thousand Dollars ($350,000) (the
"PURCHASER TERMINATION FEE") payable by wire transfer of same day funds.
Purchaser acknowledges that the agreements contained in this SECTION 7.2(C)
are an integral part of the transactions contemplated by this Agreement and
that, without these agreements, the Company would not enter into the
Agreement. Notwithstanding the foregoing, no fee shall be paid pursuant to
this Section 7.2(c) if the Company shall be in material breach of its
obligations hereunder.
ARTICLE VIII.
MISCELLANEOUS
8.1. CONFIDENTIALITY. Unless (i) otherwise expressly provided in this
Agreement, (ii) required by applicable Law or any listing agreement with, or the
rules and regulations of, any applicable securities exchange or the NASD, (iii)
necessary to secure any required Consents as to which the other party has been
advised or (iv) consented to in writing by Purchaser and the Company, any
information or documents furnished in connection herewith shall be kept strictly
confidential by the parties hereto and
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their respective officers, directors, employees and agents. Prior to any
disclosure pursuant to the preceding sentence, the party intending to make such
disclosure shall consult with the other party regarding the nature and extent of
the disclosure. Nothing contained herein shall preclude disclosures to the
extent necessary to comply with accounting, SEC and other disclosure obligations
imposed by applicable Law. To the extent required by such disclosure
obligations, Purchaser or the Company Parent, after consultation with the other
party, may file with the, SEC a Report on Form 8-K pursuant to the Securities
Exchange Act with respect to the Merger, which report may include, among other
things, financial statements and pro forma financial information with respect to
the other party. In connection with any filing with the SEC of a registration
statement or amendment thereto under the Securities Act, Purchaser or Company
Parent, after consultation with the other party, may include a prospectus
containing any information required to be included therein with respect to the
Merger, including, but not limited to, financial statements and pro forma
financial information with respect to the other party, and thereafter distribute
said prospectus. The parties hereto shall cooperate with each other and provide
such information and documents as may be required in connection with any such
filings. In the event the Merger is not consummated, each party shall return to
the other any documents furnished by the other and all copies thereof any of
them may have made and will hold in absolute confidence any information obtained
from the other party except to the extent (i) such party is required to disclose
such information by Law or such disclosure is necessary or desirable in
connection with the pursuit or defense of a claim, (ii) such information was
known by such party prior to such disclosure or was thereafter developed or
obtained by such party independent of such disclosure or (iii) such information
becomes generally available to the public other than by breach of this SECTION
8.1. Prior to any disclosure of information pursuant to the exception in clause
(i) of the preceding sentence, the party intending to disclose the same shall so
notify the party which provided the name in order that such party may seek a
protective order or other appropriate remedy should it choose to do so.
8.2. AMENDMENT AND MODIFICATION. This Agreement may be amended, modified
or supplemented only by a written agreement among all of the parties hereto.
8.3. WAIVER OF COMPLIANCE; CONSENTS. Any failure of the Company Parent on
the one hand, or Purchaser and Merger Sub on the other hand, to comply with any
obligation, covenant, agreement or condition herein may be waived by Purchaser
on the one hand, or the Company on the other hand, only by a written instrument
signed by the party granting such waiver, but such waiver or failure to insist
upon strict compliance with such obligation, covenant, agreement or condition
shall not operate as a waiver of, or estoppel with respect co, any subsequent or
other failure. Whenever this Agreement requires or permits consent by or on
behalf of any party hereto, such consent shall be given in writing in a manner
consistent with the requirements for a waiver of compliance as set forth in this
SECTION 8.3.
8.4. SURVIVAL. The respective representations, warranties, covenants and
agreements of the parties hereto contained herein or in any certificates or
other documents delivered prior to or at the Closing shall survive the execution
and delivery of this Agreement, notwithstanding any investigation made or
information obtained by the other party, but shall terminate at the Effective
Time, except for those contained in[ SECTIONS 1.4, 1.5, 1.6, 3.21, 4.1(A)(F),
5.2(A)(B)(F) 5.13 AND 8.1 hereof delivered pursuant to SECTION 6.3 (E) hereof],
which shall survive beyond the Effective Time.
8.5. NOTICES. All notices and other communications hereunder shall be in
writing and shall be deemed to have been duly given when delivered in person, by
facsimile, receipt confirmed, or on the next business day when sent by overnight
courier or on the second succeeding business day when sent by registered or
certified mail (postage prepaid, return receipt requested) to the respective
parties at the following addresses (or at such other address for a party as
shall be specified by like notice):
(i) if to the Company, to:
7315 E. Peakview Avenue
Greenwood Executive Park, Building 8
Englewood, Colorado 80111
Attention: Henry Fong, CEO
Telecopy: (561) 624-0886
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<PAGE> 126
with a copy to:
Friedlob Sanderson Raskin Paulson & Tourtillott, LLC
1400 Glenarm Place
Denver, Colorado 80202
Attention: John W. Kellogg
Telecopy: (303) 595-3159
and
(ii) if to Purchaser and/or Merger Sub, to:
4725 Aircenter Circle
Reno, Nevada 89502
Attention: Edward G. Stevenson, CEO
Telecopy: (775) 823-3030
with copies to:
Maslon Edelman Borman & Brand, LLP
3300 Norwest Center
90 South Seventh Street
Minneapolis, Minnesota 55402-4140
Attention: Douglas T. Holod
Telecopy: (612)672-8397
8.6. BINDING EFFECT; ASSIGNMENT. This Agreement and all of the provisions
hereof shall be binding upon and inure to the benefit of the parties hereto and
their respective successors and permitted assigns. Neither this Agreement nor
any of the rights, interests or obligations hereunder shall be assigned by any
of the parties hereto prior to the Effective Time without the prior written
consent of the other party hereto; PROVIDED HOWEVER, that Company Parent shall
be permitted to assign its rights and obligations under this Agreement to a
wholly owned subsidiary of Company Parent owning all of the capital stock of the
Company held by Company Parent on the date of this Agreement and; PROVIDED
FURTHER, that such wholly-owned subsidiary shall be deemed a party to this
Agreement in all respects.
8.7. EXPENSES. All costs and expenses incurred in connection with this
Agreement and the transactions contemplated hereby shall be paid by the party
incurring such costs or expenses, subject to the rights of Purchaser
contemplated under SECTION 7.2(B) hereof and the Company under SECTION 7.2(C)
hereof.
8.8. GOVERNING LAW. This Agreement shall be deemed to be made in, and in
all respects shall be interpreted, construed and governed by and in accordance
with the internal laws of, the State of Minnesota.
8.9. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which together be deemed an original, but all of which
together shall constitute one and the same instrument.
8.10. INTERPRETATION. The article and section headings contained in this
Agreement are solely for the purpose of reference, are not part of the agreement
of the parties and shall not in any way affect the meaning or interpretation of
this Agreement. As used in this Agreement, (i) the term "PERSON" shall mean and
include an individual, a partnership, a joint venture, a corporation, a limited
liability company, a trust, an association, an unincorporated organization, a
Governmental Authority and any other entity, (ii) unless otherwise specified
herein, the term "AFFILIATE," with respect to any person, shall mean and include
any person controlling, controlled by or under common control with such person
and (iii) the term "SUBSIDIARY" of any specified person shall mean any
corporation 50 percent or more of the outstanding voting power of which, or any
partnership, joint venture, limited liability company or other entity 50 percent
or more of the total equity interest of which, is directly or indirectly owned
by such specified person.
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8.11. ENTIRE AGREEMENT. This Agreement and the documents or instruments
referred to herein including, but not limited to, the Exhibits and Schedules
attached hereto, which Exhibits and Schedules are incorporated herein by
reference, embody the entire agreement and understanding of the parties hereto
in respect of the subject matter contained herein. There are no restrictions,
promises, representations, warranties, covenants, or undertakings, other than
those expressly set forth or referred to herein. This Agreement supersedes all
prior agreements and the understandings between the parties with respect to such
subject matter.
8.12. SEVERABILITY. In case any provision in this Agreement shall be held
invalid, illegal or unenforceable in a jurisdiction, such provision shall be
modified or deleted, as to the jurisdiction involved, only to the extent
necessary to render the same valid, legal and enforceable, and the validity,
legality and enforceability of the remaining provisions hereof shall not in any
way be affected or impaired thereby nor shall the validity, legality or
enforceability of such provision be affected thereby in any other jurisdiction.
8.13. SPECIFIC PERFORMANCE. The parties hereto agree that irreparable
damage would occur in the event that any of the provisions of this Agreement
were not performed in accordance with their specific terms or were otherwise
breached. Accordingly, the parties further agree that each party shall be
entitled to an injunction or restraining order to prevent breaches of this
Agreement and to enforce specifically the terms and provisions hereof in any
court of the United states or any state having jurisdiction., this being in
addition to any other right or remedy to which such party may be entitled under
this Agreement, at law or in equity.
8.14. THIRD PARTIES. Nothing contained in this Agreement or in any
instrument or document executed by any party in connection with the transactions
contemplated hereby shall create any rights in, or be deemed to have been
executed for the benefit of, any that is not a party hereto or thereto or a
successor or permitted assign of such a party.
8.15. SCHEDULES. The Company and Purchaser acknowledge that the Schedules
attached hereto and referred to herein (i) relate to certain matters concerning
the disclosures required and transactions contemplated by this Agreement, (ii)
are qualified in their entirety by reference to specific provisions of this
Agreement, and (iii) are not intended to constitute and shall not be construed
as indicating that such matter is required to be disclosed, nor shall such
disclosure be construed as an admission that such information is material with
respect to the Company or Purchaser, as the case may be, except to the extent
required by this Agreement.
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IN WITNESS WHEREOF, Purchaser, Merger Sub, Company Parent and the Company
have caused this Agreement to be signed and delivered by their respective duly
authorized officers as of the date first above written.
INNOVATIVE GAMING CORPORATION OF
AMERICA
By: /s/ Edward G. Stevenson
------------------------------------
Name: Edward G. Stevenson
Title: Chairman and Chief Executive
Officer
IGCA ACQUISITION CORP.
By: /s/ Edward G. Stevenson
------------------------------------
Name: Edward G. Stevenson
Title:
NMORTGAGE, INC.
By: /s/ Henry Fong
------------------------------------
Name: Henry Fong
Title:
EQUITEX, INC.
By: /s/ Henry Fong
------------------------------------
Name: Henry Fong
Title: President
Signature Page -- Agreement and Plan of Merger
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<PAGE> 129
AMENDMENT NO. 1
TO
AGREEMENT AND PLAN OF MERGER
This AMENDMENT No. 1 TO AGREEMENT AND PLAN OF MERGER (this "AMENDMENT"), is
made and entered into as of this 1st day of February, 2000, by and among
NMORTGAGE, INC., a Delaware corporation (the "COMPANY"), EQUITEX, INC., a
Delaware corporation, (the "COMPANY PARENT"), INNOVATIVE GAMING CORPORATION OF
AMERICA, a Minnesota corporation ("PURCHASER"), and IGCA ACQUISITION CORP., a
Minnesota corporation and wholly owned subsidiary of Purchaser ("MERGER SUB").
W I T N E S S E T H
WHEREAS, the parties hereto have previously executed that certain Agreement
and Plan of Merger (the "AGREEMENT") dated as of December 31, 1999, pursuant to
which the Company will be merged, subject to the terms and conditions contained
in the Agreement, with and into Merger Sub in accordance with the laws of the
States of Minnesota and Delaware.
WHEREAS, the parties hereto have agreed to amend certain of the provisions
of the Agreement in accordance with Section 8.2 thereof.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein and certain other good and valuable consideration, the receipt
and sufficiency of which is hereby acknowledged, the parties hereto hereby amend
the Agreement as follows:
ARTICLE I
AMENDMENTS TO ARTICLE II OF THE AGREEMENT
Section 2.2 of the Agreement is hereby amended in its entirety and replaced
with the provision set forth below:
2.2 ORGANIZATION AND CORPORATE POWER. The Company is a corporation duly
incorporated, validly existing and in good standing under the laws of the State
of Delaware, and has the requisite corporate power and authority and all
authorizations, licenses, permits and certifications necessary to own, lease and
operate its properties and to carry on its business as now being conducted. The
Company is qualified to do business as a foreign corporation in every
jurisdiction in which the nature of its business or its ownership of property
requires it to be so qualified except for those jurisdictions in which the
failure to be so qualified would not, individually or in the aggregate, have a
material adverse effect on the business, assets, condition (financial or
otherwise), liabilities or the results of operations of the Company (a "COMPANY
MATERIAL ADVERSE EFFECT"). The copies of the Company's and FBMS' articles of
incorporation and bylaws, each of which will have been furnished by the Company
to Purchaser prior to February 29, 2000, reflect all amendments made thereto and
are correct and complete as of the date hereof.
ARTICLE II
AMENDMENTS TO ARTICLE IV OF THE AGREEMENT
Section 4.11 of the Agreement is hereby amended in its entirety and
replaced with the provision set forth below:
4.11 SCHEDULES. Any Schedule required to be supplied by the Company
pursuant to this Agreement shall be completed and delivered no later than
February 29, 2000.
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ARTICLE III
AMENDMENTS TO ARTICLE V OF THE AGREEMENT
Section 5.12 of the Agreement is hereby amended in its entirety and
replaced with the provision set forth below:
5.12. SCHEDULES. Any Schedule required to be supplied by Purchaser
pursuant to this Agreement shall be completed and delivered no later than
February 29, 2000.
ARTICLE IV
AMENDMENTS TO ARTICLE VI OF THE AGREEMENT
The following sections of Article VI of the Agreement are hereby amended in
their entirety and replaced with the provisions set forth below:
6.1(i) SCHEDULES. Schedules required to be completed by the parties
hereto pursuant to Sections 4.11 and 5.12 shall have been completed by February
29, 2000.
6.2(a) DUE DILIGENCE. The Company shall have completed a full legal and
business due diligence examination of Purchaser prior to February 29, 2000, the
results of which shall be satisfactory to the Company in its sole discretion.
6.3(a) DUE DILIGENCE. Purchaser shall have completed a full legal and
business due diligence examination of the Company and FBMS prior to February 29,
2000, the results of which shall be satisfactory to Purchaser in its sole
discretion.
ARTICLE V
CERTAIN ADDITIONAL AGREEMENTS
5.1 ENTIRE AGREEMENT. This Amendment, the Agreement and the documents or
instruments referred to in the Agreement including, but not limited to, the
Exhibits and Schedules attached thereto, which Exhibits and Schedules are
incorporated therein by reference, embody the entire agreement and understanding
of the parties hereto in respect of the subject matter contained herein. There
are no restrictions, promises, representations, warranties, covenants, or
undertakings, other than those expressly set forth or referred to herein or in
the Agreement. This Amendment supersedes all prior agreements and the
understandings between the parties with respect to the subject matter contained
herein.
5.2 DEFINED TERMS. Except as otherwise expressly provided, or unless the
context otherwise requires, all capitalized terms used herein have the meanings
ascribed to them in the Agreement.
5.3 COUNTERPARTS. This Amendment may be executed in any number of
counterparts, each of which shall be deemed an original, but all of which shall
constitute but one and the same document.
5.4 RATIFICATION AND REAFFIRMATION OF AGREEMENT. Except as expressly set
forth herein, this Amendment shall not by implication or otherwise alter,
modify, amend or in any way affect any of the terms, conditions, obligations,
covenants or agreements contained in the Agreement, all of which are ratified
and affirmed in all respects and shall continue in full force and effect.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK.]
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IN WITNESS WHEREOF, Purchaser, Merger Sub, Company Parent and the Company
have caused this Agreement to be signed and delivered by their respective duly
authorized officers as of the date first above written.
INNOVATIVE GAMING CORPORATION OF
AMERICA
By: /s/ Edward G. Stevenson
------------------------------------
Name: Edward G. Stevenson
Title: Chairman and Chief Executive
Officer
IGCA ACQUISITION CORP.
By: /s/ Edward G. Stevenson
------------------------------------
Name: Edward G. Stevenson
Title:
NMORTGAGE, INC.
By: /s/ Henry Fong
------------------------------------
Name: Henry Fong
Title:
EQUITEX, INC.
By: /s/ Henry Fong
------------------------------------
Name: Henry Fong
Title: President
Signature Page
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APPENDIX C
OPINION OF FINANCIAL ADVISOR
December 17, 1999
The Board of Directors
Innovative Gaming Corporation of America
4725 Air Center Circle
Reno, Nevada 89502
Members of the Board:
You have requested our opinion as to the fairness, from a financial point
of view, to the holders of common stock of Innovative Gaming Corporation of
America (the "PURCHASER"), a Minnesota corporation, of the consideration to be
paid by such holders pursuant to the terms of the proposed agreement and plan of
merger (the "MERGER AGREEMENT")(1), by and among NMORTGAGE.COM, INC., a Delaware
corporation (the "COMPANY"), EQUITEX, INC., a Delaware corporation, (the
"COMPANY PARENT"), INNOVATIVE GAMING CORPORATION OF AMERICA, a Minnesota
Corporation (the "PURCHASER"), and IGCA MERGER SUBSIDIARY, INC., a Minnesota
corporation and wholly owned subsidiary of Purchaser (the "MERGER SUB").
Pursuant to the Merger Agreement, all of the issued and outstanding shares
of common stock of the Company, as of the Effective Time (as that term is
defined in the Merger Agreement) shall be converted into the right to receive,
in exchange for the Company Shares, an aggregate of 45,000,000 shares of the
common stock of Purchaser (subject to appropriate adjustment in the event of a
stock split, stock dividend or recapitalization after the date of the Merger
Agreement and prior to the Effective Time applicable to shares of the Purchaser
stock or the Company stock).
Craig-Hallum Capital Group, Inc. ("CRAIG-HALLUM"), as part of its
securities and investment banking business, is regularly engaged in the
valuation of businesses and their securities, in connection with mergers and
acquisitions, secondary distributions of securities, private placements and
valuations for other purposes. In rendering this fairness opinion, we have acted
on behalf of the Board of Directors of the Purchaser and will receive a fee from
the Purchaser for our services.
In connection with our review of the Merger Agreement, and in arriving at
our opinion, we have, among other things:
1. Reviewed and analyzed the financial terms of the Merger Agreement;
2. Reviewed and analyzed certain publicly available financial statements
and other information of the Purchaser and the Company Parent;
3. Reviewed and analyzed certain internal financial statements and other
historical financial and operating data concerning the Purchaser
prepared by the management of the Purchaser;
4. Reviewed and analyzed certain internal financial statements and other
historical financial and operating data concerning the Company
prepared by the management of the Company;
5. Reviewed and analyzed certain financial projections prepared by the
management of the Purchaser;
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(1) In conjunction with our analysis of this transaction, we were provided a
draft of the Merger Agreement dated November 19, 1999. We considered the
terms of the Merger Agreement as contained in that draft, and changes to
the Merger Agreement subsequent to that date were not considered in
determining our opinion.
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6. Reviewed and analyzed certain financial projections prepared by the
management of the Company;
7. Performed site visits and conducted discussions with members of the
senior management of the Purchaser with respect to the business and
prospects of the Purchaser;
8. Performed site visits and conducted discussions with members of the
senior management of the Company with respect to the business and
prospects of the Company;
9. Analyzed the pro-forma impact of the Merger Agreement on the
Purchaser's results of operations;
10. Reviewed the reported prices and trading activity for the Purchaser's
common stock and Company Parent's common stock;
11. Compared the financial performance of the Purchaser and the price of
the Purchaser's common stock with that of certain other comparable
publicly-traded companies and their securities;
12. Compared the financial performance and pro-forma financial
projections of the Company with those of certain other comparable
publicly-traded companies;
13. Participated in discussions among representatives of the Purchaser
and their financial and legal advisors; and
14. Conducted such other analyses and examinations and considered such
other financial, economic and market criteria as we have deemed
necessary in arriving at our opinion.
In rendering our opinion, we have assumed and relied upon the accuracy,
completeness and fairness of the financial, legal, tax, operating and other
information provided to us by the Purchaser and the Company (and the Purchaser's
and Company's accounting and legal advisors) and that was otherwise reviewed by
us, and have not independently verified such information. We have not performed
an independent evaluation or appraisal of any of the respective assets or
liabilities of the Purchaser or the Company and we have not been furnished with
any such valuations or appraisals. With respect to the financial forecasts
supplied to us, we have assumed that they have been reasonably prepared on the
bases reflecting the best currently available estimates and judgments of the
management of the Purchaser and the Company, as the case may be, of the
respective future financial performance of the Company and the Purchaser. We
express no view as to such projections or the assumptions upon which they were
based. We made no independent investigations of any legal matters affecting the
Purchaser or the Company and assumed the correctness of all legal advice given
to the Board of Directors of the Purchaser by its counsel. We express no opinion
herein as to the price at which the Purchaser's common stock may actually trade
at any time.
It is understood that this letter is for the information of the Board of
Directors of the Purchaser, and this letter shall not be published or otherwise
used and no public references to Craig-Hallum Capital Group, Inc. shall be made
without our prior written consent, which consent shall not be unreasonably
withheld; provided, however, that this letter may be included in its entirety in
the proxy statement submitted to the stockholders of the Purchaser for the
purpose of approving the Merger. Our opinion is, in any event, limited to the
fairness, from a financial point of view, to the holders of the Purchaser's
common stock, of the consideration paid pursuant to the Merger Agreement. Events
occurring after the date hereof may materially affect the assumptions used in
preparing this opinion. Further, our opinion speaks only as of the date hereof
and is based on the economic, market, financial and other conditions as they
exist and information which we have been supplied as of the date hereof. It
shall be understood that although subsequent developments may affect this
opinion, we do not have any obligation to update, revise or reaffirm this
opinion.
Based upon and subject to the foregoing, including the various assumptions
and limitations set forth herein, it is our opinion that as of the date hereof,
the consideration paid by the holders of the Purchaser's common stock pursuant
to the Merger Agreement is fair, from a financial point of view, to the holders
of the Purchaser's common stock. Our opinion does not constitute a
recommendation to any Board member
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or stockholder of the Purchaser as to how any such Board member or stockholder
should vote on the proposed Merger or otherwise address the purchaser's decision
to effect the Merger.
Very truly yours,
/s/ CRAIG HALLUM CAPITAL GROUP,
INC.
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CRAIG-HALLUM CAPITAL GROUP, INC.
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APPENDIX D
SECTIONS 302A.471 AND 302A.473 OF THE MINNESOTA BUSINESS CORPORATIONS ACT
Set forth below are Sections 302A.471 and 302A.473 of the Minnesota
Business Corporation Act, which provide that shareholders may dissent from and,
and obtain the fair value of their shares in the event of certain corporate
actions, and establish procedures for the exercise of such dissenters' rights.
302A.471. RIGHTS OF DISSENTING SHAREHOLDERS
SUBDIVISION 1. ACTIONS CREATING RIGHTS. A shareholder of a corporation may
dissent from, and obtain payment for the fair value of the shareholder's shares
in the event of, any of the following corporate actions:
(a) An amendment of the articles that materially and adversely affects the
rights or preferences of the shares of the dissenting shareholder in that it:
(1) alters or abolishes a preferential right of the shares;
(2) creates, alters, or abolishes a right in respect of the redemption
of the shares, including a provision respecting a sinking fund for the
redemption or repurchase of the shares;
(3) alters or abolishes a preemptive right of the holder of the shares
to acquire shares, securities other than shares, or rights to purchase
shares or securities other than shares;
(4) excludes or limits the right of a shareholder to vote on a matter,
or to cumulate votes, except as the right may be excluded or limited
through the authorization or issuance of securities of an existing or new
class or series with similar or different voting rights; except that an
amendment to the articles of an issuing public corporation that provides
that section 302A.671 does not apply to a control share acquisition does
not give rise to the right to obtain payment under this section;
(b) A sale, lease, transfer, or other disposition of all or substantially
all of the property and assets of the corporation, but not including a
transaction permitted without shareholder approval in section 302A.661,
subdivision 1, or a disposition in dissolution described in Section 302A.725,
subdivision 2, or a disposition pursuant to an order of a court, or a
disposition for cash on terms requiring that all or substantially all of the net
proceeds of disposition be distributed to the shareholders in accordance with
their respective interests within one year after the date of disposition;
(c) A plan of merger, whether under this chapter or under chapter 322B, to
which the corporation is a party, except as provided in subdivision 3;
(d) A plan of exchange, whether under this chapter or under chapter 322B,
to which the corporation is a party as the corporation whose shares will be
acquired by the acquiring corporation, if the shares of the shareholder are
entitled to be voted on the plan; or
(e) any other corporate action taken pursuant to a shareholder vote with
respect to which the articles, the bylaws, or a resolution approved by the board
of directors that dissenting shareholders may obtain payment for their shares.
SUBD. 2. BENEFICIAL OWNERS. (a) A shareholder shall not assert
dissenters' rights as to less than all of the shares registered in the name of
the shareholder, unless the shareholder dissents with respect to all the shares
that are beneficially owned by another person but registered in the name of the
shareholder and discloses the name and address of each beneficial owner on whose
behalf the shareholder dissents. In that event, the rights of the dissenter
shall be determined as if the shares as to which the shareholder has dissented
and the other shares were registered in the names of different shareholders.
(b) The beneficial owner of shares who is not the shareholder may assert
dissenters' rights with respect to shares held on behalf of the beneficial
owner, and shall be treated as a dissenting shareholder under the terms of this
section and section 302A.473, if the beneficial owner submits to the corporation
at the time of or before the assertion of the rights a written consent of the
shareholder.
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SUBD. 3. RIGHTS NOT TO APPLY. (a) Unless the articles, the bylaws, or a
resolution approved by the board otherwise provide, the right to obtain payment
under this section does not apply to a shareholder of the surviving corporation
in a merger, if the shares of the shareholder are not entitled to be voted on
the merger.
(b) If a date is fixed according to section 302A.445, subdivision 1, for
the determination of shareholders entitled to receive notice of and to vote on
an action described in subdivision 1, only shareholders as of the date fixed,
and beneficial owners as of the date fixed who hold through shareholders, as
provided in subdivision 2, may exercise dissenters' rights.
SUBD. 4. OTHER RIGHTS. The shareholders of a corporation who have a right
under this section to obtain payment for their shares do not have a right at law
or in equity to have a corporate action described in subdivision 1 set aside or
rescinded, except when the corporate action is fraudulent with regard to the
complaining shareholder or the corporation.
302A.473. PROCEDURES FOR ASSERTING DISSENTERS' RIGHTS
SUBDIVISION 1. DEFINITIONS. (a) For purposes of this section, the terms
defined in this subdivision have the meanings given them.
(b) "Corporation" means the issuer of the shares held by a dissenter before
the corporate action referred to in section 302A.471, subdivision 1 or the
successor by merger of that issuer.
(c) "Fair value of the shares" means the value of the shares of a
corporation immediately before the effective date of the corporate action
referred to in section 302A.471, subdivision 1.
(d) "Interest" means interest commencing five days after the effective date
of the corporate action referred to in section 302A.471, subdivision 1, up to
and including the date of payment, calculated at the rate provided in section
549.09 for interest on verdicts and judgments.
SUBD. 2. NOTICE OF ACTION. If a corporation calls a shareholder meeting
at which any action described in section 302A.471, subdivision 1 is to be voted
upon, the notice of the meeting shall inform each shareholder of the right to
dissent and shall include a copy of section 302A.471 and this section and a
brief description of the procedure to be followed under these sections.
SUBD. 3. NOTICE OF DISSENT. If the proposed action must be approved by
the shareholders, a shareholder who is entitled to dissent under section
302A.471 and who wishes to exercise dissenters' rights must file with the
corporation before the vote on the proposed action a written notice of intent to
demand the fair value of the shares owned by the shareholder and must not vote
the shares in favor of the proposed action.
SUBD. 4. NOTICE OF PROCEDURE; DEPOSIT OF SHARES. (a) After the proposed
action has been approved by the board and, if necessary, the shareholders, the
corporation shall send to all shareholders who have complied with subdivision 3
and to all shareholders entitled to dissent if no shareholder vote was required,
a notice that contains:
(1) The address to which a demand for payment and certificates of
certificated shares must be sent in order to obtain payment and the date by
which they must be received;
(2) Any restrictions on transfer of uncertificated shares that will
apply after the demand for payment is received;
(3) A form to be used to certify the date on which the shareholder, or
the beneficial owner on whose behalf the shareholder dissents, acquired the
shares or an interest in them and to demand payment; and
(4) A copy of section 302A.471 and this section and a brief
description of the procedures to be followed under these sections.
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(b) In order to receive the fair value of the shares, a dissenting
shareholder must demand payment and deposit certificated shares or comply with
any restrictions on transfer of uncertificated shares within 30 days after the
notice required by paragraph (a) was given, but the dissenter retains all other
rights of a shareholder until the proposed action takes effect.
SUBD. 5. PAYMENT; RETURN OF SHARES. (a) After the corporate action takes
effect, or after the corporation receives a valid demand for payment, whichever
is later, the corporation shall remit to each dissenting shareholder who has
complied with subdivisions 3 and 4 the amount the corporation estimates to be
the fair value of the shares, plus interest, accompanied by:
(1) The corporation's closing balance sheet and statement of income
for a fiscal year ending not more than 16 months before the effective date
of the corporate action, together with the latest available interim
financial statements;
(2) An estimate by the corporation of the fair value of the shares and
a brief description of the method used to reach the estimate; and
(3) A copy of section 302A.471 and this section, and a brief
description of the procedure to be followed in demanding supplemental
payment.
(b) The corporation may withhold the remittance described in paragraph (a)
from a person who was not a shareholder on the date the action dissented from
was first announced to the public or who is dissenting on behalf of a person who
was not a beneficial owner on that date. If the dissenter has complied with
subdivisions 3 and 4, the corporation shall forward to the dissenter the
materials described in paragraph (a), a statement of the reason for withholding
the remittance, and an offer to pay to the dissent the amount listed in the
materials if the dissenter agrees to accept that amount in full satisfaction.
The dissenter may decline the offer and demand payment under subdivision 6.
Failure to do so entitles the dissenter only to the amount offered. If the
dissenter makes demand, subdivisions 7 and 8 apply.
(c) If the corporation fails to remit payment within 60 days of the deposit
of certificates or the imposition of transfer restrictions on uncertificated
shares, it shall return all deposited certificates and cancel all transfer
restrictions. However, the corporation may again give notice under subdivision 4
and require deposit or restrict transfer at a later time.
SUBD. 6. SUPPLEMENTAL PAYMENT; DEMAND. If a dissenter believes that the
amount remitted under subdivision 5 is less than the fair value of the shares
plus interest, the dissenter may give written notice to the corporation of the
dissenter's own estimate of the fair value of the shares, plus interest, within
30 days after the corporation mails the remittance under subdivision 5, and
demand payment of the difference. Otherwise, a dissenter is entitled only to the
amount remitted by the corporation.
SUBD. 7. PETITION; DETERMINATION. If the corporation receives a demand
under subdivision 6, it shall, within 60 days after receiving the demand, either
pay to the dissenter the amount demanded or agreed to by the dissenter after
discussion with the corporation or file in court a petition requesting that the
court determine the fair value of the shares, plus interest. The petition shall
be filed in the county in which the registered office of the corporation is
located, except that a surviving foreign corporation that receives a demand
relating to the shares of a constituent domestic corporation shall file the
petition in the county in this state in which the last registered office of the
constituent corporation was located. The petition shall name as parties all
dissenters who have demanded payment under subdivision 6 and who have not
reached agreement with the corporation. The corporation shall, after filing the
petition, serve all parties with a summons and copy of the petition under the
rules of civil procedure. Nonresidents of this state may be served by registered
or certificated mail or by publication as provided by law. Except as otherwise
provided, the rules of civil procedure apply to this proceeding. The
jurisdiction of the court is plenary and exclusive. The court may appoint
appraisers, with powers and authorities the court deems proper, to receive
evidence on and recommend the amount of the fair value of the shares. The court
shall determine whether the shareholder or shareholders in question have fully
complied with the requirements of this section, and shall determine the fair
value of the shares, taking into account any and all factors the court finds
relevant, computed by any method or combination of methods that the court, in
its discretion, sees fit
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to use, whether or not used by the corporation or by a dissenter. The fair value
of the shares as determined by the court is binding on all shareholders,
wherever located. A dissenter is entitled to judgment in cash for the amount by
which the fair value of the shares as determined by the court, plus interest,
exceeds the amount, if any, remitted under subdivision 5, but shall not be
liable to the corporation for the amount, if any, by which the amount, if any,
remitted to the dissenter under subdivision 5 exceeds the fair value of the
shares as determined by the court, plus interest.
SUBD. 8. COSTS; FEES; EXPENSES. (a) The court shall determine the costs
and expenses of a proceeding under subdivision 7, including the reasonable
expenses and compensation of any appraisers appointed by the court, and shall
assess those costs and expenses against the corporation, except that the court
may assess part or all of those costs and expenses against a dissenter whose
action in demanding payment under subdivision 6 is found to be arbitrary,
vexatious, or not in good faith.
(b) If the court finds that the corporation has failed to comply
substantially with this section, the court may assess all fees and expenses of
any experts or attorneys as the court deems equitable. These fees and expenses
may also be assessed against a person who has acted arbitrarily, vexatiously, or
not in good faith in bringing the proceeding, and may be awarded to a party
injured by those actions.
(c) The court may award, in its discretion, fees and expenses to an
attorney for the dissenters out of the amount awarded to the dissenters, if any.
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INNOVATIVE GAMING CORPORATION
OF AMERICA
SPECIAL MEETING OF STOCKHOLDERS
, 2000
9:00 A.M.
4725 AIRCENTER CIRCLE
RENO, NEVADA 89502
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INNOVATIVE GAMING CORPORATION OF AMERICA
4725 AIRCENTER CIRCLE, RENO, NEVADA 89505
PROXY
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THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS FOR USE AT THE SPECIAL MEETING ON , 2000
The shares of stock you hold in your account or in a dividend reinvestment
account will be voted as you specify below.
IF NO CHOICE IS SPECIFIED, THE PROXY WILL BE VOTED "FOR" ITEMS 1, 2, 3 AND 4.
The undersigned, a shareholder of Innovative Gaming Corporation of
America, Inc., hereby appoints and , and each
of them, as proxies, with full power of substitution, to vote on behalf of the
undersigned the number of shares which the undersigned is then entitled to vote,
at the Special Meeting of Shareholders of Innovative Gaming Corporation of
America, Inc. to be held at , at a.m.
on , 2000, and at any and all adjournments thereof, with
all the powers which the undersigned would possess if personally present. The
undersigned hereby revokes all previous proxies relating to the shares covered
hereby and acknowledges receipt of the Notice and Proxy Statement relating to
the Special Meeting of Shareholders.
See reverse for voting instructions.
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THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ITEMS 1, 2, 3 AND 4.
(1) Adoption of Asset Purchase Agreement: [ ] For [ ] Against [ ] Abstain
(2) Adoption of Merger Agreement: [ ] For [ ] Against [ ] Abstain
(3) Amendment to Articles of Incorporation: [ ] For [ ] Against [ ] Abstain
(4) Upon such other Business as may properly come before the meeting or any
adjournments thereof.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED AS DIRECTED OR, IF NO DIRECTION IS GIVEN, WILL BE VOTED
FOR EACH PROPOSAL.
Address Change? Mark Box [ ]
Indicate changes below:
Date _____________________________________
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Signature(s) in Box
Please sign exactly as your name(s) appear on Proxy.
If held in joint tenancy, all persons must sign.
Trustees, administrators, etc., should include title
and authority. Corporations should provide full name
or corporation and title of authorized officer
signing the proxy. |
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