<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ______________
Commission File Number 0-22808
PACIFIC RIM ENTERTAINMENT, INC.
(Exact name of registrant as specified in its charter)
Delaware 95-4374983
(State or jurisdiction of (IRS Employer
incorporation) Identification No.)
401 City Avenue, Suite 319, Bala Cynwyd, Pennsylvania 19004
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (610) 660-5755
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes No X .
Number of shares of Common Stock outstanding at July 31, 1997: 1,342,488
Number of Redeemable Warrants outstanding at July 31, 1997: 146,554
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PACIFIC RIM ENTERTAINMENT, INC.
FORM 10-QSB
JUNE 30, 1997
TABLE OF CONTENTS
<TABLE>
<S> <C>
PART I - FINANCIAL INFORMATION........................................................................................... 3
Item 1. Consolidated condensed unaudited financial statements......................................................... 3
Item 2. Management's discussion and analysis of financial condition, results of operations and plan of operation...... 8
PART II-OTHER INFORMATION................................................................................................ 9
Item 2. Changes in Securities......................................................................................... 9
Item 6. Exhibits and Reports on Form 8-K.............................................................................. 9
SIGNATURES............................................................................................................... 9
INDEX OF EXHIBITS........................................................................................................ 11
</TABLE>
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PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED CONDENSED UNAUDITED FINANCIAL STATEMENTS
PACIFIC RIM ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
Unaudited Audited
June 30, 1997 December 31, 1996
------------- -----------------
<S> <C> <C>
ASSETS
Cash $ 2,501 0
Film costs inventory, net 200,000 $ 500,000
Investment in NSE (Note 6) 424,900 0
Fixed assets, net 0 6,667
------------ ------------
Total Assets $ 627,401 $ 506,667
============ ============
LIABILITIES AND STOCKHOLDERS DEFICIT
Liabilities:
Accounts payable and accrued expenses $ 329,000 $ 887,737
Payable to related parties 53,000 323,650
Notes payable 450,000 0
------------ ------------
Total Liabilities $ 832,000 $ 1,211,387
============ ============
Stockholder's Deficit:
Common stock, authorized 10,000,000 984 225
shares, par value $.01 per share, 98,396 and
22,488 shares issued and outstanding as of
June 30, 1997 and December 31, 1996
Additional paid-in-capital 12,582,762 11,754,762
Accumulated deficit (12,788,345) (12,459,071)
------------ ------------
Total Stockholder's Deficit (204,599) (704,083)
------------ ------------
Total Liabilities and Stockholder's Deficit $ 627,401 $ 506,667
============ ============
</TABLE>
The accompanying notes to financial statements are an integral part hereof
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PACIFIC RIM ENTERTAINMENT, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30 (UNAUDITED)
<TABLE>
<CAPTION>
6 mos. 3 mos. 6 mos. 3 mos.
1997 1997 1996 1996
--------- --------- --------- --------
<S> <C> <C> <C> <C>
Operating Revenues $ 0 $ 0 $ 0 $ 0
Film valuation reserve (Note 2) (300,000) (300,000) (500,000) 0
Selling, general and administrative (29,275) (567) (250,000) (31,500)
--------- --------- --------- --------
Operating Loss (329,275) (300,567) (750,000) (31,500)
Interest expense 0 0 (6,000) 0
--------- --------- --------- --------
Loss before tax (329,275) (300,567) (756,000) (31,500)
--------- --------- --------- --------
Provision for California franchise tax 0 0 0 0
--------- --------- --------- --------
Net loss (329,275) (300,567) (756,000) (31,500)
--------- --------- --------- --------
Net loss per share $ (6.88) $ (6.28) $ (33.62) $ (1.40)
Weighted average shares outstanding 47,791 47,791 22,488 22,488
</TABLE>
The accompanying notes to financial statements are an integral part hereof
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PACIFIC RIM ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT FOR THE TWO YEARS AND
SIX MONTHS ENDED JUNE 30
<TABLE>
<CAPTION>
Additional
Common Stock Paid to Accumulated
Shares Common Capital Deficit Total
------ ------ ------- ------- -----
<S> <C> <C> <C> <C> <C>
Balance -
December 31,
1995
(after
reverse split) 22,488 225 11,754,762 (12,331,617) 836,612
Net loss for
the period (127,453) (1,413,242)
----- ------------ ------------ ------------ ------------
Balance -
December 31,
1996 22,488 $ 225 $ 11,754,762 $( 12,459,070) $ (704,083)
------------
Discharge of
debt 75,908 759 828,000 828,759
----- ------------ ------------ ------------ ------------
Net Loss for
the period (329,275) (329,275)
------------ ------------
Balance -
June 30, 1997 98,396 984 $ 12,582,762 $ 12,788,345 $ (204,599)
----- ------------ ------------ ------------ ------------
</TABLE>
The accompanying notes to financial statements are an integral part hereof
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PACIFIC RIM ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOW
SIX MONTHS ENDED JUNE 30
<TABLE>
<CAPTION>
Unaudited
1997 1996
---- ----
<S> <C> <C>
Cash Flow from Operating Activities:
Net Loss $ (329,275) $(63,000)
Adjustments to Reconcile Net Loss to Net Cash
Use for Operating Activities: 6,676 3,000
Depreciation and Amortization
Film Cost Write Down 300,000
Changes in Operating Assets and Liabilities:
Increase in accounts payable and accrued expenses 0 60,000
--------- -------
Net Cash Used for Operating Activities (22,599) 0
Cash Flows from Financing Activities:
Proceed from Notes Payable to Investors 450,000
--------- -------
Net Cash Provided by Financing Activities 450,000
--------- -------
Cash Flows from Investing Activities:
Investment in NSE (424,900)
--------- -------
Net Cash Used in Investing Activities (424,900)
--------- -------
Net Increase in Cash 2,501 0
Cash at Beginning of Period 0 0
Cash at End of Period $ 2,501 $ 0
--------- -------
Supplemental Cash Flow Information:
Taxes Paid $ 0 $ 0
--------- -------
Interest Paid $ 0 $ 0
--------- -------
</TABLE>
The company issued 76,000 shares of common stock in June, 1997 in settlement of
approximately $828,000 in payables.
The accompanying notes to financial statements are an integral part hereof.
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PACIFIC RIM ENTERTAINMENT INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED UNAUDITED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES
The accompanying unaudited consolidated condensed financial statements of
Pacific Rim Entertainment, Inc. (a Delaware corporation), and subsidiaries
(collectively the "Company"), in the opinion of management, reflect all
adjustments, consisting of normal recurring accruals, necessary for a fair
presentation of the financial statements for such interim periods. Interim
results are not necessarily indicative of results for a full year.
Certain information and disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted (in accordance with the Securities and Exchange Commission
(the "SEC") rules pertaining to Form 10-QSB). It is suggested that these
consolidated condensed financial statements be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
annual report on Form 10-KSB for the fiscal year ended December 31, 1996 (the
"Form 10-KSB"), which was filed by the Company with the SEC on April 12, 1997,
in accordance with the Securities Exchange Act of 1934, as amended.
NOTE 2 - FILM COSTS INVENTORY
At June 30, 1997 and December 31, 1996, film costs inventory consisted of the
following:
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1996
------------- -----------------
<S> <C> <C>
Released, net of amortization: $ 0 $ 0
In process: 2,634,000 2,634,000
Less valuation in reserve (2,434,000) (1,634,000)
----------- -----------
$ 200,000 $ 1,000,000
=========== ===========
</TABLE>
NOTE 3 - COMMITMENTS AND CONTINGENT LIABILITIES
Reference is made to Notes 8 and 9 of the Company's Consolidated Financial
Statements included in the Company's Form 10-K for the period ended December 31,
1994 for a discussion of commitments and contingent liabilities, and employment
agreements.
NOTE 4 - LOANS PAYABLE - DIRECTORS AND SHAREHOLDERS
During the six months ended June 30, 1997, the Company received loans from its
directors and shareholders totaling $4,500.
NOTE 5 - EARNINGS PER SHARE
The computation of the shares outstanding for the period is based on the
weighted average number of shares outstanding during the period. Warrants
outstanding have not been included in the earnings per share calculation as the
effect of their inclusion would be anti-dilutive.
NOTE 6 - PRIVATE PLACEMENT
On June 5, 1997, the Company completed a private placement offering in which it
sold $450,000 in principal amount of its 8% Senior Secured Notes and Warrants to
purchase 150,000 shares of its Common Stock for an aggregate purchase price of
$450,000. These notes are secured by a security interest in all of the Company's
property. From the proceeds of the offering, the Company lent $400,000 to NSE
for working capital in exchange for a 10% demand promissory note. Of the balance
of the proceeds of the offering $45,000 was applied to pay the expenses of the
offering and $5,000 was retained as working capital.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION, RESULTS
OF OPERATIONS AND PLAN OF OPERATION
The following discussion and analysis should be read in conjunction with the
Company's financial statements and notes thereto. All per share figures give
effect to a one for two hundred share reverse stock split approved by the
shareholders of the Company in August, 1997. An amendment to the Company's
Certificate of Incorporation reflecting that reverse split will be filed with
the Secretary of State of the State of Delaware shortly. The purpose of the
amendment is to is to give legal effect to two separate reverse stock splits
which the Company's Board of Directors previously approved, but which were
subsequently determined to be invalid because shareholder approval giving effect
to the reverse splits was never obtained and such amendments were never filed
with the Secretary of State of the State of Delaware.
During the period from late 1992 to 1995 when it ceased operations, the Company
engaged in the businesses of producing animated films and creating original
animated programs. Since ceasing operations, the Company has been seeking to
obtain additional financing or to merge or form a joint venture of the Company's
operations with those of another business.
On May 23, 1997, the Company entered into an Agreement and Plan of Merger with
NSE Technologies, Inc. ("NSE"), a privately-held Texas-based company providing
network integration services to clients in the development of local and wide
area networks and customer support. Under the Merger Agreement, NSE will be
merged into a wholly-owned subsidiary of the Company, with the subsidiary being
the surviving corporation. In the merger, each four shares of NSE are to be
exchanged for one share of the Company's common stock. (A portion of these
shares will be subject to cancellation if the combined companies do not meet
certain agreed upon amounts.) As a result, the former shareholders of NSE will
obtain a controlling interest in the Company and the business of NSE will become
the principal business of the Company. In connection with the merger agreement
the Company has advanced an aggregate of $424,900 to NSE. Consummation of the
merger is dependent upon a number of conditions, including, among other things,
the Company having satisfied generally all of its outstanding present
indebtedness and achieving a positive net worth, and NSE having completed a
private offering of a minimum of 1,333,334 shares of its Convertible Preferred
Stock, which would yield gross proceeds of $1,000,000 if the minimum offering is
sold. As of the date of this report, neither of those conditions have been met
and their is substantial uncertainty as to whether they will be met.
The Company is also continuing to pursue its efforts to maximize value for
stockholders by pursuing the licensing or other distribution of all or a portion
of its distribution rights in its existing film library valued at the net
realizable value of $200,000.
On June 30, 1997, the Company completed a series of settlement agreements with
various creditors, pursuant to which these creditors separately agreed to accept
an aggregate of 76,000 shares of the Company's common stock in exchange for
general releases of all obligations of the Company to such creditors, which
obligations aggregated approximately $838,000.
Since ceasing operations, the Company has been entirely dependent upon outside
financing to fund its efforts.
On June 5, 1997, the Company completed a private placement offering in which it
sold $450,000 in principal amount of its 8% Senior Secured Notes and Warrants to
purchase 135,000 shares of its Common Stock for an aggregate purchase price of
$450,000. These notes are secured by a security
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interest in all of the Company's property. From the proceeds of the offering,
the Company lent $400,000 to NSE for working capital (which was in addition to
$24,900 previously lent to NSE) in exchange for a 10% demand promissory note. Of
the balance of the proceeds of the offering $45,000 was applied to pay the
expenses of the offering and $5,000 was retained as working capital.
As of the close of the quarter, the Company was in the process of completing an
additional offering of 1,320,000 shares of its Common Stock at a price of $.01
per share. That offering was closed following the end of the quarter.
As of June 30, 1997, the Company had total liabilities of $832,000, even after
settlement of $828,000 of indebtedness in exchange for common stock, there can
be no assurance that the Company will be able to satisfy those remaining
liabilities and achieve a positive net worth as required as a condition to the
merger. Further, even if the private placement currently being conducted by NSE
is successful, it is likely that additional financing will be required for the
anticipation operations of the combined companies.
PART II-OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
On June 5, 1997, the Company completed a private placement offering in which it
sold $450,000 in principal amount of its 8% Senior Secured Notes and warrants to
purchase 135,000 shares of its Common Stock. These notes are secured by a
security interest in all of the Company's property. Accordingly, in the event of
a liquidation, dissolution or winding up of the Company, holders of these notes
would be entitled to receive payment in preference and priority over the holders
of the Company's common stock.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 2 Agreement and Plan of Merger dated May 23, 1997.
Exhibit 4 Form of 8% Senior Secured Note.
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
On May 22, 1997, the Company filed a Report on Form 8-K reporting
the resignation of its certifying accountant.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned there unto duly authorized.
Dated: June 30, 1997 PACIFIC RIM ENTERTAINMENT, INC.
Registrant
S/STEVEN ROSNER
----------------------------------------
Steven Rosner, President and Chief
Financial Officer
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INDEX OF EXHIBITS
<TABLE>
<CAPTION>
Number Description of Exhibits Page No.
- --------------------------------------------------------------------------------
<S> <C> <C>
2 Agreement and Plan of Merger dated May 23, 1997 12
4 Form of 8 % Senior Secured Note 53
27 Financial Data Schedule
(filed only electronically with the SEC)
</TABLE>
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<PAGE> 1
AGREEMENT AND PLAN OF MERGER
BETWEEN
PACIFIC RIM ENTERTAINMENT, INC.
PR ACQUISITION CORP.
AND
NSE TECHNOLOGIES, INC.
Dated: May 23, 1997
12
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<TABLE>
<S> <C>
ARTICLE I: MERGER OF SUB WITH AND INTO NSE AND RELATED MATTERS.............. 15
1.1 The Merger............................................................. 15
1.2 Conversion of Stock; Merger Consideration.............................. 16
1.3 Additional Rights; Taking of Necessary Action; Further Action.......... 17
1.4 Dissenting Shares...................................................... 17
1.5 No Further Rights or Transfers......................................... 18
ARTICLE II: THE CLOSING..................................................... 18
2.1 Closing Date........................................................... 18
2.2 Closing Transactions................................................... 18
ARTICLE III: CERTAIN CORPORATE ACTION....................................... 19
3.1 NSE Special Shareholder Meeting........................................ 19
3.2 Acquiror Special Shareholder Meeting................................... 19
ARTICLE IV: REPRESENTATIONS AND WARRANTIES.................................. 20
4.1 Representations and Warranties of NSE.................................. 20
4.2 Representations and Warranties of Acquiror and the Sub................. 30
ARTICLE V: AGREEMENTS OF THE PARTIES........................................ 34
5.1 Financing Transactions................................................. 34
5.2 Registration Statement................................................. 35
5.3 Issuance of Securities of NSE.......................................... 36
5.4 Capitalization of Acquiror............................................. 36
5.5 Disclosure Documents................................................... 37
5.6 Access to Information.................................................. 37
5.7 Confidentiality; No Solicitation....................................... 37
5.8 Interim Operations..................................................... 39
5.9 Consents............................................................... 42
5.10 Filings............................................................... 42
5.11 All Reasonable Efforts................................................ 42
5.12 Public Announcements.................................................. 43
5.13 Notification of Certain Matters....................................... 43
5.14 Expenses.............................................................. 43
5.15 Delivery of Proxy by NSE Officers and Directors....................... 43
5.16 Reverse Stock Split................................................... 43
5.17 Authorization of Preferred Stock by Acquiror.......................... 44
ARTICLE VI: CONDITIONS TO CONSUMMATION OF THE MERGER........................ 44
6.1 Conditions to NSE's Obligations........................................ 44
6.2 Conditions to Acquiror's and the Sub's Obligations..................... 45
ARTICLE VII: TERMINATION.................................................... 47
7.1 Termination............................................................ 47
7.2 Notice and Effect of Termination....................................... 48
7.3 Extension; Waiver...................................................... 48
7.4 Amendment and Modification............................................. 49
ARTICLE VIII: MISCELLANEOUS................................................. 49
8.1 Survival of Representations and Warranties............................. 49
8.2 Notices................................................................ 49
8.3 Entire Agreement; Assignment........................................... 50
8.4 Binding Effect; Benefit................................................ 50
8.5 Headings............................................................... 50
8.6 Counterparts........................................................... 50
8.7 Governing Law.......................................................... 50
8.8 Arbitration............................................................ 50
8.9 Severability........................................................... 51
8.10 Certain Definitions................................................... 51
</TABLE>
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<TABLE>
<CAPTION>
EXHIBITS SCHEDULES
-------- ---------
<S> <C> <C> <C>
2.2(B) Shareholder Letter
5.1(a) Loan Documents 4.1(a) Articles of Incorporation and Bylaws of
NSE and each Subsidiary
6.1(i) Terms of Employment 4.1(e) Financial Statements
4.1(f)(i) Location of Leased Property
4.1(f)(ii) Written Notice
4.1(h) Litigation
4.1(j)(i) Employee Benefit Plan
4.1(j)(ii) Employee Benefit Plan (for which NSE has
obligation to contribute)
4.1(j)(iv) Material Employment Arrangements,
Contracts, etc.
4.1(m) Investment Banking Fees
4.1(n) Personal Property
4.1(o) Intellectual Property
4.1(p) Government Accounts Receivable
4.1(q) Material Contracts
4.1(r)(i) Labor Relations; Employees
4.1(r)(ii) List of Employees
4.1(r)(v) Strikes, grievance proceedings,
arbitrations, etc.
4.1(s) Suppliers and Clients
4.1(t) Conflicts of Interest
4.1(v) Absence of Certain Changes
4.2(a) Certificate of Incorporation and Bylaws
of Acquiror and Sub
4.2(g) No Violations
4.2(i) Litigation
4.2(l) Investment Banking Fees
</TABLE>
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AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (the "Agreement"), is made and entered
into as of May __, 1997, by and among PACIFIC RIM ENTERTAINMENT, INC., a
Delaware corporation ("Acquiror"), PR ACQUISITION CORP., a Texas corporation and
wholly-owned subsidiary of Acquiror ("Sub"), and NSE TECHNOLOGIES, INC., a Texas
corporation ("NSE").
RECITALS
WHEREAS, Acquiror and NSE have determined that it is in the best
interests of their respective shareholders for NSE to merge with and into Sub
upon the terms and subject to the conditions set forth in this Agreement;
WHEREAS, the respective Boards of Directors of Acquiror and NSE have each
approved this Agreement and the consummation of the transactions contemplated
hereby and approved the execution and delivery of this Agreement; and
WHEREAS, for federal income tax purposes, it is intended that this merger
shall qualify as a tax-free reorganization under the provisions of Section 368
of the Internal Revenue Code of 1986, as amended (the "Code").
NOW, THEREFORE, in consideration of the foregoing premises and
representations, warranties and agreements contained herein, and for good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto hereby agree as follows:
ARTICLE I
MERGER OF SUB WITH AND INTO NSE AND RELATED MATTERS
THE MERGER.
Upon the terms and conditions of this Agreement, at the "Effective
Time" (as defined herein), NSE shall be merged with and into the Sub (the
"Merger") in accordance with the provisions of the Texas Business Corporation
Act (the "TBCA") and the separate corporate existence of NSE shall cease, and
the Sub shall continue as the surviving corporation under the laws of the state
of Texas with the corporate name "NSE TECHNOLOGIES, INC." (the "Surviving
Corporation").
The Merger shall become effective as of the filing of and receipt of
a certificate of merger (the "Certificate of Merger") by the Secretary of State
of Texas of articles of merger (the "Articles of Merger"), in accordance with
the provisions of Article 5.04 of the TBCA, and the confirmation by the
Certificate of Merger that the merger is effective as of such filing date. The
Articles of Merger shall be filed by the appropriate parties thereto as soon as
practicable after satisfaction or waiver of all conditions to the Merger. The
date and time when the Merger shall become effective is referred to herein as
the "Effective Time."
At the Effective Time:
the Sub shall continue its existence under the laws of the
State of Texas as the Surviving Corporation;
the separate corporate existence of NSE shall cease;
all rights, title and interests to all assets, whether
tangible or intangible and any property or property rights owned by NSE shall be
allocated to and vested in the Surviving Corporation without reversion or
impairment, without further act or deed, and without any transfer or assignment
having occurred, but subject to any existing liens or other encumbrances
thereon, and all liabilities and obligations of NSE shall be allocated to the
Surviving Corporation which shall be the primary obligor
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therefor and, except as otherwise provided by law or contract, no other party to
the Merger, other than the Surviving Corporation, shall be liable therefor;
the Articles of Incorporation of the Sub as in effect
immediately prior to the consummation of the Merger, other than the name of the
Sub which shall be changed to "NSE TECHNOLOGIES, INC." in connection with the
Merger, shall be the Articles of Incorporation of the Surviving Corporation,
until thereafter amended as provided by law and such Articles of Incorporation;
the Bylaws of the Sub, as in effect immediately prior to the
consummation of the Merger, shall be the Bylaws of the Surviving Corporation
until thereafter amended as provided by law and such Bylaws; and
the officers and directors of the Acquiror shall be nominated
and elected in accordance with the provisions of Sections 6.1(e) hereof.
CONVERSION OF STOCK; MERGER CONSIDERATION.
At the Effective Time, and without any action on the part of the
parties hereto, the shareholders of NSE or any other party:
each of the shares of common stock of NSE ("NSE Common Stock") that
are issued and outstanding as of the Effective Time (other than "Dissenting
Shares", as defined herein) shall, by virtue of the Merger and without any
action on the part of any holder thereof, be converted into and represent the
right to receive, and shall be exchangeable for, one-quarter (.25) of one fully
paid and non-assessable share of common stock of Acquiror ("Acquiror Common
Stock"), each of which share of Acquiror Common Stock shall be free of any
"Encumbrance" (as defined herein), with all transfer and stamp taxes, if any,
paid thereon, and such shares shall appear immediately thereafter as issued and
outstanding on the books and records of Acquiror;
each share of preferred stock of NSE ("NSE Preferred Stock") that is
issued and outstanding as of the Effective Time (other than Dissenting Shares)
shall, by virtue of the Merger and without any action on the part of any holder
thereof, be converted into and represent the right to receive, and shall be
exchangeable for, one-quarter (.25) of one fully paid and non-assessable share
of preferred stock of Acquiror ("Acquiror Preferred Stock"), each of which share
of Acquiror Preferred Stock shall be free of any Encumbrance, with all transfer
and stamp taxes, if any, paid thereon, and such shares shall appear immediately
thereafter as issued and outstanding on the books and records of Acquiror;
each share of capital stock of NSE held in treasury as of the
Effective Time shall, by virtue of the Merger, be canceled without payment of
any consideration therefor and without any conversion thereof;
each share of common stock of the Sub that is issued and outstanding
as of the Effective Time shall continue to represent one share of common stock
of the Surviving Corporation after the
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Merger, which shares shall thereafter constitute all of the issued and
outstanding shares of capital stock of the Surviving Corporation;
Acquiror shall pay all charges and expenses, including those of any
exchange agent and the National Association of Securities Dealers, Inc., if any,
in connection with the issuance or exchange of the shares of Acquiror Common
Stock for NSE Common Stock and Acquiror Preferred Stock for NSE Preferred Stock;
From and after the Effective Time, there shall be no transfers on
the stock transfer books of the Surviving Corporation of shares of NSE capital
stock (or any warrants or other rights to acquire any of the same) that were
outstanding immediately prior to the Effective Time. If, after the Effective
Time, certificates for shares of NSE capital stock (or any warrants or other
rights to acquire any of the same) that were outstanding immediately prior to
the Effective Time and represented to the Surviving Corporation, they shall be
canceled and exchanged for the consideration to be received therefor in
connection with the Merger as provided in this Agreement; and
No fractional shares of Acquiror Common Stock or Acquiror Preferred
Stock shall be issued in the Merger, and each holder of NSE Common Stock and NSE
Preferred Stock entitled to receive as part of the Merger Consideration
fractional shares shall receive that number of shares of NSE Common Stock or NSE
Preferred Stock rounded to the nearest whole number.
ADDITIONAL RIGHTS; TAKING OF NECESSARY ACTION; FURTHER ACTION.
Each of Acquiror, Sub and NSE, respectively, shall use its best
efforts to take all such action as may be necessary and appropriate to effect
the Merger under the TBCA as promptly as possible, including, without
limitation, the filing of the Articles of Merger consistent with the terms of
this Agreement. If at any time after the Effective Time, any further action is
necessary or desirable to carry out the purposes of this Agreement and to vest
in the Surviving Corporation full right, title and possession to all assets,
property, rights, privileges, powers and franchises of either Sub or NSE, the
officers of such corporations are fully authorized in the name of their
corporations or otherwise, and notwithstanding the Merger, to take, and shall
take, all lawful and necessary action.
DISSENTING SHARES.
Notwithstanding anything in this Agreement to the contrary, none of
the shares of NSE capital stock that are outstanding immediately prior to the
Effective Time and that are held by shareholders of NSE who shall have, prior to
the NSE shareholder meeting at which a vote is to be taken with respect to a
proposal to approve this Agreement, exercise his right to dissent to such
proposed action in accordance with Article 5.12 of the TBCA (each such
shareholder being referred to herein as a "Dissenting Shareholder" and the
shares of NSE capital stock of such shareholder being referred to as "Dissenting
Shares"), shall be converted into the right to receive, or be exchangeable for,
shares of Acquiror Common Stock (with respect to Dissenting Shares of NSE Common
Stock) or shares of Acquiror Preferred Stock (with respect to Dissenting Shares
of NSE Preferred Stock), but instead, each such Dissenting Shareholder shall be
entitled to the consideration applicable under Articles 5.12 and 5.13 of the
TBCA.
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NO FURTHER RIGHTS OR TRANSFERS.
At and after the Effective Time, the shares of capital stock of NSE
outstanding immediately prior to the Effective Time shall cease to provide the
holders thereof any rights as a shareholder of NSE or the Surviving Corporation,
except for the right to surrender the certificate or certificates representing
such shares and to receive the consideration to be received in the Merger as
provided in this Agreement.
ARTICLE II
THE CLOSING
CLOSING DATE.
Subject to satisfaction or waiver of all conditions precedent set
forth in Section 6 of this Agreement, the closing of the Merger (the "Closing")
shall take place (a) at the offices of NSE, 1221 McKinney, Suite 1950, Houston,
Texas 77010, at 10:00 a.m., local time, on the date which is the first business
day after the Articles of Merger are filed by the appropriate parties, or (b) at
such other time and place and on such other date as Acquiror, the Sub and NSE
shall agree. The date of the Closing is referred to herein as the "Closing
Date."
CLOSING TRANSACTIONS.
At the Closing:
each of the holders of NSE Common Stock (other than Dissenting
Shareholders) shall surrender and deliver to the Sub as the Surviving
Corporation the certificate or certificates representing all of such shares of
NSE Common Stock; and each of the holders of NSE Preferred Stock (other than
Dissenting Shareholders) shall surrender and deliver to the Sub as the Surviving
Corporation the certificate or certificates representing all of such shares of
NSE Preferred Stock.
each of the holders of NSE Common Stock or NSE Preferred Stock
(other than Dissenting Shareholders) shall, to the extent necessary to comply
with applicable federal and state securities laws (including, if applicable,
Rule 145 promulgated under the Securities Act of 1933, as amended), execute and
deliver at the Closing a copy of a Shareholder Representation Letter in a form
to be mutually agreed by the parties at that time and attached to this Agreement
as Exhibit 2.2(b) ("Shareholder Letter");
Any outstanding shareholder agreements relating to NSE capital stock
other than as contemplated by Section 6.2(g) shall have been terminated and
evidence of such termination satisfactory to Acquiror shall have been delivered
to Acquiror;
Acquiror shall deliver or shall cause to be delivered (i) to each of
the holders of NSE Common Stock (other than a Dissenting Shareholder) a
certificate or certificates representing the number of shares of Acquiror Common
Stock as such holder is entitled to receive in connection with
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the Merger; and (ii) to each of the holders of NSE Preferred Stock (other than a
Dissenting Shareholder) a certificate or certificates representing the number of
shares of Acquiror Preferred Stock as such holder is entitled to receive in
connection with the Merger;
Each of NSE and the Sub shall execute and deliver, and file or cause
to be filed with the Secretary of State of Texas, the Articles of Merger, with
such amendments thereto as the parties hereto shall deem mutually acceptable;
and
The Certificate of Merger shall be filed with the Secretary of State
of Texas.
ARTICLE III
CERTAIN CORPORATE ACTION
NSE SPECIAL SHAREHOLDER MEETING.
NSE, acting through its Board of Directors, shall, in accordance
with applicable Texas law, its Articles of Incorporation and Bylaws:
duly call, give notice of, convene and hold a special meeting (the
"Special Meeting") of its shareholders as soon as practicable, but in no event
later than thirty (30) days, following the date of this Agreement for the
purpose of considering and approving this Agreement (which shall constitute the
plan of merger under the TBCA with respect to the Merger) and at which each of
NSE's directors shall vote all shares of NSE owned by him or her in favor of the
Merger and in opposition to all other contrary proposals; and
subject to its fiduciary duties to its shareholders under applicable
law as advised by counsel, include in a proxy statement for, or any information
statement with respect to, the Special Meeting the unanimous recommendation of
its board of directors that this Agreement be approved by the shareholders of
NSE.
ACQUIROR SPECIAL SHAREHOLDER MEETING.
Acquiror, acting through its Board of Directors, shall, in
accordance with applicable Delaware law, its Certificate of Incorporation and
Bylaws:
duly call, give notice of, convene and hold a special meeting of its
shareholders as soon as practicable, but in no event later than thirty (30) days
following the date the "Registration Statement" (as defined hereafter at Section
5.2) is declared effective by the Securities and Exchange Commission (the
"Commission"), for the purpose of considering and approving this Agreement
(which shall constitute the plan of merger under the Delaware General
Corporation Law ("DGCL") with respect to the Merger); and
subject to its fiduciary duties to its shareholders under applicable
law as advised by counsel, include in a proxy statement for, or any information
statement with respect to, the meeting the
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unanimous recommendation of its board of directors that this Agreement be
approved by the shareholders of Acquiror.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
REPRESENTATIONS AND WARRANTIES OF NSE.
As a material inducement to Acquiror and Sub to execute this
Agreement and consummate the Merger and other transactions contemplated hereby,
NSE hereby makes the following representations and warranties to Acquiror and
Sub. For purposes of the representations and warranties set forth in 4.1 below,
NSE shall be deemed to make the following representations and warranties with
respect to NSE and each of its Subsidiaries (as defined herein) both
individually and in the aggregate (and the term "NSE" shall mean NSE and each of
its Subsidiaries); provided, however, that, unless expressly stated to the
contrary, the term Material Adverse Effect as used in Section 4.1 shall apply on
the basis of NSE and its Subsidiaries taken as a whole.
CORPORATE EXISTENCE AND POWER.
NSE is a corporation duly incorporated, validly existing and
in good standing under the laws of the State of Texas, and has all corporate
powers and all governmental licenses, authorizations, consents and approvals
required to carry on its business as now conducted, except where the failure to
have any of the foregoing would not have a Material Adverse Effect. NSE is duly
qualified to do business as a foreign corporation and is in good standing in
each jurisdiction where the character of the property owned or leased by it or
the nature of its activities makes such qualification necessary, except for
those jurisdictions where the failure to be so qualified would not, individually
or in the aggregate, have a Material Adverse Effect. True, correct and complete
copies of the Articles of Incorporation and Bylaws of NSE as amended to date are
attached hereto as Schedule 4.1(a) and are made a part hereof.
Except as set forth on Schedule 4.1(a), NSE does not have any
subsidiary and does not have any interest in a corporation, partnership, joint
venture or other business association or entity (all of such subsidiaries set
forth on Schedule 4.1(a) hereinafter being individually, a "Subsidiary" and
collectively, "Subsidiaries"). Each Subsidiary is a corporation duly organized,
validly existing and in good standing under the laws of the jurisdiction of its
incorporation and has all corporate powers and all governmental licenses,
authorizations, consents and approvals required to carry on its business as now
conducted, except where the failure to have any of the foregoing would not have
a Material Adverse Effect. Each Subsidiary is qualified to do business as a
foreign corporation and is in good standing in each jurisdiction where the
character of the property owned or leased by it or the nature of its activities
makes such qualification necessary, except for those jurisdictions where the
failure to be so qualified would not, individually or in the aggregate, have a
Material Adverse Effect. Copies of the charter documents and by-laws of each
Subsidiary are accurate and complete and are attached hereto as part of Schedule
4.1(a) and are made a part hereof. Except as set forth on Schedule 4.1(a), NSE
is, directly or indirectly, the record and beneficial owner of all of the
outstanding shares of capital stock of each Subsidiary, and there are no
irrevocable proxies with respect
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to such shares owned by NSE. No equity securities of any Subsidiary are or may
become required to be issued by reason of any options, warrants, rights to
subscribe to, calls or commitments of any character whatsoever relating to, or
securities or rights convertible into or exchangeable for, shares of any capital
stock of any Subsidiary, and there are no contracts, commitments, understandings
or arrangements by which any Subsidiary is bound to issue additional shares of
its capital stock or options, warrants or rights to purchase or acquire any
additional shares of its capital stock or securities convertible into or
exchangeable for such shares. All of the shares of the Subsidiaries owned by NSE
are validly issued, fully paid and non-assessable and are owned by NSE free and
clear of any Encumbrance.
CORPORATE AUTHORIZATION. The execution, delivery and performance by
NSE of the Agreement and the consummation by NSE of the transactions
contemplated hereby are within NSE's corporate powers and, except for any
required approval by NSE's shareholders in connection with the consummation of
the Merger, have been duly authorized by all necessary corporate action. The
Agreement constitutes a valid and binding agreement of NSE, enforceable in
accordance with its terms. As of the Effective Time all corporate action on the
part of NSE required under applicable law in order to consummate the Merger will
have occurred.
NO CONTRAVENTION. The execution and delivery of the Agreement does
not, and the consummation of the transactions contemplated thereby will not: (i)
conflict with or result in any violation of any provision of the Articles of
Incorporation or Bylaws of NSE or (ii) conflict with or result in any violation
or default (with or without notice or lapse of time, or both) under, or give
rise to a right of termination, cancellation or acceleration of a right or
obligation or to loss or a benefit under, or any loan or credit agreement, note,
bond, mortgage, indenture, lease or other agreement, instrument, permit,
concession, franchise, incense, judgment, order, decree, statute, law,
ordinance, rule or regulation applicable to NSE or its properties or assets, or
result in the creation or imposition of any mortgage, lien, pledge, charge or
security interest of any kind ("Encumbrance") on any asset of NSE, except, only
as to clause (ii) above, such as is not reasonably likely to have a Material
Adverse Effect or prevent NSE from consummating the transactions contemplated by
this Agreement. No consent, approval, order or authorization of, or
registration, declaration or filing with, any court, administrative agency or
commission or other governmental authority or instrumentality, domestic or
foreign, is required by or with respect to NSE in connection with the execution
and delivery of this Agreement by NSE or the consummation by NSE of the
transactions contemplated hereby, except the filing of the Certificate of Merger
with the Secretary of State of Texas.
CAPITALIZATION. The authorized capital stock of the NSE consists
solely of 10,000,000 shares of common stock, par value $.01 per share ("NSE
Common Stock"), and 1,000,000 shares of preferred stock, par value $.01 per
share ("NSE Preferred Stock"). There are currently outstanding (i) 4,290,000
shares (and 1,130,000 treasury shares) of NSE Common Stock, (ii) no shares of
NSE Preferred Stock and (iii) 432,310 NSE Options. The outstanding shares of
capital stock of NSE have been duly authorized and validly issued and are fully
paid and nonassessable and free of preemptive rights. Except as set forth in
this Section 4.1(d), there are outstanding (A) no shares of capital stock or
other voting securities of NSE, (B ) no securities of NSE convertible into or
exchangeable for shares of capital stock or voting securities of NSE and (C) no
options, warrants or other rights to acquire from NSE, and no obligation of NSE
to issue, any capital stock, voting securities or securities convertible into or
exchangeable for capital stock or voting securities of NSE, and there are no
agreements or
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commitments to do any of the foregoing. There are no voting trusts or voting
agreements applicable to any capital stock of NSE or its Subsidiaries.
FINANCIAL STATEMENTS. Attached as Schedule 4.1(e) are copies of the
following unaudited financial statements of NSE and accompanying notes, which
were compiled by Hein & Associates and which have previously been delivered to
Acquiror on or before the date hereof: Balance Sheet and Income Statement of NSE
at and for the year ended December 31, 1996, and the Balance Sheet and Income
Statement of NSE at and for the period ended March 31, 1997 (the March 31,1997
Balance Sheet is hereinafter called the "Warranted Balance Sheet"). Such
financial statements have been prepared in accordance with generally accepted
accounting principles consistently applied throughout the periods reported upon
and fairly present in all material respects the financial position of NSE as of
the date thereof and the results of operations for the periods then ended
(subject to normal year-end adjustments). Audited financial statements for such
periods in compliance with Regulation S-X promulgated under the Securities
Exchange Act of 1934, accompanied by an audit report, shall be delivered to
Acquiror as soon as practicable following the date hereof (which delivery shall
be a condition precedent to Acquiror's obligations set forth in Section 5.2
hereof), and which shall contain no material adjustments, either in amount or
effect, to the financial statements delivered herewith.
REAL PROPERTIES.
NSE currently leases real property at those locations
identified on Schedule 4.1(f)(i) hereto pursuant to the true, correct and
complete copies of the lease agreements attached to Schedule 4.1(f)(i). NSE owns
or leases no other real estate. None of the leasehold interests held by NSE is
subject to any Encumbrance, except (a) liens for ad valorem taxes not yet due or
being contested in good faith; and (b) contractual or statutory mechanics or
materialmen's liens or other statutory or common law Encumbrances relating to
obligations of NSE that are not delinquent or are being contested in good faith.
There are no Encumbrances which materially interfere with the present use of
such leasehold interests.
Except as described on Schedule 4.1(f)(ii) hereto, NSE has not
received any written notice from any governmental entity having jurisdiction
over NSE or over any of the real property leased by NSE of any violation by NSE
of any law, regulation or ordinance relating to zoning, environmental matters,
local building or fire codes or similar matters relating to any of the real
property leased by NSE or of any condemnation or eminent domain proceeding.
Except such as has not had and is not reasonably likely to
have a Material Adverse Effect, all of the buildings leased by NSE and all
plumbing, HVAC, electrical, mechanical and similar systems are in good repair
and adequate for their current use, ordinary wear and tear excepted.
NSE is not a party to any lease, sublease, lease assignment or
other agreement for the use or occupancy of any of the leasehold premises
wherein NSE is the landlord, sub-landlord or assignor, whether by name, as
successor-in-interest or otherwise. There are no outstanding agreements with any
party to acquire the leasehold premises or any portion thereof or any interest
therein.
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All certificates of occupancy and all other licenses, permits,
authorizations, consents, certificates and approvals required by all
governmental authorities having jurisdiction over the leasehold premises
occupied by NSE have been issued, are fully paid for and are in full force and
effect, will survive the Effective Time and will not be invalidated, violated or
otherwise adversely affected by the Merger or the other transactions
contemplated by this Agreement.
NO CONTINGENT LIABILITIES. Except as set forth in the financial
statements referred to in Section 4.1(e) above, at the Effective Time, NSE shall
have no liabilities, whether related to tax or non-tax matters, known or
unknown, due or not yet due, liquidated or unliquidated, fixed or contingent,
determined or determinable in amount or otherwise and, to the knowledge of NSE
after due inquiry, there is no existing condition, situation or set of
circumstances which could reasonably be expected to result in such a liability,
except as and to the extent reflected on: (i) the Warranted Balance Sheet; (ii)
this Agreement or any Schedule or Exhibit hereto; or (iii) liabilities incurred
since the date of the Warranted Balance Sheet solely in the ordinary course of
business and as accurately reflected on the books and records of NSE; provided,
however, that no liability shall be incurred from and after the date hereof
which is in contravention of any negative covenant contained herein and
applicable to NSE.
LITIGATION. Except as described on Schedule 4.1(h) hereto there is
no action, suit, investigation or proceeding (or, to the knowledge of NSE, any
basis therefor) pending against, or to the knowledge of NSE threatened, against
or affecting NSE or any of its properties before any court or arbitrator or any
governmental body, agency or official that (i) if adversely determined against
NSE, would have a Material Adverse Effect or (ii) in any manner challenges or
seeks to prevent, enjoin, alter or materially delay the Merger or any of the
other transactions contemplated by the Agreement.
TAXES. NSE has timely filed all tax returns required to be filed by
it, or will timely file when due all tax returns required to be filed by it
between the date hereof and the Effective Time, except NSE has requested an
extension for filing for the period ended December 31, 1996. NSE has paid in a
timely fashion or will pay when due in a timely fashion, all taxes required to
be paid in respect of the periods covered by such returns, and the books and the
financial statements of NSE reflect, or will reflect, adequate reserves for all
taxes payable by NSE which have been, or will be, accrued but are not yet due.
NSE is not delinquent in the payment of any material tax, assessment or
governmental charge. No deficiencies for any taxes have been proposed, asserted
or assessed against NSE, NSE is not aware of any facts which would constitute
the basis for the proposal or assertion of any such deficiency and there is no
action, suit, proceeding, audit or claim now pending, or to NSE's knowledge,
threatened against NSE. All taxes which NSE is required by law to withhold and
collect have been duly withheld and collected, and have been timely paid over to
the proper authorities to the extent due and payable. For the purposes of this
Agreement, the term "tax" shall include all federal state, local and foreign
income, property, sales, excise and other taxes of any nature whatsoever.
Neither NSE nor any member of any affiliated or combined group of which NSE is
or has been a member has granted any extension or waiver of the limitation
period applicable to any tax returns. There are no Encumbrances for taxes upon
the assets of NSE, except Encumbrances for current taxes not yet due. There are
no tax sharing or tax allocation agreements to which NSE is now or ever has been
a party. NSE will not be required under Section 481(c) of the Internal Revenue
Code of 1986, as amended (the "Code"), to include any material adjustment in
taxable income for any period subsequent to the Merger. NSE (A) has not been a
member of an affiliated group filing a consolidated federal income tax return
(other than a group the common parent of which was NSE) and (b) has no liability
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for the taxes of any person (other than NSE) under Treasury Regulation Section
1.1502-6 (or any similar provision of state, local or foreign law), as a
transferee or successor, by contract or otherwise.
ERISA.
Schedule 4.1(j)(i) identifies each "employee benefit plan," as
defined in Section 3(3) of the Employee Retirement Income Security Act of 1974,
as amended ("ERISA"), that is subject to any provision of ERISA, and either (i)
is maintained, administered or contributed to by NSE or any affiliate (as
defined below), (ii) covers any employee or former employee of NSE or any
affiliate or (iii) under which NSE or any affiliate has any liability. Copies of
such plans and, if applicable, related trust agreements) and all amendments
thereto and any written interpretations thereof have been furnished to Acquiror,
together, if applicable, with (x) the most recent annual reports (Form 5500
including, if applicable, Schedule B thereto) prepared in connection with any
such plan and (y) the most recent actuarial valuation report prepared in
connection with any such plan. Such plans are referred to collectively herein as
the "Employee Plans." Any Form 5500 for any plan year of any Employee Plan that
has not been filed, but for which the filing date has passed on the date of this
Agreement, shall be filed prior to the date of the Merger. For purposes of this
Section, "affiliate" of any Person means any other Person which, together with
such Person, would be treated as a single employer for any purpose under Section
414 of the Code.
Schedule 4.1(j)(ii) identifies all Employee Plans to which NSE
currently has any obligation to contribute. NSE is not a party to any
multiemployer plan as defined in Section 4001(a) (3) of ERISA ("Multiemployer
Plans"), and neither NSE nor any affiliate has any outstanding liability to
contribute to any Multiemployer Plan, for delinquent contributions or for
withdrawal liability pursuant to Section 4201 of ERISA.
There are no Employee Plans that are intended to be qualified
plans under Section 401(a) of the Code, except as may have been shown and
identified as such on the list referred to in subparagraphs (i) or (ii) above.
Each Employee Plan has been maintained in compliance with its terms and with the
requirements prescribed by any and all statutes, orders, rules and regulations
that are applicable to such Plan, other than any failure to comply that is not
reasonably likely to have a Material Adverse Effect.
Schedule 4.1(j)(iv) identifies each material employment,
severance or other similar contract, arrangement or policy and each plan or
arrangement (written or oral) providing for insurance coverage (including any
self-insured arrangements), workers' compensation, disability benefits,
supplemental unemployment benefits, vacation benefits, retirement benefits or
for deferred compensation, profit-sharing, bonuses, stock options, stock
appreciation rights or other forms of incentive compensation or post-retirement
insurance, compensation or benefits that is not an Employee Plan and (A) is
entered into, maintained or contributed to, as the case may be by NSE or any of
its affiliates or (B) covers any employee or former employee of NSE or any of
its affiliates or (C) under which NSE or any affiliate has liability. Such
contracts, plans and arrangements as are described above, copies of all of which
have been furnished previously to Acquiror, are referred to collectively herein
as the "Benefit Arrangements." Each Benefit Arrangement has been maintained in
substantial compliance with its terms and with the requirements prescribed by
any and all statutes, orders, rules
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and regulations that are applicable to such Benefit Arrangement other than any
failure to comply that is not reasonably likely to have a Material Adverse
Effect.
Neither NSE nor any affiliate has or maintains and has
maintained any Employee Plan or Benefit Arrangement providing post-retirement
health or medical benefits in respect of any active or former employee of NSE or
any affiliate or former affiliate, except as may be required pursuant to the
provisions of COBRA.
NSE is not a party to or subject to any union contract or any
express employment contract (other than as set forth on Schedule 4.1(j)(iv)
hereto) or arrangement providing for annual future compensation to any officer,
consultant, director or employee in excess of $100,000.
INSURANCE COVERAGE. NSE maintains insurance covering its assets,
business, equipment, properties, operations, employees, officers and directors
with such coverage, in such amounts, and with such deductibles and premiums as
are consistent with insurance coverage provided for other companies of
comparable size and in comparable industries. All of such policies are in full
force and effect and all premiums payable have been paid in full and NSE is in
full compliance with the terms and conditions of such policies. NSE has not
received any notice from any issuer of such policies of its intention to cancel
or refusal to renew any policy issued by it or of its intention to renew any
such policy based on a material increase in premium rates other than in the
ordinary course of business. None of such policies are subject to cancellation
by virtue of the Merger or the consummation of the other transactions
contemplated by this Agreement. There is no claim by NSE pending under any of
such policies as to which coverage has been questioned or denied.
COMPLIANCE WITH LAWS. To the best of the knowledge of NSE, NSE is
not in violation of, and has not violated, any applicable provisions of any
laws, statues, ordinances or regulations, other than as would not be reasonably
likely to have a Material Adverse Effect or constitute a felony. To the best of
the knowledge of NSE, no such laws, statutes, ordinances or regulations require
or are reasonably expected to require capital expenditures by NSE that are
reasonably likely to have a Material Adverse Effect. Without limiting the
generality of the foregoing, NSE has all licenses, permits, certificates and
authorizations needed or required for the conduct of NSE's business as presently
conducted and for the use of its properties and premises occupied by it, except
where the failure to obtain a license, permit, certificate or authorization
would not have a Material Adverse Effect.
INVESTMENT BANKING FEES. Except as disclosed on Schedule 4.1(m),
there is no investment banker, broker, finder or other similar intermediary
which has been retained by, or is authorized by, NSE to act on its behalf who
might be entitled to any fee or commission from NSE, Acquiror or the Sub or any
of their respective affiliates upon consummation of the transactions
contemplated by this Agreement.
PERSONAL PROPERTY. NSE has good and valid title to all of its
personal property, tangible and intangible, reflected on the Warranted Balance
Sheet and to all other personal property owned by it, free and clear of any
Encumbrance. NSE is the owner of all of its personal property now located in or
upon its leased premises and of all personal property which is used in the
operation of its
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business. All such equipment, furniture and fixtures and other tangible personal
property are in good operating condition and repair and do not require any
repairs other than normal routine maintenance to maintain such property in good
operating condition and repair. All inventory as reflected on the Warranted
Balance Sheet is useable in the ordinary course of business free from material
defects. Set forth on Schedule 4.1(n) is a list of all motor vehicles identified
by year, make and vehicle identification number, owned or leased by NSE.
INTELLECTUAL PROPERTY; INTANGIBLE PROPERTY. The corporate names of
NSE and its Subsidiaries and the trade names and trademarks listed on Schedule
4.1(o) are the only names and trademarks which are used by NSE in the operation
of its business (the "Names and Trademarks"). Since its incorporation, NSE has
not done business and has not been known by any other name other than by its
Names and Trademarks. NSE owns and has the exclusive right to use all
intellectual property presently in use by it and necessary for the operation of
its business as now being conducted, which intellectual property includes, but
is not limited to, patents, trademarks, trade names, service marks, copyrights,
trade secrets, customer lists, inventions, formulas, methods, processes and
other proprietary information. There are no outstanding licenses or consents
granting third parties the right to use any intellectual property owned by NSE.
No royalties or fees are payable by NSE to any third party by reason of the use
of any of its intellectual property. Set forth on Schedule 4.1(o) is a
description of all computer software used by NSE in the operation of its
business, other than software which is readily available in a retail purchase
pursuant to a "shrink wrap" license. Except as set forth on such Schedule, NSE
has sole title and sole right to use the software and all applicable source
codes relating to the software, and no party is entitled to use, whether by
license, agreement or otherwise, such software or any source codes in any
business related to NSE's business. NSE has received no notice of any adversely
held patent, invention, trade mark, copyright, service mark or trade name of any
person, or any claims of any other person relating to any of the intellectual
property subject hereto, and to the knowledge of NSE, there is no reasonable
basis for any such charge or claim. There is no presently known threatened use
or encroachment of any such intellectual property.
ACCOUNTS RECEIVABLE. Each of the accounts receivable of NSE referred
to on the Warranted Balance Sheet constitutes a valid claim in the full amount
thereof against the debtor charged therewith on the books of NSE to which each
such account is payable and has been acquired in the ordinary course of
business. Each account receivable is fully collectible to the extent of the face
value thereof (less the amount of the allowance for the doubtful accounts
reflected on the Warranted Balance Sheet) no later than ninety (90) days after
such account receivable is due. To NSE's knowledge, no account debtor has any
valid setoff, deduction or defense with respect thereto, and no account debtor
has asserted any such setoff, deduction or defense. Schedule 4.1(p) sets forth
the account receivables which arise pursuant to an agreement with the United
States Government or any agency or instrumentality thereof.
CONTRACTS, LEASES, AGREEMENTS AND OTHER COMMITMENTS. NSE is not a
party to or bound by any oral, written or implied contracts, agreements, leases,
powers of attorney, guaranties, surety arrangements or other commitments
excluding equipment and furniture leases entered into in the ordinary course of
business (which do not exceed $100,000 in liabilities or commitments in the
aggregate), except for the following (which are hereinafter collectively called
the "Corporation Agreements"):
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The leases and agreements described on Schedules 4.1(f),
4.1(j)(i) and (ii) and 4.1(r)(i);
Agreements involving a maximum possible liability or
obligation on the part of NSE of less than Twenty-Five Thousand Dollars
($25,000) separately or less than One Hundred Thousand Dollars ($100,000) in the
aggregate; and
The agreements listed on Schedule 4.1(q).
The Corporation Agreements constitute all of the agreements and
instruments which are necessary and desirable to operate the business as
currently conducted by NSE. True, correct and complete copies of each
Corporation Agreement described and listed under subsections 4.1(q)(i) and
4.1(q)(iii) have been made available to Acquiror within ten (10) business days
prior to the date hereof. The term "Corporation Agreement" excludes purchase
orders entered into in the ordinary course for personalty or inventory which may
be returned to the vendor without penalty. All of the Corporation Agreements are
valid, binding and enforceable against the respective parties thereto in
accordance with their respective terms. Following the Merger, the Surviving
Corporation shall become entitled to all rights of NSE under such of the
Corporation Agreements as if the Surviving Corporation were the original party
to such Corporation Agreements. All parties to all of the Corporation Agreements
have performed all obligations required to be performed to date under such
Corporation Agreements, and no party is in default or in arrears under the terms
thereof, and no condition exists or event has occurred which, with the giving of
notice or lapse of time or both, would constitute a default thereunder. The
consummation of this Agreement and the Merger will not result in an impairment
or termination of any of the rights of NSE under any Corporation Agreement. None
of the terms or provisions of any Corporation Agreement materially adversely
affects the business, prospects, financial condition or results of operations of
NSE.
LABOR RELATIONS; EMPLOYEES.
Set forth on Schedule 4.1(r)(i) is a list of:
(A) All collective bargaining agreements and other
agreements requiring arbitration of employment disputes, and any written
amendments thereto, as well as all arbitration awards decided under any such
agreements, and all oral assurances or modifications, past practices, and/or
arrangements made in relation thereto, to which NSE is a party or by which it is
bound; and
(B) All employment agreements, and all severance
agreements which have not been fully performed, to NSE is party or by which it
is bound.
Set forth on Schedule 4.1(r)(ii) is a list of all key
management employees of NSE, broken down by location, together with their rate
of compensation and title.
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NSE has delivered to Acquiror at least ten (10) business days
prior to the date hereof or such shorter period as has been agreed to by
Acquiror, true and correct copies of all of the documents referred to on
Schedule 4.1(r)(i) hereof and all of the personnel policies, employee and/or
supervisor handbooks, procedures and forms of employment applications relating
to the employees of NSE.
There is no union representing or purporting to represent any
of the employees of NSE, and NSE is not subject to or currently negotiating any
collective bargaining agreements with any union representing or purporting to
represent the employees of any of the foregoing.
Except as set forth on Schedule 4.1(r)(v) :
(A) There are no strikes, slow downs or other work
stoppages, grievance proceedings, arbitrations, labor disputes or representation
questions pending or, to the best knowledge of NSE, threatened;
(B) NSE has complied in all material respects with all
laws relating to labor, employment and employment practices, including without
limitation, any provisions thereof relating to wages, hours and other terms of
employment, collective bargaining, nondiscrimination and the payment of social
security, unemployment compensation and similar taxes, and NSE is not (1) liable
for any arrearages of wages or any taxes or penalties for failure to comply with
any of the foregoing or (2) delinquent in the payment of any severance, salary,
bonus, commission or other direct or indirect compensation for services
performed by any employee to the date hereof, or any amount required to be
reimbursed to any employee or former employee; and
(C) There are no charges, suits, actions,
administrative proceedings, investigations and/or claims pending or, to the
knowledge of NSE, threatened against any NSE, whether domestic or foreign,
before any court, governmental agency, department, board or instrumentality, or
before any arbitrator (collectively "Actions"), concerning or in any way
relating to the employees or employment practices of NSE, including, without
limitation, Actions involving unfair labor practices, wrongful discharge and/or
any other restrictions on the right of NSE to terminate its respective
employees, employment discrimination, occupational safety and health, and
workers' compensation.
There are no express or implied agreements, policies,
practices, or procedures, whether written or oral, pursuant to which any
employee of NSE is not terminable at will and except as required by law, no
employee is entitled to any benefit or to participate in any employee benefit
plan of NSE following such termination of employment.
NSE is not a party to any oral or written (A) agreement with
any executive officer or other key employee of NSE (1) the benefits of which are
contingent, or the terms of which are materially altered, upon the occurrence of
a transaction involving NSE of the nature of the transactions contemplated by
this Agreement, (2) providing any term of employment or compensation guarantee
extending for a period longer than one year, or (3) providing severance benefits
or other
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benefits after the termination of employment of such executive officer or key
employee regardless of the reason for such termination of employment; or (B)
agreement or plan which will remain in effect after the Closing, including,
without limitation, any stock option plan, stock appreciation right plan,
restricted stock plan or stock purchase plan, any of the benefits of which will
be increased, or the vesting of benefits of which will be accelerated, by the
occurrence of any of the transactions contemplated by this Agreement or the
value of any of the benefits of which will be calculated on the basis of any of
the transactions contemplated by this Agreement.
NSE has not taken any action which requires or, taken together
with the transactions contemplated hereby, would require the giving of any
notice under the Worker Adjustment Retraining and Notification Act or any
comparable state or local law or regulation.
SUPPLIERS AND CLIENTS. Except as set forth on Schedule 4.1(s), the
relationship of NSE with its suppliers and clients are good commercial working
relationships and no supplier or client of NSE has canceled, curtailed or
otherwise terminated or, to the knowledge of NSE, threatened to cancel or
otherwise terminate, his or its relationship with NSE. NSE has no knowledge, or
reason to believe, that the Merger or any other transaction contemplated hereby
would adversely affect any such supplier or client relationship.
CONFLICTING INTERESTS. Except as set forth on Schedule 4.1(t), no
director, officer, employee or stockholder of NSE, and no relative or affiliate
of any of the foregoing (i) sells or purchases goods or services from NSE or has
any pecuniary interest in any supplier or client of any of the foregoing or in
any other business enterprise with which NSE conducts business or with which any
of the foregoing is in competition, or (ii) is indebted to NSE except for money
borrowed and as set forth on the Warranted Balance Sheet.
ENVIRONMENTAL PROTECTION. NSE has not been notified by any
governmental authority, agency or third party, and NSE has no knowledge, of any
violation by NSE of any Environmental Statute (as defined below). All
registrations by NSE with, licenses from or permits issued by governmental
agencies pursuant to environmental, health and safety laws are in full force and
effect. The term "Environmental Statutes" means all statutes, ordinances,
regulations, orders and requirements of common law concerning discharges to the
air, soil, surface water or groundwater and concerning the storage, treatment or
disposal of any waste or hazardous substance. To NSE's knowledge, there is no
hazardous substance at any premises currently or previously occupied by NSE. NSE
has not received any notice or any request for information, notice of claim,
demand or other notification that it may be potentially responsible with respect
to any investigation or clean-up of any threatened or actual release of
hazardous substances. To the knowledge of NSE, all hazardous wastes and
substances have been stored, treated, disposed of and transported in conformance
with all requirements applicable to such hazardous substances and wastes.
ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as and to the extent
set forth on the Warranted Balance Sheet or on Schedule 4.1(v), there has not
been (i) any material adverse change in the business, assets, properties,
results of operations, financial condition or prospects of NSE; (ii) any entry
by NSE into any material commitment or transaction which is not in the ordinary
course of business; (iii) any change by NSE in accounting principles or methods
except insofar as may be
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required by a change in generally accepted accounting principles; (iv) any
declaration, payment or setting aside for payment of any dividends or other
distributions (whether in cash, stock or property) in respect of capital stock
of NSE or any Subsidiary, or any direct or indirect redemption, purchase or any
other type of acquisition by NSE of any shares of its capital stock or any other
securities for an aggregate sum not in excess of $5,000; (v) any agreement by
NSE, whether in writing or otherwise, to take any action which, if taken prior
to the date of this Agreement, would have made any representation or warranty in
this Section 4.1 untrue or incorrect; (vi) any acquisition of the assets of NSE,
other than in the ordinary course of business and consistent with past practice
and not in excess of $5,000 in the aggregate; or (vii) any execution of any
agreement with any executive officer of NSE providing for his or her employment,
or any increase in the compensation or in severance or termination benefits
payable or to become payable by NSE to its officers or key employees, or any
material increase in benefits under any collective bargaining agreement or in
benefits under any bonus, pension, profit sharing, deferred compensation,
incentive compensation, stock ownership, stock purchase, stock option, phantom
stock, retirement, vacation, severance, disability, death benefit,
hospitalization, insurance or other plan or arrangement or understanding
(whether or not legally binding) providing benefits to any present or former
employee of NSE. Since the date of the Warranted Balance Sheet, there has not
been and, to the knowledge of NSE, there is not threatened, any material adverse
change in financial condition, business, results of operations or prospects of
the business or any material physical damage or loss to any of the properties or
assets of the business or to the premises occupied in connection with the
business, whether or not such loss is covered by insurance.
STATEMENTS AND OTHER DOCUMENTS NOT MISLEADING. Neither this
Agreement, including all exhibits and schedules and other closing documents, nor
any other financial statement, document or other instrument heretofore or
hereafter furnished by NSE to Acquiror or Sub in connection with the Merger or
the other transactions contemplated hereby, or any information furnished by NSE
for inclusion in the Registration Statement contains or will contain any untrue
statement of any material fact or omit or will omit to state any material fact
required to be stated in order to make such statement, information, document or
other instruments, in light of the circumstances in which they are made, not
misleading. There is no fact known to NSE which may have a Material Adverse
Effect on the business, prospects, financial condition or results of operations
of NSE or of any of its properties or assets which has not been set forth in
this Agreement as an exhibit or schedule hereto.
REPRESENTATIONS AND WARRANTIES OF ACQUIROR AND THE SUB.
As a material inducement to NSE to execute this Agreement and to
consummate the Merger and the other transactions contemplated hereby, Acquiror
and Sub covenant and agree to make the following representations and warranties
to NSE at the Effective Time: Material Adverse Effect as used herein shall be
deemed to apply to Acquiror and its Subsidiaries taken as a whole.
CORPORATE EXISTENCE AND POWER. Acquiror is a corporation duly
incorporated, validly existing and in good standing under the laws of the State
of Delaware, and the Sub is a corporation duly incorporated, validly existing
and in good standing under the laws of the State of Texas. Each of Acquiror and
the Sub has all corporate powers and all governmental licenses, authorizations,
consents
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and approvals required to carry on its business as now conducted, except where
the failure to have any of the foregoing would not have a Material Adverse
Effect. Each of Acquiror and the Sub is duly qualified to do business as a
foreign corporation and is in good standing in each jurisdiction where the
character of the property owned or leased by it or the nature of its activities
makes such qualification necessary, except for those jurisdictions where the
failure to be so qualified would not, individually or in the aggregate, have a
Material Adverse Effect. Acquiror owns all of the issued and outstanding shares
of capital stock of the Sub, and there are no other rights or obligations of
Acquiror or the Sub to issue any other shares of capital stock of the Sub. The
Sub has conducted no business activity other than in connection with the
transactions contemplated by this Agreement. True, complete and correct copies
of the Articles of Incorporation and Bylaws of Acquiror as amended to date are
attached hereto as Schedule 4.2(a) and are made a part hereof.
CORPORATE AUTHORIZATION. The execution, delivery and performance by
each of Acquiror and the Sub of the Agreement and the consummation by each of
them of the transactions contemplated hereby are within such organization's
corporate powers and, except for any required approval by the Sub's shareholder
and the Acquiror's shareholders in connection with the consummation of the
Merger, have been duly authorized by all necessary corporate action. The
Agreement constitutes a valid and binding agreement of each of Acquiror and the
Sub, enforceable in accordance with its terms. As of the Effective Time all
corporate action on the part of Acquiror and the Sub required under applicable
law in order to consummate the Merger will have occurred.
NO CONTRAVENTION. The execution and delivery of the Agreement does
not, and the consummation of the transactions contemplated thereby will not (i)
conflict with or result in any violation of any provision of the Articles of
Incorporation or Bylaws of Acquiror or Sub or (ii) conflict with or result in
any violation or default (with or without notice or lapse of time, or both)
under, or give rise to a right of termination, cancellation or acceleration of
an right or obligation or to loss or a benefit under, any provision of the
charter or Bylaws of Acquiror or the Sub or any loan or credit agreement, note,
bond, mortgage, indenture, lease or other agreement, instrument, permit,
concession, franchise, incense, judgment, order, decree, statute, law,
ordinance, rule or regulation applicable to Acquiror or its properties or
assets. or result in the creation or imposition of any Encumbrance on any asset
of Acquiror, except, only as to clause (ii) above, such as is not reasonably
likely to have a Material Adverse Effect or prevent Acquiror or Sub from
consummating the transactions contemplated by this Agreement. No consent,
approval, order or authorization of, or registration, declaration or filing
with, any court, administrative agency or commission or other governmental
authority or instrumentality, domestic or foreign, is required by or with
respect to Acquiror or the Sub in connection with the execution and delivery of
this Agreement by either of them or the consummation by either of them of the
transactions contemplated hereby, except the filing of the Certificate of Merger
with the Secretary of State of Texas and the filing with the Commission of the
Registration Statement and its declaration of effectiveness by the Commission..
CAPITALIZATION.
At the Effective Date, the authorized capital stock of the
Acquiror shall consist solely of shares of common stock, par value $.___ per
share ("Acquiror Common Stock"), of which no more than 1,400,000 shares of
Acquiror Common Stock will be outstanding as of the Effective Date except as
permitted by Section 5. All outstanding shares of capital stock of Acquiror have
been duly
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authorized and validly issued and are fully paid and nonassessable and free of
preemptive rights, and upon the issuance of the shares of Acquiror Common Stock
and Acquiror Preferred Stock to be issued in the Merger, such shares will be
duly authorized, validly issued, fully paid and nonassessable shares of Acquiror
Common Stock and Acquiror Preferred Stock, respectively. Except as set forth in
this Section 4.2(d) and except for the shares of Acquiror Common Stock and
Acquiror Preferred Stock to be issued in connection with the Merger and the
transactions relating thereto or permitted hereby, including the options to be
granted to Michael McClere, there will be outstanding (A) no shares of capital
stock or other voting securities of Acquiror, (B) no securities of Acquiror
convertible into or exchangeable for shares of capital stock or voting
securities of Acquiror and (C) no options, warrants or other rights to acquire
from Acquiror, and no obligation of Acquiror to issue, any capital stock, voting
securities or securities convertible into or exchangeable for capital stock or
voting securities of Acquiror (the items in clauses (i) and (ii) being referred
to collectively as the "Acquiror Securities") and there are no agreements or
commitments, to do any of the foregoing. There are no outstanding obligations of
Acquiror to repurchase or redeem any Acquiror Securities.
Acquiror has a sufficient number of its authorized but
unissued shares of Acquiror Common Stock and Acquiror Preferred Stock to permit
it to issue the number of shares of Acquiror Common Stock and Acquiror Preferred
Stock due in connection with the Merger and the related transactions, as well as
all of Acquiror's other obligations to issue shares of Acquiror Common Stock
upon exercise of any option, warrant or other right to acquire the same.
SEC FILINGS.
As of the Effective Time, Acquiror shall have filed all of its
Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and, to the
knowledge of Acquiror, Current Reports on Form 8-K required pursuant to the
Securities Exchange Act of 1934 and will have made available to NSE (i)
Acquiror's Annual Reports on Form 10-K for its fiscal years ended December 31,
1994 through December 31, 1996, (ii) its Quarterly Reports on Form 10-Q for its
fiscal quarters ended during 1994 through 1996, as well as March 31, 1997, (iii)
its proxy or information statements relating to meetings of, or actions taken
without a meeting by the stockholders of Acquiror held since 1994 and (iv) all
of its other reports, statements, schedules and registration statements filed
with the Securities and Exchange Commission since 1993, other than pre-effective
amendments to such registration statements. The documents referred to in the
preceding sentence are sometimes referred to herein as the "SEC Documents."
As of its filing date, to the knowledge of Acquiror, each such
SEC Document did not intentionally contain any untrue statement of a material
fact or intentionally omit to state any material fact necessary in order to make
the statements made therein, in light of the circumstances under which they were
made, not misleading.
FINANCIAL STATEMENTS. The financial statements contained within the
SEC Documents fairly present in all material respects the results of operations,
retained earnings and changes in financial position, as the case may be, of the
Acquiror at and for the periods set forth therein (subject, in the case of
unaudited statements, to normal year-end audit adjustments which will not be
material to the Acquiror, taken as a whole, in amount or effect), in each case
in accordance with generally
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accepted accounting principles consistently applied during the periods involved,
except as may be noted therein. The books and records, financial and other, of
the Acquiror are, to the knowledge of the Acquiror, in all material respects
complete and correct and have been maintained in accordance with good business
and accounting practices.
NO VIOLATIONS. Except as described on Schedule 4.2(g) hereto,
neither Acquiror or any of its subsidiaries has received any written notice from
any governmental entity having jurisdiction over it or over any of the real
property leased by it of any violation by Acquiror or any of its subsidiaries of
any law, regulation or ordinance relating to zoning, environmental matters,
local building or fire codes or similar matters relating to any of the real
property leased by Acquiror or any of its subsidiaries.
NO CONTINGENT LIABILITIES. Except as set forth in the financial
statements referred to in Section 4.2(f) above, at the Effective Time, Acquiror
and each of its subsidiaries shall have no liabilities, whether related to tax
or non-tax matters, known or unknown, due or not yet due, liquidated or
unliquidated, fixed or contingent, determined or determinable in amount or
otherwise and, to the knowledge of Acquiror after due inquiry, there is no
existing condition, situation or set of circumstances which could reasonably be
expected to result in such a liability except as and to the extent reflected on:
(i) the SEC Documents; (ii) this Agreement or any Schedule or Exhibit thereto;
or (iii) liabilities incurred since the date of the most recent SEC Document
solely in the ordinary course of business (or in connection with the
transactions contemplated hereby) and as accurately reflected on the books and
records of Acquiror; provided however, that no liability shall be incurred from
and after the date hereof which is in contravention of any negative covenant
contained herein and applicable to Acquiror.
LITIGATION. Except as set forth in any of the SEC Documents or
Schedule 4.2(i), there is no action, suit, investigation or proceeding (or, to
the knowledge of Acquiror, any basis therefor) pending against, or to the
knowledge of Acquiror threatened, against or affecting Acquiror, any of its
subsidiaries or any of their properties before any court or arbitrator or any
governmental body, agency or official that (i) if adversely determined against
Acquiror, would have a Material Adverse Effect on Acquiror and its subsidiaries,
taken as a whole, or (ii) in any manner challenges or seeks to prevent, enjoin,
alter or materially delay the Merger or any of the other transactions
contemplated by the Agreement.
TAXES. Acquiror and each of its subsidiaries have timely filed all
tax returns required to be filed by them, or will timely file when due all tax
returns required to be filed by them between the date hereof and the Effective
Time. Acquiror and each of its subsidiaries have paid in a timely fashion or
will pay when due in a timely fashion, all taxes required to be paid in respect
of the periods covered by such returns, and the books and the financial
statements of Acquiror and each of its subsidiaries reflect, or will reflect,
adequate reserves for all taxes payable by Acquiror and each of its subsidiaries
which have been, or will be, accrued but are not yet due. Acquiror and each of
its subsidiaries are not delinquent in the payment of any material tax,
assessment or governmental charge. No deficiencies for any taxes have been
proposed, asserted or assessed against Acquiror and each of its subsidiaries,
Acquiror and each of its subsidiaries are not aware of any facts which would
constitute the basis for the proposal or assertion of any such deficiency and
there is no action, suit, proceeding, audit or claim now pending, or to
Acquiror's knowledge, threatened against Acquiror and each of its subsidiaries.
All
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taxes which Acquiror and each of its subsidiaries are required by law to
withhold and collect have been duly withheld and collected, and have been timely
paid over to the proper authorities to the extent due and payable. For the
purposes of this Agreement, the term "tax" shall include all federal state,
local and foreign income, property, sales, excise and other taxes of any nature
whatsoever. Neither Acquiror or any of its subsidiaries nor any member of any
affiliated or combined group of which Acquiror is or has been a member has
granted any extension or waiver of the limitation period applicable to any tax
returns. There are no Encumbrances for taxes upon the assets of Acquiror or any
of its subsidiaries, except Encumbrances for current taxes not yet due. There
are no tax sharing or tax allocation agreements to which Acquiror or any of its
subsidiaries is now or ever has been a party. Acquiror will not be required
under Section 481(c) of the Internal Revenue Code of 1986, as amended (the
"Code"), to include any material adjustment in taxable income for any period
subsequent to the Merger. None of Acquiror or its subsidiaries (A) has been a
member of an affiliated group filing a consolidated federal income tax return
(other than a group the common parent of which was Acquiror or a subsidiary of
Acquiror) and (b) has no liability for the taxes of any person (other than
Acquiror or any of its subsidiaries) under Treasury Regulation Section 1.1502-6
(or any similar provision of state, local or foreign law), as a transferee or
successor, by contract or otherwise.
COMPLIANCE WITH LAWS. To the best knowledge of Acquiror and Sub,
neither Acquiror nor any of its subsidiaries is in violation of, and has not
violated, any applicable provisions of any laws, statutes, ordinances or
regulations, other than as would not be reasonably likely to have a Material
Adverse Effect on Acquiror and its subsidiaries, taken as a whole, or constitute
a felony. No such laws, statutes, ordinances or regulations require or are
reasonably expected to require capital expenditures that are reasonably likely
to have a Material Adverse Effect on Acquiror and its subsidiaries, taken as a
whole. Without limiting the generality of the foregoing, Acquiror and Sub have
all licenses, permits, certificates and authorizations needed or required for
the conduct of Acquiror's or Sub's business as presently conducted and for the
use of its properties and premises occupied by it, except where the failure to
obtain a license, permit, certificate or authorization would not have a Material
Adverse Effect.
INVESTMENT BANKING FEES. Except as disclosed on Schedule 4.2(l),
there is no investment banker, broker, finder or other similar intermediary
which has been retained by, or is authorized by, either Acquiror or the Sub to
act on its behalf who might be entitled to any fee or commission from NSE,
Acquiror or the Sub or any of their respective affiliates upon consummation of
the transactions contemplated by this Agreement.
STATEMENTS AND OTHER DOCUMENTS NOT MISLEADING. Neither this
Agreement, including all exhibits and schedules and other closing documents, nor
any other financial statement, document or other instrument heretofore or
hereafter furnished by Acquiror or Sub to NSE in connection with the Merger or
the other transactions contemplated hereby, or any information furnished by
Acquiror and Sub taken as a whole for inclusion in the Registration Statement
contains or will contain any untrue statement of any material fact or omit or
will omit to state any material fact required to be stated in order to make such
statement, information, document or other instruments, in light of the
circumstances in which they are made, not misleading. There is no fact known to
Acquiror and Sub taken as a whole which may have a Material Adverse Effect on
the business, prospects, financial condition or results of operations of
Acquiror and Sub taken as a whole or of any of its properties or assets which
has not been set forth in this Agreement as an exhibit or schedule hereto.
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ARTICLE V
AGREEMENTS OF THE PARTIES
FINANCING TRANSACTIONS.
Acquiror shall provide a loan to NSE in the principal amount of
$400,000 within two (2) days from the date of this Agreement pursuant to the
terms and provisions of a Loan Agreement, Secured Promissory Note, Security
Agreement and Guaranty (collectively, the "Loan Documents"), the forms of which
are attached hereto as Exhibit "5.1(a)."
If the Closing shall not have occurred within ninety (90) days from
the date of this Agreement, then Acquiror shall provide to NSE, within
twenty-five (25) days thereafter an additional loan of $400,000 subject to the
same terms and provisions of the Loan Documents.
Commencing as promptly as practicable after the date of this
Agreement, NSE shall prepare whatever documents are necessary in order to
commence a private placement of a minimum of $1.5 million of newly issued shares
of NSE Preferred Stock upon terms and conditions mutually acceptable to the
parties and in accordance with Rule 506 of Regulation D. Acquiror shall, after
having reviewed such documents to its satisfaction (but without expressing any
opinion or making any representation or warranty as to the truth, completeness
or accuracy of any information contained therein (other than as provided by
Acquiror in writing expressly for inclusion therein) or as to the compliance of
such documents with applicable law) assist NSE in identifying "accredited
investors" (as the term is described within Rule 501 of Regulation D) in
accordance with the methods of sale permitted in Rule 506 of Regulation D. NSE
shall be obligated to make all necessary filings required to be made to qualify
the offer and sale of the NSE Preferred Stock with all applicable federal and
state law.
Commencing as promptly as practicable after the date of this
Agreement, NSE shall agree to sell in a private placement transaction to solely
accredited investors in accordance with Rule 506 of Regulation D, a private
placement of 4,800,000 shares of NSE Common Stock in consideration for
subscriptions receivable for an aggregate amount of $600,000 due and payable to
NSE upon the earlier of: (i) six (6) months from the date thereof; or (ii) the
Closing Date; provided, however, that in the event that for whatever reason the
Merger is not completed before the due date of such subscriptions receivable,
NSE shall have the right to: (x) extend the due date thereof until the Closing
Date; or (y) terminate the subscriptions receivable and rescind the placement
transaction so that the holders of the subscriptions receivable shall no longer
have the right to subscribe for NSE Common Stock; provided, however, that the
termination of this offering shall not affect NSE's obligations to consummate
the Merger and any other transactions contemplated hereby. NSE shall be
obligated to make all necessary filings required to be made to qualify the offer
and sale of the NSE Common Stock with all applicable federal and state law.
REGISTRATION STATEMENT.
As promptly as practicable after the execution of this Agreement,
and subject to NSE's compliance with Section 4.1(e), Acquiror shall prepare and
file with the Commission, under the
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Securities Act of 1933, as amended (the "Securities Act"), and the Securities
Exchange Act of 1934, as amended, and shall use its best efforts to have
declared effective by the Commission, a Registration Statement on Form S-4
pursuant to which Acquiror shall cause the registration of the shares of
Acquiror Common Stock to be issued in the Merger (the "Registration Statement"),
and which shall include the proxy statement and form of proxy with respect to
the meeting of Acquiror's shareholders referred to in Section 3.2 hereof (the
"Proxy Statement"). Upon effectiveness of the Registration Statement, Acquiror
shall promptly mail to its shareholders the definitive Proxy Statement and form
of proxy. Acquiror shall notify NSE promptly of the receipt of any comments from
the Commission and of any requests by the Commission for amendments or
supplements to the Registration Statement, and will supply NSE and its counsel
with copies of any and all correspondence between Acquiror and its
representatives, on the one hand, and the Commission or members of its staff on
the other hand with respect to the Registration Statement. Acquiror shall
provide NSE and its counsel with a copy of the Registration Statement with
respect to which NSE provided information for inclusion therein prior to the
date the Registration Statement or any amendment thereto is first mailed or
otherwise filed with the Commission. NSE shall furnish to Acquiror all
information as Acquiror shall reasonably request in connection with the filing
of the Registration Statement, and the information to be provided by NSE as
aforesaid shall be true and correct in all material respects and shall not omit
to state any material fact required to be stated therein or necessary in order
to make such information not false or misleading. NSE agrees to correct, as
promptly as practicable, and, in any event, prior to the date of the meeting of
Acquiror's shareholders, any information provided by it for use in the
Registration Statement which may have become false or misleading. In the event
prior to the meeting of shareholders of Acquiror and prior to the Effective
Time, any event shall occur relating to NSE or its officers or directors which
should be described in any amendment or supplement to the Registration
Statement, NSE shall promptly inform Acquiror and shall furnish to Acquiror all
necessary information with respect thereto. In such case, Acquiror shall
prepare, file and clear with the Commission or mail or cause to be mailed to its
shareholders such amendment or supplement to the proxy statement included within
Registration Statement.
ISSUANCE OF SECURITIES OF NSE.
Between the date hereof and the Effective Time, NSE contemplates
that it will issue the following securities all in a manner in compliance with
its Articles of Incorporation, By-Laws and the TBCA and in compliance with
applicable federal and state securities laws:
Additional shares of NSE Common Stock to its existing
shareholders (and upon the exercise of outstanding options referred to at
subsection (b) hereof) so that upon the Effective Time such existing
shareholders shall beneficially own no more than 5,000,000 shares of NSE Common
Stock;
2,600,000 shares of NSE Common Stock to American Maple Leaf
Financial Corporation in consideration for its providing financial consulting
services to NSE, which shall be issued only upon completion of the Financing
Transactions identified within Section 5.1 hereof;
NSE Preferred Stock pursuant to Section 5.1(c) hereof; and
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<PAGE> 26
NSE Common Stock pursuant to Section 5.1(d) hereof.
Prior to the Effective Time, NSE shall cause each holder of a then
outstanding option, warrant, or other convertible security (other than NSE
Preferred Stock) to purchase shares of NSE capital stock to receive notice of
the proposed Merger, and NSE shall take whatever other action as may be
necessary to cancel such options and warrants on or prior to the Effective Time.
At the Effective Time, any such options, warrants and other convertible
securities with respect to which the holder thereof has not consented to
cancellation or has not otherwise exercised to purchase shares of NSE capital
stock will be canceled. Immediately following the Effective Time, each employee
stock option, stock bonus, stock award plan or stock appreciation right of NSE
or any of its Subsidiaries (as defined herein) which provides for the issuance
of NSE shares of capital stock or Subsidiary shares of capital stock shall be
terminated, and no further stock awards, stock bonuses, stock options or stock
appreciation rights shall be granted thereunder subsequent to the Effective
Time.
CAPITALIZATION OF ACQUIROR.
Commencing as promptly as practicable after the date of this
Agreement, Acquiror shall undertake all reasonable measures to reorganize its
outstanding indebtedness and capitalization so that as of the Effective Time
Acquiror shall have no more than 1,400,000 shares of Acquiror Common Stock
issued and outstanding and shall have satisfied all of its outstanding
indebtedness other than as permitted by Section 5.4 hereof. Notwithstanding the
foregoing, Acquiror reserves the right to have outstanding as of the Effective
Time more than 1,400,000 shares of Acquiror Common Stock, provided, however,
that the shares of Acquiror Common Stock to be distributed in this Merger are
increased proportionately so as to retain the same relative percentage interests
in Acquiror as originally contemplated in this Agreement.
Acquiror shall prepare and deliver to NSE a balance sheet dated
within ten (10) or fewer days prior to the Effective Time (the "Closing Balance
Sheet"). The Closing Balance Sheet shall fairly present in all material respects
the financial position of Acquiror as of the date thereof and shall reflect that
as of such date the Acquiror shall have a positive net worth , as determined by
taking into consideration only those assets consisting of cash, cash
equivalents, liquid assets and marketable securities.
DISCLOSURE DOCUMENTS.
Each of Acquiror and the Sub shall supply to NSE the necessary
information in writing, or cause the necessary information to be supplied in
writing, relating to Acquiror and the Sub for inclusion in any document(s) to be
prepared in connection with any of the financing transactions identified within
Section 5.1 hereof and in any documents to be delivered by NSE to its
shareholders in connection with the Merger and the shareholder vote with respect
to this Agreement as contemplated by Section 3.1.
NSE shall supply to Acquiror the necessary information in writing,
or cause the necessary information to be supplied in writing, relating to NSE
for inclusion in the Registration Statement to be filed with the Commission in
connection with the transactions contemplated by this
37
<PAGE> 27
Agreement and any documents to be delivered by Acquiror to its shareholders in
connection with the special meeting to be convened to approve the transactions
contemplated by this Agreement.
ACCESS TO INFORMATION.
At all times prior to the Effective Time or the earlier termination
of this Agreement in accordance with the provisions of Section 7, and in each
case subject to Section 5.7 below each of the parties hereto shall provide to
the other parties (and the other parties' authorized representatives) full
access during normal business hours and upon reasonable prior notice to the
premises, properties, books, records, assets, liabilities, operations,
contracts, personnel, financial information and other data and information of or
relating to such party (including without limitation all written proprietary and
trade secret information and documents, and other written information and
documents relating to intellectual property rights and matters), and will
cooperate with the other party in conducting its due diligence investigation of
such party.
CONFIDENTIALITY; NO SOLICITATION.
CONFIDENTIALITY OF ACQUIROR-RELATED INFORMATION. With respect to
information concerning Acquiror or the Sub that is made available to NSE
pursuant to the provisions of Sections 5.5 and 5.6, NSE agrees that it shall
hold such information in strict confidence, shall not use such information
except for the sole purpose of evaluating the Merger and related transactions
and shall not disseminate or disclose any of such information other than to it
directors, officers, employees, shareholders, affiliates, agents and
representatives who need to know such information for the sole purpose of
evaluating the Merger and the related transactions (each of whom shall be
informed in writing by NSE of the confidential nature of such information and
directed by NSE in writing to treat such information confidentially). If this
Agreement is terminated pursuant to the provisions of Section 7, NSE shall
immediately return all such information, all copies thereof and all information,
all copies thereof and all information prepared by NSE based upon the same, upon
Acquiror's request; provided, however, that one copy of all such material may be
retained by NSE's outside legal counsel for purposes only of resolving any
disputes under this Agreement. The above limitations on use, dissemination and
disclosure shall not apply to information that (i) is learned by NSE from a
third party entitled to disclose it; (ii) become known publicly other than
through NSE or any party who received the same through NSE provided that NSE has
no knowledge that the disclosing party was subject to an obligation of
confidentiality; (iii) is required by law or court order to be disclosed by NSE;
or (iv) is disclosed with the express prior written consent thereto of Acquiror.
NSE shall undertake all necessary steps to ensure that the secrecy and
confidentiality of such information will be maintained in accordance with the
provisions of this paragraph (a). Notwithstanding any thing contained herein to
the contrary, in the event a party is required by court order or subpoena to
disclose information which is otherwise deemed to be confidential or subject to
the confidentiality obligations hereunder, prior to such disclosure, the
disclosing party shall: (i) promptly notify the non-disclosing party and, if
having received a court order or subpoena, deliver a copy of the same to the
non-disclosing party; (ii) cooperate with the non-disclosing party, at the
expense of the non-disclosing party, in obtaining a protective or similar order
with respect to such information; and (iii) provide only such of the
confidential information as the disclosing party is advised by its counsel is
necessary to strictly comply with such court order or subpoena.
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<PAGE> 28
CONFIDENTIALITY OF NSE-RELATED INFORMATION. With respect to
information concerning NSE that is made available to Acquiror or the Sub
pursuant to the provisions of Sections 5.5 and 5.6, Acquiror and the Sub jointly
and severally agree that they shall hold such information in strict confidence,
shall not use such information except for the sole purpose of evaluating the
Merger and the related transactions and shall not disseminate or disclose any of
such information other than to their directors, officers, employees,
shareholders, affiliates, agents and representatives who need to know such
information for the sole purpose of evaluating the Merger and the related
transactions (each of whom shall be informed in writing by Acquiror or the Sub,
as appropriate, of the confidential nature of such information and directed by
such party in writing to treat such information confidentially). If this
Agreement is terminated pursuant to the provisions of Section 7, Acquiror and
the Sub jointly and severally agree to return immediately all such information,
all copies thereof and all information prepared by either of them based upon the
same, upon NSE's request; provided, however, that one copy of all such material
may be retained by Acquiror's outside legal counsel for purposes only of
resolving any disputes under this Agreement. The above limitations on use,
dissemination and disclosure shall not apply to information that (i) is learned
by Acquiror or the Sub from a third party entitled to disclose it; (ii) becomes
known publicly other than through Acquiror or the Sub or any party who received
the same through either of them provided that Acquiror or Sub has no knowledge
that the disclosing party was subject to an obligation of confidentiality; (iii)
is required by law or court order to be disclosed by Acquiror or the Sub; or
(iv) is disclosed with the express prior written consent thereto of NSE.
Acquiror and the Sub jointly and severally agree to undertake all necessary
steps to ensure that the secrecy and confidentiality of such information will be
maintained in accordance with the Provisions of this paragraph (b).
Notwithstanding any thing contained herein to the contrary, in the event a party
is required by court order or subpoena to disclose information which is
otherwise deemed to be confidential or subject to the confidentiality
obligations hereunder, prior to such disclosure, the disclosing party shall: (i)
promptly notify the non-disclosing party and, if having received a court order
or subpoena, deliver a copy of the same to the non-disclosing party; (ii)
cooperate with the non-disclosing party, at the expense of the non-disclosing
party, in obtaining a protective or similar order with respect to such
information; and (iii) provide only such of the confidential information as the
disclosing party is advised by its counsel is necessary to strictly comply with
such court order or subpoena.
NONDISCLOSURE. Neither Acquiror, the Sub or NSE shall disclose to
the public or to any third party the existence of this Agreement or the
transactions contemplated hereby or any other material non-public information
concerning or relating to the other party hereto, other than with the express
prior written consent of the other party hereto, except as may be required by
law or court order or to enforce the rights of such disclosing party under this
Agreement, in which event the contents of any proposed disclosure shall be
discussed with the other party before release; provided, however, that
notwithstanding anything to the contrary contained in this Agreement, any party
hereto may disclose this Agreement to any of its directors, officers, employees,
shareholders, affiliates, agents and representative who need to know such
information for the sole purpose of evaluating the Merger, and to any party
whose consent is required in connection with the Merger or this Agreement. The
parties anticipate issuing a mutually acceptable, joint press release announcing
the execution of this Agreement and the consummation of the Merger.
NO SOLICITATION. NSE will not, directly or indirectly, through any
officer, director, agent or otherwise: (i) solicit, initiate or encourage the
submission of inquiries, proposals or offers
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<PAGE> 29
from any person or entity relating to any acquisition or purchase of assets of
or any equity interest in NSE or any Subsidiary or any tender offer (including a
self-tender offer), exchange offer, merger, consolidation, business combination,
sale of a substantial amount of assets or sale of securities, liquidation,
dissolution or similar transaction involving NSE or its Subsidiaries (a
"Transaction Proposal"); (b) enter into or participate in any discussions or
negotiations regarding a Transaction Proposal, or furnish to any other person or
entity any information with respect to the business, properties or assets of NSE
or its Subsidiaries in connection with a Transaction Proposal; or (c) otherwise
cooperate in any way with, or assist or participate in, facilitate or encourage
any effort or attempt by any other person to do or seek a Transaction Proposal.
NSE shall promptly notify Acquiror if any such proposal or offer, or any inquiry
or contact with any person or entity with respect thereto is made.
INTERIM OPERATIONS.
During the period from the date of this Agreement and continuing
until the Effective Time:
INTERIM OPERATIONS OF NSE. NSE agrees (except as expressly
contemplated by this Agreement, including any Exhibits and Schedules hereto, or
to the extent that Acquiror shall otherwise consent in writing) that as to NSE
and each of its Subsidiaries:
Ordinary Course. NSE shall carry and shall cause each of its
Subsidiaries carry on its business in the usual, regular and ordinary course in
substantially the same manner as heretofore conducted and, to the extent
consistent with such business, use all reasonable efforts to preserve intact its
present business organization, keep available the services of its present
officers and employees and preserve its relationships with customers, suppliers
and others having business dealings with it;
Dividends; Changes in Stock. NSE shall not and shall not
propose to, nor cause its Subsidiaries to or propose to (a) declare, set aside
or pay any dividend, on, or make other distributions in respect of, any of its
capital stock, (b) split, combine or reclassify any of its capital stock or
issue, authorize or propose the issuance of any other securities in respect of,
in lieu of or in substitution for shares of its capital stock (c) redeem,
repurchase or otherwise acquire any shares of its capital stock or (d) otherwise
change its capitalization.
Issuance of Securities. Except as contemplated by this
Agreement, NSE shall not and shall cause its Subsidiaries not to sell, issue,
pledge, authorize or propose the sale or issuance of, pledge or purchase or
propose the purchase of, any shares of its capital stock of any class or
securities convertible into, or rights, warrants or options to acquire, any such
shares or other convertible securities (other than the issuance of shares of NSE
Common Stock upon the exercise or conversion, if any, of currently outstanding
NSE stock options).
Governing Documents. Neither NSE nor its Subsidiaries shall
amend its certificate of incorporation or its Bylaws.
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<PAGE> 30
No Dispositions. NSE shall not and shall cause its
Subsidiaries not to sell, lease, pledge, encumber or otherwise dispose of or
agree to sell, lease, pledge, encumber or otherwise dispose of, any of its
assets that are material or any other assets except in the ordinary course of
business consistent with prior practice.
Indebtedness. NSE shall not and shall cause its Subsidiaries
not to incur any indebtedness for borrowed money or guarantee any such
indebtedness or issue or sell any debt securities of NSE or a Subsidiary or
guarantee any debt securities of others other than in the ordinary course of
business consistent with prior practice provided that in no event shall either
incur or otherwise guaranty any indebtedness in any aggregate amount in excess
of $50,000.
Benefit Plans; Etc. NSE shall not and shall cause its
Subsidiaries not to adopt or amend in any material respect any collective
bargaining agreement or Employee Benefit Plan (as defined herein).
Executive Compensation. NSE shall not and shall cause its
Subsidiaries not to grant to any executive officer any increase in compensation
or in severance or termination pay, or enter into any employment agreement with
any executive officer.
Acquisitions. NSE and its Subsidiaries shall not acquire (by
merger, consolidation or acquisition of stock or assets or otherwise) any
corporation, partnership or other business organization or subdivision thereof,
or make any investment by either purchase of stock or securities, contributions
to capital (other than by NSE to the Subsidiaries), property transfer or, except
in the ordinary course of business, purchase of any property or assets, of any
other individual or entity;
Tax Elections. NSE and its Subsidiaries shall not make any
material tax election or settle or compromise any material federal, state, local
or foreign tax liability;
Waivers and Releases. NSE and its Subsidiaries shall not
waive, release, grant or transfer any rights of material value or modify or
change in any material respect any Corporation Agreement other than in the
ordinary course of business and consistent with past practice.
Other Actions. NSE shall not and shall cause its Subsidiaries
not to enter into any agreement or arrangement to do any of the foregoing. NSE
and its Subsidiaries shall not take any action, or fail to take any action, that
is reasonably likely to result in any of the representations and warranties of
NSE set forth in this Agreement becoming untrue in any material respect.
INTERIM OPERATIONS OF ACQUIROR AND SUB. Acquiror and Sub jointly and
severally agree (except as expressly contemplated by this Agreement, including
any Exhibits and Schedules hereto, or to the extent that NSE shall otherwise
consent in writing or to the extent required to permit Acquiror to meet its
obligations under Section 5.1(b)) that:
Ordinary Course. Acquiror shall carry on its business in the
usual, regular and ordinary course in substantially the same manner as
heretofore conducted and, to the extent consistent
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<PAGE> 31
with such business, use all reasonable efforts to preserve intact its present
business organization (provided that such obligation shall not relate to the
officers and employees of Acquiror or any of its subsidiaries including the Sub)
and preserve its relationships with customers, suppliers and others having
business dealings with it. The Sub shall conduct no business activity other than
in connection with the transactions contemplated by this Agreement in connection
with the Merger.
Dividends; Changes in Stock. Neither Acquiror nor the Sub
shall (and shall not propose to) (a) declare or pay any dividend, on, or make
other distributions in respect of, any of its capital stock, (b) split, combine
or reclassify any of its capital stock or issue, authorize or propose the
issuance of any other securities in respect of, in lieu of or in substitution
for shares of its capital stock, (c) repurchase or otherwise acquire any shares
of its capital stock or (d) otherwise change its capitalization.
Issuance of Securities. Neither Acquiror nor the Sub shall
sell, issue, pledge, authorize or propose the sale or issuance of, pledge or
purchase or propose the purchase of, any shares of its capital stock of any
class or securities convertible into, or rights, warrants or options to acquire,
any such shares or other convertible securities, (other than the issuance of
shares of NSE Common Stock upon the exercise or conversion, if any, of currently
outstanding NSE options or warrants).
No Dispositions. Acquiror shall not sell, lease, pledge,
encumber or otherwise dispose of, or agree to sell, lease, pledge, encumber or
otherwise dispose of, any of its assets that are material, or any other assets
except in the ordinary course of business consistent with prior practice.
Indebtedness. Neither Acquiror nor the Sub shall incur any
indebtedness for borrowed money or guarantee any such indebtedness or issue or
sell any debt securities or guarantee any debt securities of others other than
in the ordinary course of business consistent with prior practice.
Benefit Plans, Etc. Neither Acquiror nor the Sub shall adopt
or amend in any material respect any collective bargaining agreement or Employee
Benefit Plan (as defined herein).
Executive Compensation. Neither Acquiror nor the Sub shall
grant to any executive officer any increase in compensation, or enter into any
employment agreement with any executive officer, other than any of the same the
material terms of which have been disclosed to NSE on or before the date hereof.
Other Actions. Neither Acquiror nor the Sub shall enter into
any agreement or arrangement to do any of the foregoing. Neither Acquiror nor
the Sub shall take any action, or fail to take any action, that is reasonably
likely to result in any of their representations and warranties set forth in
this Agreement becoming untrue in any material respect.
CONSENTS.
Acquiror, the Sub and NSE shall cooperate and use their best efforts
to obtain, prior to the Closing Date, all licenses, permits, consents,
approvals, authorizations, qualifications and orders of
42
<PAGE> 32
governmental authorities and parties to contracts as are necessary for the
consummation of the transactions contemplated by this Agreement; provided,
however, that no loan agreement or contract for borrowed monies shall be repaid
and no contract shall be amended materially to increase the amount payable
thereunder or otherwise to be materially more burdensome in order to obtain any
such consent, approval or authorization without first obtaining the written
approval of the other parties hereto.
FILINGS.
Acquiror, the Sub and NSE shall, as promptly as practicable, make
any required filing, and any other required submissions, under any law, statute,
order rule or regulation with respect to the Merger and the related transactions
and shall cooperate with each other with respect to the foregoing.
ALL REASONABLE EFFORTS.
Subject to the terms and conditions of this Agreement and to the
fiduciary duties and obligations of the boards of directors of the parties
hereto to their respective shareholders, as advised by their counsel,, each of
the parties to this Agreement shall use all reasonable efforts to take, or cause
to be taken, all action and to do, or cause to be done, all things necessary,
proper or advisable under applicable laws and regulations, or to remove any
injunctions or other impediments or delays, legal or otherwise, as soon as
reasonable practicable, to consummate the Merger and the other transactions
contemplated by this Agreement.
PUBLIC ANNOUNCEMENTS.
Acquiror, the Sub and NSE shall consult with each other before
issuing any press release or otherwise making any public statements with respect
to the Merger, this agreement or the other transactions contemplated by this
Agreement and shall not issue any other press release or make any other public
statement without prior consultation with the other parties, except as may be
required by law or, with respect to Acquiror, by obligations pursuant to any
listing agreement with an national securities exchange.
NOTIFICATION OF CERTAIN MATTERS.
NSE shall give prompt notice to Acquiror, and Acquiror and the Sub
shall give prompt notice to NSE, of (a) the occurrence or non-occurrence of any
event, the occurrence or non-occurrence of which would cause any of its
representations or warranties in this Agreement to be untrue or inaccurate in
any material respect, as to NSE, at or prior to the Effective Time, and, as to
Acquiror and Sub, at the Effective Time and (b) any material failure of NSE, on
the one hand, or Acquiror or the Sub, on the other hand, as the case may be, to
comply with or satisfy any covenant, condition or agreement to be complied with
or satisfied by it under this Agreement; provided, however, the delivery of any
notice pursuant to this Section shall not limit or otherwise affect the remedies
available to the party receiving such notice under this Agreement as expressly
provided in this Agreement.
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EXPENSES.
Except as otherwise expressly provided herein, all costs and
expenses incurred in connection with the Agreement and the transactions
contemplated hereby shall be paid by the party incurring such expenses whether
or not the Merger is consummated.
DELIVERY OF PROXY BY NSE OFFICERS AND DIRECTORS.
Each of the directors of NSE shall deliver to Acquiror or to
Acquiror's duly authorized representative a proxy which shall entitle Acquiror
or its duly authorized representative to vote the shares of NSE capital stock
owned by such director at the NSE shareholders meeting referred to in Section
3.1 herein, in favor of the Merger Agreement and in opposition to any other
Transaction Proposal, and which proxy shall be in form and substance reasonably
acceptable to the parties hereto.
REVERSE STOCK SPLIT.
Promptly following the date of this Agreement, Acquiror shall take
such action as shall be necessary and appropriate to obtain the approval of its
stockholders to an amendment to Acquiror's Certificate of Incorporation to
authorize a reverse stock split the intent of which is to substantially correct
in all material respects the invalidity of the prior reverse stock splits to
which reference is made in the Annual Report on Form 10-K for the fiscal year
ended December 31, 1996, it being a condition to the Merger that the
capitalization of Acquiror as reflected herein, and the number of kind of
securities issuable in exchange for the NSE Common Stock and NSE Preferred Stock
in the Merger, shall be deemed to give effect to the consummation of the reverse
stock split on or prior to the Effective Time.
AUTHORIZATION OF PREFERRED STOCK BY ACQUIROR.
Acquiror shall include in the Proxy Statement to which reference is
made in Section 5.2 hereof, a proposal to amend its Certificate of Incorporation
to authorize the issuance of the Acquiror Preferred Stock to be issued in
exchange for the NSE Preferred Stock in the Merger.
ARTICLE VI
CONDITIONS TO CONSUMMATION OF THE MERGER
CONDITIONS TO NSE'S OBLIGATIONS.
The obligations of NSE to consummate the Merger and the other
transactions contemplated to be consummated by it at the Closing are subject to
the satisfaction (or waiver by NSE) at or prior to the Effective Time (or at
such other time prior thereto as may be expressly provided in this Agreement) of
each of the following conditions:
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<PAGE> 34
The representations and warranties of Acquiror and the Sub set out
in this Agreement shall be true and correct in all material respects at the
Effective Time.
Each of Acquiror and the Sub shall have complied in a timely manner
and in all material respects with the respective covenants and agreements set
out in this Agreement.
The Registration Statement shall have become effective in accordance
with the provisions of the Securities Act. No stop order suspending the
effectiveness of the Registration Statement shall have been issued by the
Commission and remain in effect.
The shareholders of Acquiror shall have approved the Merger in
accordance with the provisions of the DGCL.
On the Effective Time the officers and directors of Acquiror shall
tender their immediate resignations from office and shall in conjunction
therewith nominate to Acquiror's Board of Directors five (5) individuals
consisting of three (3) directors as designated by NSE and two (2) directors as
designated by Acquiror; and these designees shall be duly elected to such
positions in accordance with the provisions of the DGCL. The officers of
Acquiror shall be appointed by its newly elected Board of Directors provided
that the Chairman shall be designated by the non-NSE designated directors with
the consent of Michael McClere (as long as he is Chief Executive Officer) which
consent shall not be unreasonably withheld.
NSE shall be reasonably satisfied that the Merger results in a
tax-free reorganization under the Code.
Acquiror shall enter into an Employment Agreement with Michael
McClere, substantially in accordance with the terms contained within Exhibit
"6.1(g)."
American Maple Leaf Financial Corporation shall with respect to the
shares of Acquiror Common Stock beneficially owned by it, provide an irrevocable
voting proxy over such shares to Michael McClere for a period of three (3)
years.
All director, shareholder, lender, lessor and other parties'
consents and approvals, as well as all filings with, and all necessary consents
or approvals of, all federal, state and local governmental authorities and
agencies, as are required under this Agreement, applicable law or any applicable
contract or agreement (other than as contemplated by this Agreement) to complete
the Merger shall have been secured.
No statute, rule, regulation, executive order, decree, injunction or
restraining order shall have been enacted, entered, promulgated or enforced by
any court of competent jurisdiction or governmental authority that prohibits or
restricts the consummation of the Merger or the related transactions.
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<PAGE> 35
NSE shall have approved the proposed amendment to Acquiror's
Certificate of Incorporation and Bylaws pursuant to Section 6.2(k) hereof.
NSE shall have successfully completed the financing transactions
identified in Sections 5.1(c) and 5.1(d).
In the event any condition precedent set forth in this Section 6.1
shall not have been met, the sole remedy of NSE shall be either to waive such
failure and proceed to close hereunder, or to terminate this Agreement in which
event neither NSE nor Acquiror shall have any claim or action against the other,
except that NSE shall be entitled to exercise its right under the Promissory
Note and Loan Agreement referred to herein to extend the maturity date as
provided therein.
CONDITIONS TO ACQUIROR'S AND THE SUB'S OBLIGATIONS.
The obligations of Acquiror and the Sub to consummate the Merger and
the other transactions contemplated to be consummated by it at the Closing are
subject to the satisfaction (or waiver by Acquiror) at or prior to the Effective
Time (or at such other time prior thereto as may be expressly provided in this
Agreement) of each of the following conditions:
Holders of not more than five percent (5%) of the outstanding shares
of NSE Common Stock and NSE Preferred Stock shall have filed with NSE, prior to
the NSE shareholder meeting at which a vote is to be taken with respect to a
proposal to approve this Agreement, a written objection to such proposed action,
as required by Article 5.12A(l)(a) of the TBCA in order for such shareholder to
perfect the right to dissent from such proposed action.
NSE shall have provided to Acquiror a copy of the financial
statements required for inclusion in the Registration Statement and in
compliance with the requirements of Regulation S-X promulgated by the Commission
under the Securities Exchange Act of 1934, as amended, together with a manually
signed audit report and auditor's consent.
The representations and warranties of NSE set out in this Agreement
shall be true and correct in all material respects at and as of the Effective
Time.
Between the date hereof and the Effective Time, the NSE Options
shall be exercised and the appropriate shares of NSE Common Stock shall be
issued. In the event any NSE Options remain outstanding, prior to the Effective
Time, then NSE shall take any and all actions necessary to cancel such NSE
Options.
NSE shall have complied in a timely manner and in all material
respects with its covenants and agreements set out in this Agreement.
All director, shareholder, lender, lessor and other parties'
consents and approvals, as well as all filings with, and all necessary consents
or approvals of, all federal, state and local governmental authorities and
agencies, as are required under this Agreement, applicable law or any
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applicable contract or agreement (other than as contemplated by this Agreement)
to complete the Merger shall have been secured.
The shareholders of NSE as of the date hereof ("Historic NSE
Shareholders"), who shall own 5,000,000 shares of NSE Common Stock immediately
prior to the Effective Time and who shall pursuant to the Merger receive
1,250,000 shares of Acquiror Common Stock pursuant to the Merger, shall enter
into a Shareholders' Agreement whereby the Historic NSE Shareholders agree that
400,000 of their shares, on a pro rata basis, will be subject to surrender and
cancellation (the "Give Back Shares") in the event that the after-tax net income
of Acquiror (as determined in accordance with the Company's periodic reports
filed with the Commission under the Securities Exchange Act of 1934) shall not
exceed the aggregate amount of $7,750,000 for the 3 year period commencing the
fiscal quarter following the later of: (i) the Effective Time; or (ii) the date
upon which the Acquiror's Common Stock is listed for trading on The NASDAQ
SmallCap Market. The Shareholders' Agreement shall provide that the transfer
agent for the Acquiror Common Stock shall issue stop transfer instructions to
any share which may be subject to surrender as aforesaid and such shares will be
subject to appropriate legends. Certain of the Give Back Shares may be retained
by the Historic NSE Shareholders free and clear of the obligations identified
above in the event that the after-tax net income of Acquiror exceeds those
amounts identified below for those periods following the later of (i) the
Effective Time; or (ii) the date upon which the Acquiror's Common Stock is
listed for trading on The NASDAQ SmallCap Market:
<TABLE>
<CAPTION>
YEAR ANNUAL AFTER TAX NET INCOME GIVE BACK SHARES TO BE RETAINED
--------------------------- -------------------------------
<S> <C> <C>
1 $ 550,000 133,334
2 $2,200,000 133,333
3 $5,000,000 133,333
</TABLE>
No statute, rule, regulation, executive order, decree, injunction or
restraining order shall have been enacted, entered, promulgated or enforced by
any court of competent jurisdiction or governmental authority that prohibits or
restricts the consummation of the Merger or the related transactions.
Acquiror's shareholders and Board of Directors shall have approved
the Merger in accordance with the DGCL and each of the other proposals set forth
in the Proxy Statement which are a condition precedent to the consummation of
the Merger.
Each of the directors and officers of NSE and its Subsidiaries shall
have executed a release releasing NSE, Acquiror, Sub, any Subsidiary, and the
Surviving Corporation from and against any and all claims, other than those set
forth in the Warranted Balance Sheet, and actions, whether arising by reason of
their capacity as a shareholder of NSE or by reason as their serving as a
director, officer or employee of NSE prior to the Effective Time, and which
release shall be effective at the Effective Time and shall be in form and
substance reasonably satisfactory to Acquiror. Nothing in the foregoing sentence
shall be deemed to release NSE, Acquiror, Sub or any Subsidiary from its
covenants under this Agreement or from a breach of a representation or warranty
hereunder.
On or before the Effective Time, Acquiror shall take all actions
necessary to amend its Certificate of Incorporation and Bylaws as of the
Effective Date in a manner mutually satisfactory to Acquiror and NSE so as to
require the affirmative vote of not less than 75% of the directors of
47
<PAGE> 37
Acquiror in order to adopt any of the following actions taken or proposed to be
taken from the Effective Time through December 31, 2000: (i) any merger,
consolidation, sale of all or substantially all of the assets of Acquiror, sale
of all or substantially all of the equity ownership of any subsidiary of
Acquiror or a similar transaction; (ii) any acquisition of the capital stock of
another entity as a result of which such entity's financial results of
operations are required by generally accepted accounting principles to be
consolidated with the financial results of operations of Acquiror, or the
acquisition of all or substantially all of the assets of another entity; (iii)
any issuance by Acquiror of non-trade funded indebtedness in excess of $50,000
per issuance, $150,000 in the aggregate, or the issuance by Acquiror of capital
stock for a consideration per share which is less than the fair market value of
the capital stock as determined in good faith by the Board of Directors; (iv)
any amendment to Acquiror's Articles of Incorporation or Bylaws; (v) the
authorization by Acquiror of a class or series of capital stock having rights
and preferences which are pari passu with or superior to the rights and
preferences of the Acquiror Common Stock; and (vi) any increase or decrease in
the number of directors serving on the Board of Directors.
ARTICLE VII
TERMINATION
TERMINATION.
This Agreement may be terminated and the Merger may be abandoned at
any time prior to the Effective Time, whether before or after the vote of the
shareholders of NSE and the shareholders of Acquiror:
by mutual written consent of the board of directors of Acquiror, the
Sub and NSE:
by any of Acquiror, the Sub or NSE:
if the Effective Time shall not have occurred on or before 180
days after the date hereof; provided, however, that the right to terminate this
Agreement under this Section 7.1(b)(i) shall not be available to any party whose
failure to fulfill any obligation under this Agreement has been the cause of, or
resulted in, the failure of the Effective Time to occur on or before that date;
or
if any court of competent jurisdiction, or any governmental
body, regulatory or administrative agency or commission having appropriate
jurisdiction shall have issued an order, decree or filing or taken any other
action restraining, enjoining or otherwise prohibiting the transactions
contemplated by this Agreement and such order, decree, ruling or other action
shall have become final and non-appealable;
by NSE if any of the conditions specified in Section 6.1 have not
been met or waived by NSE at such time as such condition can no longer be
satisfied; or
by Acquiror if any of the conditions specified in Section 6.2 have
not been met or waived by Acquiror at such time as such condition can no longer
be satisfied.
48
<PAGE> 38
NOTICE AND EFFECT OF TERMINATION.
In the event of the termination and abandonment of this Agreement
pursuant to Section 7.1, written notice thereof shall forthwith be given to the
other party or parties specifying the provision pursuant to which such
termination is made, and this Agreement shall forthwith become void and have no
effect without any liability on the part of any party or its directors, officers
or shareholders, except for the provisions of this Section 7.2 and Sections 5.7,
5.12 and 5.14, which shall survive any termination of this Agreement. Nothing
contained in this Section 7.2 shall relieve any party from any liability for any
breach of this Agreement provided that the sole remedy available to NSE for any
breach of this Agreement by Acquiror or Sub shall be as set forth in Section 6.1
hereof.
EXTENSION; WAIVER.
Any time prior to the Effective Time, the parties may (a) extend the
time for the performance of any of the obligations or other acts of any other
party under or relating to this Agreement; (b) waive any inaccuracies in the
representations or warranties by any other party or (c) waive compliance with
any of the agreements of any other party or with any conditions to its own
obligations. Any agreement on the part of any other party to any such extension
or waiver shall be valid only if set forth in an instrument in writing signed on
behalf of such party.
AMENDMENT AND MODIFICATION.
This Agreement may be amended, whether before or after the vote of
the shareholders of NSE or shareholders of Acquiror, by written agreement of
Acquiror, the Sub and NSE; provided, however, that after the approval, if any,
of this Agreement by the shareholders of NSE, no such amendment shall reduce or
change the consideration to be received by any shareholder of NSE in connection
with the Merger as set out in Section 1.3 hereof or shall otherwise adversely
affect the rights under this Agreement of the shareholders of NSE without the
approval of such adversely affected shareholders. This Agreement may not be
amended except by an instrument in writing signed on behalf of Acquiror, the Sub
and NSE.
ARTICLE VIII
MISCELLANEOUS
SURVIVAL OF REPRESENTATIONS AND WARRANTIES.
The respective representations and warranties of Acquiror, the Sub
and NSE shall not be deemed waived or otherwise affected by any investigation
made by any party. Each representation and warranty shall expire with, and be
terminated and extinguished by, the Effective Time and thereafter Acquiror, the
Sub and NSE shall have no liability with respect to any such representation or
warranty. The provisions of this Section shall have no effect upon any other
obligation of the parties, whether to be performed before or after the Effective
Time.
49
<PAGE> 39
NOTICES.
All notices requests, demands, waivers and other communications
required or permitted to be given under this Agreement shall be in writing and
shall be deemed to have been duly given on the date if delivered personally, or
upon the second business day after it shall have been deposited by certified or
registered mail with postage prepaid, or sent by telex, telegram or telecopier,
as follows (or at such other address or facsimile number for a party as shall be
specified by like notice):
if to NSE, to it at: with a copy to:
NSE Technologies, Inc. Stephen M. Cohen, Esq.
One Houston Center Buchanan Ingersoll, P.C.
1221 McKinney, Suite 1950 Eleven Penn Center, 14th Fl.
Houston, TX 77010 Philadelphia, PA 19103
Attn: Michael McClere Fax: (713) 623-0990
Fax: (281) 488-8725
if to Acquiror or the Sub to it at: with a copy to:
Pacific Rim Entertainment, Inc. Steven N. Haas, Esq.
401 City Avenue; Suite 319 Cozen and O'Connor
Bala Cynwyd, PA 19004 The Atrium, 3rd Floor
Attn: Steven Rosner 1900 Market Street
Fax (610) 660-5905 Philadelphia, PA 19103
Fax: (215) 665-2013
ENTIRE AGREEMENT; ASSIGNMENT.
This Agreement, including all Exhibits and Schedules hereto, (a)
constitutes the entire agreement among the parties with respect to its subject
matter and supersedes all prior agreements and understandings, both written and
oral, among the parties or any of them with respect to such subject matter and
(b) shall not be assigned by operation of law or otherwise, provided that,
subject to any approvals required by applicable law, Acquiror or the Sub may
assign its respective rights and obligations to any majority-owning or owned,
direct or indirect, parent, subsidiary or subsidiaries of Acquiror, but no such
assignment shall relieve Acquiror or the Sub of its obligations under this
Agreement.
BINDING EFFECT; BENEFIT.
This Agreement shall inure to the benefit of and be binding upon the
parties and their respective successors and assigns. Nothing in this Agreement
is intended to confer on any person other than the parties to this Agreement or
their respective successors and assigns any rights, remedies, obligations or
liabilities under or by reason of this Agreement.
50
<PAGE> 40
HEADINGS.
The descriptive headings of the sections of this Agreement are
inserted for convenience only, do not constitute a part of this Agreement and
shall not affect in any way the meaning or interpretation of this Agreement.
COUNTERPARTS.
This Agreement may be executed in two or more counterparts and
delivered via facsimile, each of which shall be deemed to be an original, and
all of which together shall be deemed to be one and the same instrument.
GOVERNING LAW.
This agreement shall be governed by and construed in accordance with
the laws of the State of Texas, without regard to the laws that might otherwise
govern under principles of conflicts of laws applicable thereto.
ARBITRATION.
If a dispute arises as to the interpretation of this Agreement, it
shall be decided finally by three arbitrators in an arbitration proceeding
conforming to the Rules of the American Arbitration Association applicable to
commercial arbitration. The arbitrators shall be appointed as follows: one by
NSE, one by the Acquiror and the third by the said two arbitrators, or, if they
cannot agree, then the third arbitrator shall be appointed by the American
Arbitration Association. The third arbitrator shall be chairman of the panel and
shall be impartial. The arbitration shall take place in Houston, Texas. the
decision of a majority of the Arbitrators shall be conclusively binding upon the
parties and final, and such decision shall be enforceable as a judgment in any
court of competent jurisdiction. Each party shall pay the fees and expenses of
the arbitrator appointed by it, its counsel and its witnesses. The parties shall
share equally the fees and expenses of the impartial arbitrator.
SEVERABILITY.
If any term, provision, covenant or restriction of this Agreement is
held by a court of competent jurisdiction or other authority to be invalid,
void, unenforceable or against its regulatory policy, the remainder of this
Agreement shall remain in full force and effect and shall in no way be affected,
impaired or invalidated.
CERTAIN DEFINITIONS.
As used herein:
51
<PAGE> 41
"AFFILIATE" shall have the meanings ascribed to such term in Rule
12b-2 of the General Rules and Regulations under the Securities Exchange Act of
1934, as amended to date (the "Exchange Act");
"BUSINESS DAY" shall mean any day other than a Saturday, Sunday or a
day on which federally chartered financial institutions are not open for
business in the City of Houston, Texas;
"KNOWLEDGE" shall mean the actual current knowledge of the executive
management of the party to this Agreement to whom knowledge is ascribed together
with the knowledge such executive management should reasonably be expected to
have in the performance of its duties and responsibilities.
"MATERIAL ADVERSE EFFECT" shall mean any adverse effect on the
business, condition (financial or otherwise) or results of operation of the
relevant party and its subsidiaries, if any, which is material to such party and
its subsidiaries, if any, taken as a whole;
"PERSON" means any individual, corporation, partnership,
association, trust or other entity or organization, including a governmental or
political subdivision or any agency or institution thereof; and
"SUBSIDIARY" shall mean, when used with reference to an entity, any
corporation, a majority of the outstanding voting securities of which is owned
directly or indirectly, or a majority of the board of directors of which may be
elected, by such entity.
IN WITNESS WHEREOF, Acquiror, the Sub and NSE have caused this
Agreement to be signed by their respective officers hereunto duly authorized,
all as of the date first written above.
PACIFIC RIM ENTERTAINMENT, INC.
By: S/______________________________
Name: __________________________
Title: _________________________
PR ACQUISITION CORP.
By: S/______________________________
Name: __________________________
Title: _________________________
NSE TECHNOLOGIES, INC.
By: S/______________________________
Name: __________________________
Title: _________________________
52
<PAGE> 1
SENIOR SECURED NOTE
$____________________ Dated: _____ __, 1997
FOR VALUE RECEIVED, PACIFIC RIM ENTERTAINMENT, INC., a Delaware
corporation ("Maker"), promises to pay to the order of __________________
("Payee") with an address of _____________________________________, the
principal sum of __________________________________ Dollars
($_________________), lawful money of the United States of America, together
with interest accrued thereon, at the rate and on the terms set forth below:
1. Payment of Interest and Principal.
(a) Payment of Interest. Interest on the unpaid principal
amount of this Note shall accrue at a rate equal ten percent (10%) per annum.
Accrued interest shall be added to the unpaid principal balance as specified
herein; provided, however, that for purposes of calculating the amount of
interest which shall accrue on the unpaid principal balance, interest then
accrued to date shall not be considered part of the unpaid principal balance
under this Note.
(b) Payment of Principal. The unpaid principal balance under
the Note together with all accrued and unpaid interest on the unpaid principal
balance shall be paid in full on the earlier to occur of (i) the one hundred
fiftieth (150) day from the date hereof and (ii) the closing date of a merger,
acquisition or sale of all or substantially all of the assets of the Debtor, a
consolidation or similar fundamental transaction between the Debtor and an
unaffiliated third party with an operating business.
(c) Rank of Note; Obligation of Payee to Hold Amounts in
Trust. This Note is one of several senior secured notes (collectively with this
Note, the "Notes") issued by Maker under a Loan Agreement dated of even date
herewith between Maker, Payee and certain other obligees of Maker (the "Loan
Agreement"). Each Note is ranked pari passu with each other Note in payment of
interest and principal, and payments of interest and principal by Maker under
the Notes, including prepayments, if any, shall be made pro rata among each Note
in the same proportion that the outstanding principal amount of each Note bears
to the outstanding principal amount of each other Note. In the event it is
determined that Payee has received payments in respect of interest or principal
under this Note which are disproportionately greater than payments of interest
or principal made to one or more obligees due in respect of the other Notes
(determined in accordance with the immediately preceding sentence), then Payee
shall be deemed to have received and shall hold such greater amount solely in
trust for the benefit for each of the obligees to whom such excess should inure,
and Payee shall forthwith deliver such excess amount to Maker for payment to
such other obligees.
(d) Prepayment. Maker shall have the right to prepay at any
time and from time to time, without penalty or premium, all or any portion of
the outstanding principal of the Note, subject to subparagraph 1(c) above. All
prepayments of outstanding principal of the Note shall be applied first to
accrued interest, and second to unpaid principal due thereunder.
53
<PAGE> 2
(e) Place of Payment. Maker shall make all payments to Payee
at the address of Payee as set forth on the first page of this Note or to such
other place or places as Payee, from time to time, shall designate in writing to
Maker.
2. Security Agreement. To secure all of Maker's obligations under
the Notes and the Loan Agreement, Maker has granted to Payee a first lien and
security interest in the Collateral, as such term is defined in the Security
Agreement of even date herewith between Maker and each payee to whom a Note has
been issued (the "Security Agreement"), the terms of which being incorporated
herein by reference. The security interest in the Collateral shall be discharged
upon payment in full of the indebtedness of the Maker to the Payees under the
Notes and the Loan Agreement.
3. Events of Default; Remedies.
(a) Events of Default. The following shall constitute events
of default ("Events of Default"):
54
<PAGE> 3
(i) Maker fails to pay when due any principal,
interest or other sums due hereunder and shall not have remedied such failure
within ten (10) days after the date when due.
(ii) Maker defaults in the observance or performance
of any condition or covenant contained in this Note, the Loan Agreement, the
Warrants being granted to the Payee concurrently herewith (the "Warrants") or
the Security Agreement, and Maker shall not have remedied the default within
thirty (30) days after receipt of written notice of such default has been given
by Payee to Maker. The Loan Agreement, Warrants and Security Agreement are
sometimes collectively herein called the "Loan Documents".
(iii) The breach by Maker of any warranty or any
misrepresentation contained in this Note or the Loan Documents, and such breach
or misrepresentation shall not have been remedied within thirty (30) days after
receipt of written notice of such breach has been given by Payee to Maker.
(iv) A dissolution or liquidation of Maker shall have
been declared.
(v) If Maker shall make an assignment for the benefit
of creditors, or file a voluntary petition under the Bankruptcy Code, as
amended, or any other federal or state insolvency law, or apply for or consent
to the appointment of a receiver, trustee or custodian of all or part of its
property.
(vi) If Maker shall file an answer admitting the
jurisdiction of the court and the material allegations of an involuntary
petition filed against it under the Bankruptcy Code, as amended, or any other
federal or state insolvency law, or shall fail to have such petition dismissed
within sixty (60) days after its filing.
(vii) If an Order for relief shall be entered
following the filing of an involuntary petition against Maker under the
Bankruptcy Code, as amended, or any other federal or state insolvency law, or if
an Order shall be entered appointing a receiver, trustee or custodian of all or
parts of its property.
(viii) If there shall have occurred an Event of
Default under another promissory note issued by Maker under the Loan Agreement.
(b) Remedies. In an Event of Default shall occur and be
continuing then, in the sole discretion of Payee and without further notice to
Maker, the unpaid principal amount and the accrued interest hereunder at the
applicable rate specified above until full payment of all amounts due hereunder,
and all other sums due by Maker under this Note shall become immediately due and
payable without presentment, demand, protest or other requirements of any kind,
all of which are hereby expressly waived by Maker. In addition, in each case,
Payee may recover all costs of suit and other expenses incurred by Payee
(including reasonable attorneys' fees) in connection with the collection of any
sums due hereunder. In addition to other remedies available to it, Payee may
exercise its rights under the Loan Agreement and Security Agreement. The
remedies set forth herein shall be in addition to, and not in lieu of, any other
additional rights or remedies Payee may have at law or in equity.
4. Rights Cumulative. The remedies of Payee as provided in this Note
shall be cumulative and concurrent; may be pursued singly, successively or
together at the sole discretion of Payee, may be exercised as often as occasion
for their exercise shall occur; and in no event shall the failure to exercise
any such right or remedy be construed as a waiver or release of it.
5. Controlling Law. This Note and all questions relating to its
validity, interpretation or performance and enforcement shall be governed by and
construed in accordance with the laws of the Commonwealth of Pennsylvania.
6. Notices. Any notices or other communications required to be
delivered hereunder shall be sent or delivered in accordance with the Loan
Agreement.
55
<PAGE> 4
7. Binding Nature of Note. This Note shall be binding upon Maker,
and its successors and assigns and shall inure to the benefit of Payee and its
successors and assigns.
8. Modification. This Note may not be modified or amended other
than by an agreement in writing signed by Maker and Payee.
IN WITNESS WHEREOF, Maker, intending to be legally bound, has caused
its duly authorized representative to execute and deliver this Note on the date
first written above.
PACIFIC RIM ENTERTAINMENT, INC.
Attest:________________ By:_______________________________
56
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 2,501
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 200,000
<CURRENT-ASSETS> 627,401
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 627,401
<CURRENT-LIABILITIES> 382,000
<BONDS> 450,000
0
0
<COMMON> 984
<OTHER-SE> (205,583)
<TOTAL-LIABILITY-AND-EQUITY> 627,401
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 300,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (329,275)
<INCOME-TAX> 0
<INCOME-CONTINUING> (329,275)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (329,275)
<EPS-PRIMARY> (6.88)
<EPS-DILUTED> (6.88)
</TABLE>
