<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 8, 1997
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
QUIETPOWER SYSTEMS, INC.
(Name of small business issuer as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 8980 06-1346524
(State or other jurisdiction of (Primary standard (I.R.S. employer
incorporation or organization) industrial classification identification no.)
code number)
</TABLE>
------------------------
1675 BROADWAY
NEW YORK, NEW YORK 10019
(212) 830-7254
(Address and telephone number of principal executive offices)
------------------------
JONATHAN M. CHARRY, PRESIDENT
QUIETPOWER SYSTEMS, INC.
1675 BROADWAY
NEW YORK, NEW YORK 10019
(212) 830-7254
(Name, address and telephone number of agent for service)
------------------------
Copies of all communications, including all communications sent to the agent for
service, should be sent to:
<TABLE>
<S> <C>
GARY T. MOOMJIAN, ESQ. LAWRENCE B. FISHER, ESQ.
BRESLOW & WALKER, LLP ORRICK, HERRINGTON & SUTCLIFFE LLP
767 THIRD AVENUE 666 FIFTH AVENUE
NEW YORK, NEW YORK 10017 NEW YORK, NEW YORK 10103
TEL: (212) 832-1930 TEL: (212) 506-5000
FAX: (212) 888-4955 FAX: (212) 506-5151
</TABLE>
------------------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. /X/
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / / _____
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / _____
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED PROPOSED
MAXIMUM MAXIMUM
AMOUNT OFFERING AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF TO BE PRICE PER OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED SECURITY(1) PRICE(1) FEE
<S> <C> <C> <C> <C>
Common Stock, par value $.01 per share(2) 2,300,000 $9.50 $21,850,000 $6,621.21
Redeemable Common Stock Purchase Warrants, each to
purchase one share of Common Stock ("Warrants")(3)..... 2,300,000 $0.10 $230,000 $69.70
Common Stock, par value $.01 per share(4)................ 2,300,000 $14.25 $32,775,000 $9,931.82
Representative's Warrants, each to purchase one share of
Common Stock and one Warrant(5)........................ 200,000 $0.0001 $20 --
Common Stock, par value $.01 per share(6)................ 200,000 $11.40 $2,280,000 $690.91
Warrants, each to purchase one share of Common
Stock(6)............................................... 200,000 $0.12 $24,000 $7.27
Common Stock, par value $.01 per share(7)................ 200,000 $14.25 $2,850,000 $863.64
Common Stock, par value $.01 per share(8)................ 507,500 $9.50 $4,821,250 $1,460.98
Total.................................................... $64,830,270 $19,645.53
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee.
(2) Includes 300,000 shares of Common Stock which the Representative has the
option to purchase to cover over-allotments, if any.
(3) Includes 300,000 Warrants which the Representative has the option to
purchase to cover over-allotments, if any.
(4) Issuable upon exercise of publicly traded Warrants.
(5) This Registration Statement also relates to the resale of these securities
by the holders thereof or their transferees.
(6) Issuable upon exercise of the Representative's Warrants. This Registration
Statement also relates to the resale of these securities by the holders
thereof or their transferees.
(7) Issuable upon exercise of the Warrants underlying the Representative's
Warrants. This Registration Statement also relates to the resale of these
securities by the holders thereof or their transferees.
(8) Represents shares of Common Stock which may be sold by selling stockholders.
See "Selling Stockholders" in the Selling Stockholders' Prospectus.
Pursuant to Rule 416 of the Securities Act of 1933, this Registration
Statement also relates to such additional indeterminate number of shares of
Common Stock as may become issuable by reason of stock splits, dividends and
similar adjustments, in accordance with the anti-dilution provisions of the
publicly traded Redeemable Common Stock Purchase Warrants, the Representative's
Warrants and the Warrants underlying the Representative's Warrants.
<PAGE>
QUIETPOWER SYSTEMS, INC.
CROSS-REFERENCE SHEET SHOWING LOCATION IN PROSPECTUS
OF INFORMATION REQUIRED BY ITEMS IN PART I OF FORM SB-2
<TABLE>
<CAPTION>
ITEM NUMBERS OF FORM SB-2 AND TITLE OF ITEM LOCATION IN PROSPECTUS
----------------------------------------------------- -----------------------------------------------------
<C> <S> <C>
1. Front of Registration Statement and Outside Front Facing Page of Registration Statement; Outside Front
Cover of Prospectus................................ Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages of Inside Front and Outside Back Cover Pages of
Prospectus......................................... Prospectus
3. Summary Information and Risk Factors................. Prospectus Summary; Risk Factors
4. Use of Proceeds...................................... Use of Proceeds
5. Determination of Offering Price...................... Outside Front Cover Page of Prospectus; Risk Factors;
Underwriting
6. Dilution............................................. Risk Factors; Dilution
7. Selling Security Holders............................. Concurrent Offering
8. Plan of Distribution................................. Outside Front Cover Page of Prospectus; Underwriting
9. Legal Proceedings.................................... Business
10. Directors, Executive Officers, Management; Principal Stockholders
Promoters and Control Persons........................
11. Security Ownership of Certain Beneficial Principal Stockholders
Owners and Management................................
12. Description of Securities............................ Description of Securities
13. Interest of Named Experts and Counsel................ Legal Matters; Experts
14. Disclosure of Commission Position on Not Applicable
Indemnification for Securities Act Liabilities.......
15. Organization Within Last Five Years.................. Not Applicable
16. Description of Business.............................. Prospectus Summary; Risk Factors; Management's
Discussion and Analysis of Financial Condition and
Results of Operations; Business
17. Managements's Discussion and Analysis or Management's Discussion and Analysis of Financial
Plan of Operation.................................... Condition and Results of Operations
18. Description of Property.............................. Business--Facilities
19. Certain Relationships and Related Transactions....... Certain Transactions
20. Market for Common Equity and Related Dividend Policy; Dilution; Description of Securities;
Stockholder Matters.................................. Shares Eligible for Future Sale
21. Executive Compensation............................... Management
22. Financial Statements................................. Financial Statements
23. Changes In and Disagreement with Not Applicable
Accountants on Accounting and Financial
Disclosure.........................................
</TABLE>
<PAGE>
SUBJECT TO COMPLETION, DATED MAY 8, 1997
PROSPECTUS
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
QUIETPOWER SYSTEMS, INC.
2,000,000 SHARES OF COMMON STOCK AND
2,000,000 REDEEMABLE COMMON STOCK PURCHASE WARRANTS
---------------------
This Prospectus relates to the offering (the "Offering") of 2,000,000 shares
(the "Shares") of common stock, $0.01 par value per share (the "Common Stock"),
and 2,000,000 Redeemable Common Stock Purchase Warrants (the "Warrants") of
QuietPower Systems, Inc., a Delaware corporation ("QuietPower" or the
"Company"). The Shares and Warrants are sometimes hereinafter collectively
referred to as the "Securities." Until the completion of this Offering, the
Shares and Warrants may only be purchased together on the basis of one Share and
one Warrant. Each Warrant entitles the registered holder thereof to purchase one
share of Common Stock at an initial exercise price of $ per share [150%
of the initial public offering price per share of Common Stock] at any time
during the period commencing on the date of this Prospectus and terminating five
(5) years from the date of this Prospectus. The Warrant exercise price is
subject to adjustment under certain circumstances. Commencing thirteen (13)
months after the date of this Prospectus, with the consent of National
Securities Corporation (the "Representative") (which consent shall not be
unreasonably withheld), the Company may redeem all, but not less than all, of
the Warrants at a price equal to five cents ($0.05) per Warrant, provided that
the average closing sale price of the Common Stock as reported on the American
Stock Exchange ("AMEX") equals or exceeds $ [150% of the then exercise
price per Warrant] (subject to adjustment) for any twenty (20) trading days
within a period of thirty (30) consecutive trading days ending on the fifth (5)
trading day prior to the date of the notice of redemption. See "Description of
Securities--Warrants."
Prior to this Offering, there has been no public market for the Common Stock
or the Warrants, and there can be no assurance that such a market will develop
after the completion of this Offering or, if developed, that it will be
sustained. It is currently anticipated that the initial public offering prices
will be between $7.50 and $9.50 per Share and $0.10 per Warrant. For information
regarding the factors considered in determining the initial public offering
prices of the Shares and Warrants and the terms of the Warrants, see "Risk
Factors" and "Underwriting." It is anticipated that application will made to
include the Shares and Warrants for listing on AMEX and that, when listed, they
will trade separately immediately after the Offering under the symbols "KWT" and
"KWT.WS," respectively.
Concurrently with this offering, 507,500 shares of Common Stock issuable
upon exercise of warrants (the "Private Placement Warrants") issued to investors
(the "Selling Stockholders") in two private placement financings consummated by
the Company in May 1996 and April 1997, respectively, are being registered at
the Company's expense for sale by the Selling Stockholders pursuant to a
separate prospectus. The shares offered by the Selling Stockholders are not part
of the underwritten offering and of such shares, 373,750 may not be offered or
sold prior to three months from the date of this Prospectus, and 133,750 may not
be offered prior to nine months from the date of this Prospectus, without the
prior written consent of the Representative. See "Concurrent Offering."
------------------------------
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE
SUBSTANTIAL DILUTION. SEE "RISK FACTORS" COMMENCING ON PAGE 8 AND "DILUTION."
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATES SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO PUBLIC DISCOUNT(1) COMPANY(2)
<S> <C> <C> <C>
Per Share..................... $ $ $
Per Warrant................... $ $ $
Total(3)...................... $ $ $
</TABLE>
(1) Does not include additional compensation payable to the Representative in
the form of a non-accountable expense allowance. In addition, see
"Underwriting" for information concerning indemnification and contribution
arrangements with the Underwriters and other compensation payable to the
Representative.
(2) Before deducting estimated expenses of $494,000 payable by the Company,
excluding the non-accountable expense allowance payable to the
Representative.
(3) The Company has granted to the Underwriters an option (the "Over-allotment
Option") exercisable within 45 days after the date of this Prospectus to
purchase up to an aggregate of 300,000 additional shares of Common Stock
and/or 300,000 additional Warrants upon the same terms and conditions as set
forth above, solely to cover over-allotments, if any. If such Over-allotment
Option is exercised in full, the total Price to Public, Underwriting
Discount and Proceeds to Company will be $ , $ and
$ , respectively. See "Underwriting."
------------------------------
The Securities are being offered by the Underwriters, subject to prior sale,
when, as and if delivered to and accepted by the Underwriters, and subject to
approval of certain legal matters by their counsel and subject to certain other
conditions. The Underwriters reserve the right to withdraw, cancel or modify
this Offering and to reject any order in whole or in part. It is expected that
delivery of the Securities offered hereby will be made against payment at the
offices of National Securities Corporation, Seattle, Washington on or about
, 1997.
NATIONAL SECURITIES CORPORATION
The date of this Prospectus is , 1997
<PAGE>
[PHOTOGRAPHS AND CAPTIONS]
[PHOTOGRAPHS OF TRANSFORMER WITH ATQ-100 AND OF HEADSET]
------------------------
The Company intends to furnish its stockholders with annual reports
containing financial statements audited by its independent certified public
accountants and quarterly reports for the first three quarters of each fiscal
year containing unaudited interim financial information.
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SECURITIES,
INCLUDING PURCHASES OF THE SECURITIES TO STABILIZE THEIR MARKET PRICES,
PURCHASES OF THE SECURITIES TO COVER SOME OR ALL OF A SHORT POSITION IN THE
SECURITIES MAINTAINED BY THE UNDERWRITERS AND THE IMPOSITION OF PENALTY BIDS.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS, INCLUDING NOTES THERETO, APPEARING
ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED HEREIN ALL INFORMATION
SET FORTH IN THIS PROSPECTUS (I) DOES NOT GIVE EFFECT TO THE ISSUANCE OF
2,000,000 SHARES OF COMMON STOCK UPON EXERCISE OF THE WARRANTS; (II) DOES NOT
GIVE EFFECT TO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION, OR EXERCISE
OF THE WARRANTS GRANTED TO THE REPRESENTATIVE TO PURCHASE 200,000 SHARES OF
COMMON STOCK AND/OR 200,000 WARRANTS (THE "REPRESENTATIVE'S WARRANTS"), OR
EXERCISE OF ANY OTHER STOCK OPTIONS OR WARRANTS ISSUED BY THE COMPANY; AND (III)
ASSUMES THE CONVERSION OF ALL OUTSTANDING SHARES OF PREFERRED STOCK OF THE
COMPANY INTO COMMON STOCK ON A 1 FOR 200 BASIS. THE ACCOMPANYING FINANCIAL
STATEMENTS DO NOT ASSUME THE CONVERSION OF ALL OUTSTANDING SHARES OF PREFERRED
STOCK OF THE COMPANY INTO COMMON STOCK. SEE "RISK FACTORS" FOR INFORMATION THAT
SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS. THIS PROSPECTUS CONTAINS FORWARD-
LOOKING STATEMENTS WHICH INVOLVE CERTAIN RISKS AND UNCERTAINTIES. THE COMPANY'S
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE
FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET
FORTH UNDER RISK FACTORS AND ELSEWHERE IN THIS PROSPECTUS.
THE COMPANY
QuietPower Systems, Inc. ("QuietPower" or the "Company") is engaged in the
development, commercialization and marketing of products utilizing two
acoustically based technologies: (i) active noise and vibration control and (ii)
failure diagnostic and condition monitoring. The Company's active noise and
vibration control technology uses equal but opposite noise signals to reduce or
cancel noise emissions. QuietPower has used the active noise and vibration
control technology to develop its initial commercial products, including the
ATQ-100, a transformer quieting system which reduces the sound emanating from
electric power distribution transformers. The Company has also commenced
marketing its communication headset systems ("Headsets"), which reduce noise and
enhance communications in high noise industrial environments. QuietPower is
currently engaged in a joint venture with ABB Secheron S.A., an indirect
wholly-owned subsidiary of ABB Asea Brown Boveri Limited ("ABB"), for the
purpose of developing and marketing the ATQ-100 in the European market. The
Company's failure diagnostic and condition monitoring technology is to be
utilized to detect sound emissions that signal imminent equipment failure.
QuietPower is engaged in a joint venture with Prolec-GE, de S. de R.L. de C.V.
("Prolec-GE"), a joint venture between the General Electric Company ("GE") and
Prolec S.A. de C.V., for the purpose of developing a failure diagnostic and
condition monitoring line of products for use with transformers and other
substation equipment. The primary market for the Company's current and proposed
products is the worldwide electric utility (power generation, transmission and
distribution) and supply industries (collectively, the "Power Industry").
The Company has entered into a world-wide exclusive manufacturing, marketing
and distribution agreement with Noise Cancellation Technologies, Inc. ("NCT").
This agreement covers all of NCT's proprietary active noise and vibration
control technology and products relating to the Power Industry and grants the
Company world-wide exclusive rights within the Power Industry. The ATQ-100 and
the Headsets utilize the active noise and vibration control technology to
electronically reduce noise and vibration. Software-based algorithms, used in
conjunction with certain controlling, sensing and actuating hardware components,
act together as a digital signal processor to analyze noise emissions and
produce equal and opposite noise signals. When the two signals meet, the noise
is reduced or canceled. The Company's proposed failure diagnostic and condition
monitoring systems will also utilize digital signal-based technology.
The Company's joint venture with ABB Secheron S.A. was formed for the
purpose of developing and marketing active noise and vibration control systems
for use on transformers in Europe. Each party is obligated to contribute to the
joint venture such personnel and resources as shall be approved in connection
with each product improvement program. Proposed goals of these programs include
reducing
3
<PAGE>
the cost of the ATQ-100, modifying the ATQ-100 to meet European operating
specifications, and marketing and selling the ATQ-100 to European utility
customers.
QuietPower's joint venture with Prolec-GE was formed for the purpose of
developing failure diagnostic systems for power distribution transformers and
other substation equipment. The proposed failure diagnostic and condition
monitoring systems are intended to utilize digital signal processing based
technology to locate and analyze certain acoustic signals that indicate
equipment failure is imminent. QuietPower is obligated to grant the
Prolec-GE/QuietPower joint venture a world-wide license to use the failure
diagnostic and condition monitoring technology and to contribute to the joint
venture such personnel and resources as are required in connection with each
approved project.
The Company's principal operating strategy is to develop and position
products that take advantage of opportunities arising from the significant and
ongoing changes in the Power Industry. The Power Industry is a multibillion
dollar capital-intensive industry. The Company anticipates that the current move
toward deregulation in the North American and European electric utility
industries will increase market demand for companies which offer products that
reduce utilities' operating costs, enhance equipment efficiency and flexibility
and extend the expected useful lives of fixed assets. In addition to the Power
Industry, QuietPower plans to market its products to other capital-intensive
markets. To date, the Company has commenced marketing its Headsets to the
railroad and communication industries. The Company also intends to employ a
growth strategy pursuant to which it will identify and develop additional
products related to its core technologies and products. In this respect, it has
recently commenced development efforts on its active magnetic field control and
cancellation technology, which functions similarly to the active noise and
vibration control technology. The Company also intends to acquire outside
synergistic or alternative technologies and products.
QuietPower anticipates utilizing a portion of the net proceeds from this
Offering to finance its participation in the joint ventures and for the
marketing, product development and acquisition activities described above. See
"Use of Proceeds."
The Company was incorporated in Delaware in May 1992 under the name Active
Acoustical Solutions, Inc., and in February 1994 changed its name to QuietPower
Systems, Inc. The Company's principal offices are located at 1675 Broadway, New
York, New York 10019. Its telephone number is (212) 830-7290.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Securities Offered:.......... 2,000,000 Shares of Common Stock and 2,000,000 Warrants. The
Shares and the Warrants will be separately transferable
immediately after the completion of this Offering. See
"Description of Securities."
Terms of Warrants:........... Each Warrant entitles the registered holder thereof to
purchase, at any time during the five year period commencing
on the date of this Prospectus, one share of Common Stock at
a price of $ per share [150% of the initial public
offering price per share of Common Stock]. The Warrant
exercise price is subject to adjustment under certain
circumstances. Commencing 13 months after the date of this
Prospectus, with the consent of the Representative, the
Warrants are subject to redemption by the Company, in whole
but not in part, at $0.05 per Warrant, on 30 days' prior
written notice, provided that the average closing sale price
of the Common Stock equals or exceeds $ per share
[150% of the exercise price per share of the Warrant],
subject to adjustment, for any 20 trading days within a
period of 30 consecutive trading days ending on the fifth
trading day prior to the date of the notice of redemption.
See "Description of Securities."
Common Stock Outstanding
Prior to the
Offering(1):............... 1,004,013 shares
Common Stock Outstanding
After the Offering(1):..... 3,004,013 shares
Use of Proceeds:............. The Company intends to use the net proceeds of the Offering
as follows: (i) development of products, (ii) marketing and
sales, (iii) repayment of outstanding indebtedness and
payables, (iv) acquisitions and (v) working capital and
general corporate purposes.
Risk Factors:................ Investment in the Securities offered hereby is highly
speculative and involves a high degree of risk and immediate
and substantial dilution to the purchasers in this Offering.
See "Risk Factors" and "Dilution."
Proposed American Stock
Exchange Symbols:
Common Stock............. KWT
Warrants................. KWT.WS
</TABLE>
- ------------------------
(1) Does not include (i) 1,414,915 shares of Common Stock issuable upon exercise
of outstanding warrants (which number includes warrants to purchase 265,000
shares of Common Stock that will be issued upon completion of this Offering
and warrants to purchase 133,750 shares of Common Stock that are issuable
upon exercise of nominally priced warrants), with a weighted average
exercise price of $3.44 per share, (ii) 250,000 shares of Common Stock
subject to options available under the Company's 1993 Stock Option Plan (the
"1993 Plan"), of which options to purchase an aggregate of 239,490 shares of
Common Stock with a weighted average exercise price of $4.22 per share have
been granted, and options to purchase 10,510 shares of Common Stock remain
available for future grants, and (iii) 83,333 shares of Common Stock
issuable upon conversion of convertible promissory notes in the aggregate
principal amount of $625,000 (assuming an initial public offering price of
$7.50 per Share). See "Management's Discussion and Analysis of Financial
Condition and Results of its Operations," "Use of Proceeds" and
"Management--Stock Option Plan."
5
<PAGE>
SUMMARY FINANCIAL DATA
The balance sheet data and the income statement data presented below for
each of the years in the two years ended December 31, 1996 are derived from the
Financial Statements of the Company, which have been audited by Richard A.
Eisner and Company, LLP, and are included elsewhere in this Prospectus. The
selected financial data for the year ended December 31, 1994 and the Balance
Sheet Data as of December 31, 1995, were derived from financial statements of
the Company. These financial statements include all adjustments, consisting of
normal recurring accruals, which the Company considers necessary for a fair
presentation of the financial position and the results of operations for this
period. The information presented below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements and related notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
<S> <C> <C> <C>
1994 1995 1996
---------- ---------- -------------
STATEMENTS OF OPERATIONS:
Net revenues
Product sales.......................................................... $ 0 $ 35,000 $ 216,000
Development funding(1)................................................. 541,000 315,000 0
---------- ---------- -------------
Total revenues..................................................... 541,000 350,000 216,000
---------- ---------- -------------
---------- ---------- -------------
Costs and expenses
Cost of sales.......................................................... 0 29,000 260,000
Development costs...................................................... 587,000 335,000 187,000
Selling, general and administrative.................................... 893,000 843,000 1,714,000
---------- ---------- -------------
Total costs and expenses........................................... 1,480,000 1,207,000 2,161,000
---------- ---------- -------------
---------- ---------- -------------
Interest expense......................................................... 0 17,000 333,000
---------- ---------- -------------
Net (loss)............................................................... $ (939,000) $ (874,000) $ (2,278,000)
---------- ---------- -------------
---------- ---------- -------------
Net (loss) per share(2).................................................. $ (0.69) $ (.62) $ (1.53)
---------- ---------- -------------
---------- ---------- -------------
Pro forma weighted average number of common shares outstanding(2)........ 1,353,000 1,403,000 1,484,000
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------------------------------
PRO FORMA
DECEMBER 31, AS
1995 ACTUAL PRO FORMA(3) ADJUSTED(3)(4)
------------- ------------- ------------- ----------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficiency)...................... $ (1,243,000) $ (654,000) $ 1,920,000 $ 11,560,000
Total assets(5)................................... 436,000 463,000 2,801,000 12,422,000
Notes payable..................................... 93,000 511,000 1,975,000 585,000
Total liabilities................................. 1,273,000 1,543,000 2,836,000 1,227,000
Accumulated deficit............................... (2,401,000) (4,679,000) (4,927,000) (6,427,000)
Stockholders' equity (deficiency)................. (837,000) (1,080,000) (35,000) 11,195,000
</TABLE>
- ------------------------
(1) Development funding consists of the direct investment by utilities in the
Company's research and development projects.
(2) See Note B of the Notes to the Financial Statements.
(3) Adjusted to give pro forma effect to (i) a bridge financing, the gross
proceeds of which were $2,000,000 and pursuant to which the Company issued
$2,000,000 of promissory notes and warrants to purchase an aggregate 240,000
shares of Common Stock, which resulted in an original issue discount
6
<PAGE>
to the notes of $856,000, (ii) a private financing pursuant to which the
Company issued $625,000 of one-year promissory notes, which notes are
convertible into Common Stock at a price per share equal to the initial
public offering price per Share, and warrants to purchase an aggregate of
16,667 shares of Common Stock, which resulted in an original issue discount
to the notes of $40,000, (iii) the conversion of $200,000 of promissory
notes existing at December 31, 1996 into 39,466 shares of Common Stock, (iv)
the payment of $136,000 to NCT for amounts owing, (v) the payment of
$151,000 with respect to promissory notes outstanding on December 31, 1996,
and (vi) the recognition of the expense of $170,000 resulting from the
increase in 26,750 shares of Common Stock and warrants to purchase 26,750
shares of Common Stock underlying warrants granted in a private financing,
all of which events occurred subsequent to December 31, 1996. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
(4) As adjusted to give effect to (i) the sale of the Securities offered hereby
(at an assumed initial public offering price of $7.50 per Share and $.10 per
Warrant), the initial application of the estimated net proceeds therefrom,
and (ii) the expense of $1,417,000 relating to the write-off of debt
discount and debt issuance cost. Does not give effect to the potential
repayment of $625,000 in convertible promissory notes that become payable on
demand upon completion of the Offering. See "Use of Proceeds."
(5) Includes technology rights. As of December 31, 1996 the balance of such
rights was $328,000.
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RISK FACTORS
AN INVESTMENT IN THE SECURITIES OFFERED HEREBY INVOLVES A HIGH DEGREE OF
RISK AND SHOULD BE MADE ONLY BY INVESTORS WHO CAN AFFORD THE LOSS OF THEIR
ENTIRE INVESTMENT. PROSPECTIVE INVESTORS SHOULD CAREFULLY REVIEW AND CONSIDER
THE FOLLOWING RISKS AS WELL AS THE OTHER INFORMATION SET FORTH IN THIS
PROSPECTUS.
LIMITED OPERATING HISTORY; OPERATING LOSSES; STOCKHOLDERS' AND WORKING CAPITAL
DEFICITS
Since its inception in 1992, the Company has been principally engaged in the
development of its technologies. To date, the majority of the Company's
operations have been financed by the net proceeds of several private placements
of both debt and equity securities of the Company, aggregating approximately
$5,715,000, and funding by utility companies for the research and development of
its technologies, aggregating $541,000 in 1994 and $315,000 in 1995. The Company
has not yet generated any significant product sales revenues and there can be no
assurance that significant revenues will develop. The Company has a limited
operating history on which an evaluation of its performance and prospects can be
made and its operations are subject to all of the risks inherent in the
establishment of a new business enterprise. The likelihood of the success of the
Company must be considered in light of the problems, expenses, difficulties,
complications and delays frequently encountered in connection with a new
business, the identification, development and commercialization of new products,
the dependence on and attempts to apply new and rapidly changing technology, and
the competitive environment in which the Company operates.
The Company sustained net losses of $939,000, $874,000 and $2,278,000 for
the years ended December 31, 1994, 1995 and 1996, respectively. As of December
31, 1996, the Company had a stockholders' deficit of $1,080,000, a working
capital deficit of $654,000 and an accumulated deficit of $4,679,000. In
addition, at December 31, 1996, notes payable were discounted by $224,000, which
amount will be expensed as interest in 1997. Furthermore, the Company will
expense through the 1997 fiscal quarter in which the Offering is completed, a
non-cash charge of approximately $1,365,000 of original issue discount and debt
issuance costs arising from private financings completed in 1997. The Company
expects to continue to incur a loss for at least the first three quarters of
1997, and there can be no assurance that the Company will achieve profitable
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Note A of the Notes to the Financial Statements.
DEPENDENCE ON OFFERING; POSSIBLE NEED FOR ADDITIONAL FINANCING
The Company is dependent upon the net proceeds of this Offering to finance
its operating activities. Although the Company believes that the estimated net
proceeds from this Offering together with cash from operations will enable it to
fund its operations, including product development, marketing and other
operating activities, for at least 12 months, no assurance can be given in that
regard. The Company's future capital requirements could vary significantly and
will depend on certain factors, many of which are not within the Company's
control. Factors that may require the Company to seek additional funding include
the need for cash to fund acquisitions in an aggregate amount in excess of that
allocated from this Offering, greater than anticipated expenses, less than
anticipated revenues, and longer product development times than now
contemplated. See "Business--Business Strategy--Acquisitions." The Company may
seek such additional funding through public or private financings or borrowings.
There can be no assurance that additional funds will be available on acceptable
terms, if at all. If additional funds are raised by issuing equity securities,
substantial dilution to existing stockholders, including purchasers of the
Securities offered hereby, may result. If additional funds are raised through
the incurrence of debt with financial institutions, the Company would likely
become subject to restrictive covenants relating to its operations and finances.
If adequate funds are not available, the Company may be required to
significantly curtail or cease its expansion strategy. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
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DEPENDENCE ON NCT
The Company anticipates that it will derive a significant portion of its
revenues for the foreseeable future from the marketing and distribution of
active noise and vibration control products using the proprietary technology of
NCT. The Company does not exercise any control over NCT.
The Company has entered into a Master Agreement, dated March 27, 1995 and
amended on March 28, 1995, April 21, 1995, May 21, 1996 and April 9, 1997 (the
"NCT Master Agreement"), with NCT, the holder of the basic active noise and
vibration control patents upon which the Company relies, which grants the
Company an exclusive world-wide license to manufacture, market, sell and
distribute, for use within the Power Industry, as well as the gas power
industry, active transformer quieting products, and all future products for
which the Company provides development and commercialization funding. The NCT
Master Agreement also grants the Company an exclusive world-wide license in
connection with active steam and gas turbine quieting products, which products
the Company has no current plans to develop in the near term. There can be no
assurance that the Company will be able to raise adequate funds to complete
development of all such projects. In addition, the Company has entered into a
Distributor Agreement with NCT, dated October 7, 1994 (the "Distributor
Agreement"), relating to the industrial communication Headsets.
NCT has incurred substantial net losses from operations since its inception.
Based upon NCT's Annual Report on Form 10-K for the year ended December 31,
1996, at December 31, 1996, NCT had a working capital deficit of $1,312,000, an
accumulated deficit of $83,700,000 and stockholders' equity of $2,610,000. In
addition, based upon such disclosure, NCT had a net loss of $10,825,000 for
1996. Based upon a press release issued by NCT on April 6, 1997, NCT reported
net income of $600,000 for the three months ended March 31, 1997, although there
can be no assurance that NCT will continue to generate profits from its
operations. Due to the Company's important contractual ties with NCT, the
Company may be significantly and adversely affected should NCT be unable to
continue operations or otherwise perform its obligations with the Company. In
the event that NCT commences, or is subject to, a bankruptcy or reorganization
case, or ceases to operate its business, then, notwithstanding certain statutory
and contractual protective provisions regarding the continued effectiveness of
the Company's licenses from NCT, NCT may be able to reject, breach or be excused
from performing, or may fail to perform, its obligations under the NCT Master
Agreement, the Distributor Agreement and any other agreement between NCT and the
Company. See "Business--Contractual Agreements with NCT."
LIMITED SALES HISTORY; NEED FOR COST REDUCTION OF ATQ-100 AND MODIFICATION OF
HEADSETS; SUBSTANTIAL TIME LAPSE UNTIL ADDITIONAL COMMERCIAL PRODUCT
INTRODUCTION
Pursuant to the NCT Master Agreement, the Company has developed and
commenced marketing the first of its active noise and vibration control
products, a transformer quieting system called the ATQ-100. In 1996, sales for
the ATQ-100 totalled $178,000. Based upon market feedback, the Company has
recently determined to accelerate its efforts to lower the sales price of the
ATQ-100 by continuing a significant development effort to reduce the cost of the
system components and installation of the ATQ-100. As a result, the Company
believes that the gross profit relating to sales of this product in the first
half of 1997 will be nominal. There can be, however, no assurance that the
Company will achieve commercially significant sales or that the Company will
reduce costs sufficiently to generate acceptable gross profit margins.
The Company has also commenced marketing its industrial communication
headsets ("Headsets"), for which sales in 1996 totalled $38,000. In view of
market response to initial marketing efforts regarding the communication
Headsets, the Company determined that in order to achieve significant Headset
sales, engineering modifications were necessary to tailor the Headsets to the
needs of each specific industry (e.g. the Power Industry, railroads, oil and
gas, mining and pulp and paper). Although design modifications have recently
been completed for railroad industry Headsets and are substantially completed
for Power
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Industry Headsets, there can be no assurance that these and any future design
modifications will result in significantly increased Headset sales.
The Company does not anticipate that the commercial development of its next
products will be completed until at least the third quarter of 1997. There can
be no assurance as to the time required to complete such development efforts, or
that they can be successfully completed at all.
COMPETITION; TECHNOLOGICAL OBSOLESCENCE
The Company does not believe that any other company is now developing and/or
commercializing products for the Power Industry utilizing the active noise and
vibration control or failure diagnostic and condition monitoring technologies.
However, the Company faces competition from companies developing their own noise
reduction and failure diagnostic systems and from companies which develop
traditional methods of quieting, such as barrier walls or reinforced "low noise"
transformers. With respect to the ATQ-100 and the Headsets, the Company believes
that it will compete primarily on the basis of cost and effectiveness. In
addition, competition may arise from products currently in development, or
developed in the future, by other companies. The development by others of new
and improved products, processes, and technologies may make the products
marketed by the Company less competitive or obsolete. Many of the Company's
current and potential competitors are likely to have substantially greater
financial, managerial and technical resources than the Company. There can be no
assurance that the Company will be able to compete successfully in its markets.
See "Business--Competition."
UNCERTAIN MARKET ACCEPTANCE
Since its inception, the Company has primarily focused its efforts on active
noise and vibration control and failure diagnostic and condition monitoring
products for the Power Industry, and Headsets for multiple industries. As with
any new technology, there is the risk that the market may not recognize the
benefits or the potential applications of the active noise and vibration control
and failure diagnostic condition monitoring technologies, or any future products
or technologies developed by the Company. Market acceptance of the Company's
products will depend, in large part, upon the ability of the Company to
demonstrate to prospective customers the potential advantages of the Company's
products over other types of products performing similar functions. There can be
no assurance that the Company will be successful in marketing its products to
the Power Industry or other markets or that the Company's products will be
accepted by the Power Industry or other markets. See "Business--Business
Strategy" and "Business--Additional Potential Active Noise Control Products."
RISK OF INTERNATIONAL OPERATIONS
The Company intends to market its products in industrialized international
markets. International operations entail various risks, including economic
instability and recessions, exposure to currency fluctuations, difficulties of
administering foreign operations generally, and obligations to comply with a
wide variety of foreign import and United States export laws, tariffs and other
regulatory requirements. The Company's competitiveness in overseas markets may
be negatively impacted if there is a significant increase in the value of the
dollar against the currencies of the other countries in which the Company does
business. In addition, the laws of certain foreign countries may not protect the
Company's proprietary rights to the same extent as the laws of the United
States.
DEPENDENCE ON PATENTS; UNCERTAIN PROPRIETARY PROTECTION
The Company's success with respect to its active noise and vibration
control, failure diagnostic and condition monitoring and active magnetic field
cancellation systems is dependent in large measure upon its ability to obtain
patent protection for these products. NCT holds or has rights to all of the
active noise and vibration control patents on which the Company relies. To date
the Company has filed patent applications
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in the United States and pursuant to the Patent Cooperation Treaty in Canada and
other countries in connection with its failure diagnostic and condition
monitoring system, and is currently preparing a patent application for filing
with regard to its active magnetic field cancellation system. There can be no
assurance that patents will issue from any of the Company's patent applications,
or that the Company will develop additional products that are patentable. No
assurance can be given as to the range or degree of protection any patents
issued to the Company or licensed from NCT will afford or that such patents or
licenses will provide protection that has commercial significance or will
provide competitive advantages for the Company's products. No assurance can be
given that either the Company's owned or licensed patents will afford protection
against competitors with similar technologies or that others will not obtain
patents claiming aspects similar to those covered by the Company's owned or
licensed patents or patent applications. No assurance exists that the Company's
owned or licensed patents will not be challenged by third parties, invalidated,
rendered unenforceable or designed around. Furthermore, there can be no
assurance that any pending patent application of QuietPower or applications
filed in the future by the Company will result in the issuance of a patent. The
invalidation or expiration of patents owned or licensed by the Company and
believed by the Company to be commercially significant could permit increased
competition, with potential adverse effects on the Company and its business
prospects. Although NCT has indicated to the Company that it intends to file for
extensions to certain patents, the Company can make no assurances that, if
filed, the United States or foreign government patent authorities will grant
such extensions to NCT. In addition, there can be no assurance that any patents
which are issued to or licensed by the Company will be held valid by a court of
law reviewing any such patent.
With respect to the patents owned by, or licensed to NCT, NCT has indicated
to the Company that it has conducted only limited patent searches and no
assurances can be given by the Company that patents do not exist or will not be
issued in the future that would have an adverse effect on the Company's ability
to market its products or maintain its competitive position with respect to its
products. In the event NCT chooses not to defend against its patent rights,
substantial resources may be required to obtain and defend patent and other
rights to protect present and future technology and other property of the
Company. Although the Company intends to pursue its interests in preventing
infringement of any patents licensed to it which are not pursued by NCT, the
Company makes no assurances that it will be successful in any action for
infringement of the technology licensed to it. See "Business--Patent
Protection."
DEPENDENCE ON JOINT VENTURE PARTNERS
The Company's strategy for the testing, development, manufacturing and
commercialization of the majority of its products requires arrangements with
partners in, or manufacturers for, the Power Industry, and is dependent upon the
subsequent success of these outside parties in performing their
responsibilities. In this regard, the Company has entered into joint venture
agreements with ABB Secheron S.A. with respect to the marketing of the ATQ-100
system in Europe and with Prolec-GE with respect to the marketing and
development of failure diagnostic and condition monitoring systems worldwide. In
addition, there can be no assurance that such partners will not pursue
alternative technologies. In the event an appropriate joint venture arrangement
is not available relating to the manufacturing of any one or more products, the
Company will be required to enter into contract manufacturing arrangements.
There can be no assurance that the Company will be able to negotiate acceptable
joint venture or contract manufacture arrangements, or that any such
arrangements will be successful. See "Business--Joint Venture Agreements."
NO MANUFACTURING FACILITIES OR PERSONNEL
The Company does not have any capability to manufacture any products it
develops and its management has no experience in large-scale manufacturing.
Accordingly, if in the future the Company is unable to have third parties
manufacture its products, either pursuant to joint venture or contract
manufacturing agreements, or if the Company decides to manufacture its developed
products, the Company will be
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required to establish the necessary manufacturing facilities and employ and
train qualified manufacturing personnel, all of which may result in a delay in
the production of the Company's products. The Company will also require
substantial additional financing to establish a large scale manufacturing
facility. There can be no assurance that the Company will be successful in
attracting and retaining experienced personnel or establishing the necessary
manufacturing facilities or arrangements that will enable the Company to operate
or produce high quality products for sale at competitive prices. The failure to
achieve these objectives could have a material adverse affect on the Company's
business, financial condition and results of operations. See
"Business--Manufacturing."
LIMITED MARKETING AND SALES CAPABILITIES
The Company has limited marketing and sales capabilities. In order to market
and sell the Company's products directly or through strategic joint venture
arrangements, the Company will need to develop a larger sales force and
marketing group with technical expertise, or make appropriate arrangements with
joint venture partners. There can be no assurance that such efforts will be
successful. In addition, there can be no assurance that the Company will be able
to effectively market or sell its products through sales representatives,
through arrangements with some other outside sales force, or through strategic
partners. See "Business--Business Strategy--Marketing."
NO ASSURANCE OF SUCCESS OF ACQUISITION PROGRAM
The Company intends, subject to having appropriate financing, to make
acquisitions of or from entities that offer other leading edge technologies to
utilities. There can be no assurance that any such acquisitions will be made or
that, if made, such acquisitions will prove profitable to the Company. See "Use
of Proceeds" and "Business--Business Strategy--Acquisitions."
DEPENDENCE ON KEY PERSONNEL
The Company is heavily dependent upon the active participation of its
President, Jonathan M. Charry, Ph.D. In this respect, Dr. Charry has
longstanding relationships with representatives within the Power Industry which
comprises the major market for the Company's products. Dr. Charry has entered
into an employment agreement with the Company for a term expiring in March 1998,
and the Company has obtained a key person life insurance policy in the amount of
$1 million on the life of Dr. Charry. The loss of the services of Dr. Charry
could have a material adverse effect on the Company. In addition, the Company is
dependent on the services of its sales and marketing and research and
development personnel, consisting of a limited number of persons with highly
specialized technical knowledge. The loss of any of such persons could mean a
delay in the development and/or marketing of one or more of its proposed or
actual products.
The Company's present management has limited experience in managing a large
business. In order to meet its business objectives, it will be necessary for the
Company to hire appropriate management personnel, as well as additional
scientific and engineering personnel. The Company competes for such persons with
other companies, academic institutions, government entities and other
organizations, some of which may have substantially greater capital resources
and facilities than the Company. There can be no assurance that the Company will
be successful in recruiting and retaining such personnel. See "Business--
Employees" and "Management."
CONTROL BY EXISTING STOCKHOLDERS
Existing stockholders of the Company presently own 1,004,013 shares of
Common Stock and options and warrants to purchase an aggregate of 1,654,405
(including warrants issuable upon completion of this Offering) shares of Common
Stock. Upon consummation of this Offering, assuming all warrants and options of
existing stockholders are exercised (but not the Warrants or the
Representative's Warrants),
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such stockholders will beneficially own 57.1% of the Common Stock. Immediately
after the Offering, the existing stockholders will have the ability to elect a
majority of the Company's directors and otherwise control the Company. See
"Principal Stockholders."
SPECULATIVE NATURE OF THE WARRANTS
The Warrants do not confer any rights of Common Stock ownership on their
holders, such as voting rights or the right to receive dividends, but rather
merely represent the right to acquire shares of Common Stock at a fixed price
for a limited period of time. Specifically, commencing on the date of this
Prospectus, holders of the Warrants may exercise their right to acquire Common
Stock and pay an exercise price of $ per share [150% of the initial
public offering price per Share], subject to adjustment upon the occurrence of
certain dilutive events, until five years after the date of this Prospectus,
after which date any unexercised Warrants will expire and have no further value.
Moreover, following the completion of the Offering, the market value of the
Warrants is uncertain and there can be no assurance that the market value of the
Warrants will equal or exceed their initial public offering price. There can be
no assurance that the market price of the Common Stock will ever equal or exceed
the exercise price of the Warrants, and consequently, whether it will ever be
profitable for holders of the Warrants to exercise their Warrants. See
"Description of Securities--Warrants."
IMMEDIATE SUBSTANTIAL DILUTION
Purchasers of Securities in this Offering will experience immediate and
substantial dilution in the net tangible book value of the shares of Common
Stock purchased by them in this Offering. The immediate dilution to purchasers
of the Securities offered hereby (assuming a public offering price of $7.50 per
Share) will be $3.86, or 51.5%, per share of Common Stock. Additional dilution
to future net tangible book value per share may occur upon the exercise of the
Warrants, Representative's Warrants, and other options and warrants that are
outstanding or will be issued by the Company. The current stockholders of the
Company, including the Company's officers and directors, acquired their shares
of Common Stock, in most cases, for nominal consideration or for consideration
substantially less than the public offering price of the shares of Common Stock
included in this Offering. See "Capitalization," "Dilution" and "Certain
Transactions."
POTENTIAL ADVERSE EFFECT OF REDEMPTION OF WARRANTS
The Warrant Agreement provides that, commencing thirteen months after the
date of this Prospectus, with the consent of the Representative, if the average
closing bid price of the Common Stock equals or exceeds $ per share
[150% of the then exercise price per Warrant] for any twenty trading days within
a period of thirty consecutive trading days ending on the fifth trading day
prior to the Company's notice of its intent to redeem the Warrants, the Company
may redeem all, but not less than all, of the Warrants for $0.05 per Warrant. If
the Warrants are redeemed, holders of the Warrants will lose their rights to
exercise the Warrants after the expiration of the 30-day notice of redemption
period. Upon receipt of a notice of redemption, holders would be required to:
(i) exercise the Warrants and pay the exercise price at a time when it may be
disadvantageous for them to do so, (ii) sell the Warrants at the current market
price, if any, when they might prefer to hold the Warrants, or (iii) accept the
redemption price which is likely to be substantially less than the market value
of the Warrants at the time of redemption. See "Description of
Securities--Warrants."
POTENTIAL ADVERSE EFFECT OF REPRESENTATIVE'S WARRANTS
In connection with this Offering, the Company has authorized the issuance of
the Representative's Warrants and has reserved 400,000 shares of Common Stock
for issuance upon exercise of such warrants (including the Warrants issuable
upon exercise of the Representative's Warrants). The Representative's Warrants
will entitle the holders thereof to acquire shares of Common Stock and Warrants
at an exercise price of 120% of the initial public offering price per share and
Warrant, respectively ($9.00 per share
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assuming an initial public offering price of $7.50 per Share). The
Representative's Warrants will be exercisable at any time from the first
anniversary of the date of this Prospectus until the fifth anniversary of the
date of this Prospectus. For the term of the Representative's Warrants, the
holders thereof will have, at nominal cost, the opportunity to profit from a
rise in the market price of the Securities without assuming the risk of
ownership, with a resulting dilution in the interest of the other security
holders. As long as the Representative's Warrants remain unexercised, the
Company's ability to obtain additional capital might be adversely affected.
Moreover, the holders of the Representative's Warrants may be expected to
exercise such warrants at a time when the Company would, in all likelihood, be
able to obtain any needed capital by a new offering of its securities on terms
more favorable than those provided by such warrants. See "Description of
Securities."
NO DIVIDENDS
The Company has never declared or paid dividends, and does not intend to pay
any dividends in the foreseeable future on shares of Common Stock. Earnings of
the Company, if any, are expected to be retained for use in expanding the
Company's business. The payment of dividends is within the discretion of the
Board of Directors of the Company and will depend upon the Company's earnings,
if any, capital requirements, financial condition and such other factors as are
considered to be relevant by the Board of Directors from time to time. See
"Dividend Policy."
NO PUBLIC MARKET FOR THE SECURITIES
Prior to this Offering there has been no public market for the Common Stock
or the Warrants, and there can be no assurance that an active public market for
the Securities will develop or be sustained after this Offering. See
"Underwriting."
LEGAL RESTRICTIONS ON SALES OF SHARES UNDERLYING THE WARRANTS
The Warrants are not exercisable unless, at the time of the exercise, the
Company has a current prospectus covering the shares of Common Stock issuable
upon exercise of the Warrants, and such shares have been registered, qualified
or deemed to be exempt under the securities laws of the state of residence of
the exercising holder of the Warrants. The Warrants may be deprived of value if
a current prospectus covering the shares of Common Stock issuable upon the
exercise of the Warrants is not kept effective. The Common Stock and the
Warrants are separately transferable immediately upon issuance. Purchasers may
buy Warrants in the aftermarket or may move to jurisdictions in which the shares
underlying the Warrants are not so registered or qualified during the period
that the Warrants are exercisable. In this event, the Company would be unable to
issue shares to those persons desiring to exercise their Warrants, and holders
of Warrants would have no choice but to attempt to sell the Warrants in a
jurisdiction where such sale is permissible or allow them to expire unexercised.
See "Description of Securities--Warrants."
CERTAIN ANTI-TAKEOVER PROVISIONS AND POTENTIAL ADVERSE EFFECT ON MARKET PRICE OF
SECURITIES FROM ISSUANCE OF PREFERRED STOCK
The Company's Certificate of Incorporation and By-laws contain certain
provisions that could have the effect of delaying or preventing a change of
control of the Company, which could limit the ability of security holders to
dispose of their Common Stock and/or Warrants in such transactions. The
Certificate of Incorporation authorizes the Board of Directors to issue one or
more series of preferred stock without stockholder approval. Such preferred
stock could have voting and conversion rights that adversely affect the voting
power of the holders of Common Stock, or could result in one or more classes of
outstanding securities that would have dividend, liquidation or other rights
superior to those of the Common Stock. Issuance of such preferred stock may have
an adverse effect on the then prevailing market price of the Common Stock and
Warrants. Additionally, the Company is subject to the anti-takeover provisions
of Section 203 of the Delaware General Corporation Law, which prohibits the
Company from engaging in a
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"business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed manner.
Section 203 could have the effect of delaying or preventing a change of control
of the Company. See "Description of Securities--Preferred Stock" and
"Description of Securities--Anti-Takeover Provisions."
BROAD DISCRETION OVER APPLICATION OF PROCEEDS
A substantial portion of the net proceeds of this Offering, aggregating
approximately $4,152,000 or 33%, has been allocated for working capital and
general corporate purposes, including the funding of acquisitions. Accordingly,
management of the Company will have broad discretion in determining the manner
in which the net proceeds of the Offering are applied. See "Use of Proceeds."
ARBITRARY DETERMINATION OF OFFERING PRICE
The initial public offering prices of the Securities, as well as the
exercise prices of the Warrants and the Representative's Warrants, were
determined by negotiations between the Company and the Representative, and
should not be regarded as indicative of any future market price of the
Securities. The factors considered in such negotiations, in addition to
prevailing market conditions, included the history of and prospects for the
industry in which the Company competes, an assessment of the Company's
management, the prospects of the Company, its capital structure, the market for
initial public offerings and certain other factors as were deemed relevant.
However, the public offering price of the Securities and the exercise prices of
the Warrants and the Representative's Warrants do not necessarily bear any
relationship to the Company's assets, book value, earnings or any other
established criteria of value. See "Underwriting."
POSSIBLE VOLATILITY OF STOCK PRICE
The stock market has, from time to time, experienced significant price and
volume fluctuations that may be unrelated to the operating performance of
particular companies. In addition, the market price of the Securities, like the
stock prices of many publicly-traded companies, may prove to be highly volatile.
Announcements of innovations or new commercial products by the Company or its
competitors, developments or disputes concerning proprietary rights, as well as
period-to-period fluctuations in financial results, among other factors, may
have a significant impact on the market price of the Securities.
SHARES ELIGIBLE FOR FUTURE SALE
Upon the consummation of this Offering, the Company will have 3,004,013
shares of Common Stock outstanding (assuming no exercise of warrants or
options). All of the 2,000,000 shares of Common Stock being offered hereby will
be immediately tradeable without restriction or further registration under the
Securities Act of 1933, as amended (the "Securities Act"). Subject to certain
contractual restrictions as described below and the continued effectiveness of
the Selling Stockholders' prospectus within this registration statement relating
to these shares, an additional 507,500 shares of Common Stock issuable upon
exercise of the Private Placement Warrants will be freely tradeable. See
"Concurrent Offering." The Selling Stockholders have agreed not to sell any of
such securities for a period of three months from the date of this Prospectus
and not to sell 137,500 of such securities for a period of nine months from the
date of this Prospectus without the prior written consent of the Representative.
The 1,004,013 shares of Common Stock issued and outstanding prior to this
Offering are deemed to be "restricted securities," as that term is defined under
Rule 144 promulgated under the Securities Act, and may be sold without
registration pursuant to such rule at varying times, commencing 90 days from the
date hereof. In addition, the Company currently has outstanding options and
warrants (not including the Warrants and Private Placement Warrants) to purchase
an additional 1,654,405 shares of Common Stock (including certain warrants
issuable upon completion of this Offering). All of the officers and directors of
the Company and all holders of 1% or more of the issued and outstanding Common
Stock and all holders of options,
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warrants or other securities convertible, exercisable, or exchangeable for 1% or
more of the issued and outstanding Common Stock (except as described above) have
agreed not to, directly or indirectly, issue, offer, agree or offer to sell,
sell, transfer, assign, encumber, grant an option for the purchase or sale of,
pledge, hypothecate or otherwise dispose of any beneficial interest in such
securities for a period of 13 months following the effective date of the
Registration Statement without the prior written consent of the Company and the
Representative. An appropriate legend shall be marked on the face of the
certificates representing all such securities. The Company has granted certain
demand and piggyback registration rights to the Representative with respect to
the securities issuable upon exercise of the Representative's Warrants. In
addition, the Company has also granted certain piggyback registration rights to
BWM Investments, an affiliate of Breslow & Walker, LLP, counsel to the Company,
and Kalkines, Arky, Zall & Bernstein of which William S. Bernstein, a director
of the Company, is a partner, in each case as to 25,000 shares of Common Stock
underlying warrants. See "Certain Transactions" and "Legal Matters."
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned restricted shares for at
least one year (including the holding period of any prior owner except an
affiliate) would be entitled to sell within any three-month period a number of
shares that does not exceed the greater of (i) one percent of the number of
shares of Common Stock then outstanding (approximately 30,040 shares immediately
after this Offering), or (ii) the average weekly trading volume of the Common
Stock during the four calendar weeks preceding the filing of a Form 144 with
respect to such sale. No prediction can be made as to the effect, if any, that
sales of shares of Common Stock or even the availability of such shares for sale
will have on the market prices prevailing from time to time. The possibility
that substantial amounts of Common Stock may be sold in the public market may
adversely affect prevailing market prices for the Common Stock or the Warrants
and could impair the Company's ability to raise capital through the sale of its
equity securities. See "Principal Stockholders," "Description of Securities,"
"Shares Eligible for Future Sale" and "Underwriting."
POTENTIAL ADVERSE EFFECT OF SUBSTANTIAL SHARES OF COMMON STOCK RESERVED FOR
ISSUANCE
The Company has reserved a total of 4,148,248 shares of Common Stock for
issuance as follows: (i) 2,000,000 shares for issuance upon exercise of the
2,000,000 Warrants; (ii) 200,000 shares for issuance upon exercise of the
Representative's Warrants; (iii) 200,000 shares for issuance upon exercise of
the Warrants issuable upon exercise of the Representative's Warrants; (iv)
1,414,915 shares at a weighted average exercise price of $3.44 per share subject
to outstanding warrants as of the date of this Prospectus; (v) 83,333 shares
issuable upon conversion of outstanding promissory notes totalling $625,000
(assuming an initial public offering price of $7.50 per Share); and (vi) 250,000
shares for issuance pursuant to the 1993 Plan, 239,940 shares of which are
issuable at a weighted average exercise price of $4.22 per share upon exercise
of stock options outstanding as of the date hereof. The existence of the
Warrants, the Representative's Warrants and other options or warrants may
adversely affect the Company's ability to consummate future equity financings.
Further, the holders of such warrants and options may exercise them at a time
when the Company would otherwise be able to obtain additional equity capital on
terms more favorable to the Company. The exercise and sale of the Common Stock
underlying the warrants and options would have a dilutive effect on the
Company's stockholders, as well as have a material adverse effect on the market
price of the Common Stock. See "Shares Eligible for Future Sale."
REPRESENTATIVE'S INFLUENCE ON THE MARKET
A significant amount of the Securities offered hereby may be sold to
customers of the Representative. Such customers subsequently may engage in
transactions for the sale or purchase of such securities through or with the
Representative. If it participates in the market, the Representative may exert a
dominating influence on the market, if one develops, for the Securities
described in this Prospectus. Such marketmaking activity may be discontinued at
any time. The price and liquidity of the Common Stock and the
16
<PAGE>
Warrants may be significantly affected by the degree, if any, of the
Representative's participation in such market. See "Description of Securities"
and "Underwriting."
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Company's Certificate of Incorporation limits, to the maximum extent
permitted by the Delaware General Corporation Law ("Delaware Law"), the personal
liability of directors for monetary damages for breach of their fiduciary duties
as a director. The Company's By-laws provide that the Company shall indemnify
its officers and directors and may indemnify its employees and other agents to
the fullest extent permitted by law. Section 145 of the Delaware Law provides
that a corporation may indemnify a director, officer, employee or agent made or
threatened to be made a party to an action by reason of the fact that he was a
director, officer, employee or agent of the corporation or was serving at the
request of the corporation, against expenses actually and reasonably incurred in
connection with such action if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, if he had
no reasonable cause to believe his conduct was unlawful. Delaware Law does not
permit a corporation to eliminate a director's duty of care, and the provisions
of the Company's Certificate of Incorporation have no effect on the availability
of equitable remedies, such as injunction or rescission, for a director's breach
of the duty of care. See "Management--Indemnification of Directors."
RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS INCLUDED IN THIS PROSPECTUS
This Prospectus contains certain forward-looking statements regarding, among
other items, the Company's expansion strategy. The forward-looking statements
included herein are based on current expectations that involve numerous risks
and uncertainties. Assumptions relating to the foregoing involve judgments with
respect to, among other things, future economic, competitive and market
conditions and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond the control of the
Company. Although the Company believes that its assumptions underlying the
forward-looking statements are reasonable, any of the assumptions could prove
inaccurate and, therefore, there can be no assurance that the forward-looking
statements included in this Prospectus will prove to be accurate. In light of
the significant uncertainties inherent in the forward-looking statements
included herein, the inclusion of such information should not be regarded as a
representation by the Company or any other person that the objectives and plans
of the Company will be achieved.
17
<PAGE>
CONCURRENT OFFERING
The registration statement of which this Prospectus forms a part also
includes a prospectus with respect to an offering of 507,500 shares of Common
Stock issuable upon exercise of the Private Placement Warrants held by DayStar
Partners, L.P., Douglas Lee, The Smith 1987 Family Trust, J. Thomas Bentley,
Westminster Associates, Ltd., QPS Bridge, LLC, Anderson, Weinroth & Co., L.P.
and Regent Capital Partners, L.P. (collectively, the "Selling Stockholders"),
all of which may be sold in the open market, in privately negotiated
transactions or otherwise, directly by the Selling Stockholders. The Selling
Stockholders have agreed with the Representative not to sell any of such
securities for three months from the date of this Prospectus and not to sell
137,500 of such securities prior to nine months from the date of this Prospectus
without the consent of the Representative. The Company will not receive any
proceeds from the sale of such securities by the Selling Stockholders, although
it will receive proceeds from the exercise of the Private Placement Warrants, if
any. Expenses of the concurrent offering, other than fees and expenses of
counsel to the Selling Stockholders and selling commissions, will be paid by the
Company. Sales of such securities by the holders thereof or the potential for
such sales may have an adverse effect on the market price of the Securities
offered hereby.
18
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Securities offered
hereby (assuming an initial public offering price of $7.50 per Share and $.10
per Warrant), after deduction of underwriting discounts and other estimated
offering expenses, are estimated to be approximately $12,730,000 ($14,782,000 if
the Underwriters' Over-allotment Option is exercised in full). The Company
intends to utilize such net proceeds as follows:
<TABLE>
<CAPTION>
APPROXIMATE APPROXIMATE
AMOUNT OF NET PERCENTAGE OF NET
PROCEEDS(1) PROCEEDS
------------- -------------------
<S> <C> <C>
Development Costs (2)....................................... $ 4,400,000 34%
Marketing and Sales (3)..................................... $ 1,400,000 11%
Repayment of Indebtedness and Payables (4).................. $ 2,778,000 22%
Working Capital and General Corporate Purposes (5).......... $ 4,152,000 33%
------------- ---
Total................................................... $12,730,000 100%
-------------
-------------
</TABLE>
- ------------------------
(1) The amount set forth with respect to each purpose represents the Company's
current estimate of the approximate amount of the net proceeds that will be
used for such purpose. However, the Company reserves the right to change the
amount of such net proceeds that will be used for any purpose to the extent
that management determines that such change is advisable. Consequently,
management of the Company will have broad discretion in determining the
manner in which the net proceeds of the Offering are applied. See "Risk
Factors--Broad Discretion over Application of Proceeds."
(2) Represents anticipated development costs associated with (i) the Company's
efforts to reduce the cost of the system components and installation of the
ATQ-100 system, (ii) the Company's development of an air core reactor
quieting system, (iii) the Company's development efforts relating to the
active magnetic field control and cancellation program, (iv) the Company's
obligated expenditures under the joint venture agreement with Prolec-GE, (v)
the Company's obligated expenditures under the joint venture agreement with
ABB Secheron S.A., and (vi) the Company's efforts to modify the design of
the Headset systems for specific industries. See "Business."
(3) Represents anticipated costs associated with the expansion of the Company's
marketing and sales activities, including market research, advertising and
development of promotional materials related to the Company's current and
proposed products. See "Business--Business Strategy--Marketing."
(4) Represents the payment of (i) certain payables of the Company owed to NCT
under the NCT Master Agreement, aggregating approximately $200,000, (ii) the
Company's notes held by DayStar Partners, L.P. and certain other purchasers,
aggregating approximately $458,000 (including accrued interest through June
30, 1997), which notes bear interest at a rate of 15%, and were issued in a
private placement by the Company, the proceeds of which were used for
working capital purposes, (iii) the Company's notes held by QPS Bridge, LLC
and Regent Capital Partners, L.P., aggregating approximately $2,045,000
(including accrued interest through June 30, 1997), which notes bear
interest at a rate of 11% and were issued in a private placement by the
Company, the proceeds of which were used for general operating purposes
including development and marketing efforts and the repayment of certain
debt obligations, and (iv) an advance received in 1994 from its stockholder,
Environmental Research, Inc. (of which the Chief Executive Officer of the
Company is Chairman, President and a 10% stockholder), aggregating $75,000,
which amount was used for working capital. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Certain
Transactions."
(5) Represents funds that may be utilized (i) for working capital and general
corporate purposes, (ii) to pay the cash portion of one or more acquisitions
that may be effected by the Company, and (iii) to pay
19
<PAGE>
the Company's notes that were issued pursuant to a debt financing completed
in April 1997, the proceeds of which aggregated $625,000 and were used for
working capital purposes, which notes become payable on demand in cash or in
shares of Common Stock upon completion of the Offering. The amount to be
used for acquisitions may vary considerably based on the number of
acquisitions made by the Company as well as the type of transactions used
for such acquisitions, and whether the purchase price is paid in cash or
securities. The Company has not yet entered into discussions with any
potential acquisition candidates, nor are there any understandings with
respect to any entities which it may desire to acquire, and there can be no
assurance that the Company will consummate any such acquisitions. See
"Business--Business Strategy--Acquisitions."
The Company anticipates, based on current plans and assumptions relating to
its operations, that the net proceeds of this Offering, together with net cash
from operations, should be sufficient to satisfy the Company's cash requirements
for at least 12 months after the date of this Prospectus. Proceeds not
immediately required for the purposes described above will be invested in
short-term, investment grade, interest bearing government obligations. However,
there can be no assurance that the net proceeds of the Offering will satisfy the
Company's requirements for any particular period of time. In the event the
Company identifies additional acquisition candidates, or if the Company
identifies new applications for its technology which require additional internal
development efforts, the Company may require additional financing after the use
of the net proceeds of the Offering to pursue such opportunities. No assurance
can be given that such additional financing will be available when needed on
terms acceptable to the Company, if at all. See "Risk Factors--Dependence on
Offering; Possible Need for Additional Financing."
DIVIDEND POLICY
The Company has never declared or paid dividends, and does not intend to pay
any dividends in the foreseeable future on shares of Common Stock. Earnings of
the Company, if any, are expected to be retained for use in expanding the
Company's business. The payment of dividends is within the discretion of the
Board of Directors of the Company and will depend upon the Company's earnings,
if any, capital requirements, financial condition and such other factors as are
considered to be relevant by the Board of Directors from time to time.
20
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of December
31, 1996 (i) on an actual basis, (ii) on a pro forma basis to give effect to
certain financial events occurring subsequent to December 31, 1996, and (iii) on
a pro forma basis as adjusted to give effect to the sale by the Company of the
Securities offered hereby (at an assumed initial public offering price of $7.50
per Share and $.10 per Warrant) and the initial application of the estimated net
proceeds therefrom.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------------------------------
<S> <C> <C> <C>
PRO FORMA
AS
ACTUAL PRO FORMA(1) ADJUSTED(1)(2)
------------- ------------- ----------------
Notes payable.................................................... $ 511,000 $ 1,975,000 $ 585,000
------------- ------------- ----------------
Stockholder's equity:
Preferred stock, par value $.01 per share; 10,000 shares
authorized, issued 1,325 (actual and pro forma),none issued
and outstanding (as adjusted)................................ 1,059,000 1,059,000 --
------------- -------------
Common stock, par value $.01 per share; 10,000,000 shares
authorized; issued 684,855 (actual),724,321 (pro forma)
2,989,321 (pro forma as adjusted)............................ 7,000 7,000 30,000
Additional paid-in capital..................................... 2,836,000 4,129,000 17,895,000
Unearned options/warrants(3)................................... (303,000) (303,000) (303,000)
Accumulated deficit............................................ (4,679,000) (4,927,000) (6,427,000)
------------- ------------- ----------------
Total stockholders' equity (deficit)............................. $ (1,080,000) $ (35,000) $ 11,195,000
------------- ------------- ----------------
------------- ------------- ----------------
Total capitalization............................................. $ (569,000) $ 1,940,000 $ 11,780,000
------------- ------------- ----------------
------------- ------------- ----------------
</TABLE>
- ------------------------
(1) Adjusted to give pro forma effect to (i) a debt financing, the gross
proceeds of which were $2,000,000 and pursuant to which the Company issued
$2,000,000 of promissory notes and warrants to purchase an aggregate 240,000
shares of Common Stock, (ii) a private financing pursuant to which the
Company issued $625,000 of one-year promissory notes, which notes are
convertible into Common Stock at a price per share equal to the initial
public offering price per Share, and warrants to purchase an aggregate of
16,667 shares of Common Stock, (iii) the conversion of $200,000 of
promissory notes existing at December 31, 1996 into 39,466 shares of Common
Stock, (iv) the payment of $151,000 with respect to promissory notes
outstanding on December 31, 1996, and (v) the recognition of the expense of
$170,000 resulting from the increase in 26,750 shares of Common Stock and
warrants to purchase 26,750 shares of Common Stock underlying warrants
granted in a private financing, all of which events occurred subsequent to
December 31, 1996. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
(2) As adjusted to give effect to (i) the sale of the Securities offered hereby
(at an assumed initial public offering price of $7.50 per Share and $.10 per
Warrant), an initial application of the estimated net proceeds therefrom and
(ii) the expense of $1,417,000 relating to the write-off of debt discount
and debt issuance cost. Does not give effect to the potential repayment of
$625,000 in convertible promissory notes that become payable on demand upon
completion of the Offering.
21
<PAGE>
(3) Represents the difference between the exercise price of compensatory stock
options and warrants issued to employees of the Company and the fair market
value of the Common Stock. See Note B(7) of the Notes to the Financial
Statements.
22
<PAGE>
DILUTION
At December 31, 1996, the Company had a negative net tangible book value of
$(1,408,000) or $(1.48) per share of Common Stock. Net tangible book value per
share is determined by dividing the net tangible book value of the Company
(total tangible assets less total liabilities) by the number of outstanding
shares of Common Stock. The difference between the offering price per share of
Common Stock and the net tangible book value per share after this Offering
constitutes the dilution to investors in this Offering. After giving effect to
(i) a bridge financing, the gross proceeds of which were $2,000,000 and pursuant
to which the Company issued promissory notes and warrants to purchase an
aggregate of 240,000 shares of Common Stock, (ii) a private financing pursuant
to which the Company issued $625,000 of one-year promissory notes, which are
convertible into Common Stock at a price per share equal to the initial public
offering price per Share, and warrants to purchase 16,667 shares of Common
Stock, (iii) the conversion of $200,000 of promissory notes existing at December
31, 1996 into 39,466 shares of Common Stock, (iv) the payment of $151,000 with
respect to promissory notes outstanding on December 31, 1996, (v) the expense of
$1,417,000 relating to the write-off of debt discount and debt issuance cost,
and (vi) the sale of the shares of Common Stock and Warrants offered hereby at
an assumed initial public offering price of $7.50 per share and $.10 per
Warrant, and after deducting underwriting discounts and commissions and
estimated offering expenses payable by the Company, the pro forma net tangible
book value of the Company at December 31, 1996 would have been $10,867,000 or
$3.64 per share. This represents an immediate increase in pro forma net tangible
book value of $5.12 per share to the existing stockholders of the Company and an
immediate dilution of $3.86 (51.5%) per share to new investors. The following
table illustrates the foregoing information with respect to dilution to new
investors on a per share basis:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.............. $ 7.50
Negative net tangible book value per share prior to the
Offering................................................... $ (1.48)
Increase per share attributable to the Offering.............. $ 5.12
Pro forma net tangible book value per share after this
Offering................................................... $ 3.64
---------
Dilution to new investors.................................... $ 3.86
---------
</TABLE>
In the event the Representative's Over-allotment Option is exercised in
full, the pro forma net tangible book value as of December 31, 1996 would have
been $12,919,000, or $3.93 per share of Common Stock, which would result in
immediate dilution in net tangible book value to new investors of approximately
$3.57 per share.
The following table sets forth as of the date of this Prospectus, with
respect to the Company's existing stockholders and new investors, a comparison
of the number of shares of Common Stock acquired from the Company (attributing
no value to warrants issued in conjunction with the sale of shares), the
percentage ownership of such shares, the total consideration paid, the
percentage of total consideration paid and the average price per share.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
----------------------- -------------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Existing Stockholders(1)................................ 1,004,013 33% $ 3,213,708 17% $ 3.20
New Investors........................................... 2,000,000 67% $ 15,200,000 83% $ 7.60
---------- --- ------------- ---
Total................................................... 3,004,013 100% $ 18,413,708 100%
---------- --- ------------- ---
---------- --- ------------- ---
</TABLE>
The above table assumes no exercise of the Representative's Over-allotment
Option. If the Representative's Over-allotment Option is exercised in full, new
investors will have paid $17,480,000 for 2,300,000 shares of Common Stock,
representing 84.5% of the total consideration for 69.6% of the total number of
shares of Common Stock outstanding. The foregoing also assumes no exercise of
outstanding warrants or options. See "Management--Stock Option Plan," "Shares
Eligible for Future Sale" and "Underwriting."
22
<PAGE>
To the extent outstanding options or warrants or subsequently granted
options or warrants are exercised, there could be further dilution to new
investors. See "Shares Eligible for Future Sale" and "Management--Stock Option
Plan."
- ------------------------
(1) Does not include (i) 1,414,915 shares of Common Stock issuable upon exercise
of outstanding warrants (which number includes warrants to purchase 265,000
shares of Common Stock that will be issued upon completion of this Offering
and warrants to purchase 133,750 shares of Common Stock that are issuable
upon exercise of nominally priced warrants), with a weighted average
exercise price of $3.44 per share, (ii) 250,000 shares of Common Stock
subject to options available under the 1993 Plan, of which options to
purchase an aggregate of 239,490 shares of Common Stock with a weighted
average exercise price of $4.22 per share have been granted, and options to
purchase 10,510 shares of Common Stock remain available for future grants,
and (iii) 83,333 shares of Common Stock issuable upon conversion of
currently callable convertible promissory notes in the aggregate amount of
$625,000. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Management--Stock Option Plan."
23
<PAGE>
SELECTED FINANCIAL DATA
The balance sheet data as of December 31, 1996 and the income statement data
for each of the years in the two years ended December 31, 1996 presented below
are derived from the Financial Statements of the Company, which have been
audited by Richard A. Eisner and Company, LLP, and are included elsewhere in
this Prospectus. The selected financial data for the year ended December 31,
1994 and the Balance Sheet Data as of December 31, 1995, were derived from
financial statements of the Company. These financial statements include all
adjustments, consisting of normal recurring accruals, which the Company
considers necessary for a fair presentation of the financial position and the
results of operations for this period. The information presented below should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Financial Statements and related
notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
<S> <C> <C> <C>
1994 1995 1996
------------- ---------- -------------
STATEMENTS OF OPERATIONS DATA:
Net revenues
Product sales...................................................... $ 0 $ 35,000 $ 216,000
Development funding((1))........................................... 541,000 315,000 0
------------- ---------- -------------
Total revenues..................................................... 541,000 350,000 216,000
------------- ---------- -------------
------------- ---------- -------------
Costs and expenses
Cost of sales...................................................... 0 29,000 260,000
Development costs.................................................. 587,000 335,000 187,000
Selling, general and administrative................................ 893,000 843,000 1,714,000
------------- ---------- -------------
Total costs and expenses............................................... 1,480,000 1,207,000 2,161,000
------------- ---------- -------------
------------- ---------- -------------
Interest expense....................................................... 0 17,000 333,000
------------- ---------- -------------
Net (loss)............................................................. $ (939,000) $ (874,000) $ (2,278,000)
------------- ---------- -------------
------------- ---------- -------------
Net (loss) per share(2)................................................ $ (.69) $ (.62) $ (1.53)
------------- ---------- -------------
------------- ---------- -------------
Pro forma weighted average number of common shares outstanding(2)...... 1,353,000 1,403,000 1,484,000
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, 1996
-------------------------- ---------------------------------------------
<S> <C> <C> <C> <C> <C>
PRO FORMA
AS ADJUSTED
1994 1995 ACTUAL PRO FORMA(3) (3)(4)
----------- ------------- ----------- ------------- -----------------
BALANCE SHEET DATA:
Working capital (deficiency)......... $ (422,000) $ (1,243,000) $ (654,000) $ 1,920,000 $ 11,560,000
Total assets (5)..................... 394,000 436,000 463,000 2,801,000 12,422,000
Notes payable........................ 0 93,000 511,000 1,975,000 585,000
Total liabilities.................... 589,000 1,273,000 1,543,000 2,836,000 1,227,000
Accumulated deficit.................. (1,527,000) (2,401,000) (4,679,000) (4,927,000) (6,427,000)
Stockholders' equity (deficiency).... (195,000) (837,000) (1,080,000) (35,000) 11,195,000
</TABLE>
- ------------------------
(1) Development funding primarily consists of the direct investment by utilities
in the Company's research and development projects.
(2) See Note B of the Notes to the Financial Statements.
(3) Adjusted to give pro forma effect to (i) a debt financing, the gross
proceeds of which were $2,000,000 and pursuant to which the Company issued
$2,000,000 of promissory notes and warrants to purchase an aggregate 240,000
shares of Common Stock, which resulted in an original issue discount to the
24
<PAGE>
notes of $856,000, (ii) a private financing pursuant to which the Company
issued $625,000 of one-year promissory notes, which notes are convertible
into Common Stock at a price per share equal to the initial public offering
price per Share, and warrants to purchase an aggregate of 16,667 shares of
Common Stock, which resulted in an original issue discount to the notes of
$40,000, (iii) the conversion of $200,000 of promissory notes existing at
December 31, 1996 into 39,466 shares of Common Stock, (iv) the payment of
$136,000 to NCT for amounts owing, (v) the payment of $151,000 with respect
to promissory notes outstanding on December 31, 1996, and (vi) the
recognition of the expense of $170,000 resulting from the increase in 26,750
shares of Common Stock and warrants to purchase 26,750 shares of Common
Stock underlying warrants granted in a private financing, all of which
events occurred subsequent to December 31, 1996. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
(4) As adjusted to give effect to (i) the sale of the Securities offered hereby
(at an assumed initial public offering price of $7.50 per Share and $.10 per
Warrant), an initial application of the estimated net proceeds therefrom,
and (ii) the expense of $1,417,000 relating to the write-off of debt
discount and debt issuance costs. Does not give effect to the potential
repayment of $625,000 in convertible promissory notes that become payable on
demand upon completion of the Offering. See "Use of Proceeds."
(5) Includes technology rights. As of December 31, 1996, the balance of such
rights was $328,000.
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
QuietPower was incorporated in May 1992 and, to date, has devoted
substantially all of its resources to product and market development. In 1992,
the Company's activities consisted primarily of providing engineering design
services to industrial companies regarding the potential use of active noise and
vibration control. In May 1993, the Company entered into a series of marketing
agreements with NCT setting forth QuietPower's rights to market NCT's active
noise and vibration control products. In addition, during 1993, the Company, in
conjunction with NCT, focused on electric utility-funded projects, with respect
to active transformer quieting systems, Headsets and active diesel generating
quieting systems. In general, with respect to these projects, QuietPower
provided technical expertise and services, NCT provided technical expertise and
services and technology rights and the utilities provided funding and design
specifications for each product. Funding provided by the utilities was
recognized as development revenues by the Company.
In October 1994, the Company entered into the Distributor Agreement with NCT
with respect to the proposed Headset products. Throughout the year,
utility-funded projects continued and expanded, and the Company determined to
focus its primary development efforts on transformer quieting systems and
Headsets. In March 1995, QuietPower entered into the NCT Master Agreement, which
superseded the marketing agreements executed in May 1993, and provide, together
with the Distributor Agreement, the basis for the Company's current rights to
NCT's technology. During 1995, the Company completed its transformer quieting
system development projects. In the fourth quarter of 1995, QuietPower commenced
installation of its first ATQ-100 transformer quieting system at Public Service
Company of Colorado and commenced initial marketing of generic Headsets for
evaluation purposes. In addition, during 1995, feasibility studies regarding
failure diagnostic and condition monitoring commenced in conjunction with GE and
Baltimore Gas & Electric Company.
In 1996, the Company completed installation of its ATQ-100 system at Public
Service Company of Colorado and upgraded its prototype system at Commonwealth
Edison into a commercial ATQ-100 system. Marketing efforts, which were
constrained by lack of capital resources, focused on developing market
familiarity with the ATQ-100 by means of exhibitions at industry conferences and
seminars and development of brochures and videos. During the year, based upon
feedback from potential utility customers, the Company commenced its current
effort to further reduce the cost of the system components and installation of
the ATQ-100. The Company also continued to market Headsets for evaluation
purposes. Based upon customer response, the Company determined that engineering
modifications would be necessary to tailor Headsets to the needs of each
specific industry (e.g. the Power Industry or the railroad, oil and gas, mining
and pulp and paper industries). In addition, the Company entered into its Joint
Venture Agreements with ABB Secheron S.A. with regard to developing and
marketing the ATQ-100 system in Europe and with Prolec-GE with regard to
developing and marketing failure diagnostic condition monitoring products
world-wide.
Currently, the Company is marketing the ATQ-100 to a number of utilities,
which have proposed purchases under consideration. In view of the cost
reductions already effected and anticipated to be effected, the sales price of
the ATQ-100 has been lowered by the Company. As a result, the Company expects
that the gross profit relating to sales of the ATQ-100 system in the early part
of 1997 shall be nominal, but will increase over the course of the year as
further anticipated cost reduction measures are effected. With respect to
Headsets, QuietPower has recently completed development of a system specifically
designed for the railroad industry, which Headset unit is currently under
consideration for purchase by several large railroad companies. In addition,
modification efforts toward a Power Industry specific Headset are substantially
complete. The Company is currently in discussions with representatives of other
target industries for which it plans to modify the Headsets, as to the specific
needs of each industry.
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QuietPower is also continuing development work on its failure diagnostic
condition monitoring system in conjunction with Prolec-GE, an air core reactor
quieting system and an active magnetic field cancellation system. Finally, the
Company anticipates that it will expand its product offering by means of
acquiring specific complementary technologies, products or companies.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
NET REVENUES--DEVELOPMENT FUNDING. Development funding decreased $315,000 in
the year ended December 31, 1996 from $315,000 in the year ended December 31,
1995 compared to $0 in 1996. Development funding was recognized in 1995 from the
completion of two funded projects and one funded study. Final utility
transformer projects funded by Jersey Central Power & Light and Commonwealth
Edison were completed in April and August 1995, respectively, and the
feasibility study for failure diagnostics and condition monitoring funded by
Baltimore Gas & Electric Company was completed in December 1995. In 1996, the
Company determined not to seek such utility funding in view of its transition in
focus to commercial introduction of product and, therefore, recognized no
development revenues.
NET REVENUES--PRODUCT SALES. Product sales increased $181,000 in the year
ended December 31, 1996 from $35,000 in the year ended December 31, 1995
compared to $216,000 in 1996. This increase resulted from the initiation of the
ATQ-100 installation at Public Service Company of Colorado and a number of small
orders of generic communications Headsets for evaluation purposes. Product sales
totaling $216,000 in 1996 include revenues from the installation of the ATQ-100
at Public Service Company of Colorado, the upgrade of a prototype system to the
ATQ-100 system at Commonwealth Edison and continued evaluation sales of the
Headsets.
DEVELOPMENT COSTS. Development costs decreased $148,000 in the year ended
December 31, 1996 from $335,000 in the year ended December 31, 1995 compared to
$187,000 in 1996. Development costs in 1995 included the Company's contributions
to utility funded development projects, which varied in amount depending upon
the scope of the project and the amount of utility contributions. Development
costs in 1996 resulted from the Company's efforts for product optimization and
cost reduction of the transformer quieting system, and initial market
development efforts in Europe.
COST OF SALES. Cost of sales increased $231,000 in the year ended December
31, 1996 from $29,000 in the year ended December 31, 1995 compared to $260,000
in 1996. These costs relate to the product sales of the ATQ-100 and the
Headsets. This increase is principally due to the increase in product sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $871,000 in the year ended December 31, 1996
from $843,000 in the year ended December 31, 1995 compared to $1,714,000 in
1996. This increase is primarily the result of an increase of $374,000
reflecting the cost assigned to stock options and warrants issued in exchange
for services. Other increases related to the Company's activities to bring more
of its technical capabilities in-house and to bring its commercial products to
market. Specifically, salaries and staff related costs increased by $181,000
which was the result of hiring additional staff, pay increases, and the
allocation of costs related to the assignment of staff to sales activities.
Market development expenditures increased by $112,000 and reflected the creation
of marketing materials, participation at trade conferences and exhibitions,
increased travel expenditures, and the supply of evaluation Headset units to
potential customers.
INTEREST EXPENSE. Interest expense increased $316,000 in the year ended
December 31, 1996 from $17,000 in the year ended December 31, 1995 compared to
$333,000 in 1996. This increase reflects the substantial increase in
indebtedness of the Company, and reflects the cost assigned to warrants issued
with debt as additional interest expense. Debt financing was obtained by the
Company beginning in the fourth quarter of 1995 and continued through the second
quarter of 1996. With respect to its debt financings, in May 1996 the Company
raised $535,000 and in January through April 1997 the Company raised an
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aggregate of $2,625,000. To account for the imputed interest related to the
warrants attached to the $535,000 debt, the principal amount of the note was
discounted by $224,000 as of December 31, 1996. The Company will recognize this
discounted amount as interest expense over the period from January 1, 1997
through the earlier of the effective date of this Offering or January 15, 1998.
To account for the imputed interest related to the warrants attached to the
$2,625,000 debt, the Company has preliminarily determined a discount of
$896,000. The Company will recognize this discounted amount as interest expense
from the dates of issuance through the earlier of the effective date of this
Offering or April 17, 1998. See "Liquidity and Capital Resources."
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1996, the Company had a working capital (deficit) of
$654,000 and a stockholders' equity (deficit) of $1,080,000. The Company has to
date financed its operations through development projects funded by electric
utilities, direct equity and debt financings, and a limited amount of commercial
sales.
Net cash used in operating activities was $1,604,000 for the year ended
December 31, 1996 as compared to $385,000 for the year ended December 31, 1995.
The increase in cash used in operations is primarily the result of the increase
in the net loss of the Company of $1,404,000, (i) reduced by $628,000 to reflect
the increase in non-cash expenditures, (ii) increased to reflect net changes in
accounts receivable of $223,000, and (iii) increased to reflect changes in
accounts payable and accrued expenses of $202,000. Net cash used in investing
activities was $190,000 for the year ended December 31, 1996, as compared to
$7,000 for the year ended December 31, 1995. The increase in cash used in
investing activities was primarily attributable to the payment to NCT of a
portion of the amounts owed by the Company under the NCT Master Agreement. Net
cash provided by financing activities was $1,780,000 for the year ended December
31, 1996 as compared to $290,000 for the year ended December 31, 1995. The
increase in cash provided by financing activities is primarily attributable to
two private financings of the Company, the proceeds of which were used to fund
its operating activities. At December 31, 1996, the Company had cash of $6,000.
Since inception, the Company has received an aggregate of $1,189,000 from
seven electric utilities for the purpose of developing the Company's active
noise and vibration control technology. Project fees were received as follows:
<TABLE>
<CAPTION>
YEAR PROJECT FEES
- -------------------------------------------------------------------------------- ------------
<S> <C>
1992............................................................................ $ 9,000
1993............................................................................ 515,000
1994............................................................................ 532,000
1995............................................................................ 133,000
1996............................................................................ 0
------------
$ 1,189,000
------------
------------
</TABLE>
The Company also received project funding from utilities of $10,000 and
$174,000 in 1994 and 1995, respectively, for developing its failure diagnostic
and condition monitoring technology. Typically, the agreements with utilities
provide for a return on the above funded amounts through royalties to be paid on
future product sales, which royalties could total up to $2.2 million. The
Company did not seek project funding in 1996.
In 1992, through a private placement of its Common Stock, the Company issued
an aggregate of 130,000 shares at a price of $2.50 per share, for which it
received gross proceeds of $325,000. In 1993, through a private placement of its
Common Stock, the Company issued an aggregate of 30,000 shares also at a price
of $2.50 per share, for which it received gross proceeds of $75,000.
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<PAGE>
In January 1994, through a private placement of its Common Stock, the
Company issued an aggregate of 20,000 shares at a price of $2.50 per share, for
which it received gross proceeds of $50,000. In November 1994, the Company
completed a private placement of 97,366 shares of Common Stock at a price of
$8.77 per share, for which it received gross proceeds of $853,900.
In July and August 1995, the Company raised gross proceeds of $75,000 in
exchange for 18,750 shares of Common Stock and warrants for the purchase of
18,750 shares of Common Stock at an exercise price of $6.00 per share. Also, in
July of 1995, the Company raised gross proceeds of $25,000 through an offering
of debt with warrants attached. The debt was evidenced by a promissory note
bearing an interest rate of 6% per annum with a due date of January 27, 1996.
The principal and interest were converted into 7,523 shares of Common Stock in
April 1997. The warrants are for the purchase of 6,250 shares of Common Stock at
an exercise price of $6.00 per share.
In October 1995, the Company raised gross proceeds of $100,000 in exchange
for 14,706 shares of Common Stock and warrants for the purchase of 14,706 shares
of Common Stock at an exercise price of $6.80 per share.
In November 1995 and January 1996, in exchange for a promissory note with
interest in the form of warrants, the Company raised gross proceeds of $88,000.
The transaction also provided for additional warrants to be issued if the term
of the loan was extended beyond March 31, 1996. Final payment of the note
occurred in October 1996 at which time warrants were issued for the purchase of
45,000 shares of Common Stock at an exercise price of $2.50.
In February 1996, the Company raised gross proceeds of $68,000 in exchange
for 10,000 shares of Common Stock and warrants for the purchase of 10,000 shares
of Common Stock at an exercise price of $6.80 per share.
In April 1996, the Company raised gross proceeds of $25,000 through an
offering of debt with warrants attached. The debt was evidenced by a promissory
note bearing an interest rate of 12% per annum. The warrants are for the
purchase of 3,676 shares of Common Stock at an exercise price of $3.625 per
share. Principal and interest of the note were repaid in September 1996.
In March and April 1996, the Company raised gross proceeds of $175,000
through four debt with warrant issuances. All issuances were evidenced by
convertible promissory notes bearing interest rates at 12% with terms ranging
from September through October 1996. The principal and interest were converted
into 31,943 shares of Common Stock in April 1997. The warrants are for the
purchase of 21,176 and 2,500 shares of Common Stock at exercise prices of $3.625
and $6.80 per share, respectively.
In May 1996, the Company raised $535,000 through a debt financing with
DayStar Partners, L.P., a venture capital firm, and certain other purchasers
(the "May 1996 Financing"). This debt is evidenced by notes which provide for
the repayment of the principal and interest at the earlier of an initial public
offering or in four quarterly installments commencing in February 1997.
Accordingly, this debt is repayable upon consummation of this Offering and the
Company intends to use a portion of the proceeds of this Offering for that
purpose. Substantially all of the Company's assets secure repayment of this
loan. Through November 24, 1996 the notes bore interest at the annual rate of
12%, and 15% thereafter. By a letter agreement dated April 9, 1997, it was
agreed that a quarterly installment of $133,750 would be paid in April 1997,
with the remaining principal due on the earlier of the consummation of the
Offering or January 15, 1998, and that the notes would continue to bear interest
at the rate of 15%. The terms of the transaction also provided that warrants
exercisable at $.01 per share to purchase 133,750 shares of Common Stock and
warrants to purchase 133,750 shares of Common Stock, at a per share exercise
price equal to that of any warrants offered in an initial public offering of the
Company's securities, be issued.
In December 1996, the Company completed a private placement of 1,325 shares
of Series A Convertible Preferred Stock, at a price of $1,000 per share, for
which it received gross proceeds of $1,325,000. Each share of Series A
Convertible Preferred Stock shall automatically convert upon the
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<PAGE>
completion of this Offering into 200 shares of Common Stock and warrants to
purchase 200 shares of Common Stock at a per share price of $2.50. The holders
of the Series A Convertible Preferred Stock were guaranteed a 35% annual rate of
return on their investment, through the completion of the Company's initial
public offering. In this connection, to the extent such holders do not realize a
35% rate of return on their investment upon completion of this Offering, they
shall receive additional shares of Common Stock. In addition, subject to the
Representative's consent, such holders shall have the right to purchase a
portion of the Securities (but in no event more than 10% of the Securities),
such that each holder shall maintain its percentage interest in the Company.
In April 1997, the Company raised $2,000,000 through a debt financing with
QPS Bridge, LLC and Regent Capital Management, L.P. This debt is evidenced by
notes which bear interest at the annual rate of 11% and provide for repayment of
the principal and interest at the earlier to occur of one or a series of public
and/or private offerings of securities of the Company or any sale assets,
merger, recapitalization or other capital transactions with aggregate gross
proceeds to the Company of not less than $4,000,000 or April 17, 1998.
Accordingly, this debt is repayable upon consummation of this Offering and the
Company intends to use a portion of the proceeds of this Offering for that
purpose. Substantially all of the Company's assets secure repayment of this
loan, subordinate to the repayment of the May 1996 Financing. The terms of the
transaction also provided that warrants to purchase 240,000 shares of Common
Stock, at an exercise price equal to the lesser of $3.75 or one-half of the
price per share of Common Stock offered to the public in an initial public
offering of the Company's securities, be issued.
In April 1997, the Company also raised gross proceeds aggregating $625,000
through an offering of debt with warrants attached. The debt was evidenced by
promissory notes bearing an interest rate of 10% per annum. The warrants are for
the purchase of a total of 16,667 shares of Common Stock, at an exercise price
per share equal to the lower of $6.00 or one-half of the price per share of
Common Stock offered to the public in an initial public offering of the
Company's securities.
The Company believes that the net proceeds from the Offering, together with
net cash from operations, should be sufficient to satisfy the Company's cash
requirements for at least 12 months from the date of this Prospectus.
RECENT PRONOUNCEMENTS OF THE FINANCIAL ACCOUNTING STANDARDS BOARD
The Financial Accounting Standards Board has issued Statement No. 123
"Accounting and Disclosure of Stock-Based Compensation" ("SFAS 123") in October
1995, which is effective for 1996. SFAS 123 requires companies to estimate the
fair value of common stock, stock options or other equity instruments ("Equity
Instruments") issued to employees, using pricing models which take into account
various factors, such as the current price of the common stock, volatility and
the expected life of the Equity Instrument. SFAS 123 permits companies to elect
either to provide pro forma note disclosure or adjust operating results for the
amortization of the estimated value of the Equity Instrument as compensation
expense over the vesting period of the Equity Instrument. The Company has
elected to provide pro forma note disclosure, which appears in its financial
statements for the year ended December 31, 1996, and therefore, the adoption of
SFAS 123 has no effect on the Company's financial position or results of
operations. See Note H of the Notes to the Financial Statements.
NET OPERATING LOSS CARRYFORWARDS
The Company has net operating loss carryforwards of approximately $4,340,000
which commence expiring in the year 2007. The amount of net operating loss
carryforward that can be used in any one year will be limited by the applicable
tax laws which are in effect at the time such carryforward can be utilized. As a
result of ownership changes resulting from recent sales of equity securities,
the Company's ability to use the loss carryforwards may be subject to
limitations as defined in Section 382 of the Internal Revenue Code of 1986, as
amended. Pursuant to Section 382, the change in ownership resulting from the
Offering and any other future sale of stock may limit utilization of future
losses in any one year. The annual limitation and the timing of attaining
profitability may result in the expiration of net operating loss carryforwards
before utilization.
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<PAGE>
BUSINESS
GENERAL
QuietPower Systems, Inc. ("QuietPower" or the "Company") is engaged in the
development, commercialization and marketing of products utilizing two
acoustically based technologies: (i) active noise and vibration control and (ii)
failure diagnostic and condition monitoring. The Company's active noise and
vibration control technology uses equal but opposite noise signals to reduce or
cancel noise emissions. QuietPower has used the active noise and vibration
control technology to develop its initial commercial products, including the
ATQ-100, a transformer quieting system which reduces the sound emanating from
electric power distribution transformers. The Company has also commenced
marketing its communication headset systems ("Headsets"), which reduce noise and
enhance communications in high noise industrial environments. QuietPower is
currently engaged in a joint venture with ABB Secheron S.A., an indirect
wholly-owned subsidiary of ABB Asea Brown Boveri Limited ("ABB"), for the
purpose of developing and marketing the ATQ-100 in the European market. The
Company's failure diagnostic and condition monitoring technology is to be
utilized to detect sound emissions that signal imminent equipment failure.
QuietPower is engaged in a joint venture with Prolec-GE, de S. de R.L. de C.V.
("Prolec-GE"), a joint venture between the General Electric Company ("GE") and
Prolec S.A. de C.V., for the purpose of developing a failure diagnostic and
condition monitoring line of products for use with transformers and other
substation equipment. The primary market for the Company's current and proposed
products is the worldwide electric utility (power generation, transmission and
distribution) and supply industries (the "Power Industry").
The Company has entered into a world-wide exclusive manufacturing, marketing
and distribution agreement with Noise Cancellation Technologies, Inc. ("NCT").
This agreement covers all of NCT's proprietary active noise and vibration
control technology and products relating to the Power Industry and grants the
Company world-wide exclusive rights within the Power Industry. The ATQ-100 and
the Headsets utilize the active noise and vibration control technology to
electronically reduce noise and vibration. Software-based algorithms, used in
conjunction with certain controlling, sensing and actuating hardware components,
act together as a digital signal processor to analyze noise emissions and
produce equal and opposite noise signals. When the two signals meet, the noise
is reduced or canceled. The Company's proposed failure diagnostic and condition
monitoring systems will also utilize digital signal-based technology.
The Company's principal operating strategy is to develop and position
products that take advantage of opportunities arising from the significant and
ongoing changes in the Power Industry. The Power Industry is a multibillion
dollar capital-intensive industry. The Company anticipates that the current move
toward deregulation in the North American and European electric utility
industries will increase market demand for companies which offer products that
reduce utilities' operating costs, enhance equipment efficiency and flexibility
and extend the expected useful lives of fixed assets. In addition to the Power
Industry, QuietPower plans to market its products to other capital-intensive
markets. To date, the Company has commenced marketing its Headsets to the
railroad and communication industries. The Company also intends to employ a
growth strategy pursuant to which it will identify and develop additional
products related to its core technologies and products. In this respect, it has
recently commenced development efforts on its active magnetic field control and
cancellation technology, which functions similarly to the active noise and
vibration control technology. The Company also intends to acquire outside
synergistic or alternative technologies and products.
THE POWER INDUSTRY MARKET
Within the Power Industry, electric utilities represent the largest
potential market for transformer quieting systems, failure diagnostic and
condition monitoring systems, air core reactor quieting systems and active
magnetic field control and cancellation systems. Among the roughly 3,100
electric companies in
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North America, 244 are investor-owned utilities ("IOU's"). These utilities have
been specifically targeted by QuietPower because revenues from these 244
utilities represent an estimated 79% of all electric power sales. In addition,
these IOU's have assets totalling an estimated $585 billion and operating
revenues of an estimated $177 billion, making it one of the largest industry
segments in North America. Electric utility operations are also very
capital-intensive; of these utilities' $585 billion in assets, approximately
$408 billion represent fixed assets. Between 1966 and 1991, an estimated 192,000
power transformers were shipped to purchasers.
The change in the North American electric utility sector of the Power
Industry has been substantial in the last decade. Historically, utilities have
operated in a highly regulated environment, with the impact of major capital
expenditures on billable rates being subject to regulatory oversight.
Competition was significantly lacking in this environment. Over the past several
years, a major nationwide trend toward deregulation of electric utilities was
initiated, and is currently progressing at various rates across the United
States. The effect of deregulation is to encourage the commencement of
competition. In response, utilities have been downsizing and focusing on
increased productivity and operating cost reductions. In addition, the Company
believes that competitive considerations will cause electric utilities to adopt
positive public relation and good neighbor policies, such as reducing the sound
levels of noisy transformers. The Company believes that the current changes
provide significant opportunities for companies like QuietPower which offer
products that reduce utilities' operating costs, enhance equipment efficiency
and flexibility, extend expected useful lives of valuable fixed assets and
provide positive public relations impressions.
In addition, as environmental consciousness is raised throughout the
country, the Company believes that local governments may seek to further curb
noise pollution and increase the stringency of existing noise regulations. This
would have the effect of increasing demand for noise quieting products, such as
those of the Company, although there can be no assurance with respect thereto.
See "Governmental Regulation."
Europe represents another significant potential market for the Company's
products. The overall European power generation and power consumption markets
for 1995 were 48% and 78%, respectively, of the United States market.
Deregulation, and the concomitant concern about competition, is also beginning
to take place in some European Union countries. A European Union directive
adopted in 1996 sets out a framework for the deregulation of the electricity
market in member countries beginning in 1998. It is up to each member of the
Union to determine how detailed implementation of the directive should be
handled. Generally, the framework provides for the independent operation of
utilities' transmission assets so as to open access to independent suppliers of
power. In addition the framework also proposes mechanisms for power sales to
retail customers. Member countries of the European Union include Great Britain,
France, Italy, Germany, Spain, Portugal, Belgium and Austria. The larger
integrated electric utilities in Switzerland (not a member of the European
Union) are in the process of unbundling their services and some distribution
companies have been sold to private entities.
The Company intends to market its products in industrialized international
markets. The Company's competitiveness in overseas markets may be negatively
impacted if there is a significant increase in the value of the dollar against
the currencies of the other countries in which the Company does business.
Further, the laws of certain foreign countries may not protect the Company's
proprietary rights to the same extent as the laws of the United States. See
"Risk Factors--Risk of International Operations."
BUSINESS STRATEGY
The Company's principal operating strategy is to develop and position
products that take advantage of opportunities arising from the significant and
ongoing changes in the Power Industry. The Company believes that the current
move toward deregulation in the Power Industry will put a priority on finding
ways to succeed in a soon-to-be highly competitive environment. In addition to
the Power Industry,
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QuietPower anticipates, where appropriate, to market products to other
capital-intensive industries (e.g., the railroad and mining industries), which
is the Company's current marketing strategy with respect to the Headsets.
The Company has identified two sources of potential growth in addition to
sales of its current and proposed products, which sources will be the focus of
its middle to long-term operating strategy. One source of growth involves the
identification and internal development of additional products related to the
Company's core technologies and markets. The second contemplates the acquisition
of outside technologies and products through the purchase of ongoing businesses
so as to add function to existing products or broaden product lines for
QuietPower's target markets. The Company believes that these strategies will (i)
help achieve long-term revenue growth, (ii) through the acquisition of
synergistic or alternative technologies, enable the Company to broaden its
technology base and therefore be less dependent on a small number of
technologies, and (iii) add other products and services to its current products
and allow the Company to be viewed by utilities as a full service provider of
technology solutions.
NEW APPLICATIONS. Internal development involves the identification of new
applications within the Company's targeted industry markets using active noise
and vibration control technology, failure diagnostic and condition monitoring
technology and active magnetic field control and cancellation technology. The
Company may seek to conduct such development with joint venture partners or
through utility funded projects. With respect to development efforts covered by
the NCT Master Agreement, the Company is entitled to receive either direct
ownership of or exclusive or non-exclusive licenses for any new products
developed.
ACQUISITIONS. The acquisition of outside technologies and products may be
effected by acquiring specific technology rights, acquiring products or product
lines, or acquiring an entity (through stock or asset purchases) that possesses
desired assets. The acquisition of technology rights may, in appropriate cases,
be effected through exclusive, or non-exclusive, licensing. QuietPower's current
expansion strategy involves identifying and obtaining the rights to technologies
and products which the Company believes would complement its products, expand
market reach, and/or provide some degree of added control over the delivery of
products into the marketplace. Complementary technologies would be those that
can be used by the Company's targeted markets to enhance performance and/or
reliability of their equipment base. QuietPower's expertise and extensive
knowledge of the Power Industry will be utilized to identify and make
appropriate acquisitions. The Company has not yet entered into discussions with
any companies, nor are there any understandings with respect to any companies
which it may wish to acquire. The Company intends to use a portion of the net
proceeds of this Offering in furtherance of this acquisition strategy. See "Use
of Proceeds."
MARKETING. The Company believes that utilities look to its products for a
variety of reasons. Compliance with environmental noise ordinances is one of
several important components to the market acceptance of the Company's active
noise and vibration control-based products. Other factors include the Power
Industry's desire to improve relations with its customer base, to create
stronger customer loyalty, and to reduce potential litigation by becoming more
sensitive to environmental issues affecting the community, such as noise. Given
new concerns regarding competition, products that enhance productivity may be
viewed by utilities as an important step towards improving their competitive
stance. Therefore, QuietPower's promotional efforts attempt to show potential
customers that the Company's products offer operational efficiency, maintenance
solutions and facilitated safety communications.
Historically, the Company has focused its attention almost exclusively on
the North American marketplace due to practical, logistical and cost concerns.
The Company believes that its recent execution of the joint venture agreement
with Prolec-GE (the "GE-JV Agreement") will assist it in gaining access to a
large section of the North American Power Industry market. More recently the
Company has sought to establish additional marketing alliances in Europe with
both manufacturers of substation equipment as well as end-user utilities. The
Company believes that the joint venture agreement with ABB Secheron S.A.
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(the "ABB JV Agreement") will provide QuietPower with a means of penetrating the
European market. Currently, the Company is in discussions with several
additional European companies to establish development and marketing partners in
Europe in connection with both air core reactor quieting and active magnetic
field cancellation technology. See "Joint Venture Agreements."
With respect to the Headset product, its initial commercialization meant the
introduction of QuietPower's first product that was ready for commercial sale.
The Company has also identified industries outside the Power Industry where the
need for worker communication in high noise environments is important. Marketing
efforts to date have relied heavily on the railroad industry, but have also
included the Power Industry, the armed forces, the paper and pulp industry, the
oil and gas industry and the mining industry. Based upon customer feedback, the
Company is modifying the Headsets to make them industry specific.
In order to develop product awareness, the Company has published articles
for industry trade and technical journals, and attempts to receive press
coverage in industry trade journals. QuietPower's technical staff have presented
papers at utility sponsored conferences, trade shows and meetings. In addition,
the Company has developed video tapes showing industry relevant technology
applications, and prepared case studies and specification sheets. QuietPower has
also involved electric utilities in all stages of development and
commercialization for various product market segments. Several large utility
companies have invested funding in QuietPower's work, and served as test sites
for the technology under development. See "Utility Funded Development Projects."
ACTIVE NOISE CONTROL TECHNOLOGY AND PRODUCTS
Active noise and vibration control technology reduces noise and vibration,
which manifest themselves as wave forms, through the process known as
"destructive interference." The source noise signal is measured, analyzed and
canceled, using digital signal processing based algorithms, in conjunction with
controlling, sensing (e.g., microphones) and actuating hardware components
(e.g., resonant acoustic devices, piezo ceramics or speakers). The noise wave
characteristics (or vibration characteristics when it travels through a solid
substance) are analyzed by the active noise and vibration control algorithms,
and an equal and opposite (180 degrees out of phase) noise signal is generated
through the actuating hardware to cancel the source signal. Active noise
reduction can be used for airborne acoustic signals, vibration in solid
structures and vibration in fluids.
The active noise and vibration control technology can be utilized for a wide
range of applications. The Company is currently marketing two of its products,
the transformer quieting systems and Headsets, to the Power Industry, and
believes that one of its potential products, the air core reactor quieting
systems, is marketable to this industry as well. In addition, the Company is
currently marketing the Headsets to other capital-intensive industries.
TRANSFORMER NOISE QUIETING. Utilities generate electricity at various
locations around the country. This electricity must be sent from a power
generating plant to the electrical utility customers. To accomplish this,
utilities transmit the electricity at extremely high voltages through power
lines to various distribution points called substations. At these substations,
utilities place "distribution transformers" to convert, or step down, the high
voltage transmissions, which can be in the hundreds of kilovolts, to a safe and
useable voltage. These distribution transformers, with ratings from .5
million-volt-amperes ("MVA") to over 100 MVA, operate in fundamentally the same
way. Inside each transformer is a magnetic core, surrounded by high and low
voltage windings. The magnetic field created in the core causes the core and
windings to vibrate in relation to the AC line frequency. These vibrations
correspond to twice the line frequency and its multiple harmonics. North
American transformers use a line frequency of 60 Hertz ("Hz"), thus the
vibration produced is at multiples, or harmonics of, this line frequency (i.e.,
240 Hz, 360 Hz, etc...). This vibration is transmitted to the outside surface of
the unit and is radiated out into the substation and surrounding neighborhood in
the form of tonal noise. Due to their low frequency, these tones carry for
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extended distances. Although there are similarities in the general noise
characteristics of transformers, sound levels from each transformer will vary
depending on a given transformer's structural geometry, as well as the load that
it is carrying at any given time. The ATQ-100 transformer quieting system
continuously measures and analyzes each of these readings and adjusts its
opposing noise signals to achieve optimal sound cancellation.
Utilities may seek to quiet transformers for a variety of reasons, including
the reduction of noise complaints from neighboring properties and to comply with
noise ordinances that may exist. See "Business Strategy--Marketing" and
"Governmental Regulation." Traditional passive quieting solutions for existing
transformers require the construction of barrier walls around the unit. However,
low frequency tones produced by transformers not only travel greater distances
than high frequency tones, but are more difficult to block with a barrier wall.
Since low frequency sound waves can travel through and refract around barrier
walls, these walls must be built according to rigorous specifications that can
result in significant installation costs. Barrier walls can also interfere with
overhead buswork, obstruct the maintenance of transformers and cause heat to
build up, forcing utilities to reduce transformer load, resulting in decreased
efficiency. For utilities installing new transformers, an alternate quieting
solution is to purchase a "low noise" unit using heavier, stiffened materials.
While these units are quieter than other standard transformers, the use of
special materials in their construction leads to a much higher acquisition cost
per unit.
QuietPower, in conjunction with NCT engineers, completed development of the
initial prototype of a transformer quieting system in 1993. From 1992 to 1995,
the Company engaged several utilities in all stages of the commercialization of
the transformer quieting systems. Prototype quieting systems were installed on
various transformers in order to, among other things, research product
reliability and optimization testing. During this period, utilities invested
approximately $816,000 in QuietPower in connection with these development
projects. See "Utility Funded Development Projects."
The Company's first commercial transformer noise quieting product, the
ATQ-100, was installed at Public Service Company of Colorado on two 20 MVA
transformers in Lafayette, Colorado. Installation commenced in October 1995 and
was completed in May 1996. In addition, between August 1996 and January 1997,
the Company converted a prototype transformer quieting system into a commercial
ATQ-100 system for Commonwealth Edison in Rockford, Illinois, on four
transformers, ranging in size from 20 to 50 MVA. Prototype transformer quieting
systems using a digital signal processing based controller, in conjunction with
multiple sensing (e.g., microphones) and actuating devices (e.g., resonant
acoustic devices and piezo ceramic transducers), were installed at Manitoba
Hydro in December 1993, Baltimore Gas & Electric in December 1994, and Jersey
Central Power & Light in April 1995. The size of these transformers ranges from
7.5 MVA to 45 MVA. Use of the transformer quieting systems has resulted in noise
reductions of up to 30 decibels ("dB") for the lower frequency tones, which
tones are the most problematic for traditional quieting technologies. Similar
noise reductions would most likely be sufficient to bring virtually any
transformer into compliance with noise regulations and ordinances throughout
North America. See "Governmental Regulation."
Based upon market feedback, the Company has determined that the initial
sales price of the ATQ-100 has inhibited widespread market acceptance.
Accordingly, during 1996, QuietPower accelerated its efforts to reduce the cost
of the system components and installation of the ATQ-100. In this connection, in
view of the cost reductions already effected and anticipated to be effected, the
ATQ-100 sales price has been lowered by the Company. As a result, the Company
expects that the gross profit relating to sales of the ATQ-100 in the first half
of 1997 will be nominal. The Company expects to use a portion of the net
proceeds of this Offering to continue such further development. See "Risk
Factors--Limited Sales History; Need for Cost Reduction of ATQ-100 and
Modification of Headsets; Substantial Time Lapse Until Additional Commercial
Product Introduction," "Use of Proceeds" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
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INDUSTRIAL COMMUNICATION HEADSETS. The Company's Headsets are designed to
improve worker safety and productivity through the enhancement of communications
by selectively canceling surrounding noise from loud machinery or engines using
the active noise and vibration control technology. Accordingly, these Headsets
facilitate communication between co-workers, enable them to hear warning
signals, and reduce noise related fatigue. The prototype generic Headsets
developed by NCT in cooperation with the Company and Manitoba Hydro have been
fully commercialized and are available as products. The Company commenced
selling the Headsets in the third quarter of 1995. The Headsets are designed to
be portable, as well as lightweight and comfortable. Independent tests performed
by an outside contractor on behalf of NCT have assigned the Headsets a Noise
Reduction Rating (or "NRR") of 21dB. NRR's are assigned based on a series of
standardized tests that are performed on hearing protection devices to determine
noise reductions at the ear. Tests on Headset effectiveness conducted by NCT
have shown noise reductions of 20 dB in the 30 to 500 Hz frequency ranges.
However, the Company believes that in order to make significant sales to any
industry, the Company will have to further modify the current generic Headset
system to meet the specific needs of each industry. Based on feedback from
potential railroad customers, the Company has recently modified the Headsets to
tailor them to the needs of the railroad industry. Modifications have included
developing new microphone and intercom electronics and protocols, redesigning
the external structure of the Headsets and modifying mounting devices. This
system allows the personnel present in the locomotive cab to communicate with
one another as well as with the railroad dispatcher and to more readily hear
warning signals. Revenues from the railroads to date are nominal and reflect the
sale of seven demonstration Headset systems. In addition, modification efforts
toward a Power Industry specific Headset are substantially complete. The Company
is currently in discussions with representatives of other target industries for
which it plans to modify its Headsets, including mining, paper and pulp
processing, the armed forces, and oil and gas, as to the specific needs of each.
A portion of the net proceeds of this Offering has been allocated toward these
development efforts. See "Risk Factors -- Limited Sales History; Need for Cost
Reduction of ATQ-100 and Modification of Headsets; Substantial Time Delay Until
Additional Commercial Product Introduction," "Use of Proceeds" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
AIR CORE REACTOR NOISE QUIETING SYSTEMS. Air core reactors are used by
utilities at substations during the distribution process. Air core reactors act
like surge protectors to regulate voltage levels and act as line voltage
stabilizers. Electrical excitation of the reactor's core leads to vibration and
noise escalation. The noise characteristics of reactors are similar to those of
transformers, in that low frequency noise at 120 Hz dominates the reactor's
overall noise signals. The Company has measured noise generated by air core
reactors as high as 90 dB. The Company believes that minor modifications of the
transformer quieting system's software and hardware could result in a reactor
quieting product. QuietPower is currently in discussions with an air core
reactor manufacturer to develop a prototype air core reactor noise quieting
system. There can be no assurance that the Company will be successful in its
attempt to develop or commercialize a reactor quieting system.
SUBSTATION FAILURE DIAGNOSTIC AND CONDITION MONITORING PRODUCTS
Proposed failure diagnostic and condition monitoring systems are being
designed to be used by utilities to detect imminent equipment breakage or
failure in transformers and other substation equipment; occurrences which are
expensive and sometimes dangerous to substation personnel and property. The
aging of electrical power systems has increased the importance of monitoring the
condition of the equipment that comprise these systems. Transformer failures are
known to be associated with degradation of the transformer's insulation. This
degradation produces certain electrical charges within the transformer known as
partial discharge. The electric partial discharge signals also generate high
frequency acoustic waves, which can be detected using acoustic sensors. Accurate
and precise acoustic readings of partial discharge, analyzed in a meaningful
interpretative context, are expected to provide valuable information to
substation operators for preventive maintenance.
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<PAGE>
A year long feasibility study by the Company in conjunction with GE's Power
Transformer division and Baltimore Gas & Electric Company was completed in
December 1995. On the basis of this study, the Company, pursuant to a joint
venture agreement with Prolec-GE, is currently developing a failure diagnostic
and condition monitoring system for power transformers. The joint venture may
also use QuietPower's technology to develop other acoustically-based failure
diagnostic systems for use with load-tap changers, high voltage instrument
transformers and circuit breakers. See "Joint Venture Agreements-- GE Joint
Venture." The proposed failure diagnostic and condition monitoring systems will
utilize sensors to collect acoustic data which will provide an on-line
assessment of the transformer's operating condition to the Power Industry
customer. The proposed system is being designed to be a digitally based
analytical system that reads, stores and analyzes large amounts of acoustic
data. The system is intended to provide real time condition monitoring for
transformers where data are communicated via a data-link to central operating
stations. Basic hardware components will include ultrasonic sensors, a
microprocessor and data-link equipment.
A line of products based on the failure diagnostic and condition monitoring
technology is currently being developed by the Company. The first proposed
product is a partial discharge (or failure) locator. This product is being
designed to be used in transformer testing, maintenance and repair shops to
pinpoint the source of a failure, which will significantly reduce the amount of
time required for testing and repair. A second proposed product is a continuous
on-line condition monitoring system, which will allow remote monitoring of a
transformer's operating condition and will be designed to alert the system
operator in the event of deterioration in performance. This proposed product
will be designed to communicate via a modem or other communications device, thus
minimizing the labor intensity of system monitoring. Additional proposed
products may be developed to enhance the on-line system (i.e., fault severity
assessment). A major design feature of one of the proposed failure diagnostic
and condition monitoring systems is to use multiple piezo ceramic detectors to
triangulate the location of the source of the problem. The system is also being
designed to operate either as a stand-alone system or in combination with a
transformer quieting system, which may enable the sharing of certain hardware
components. The Company believes that availability of such a combined system may
enhance the customer's perceived value of the Company's products, thereby
facilitating sales. The Company has filed patent applications in connection with
the failure diagnostic and condition monitoring technology in the United States,
Canada and other countries. See "Risk Factors--Dependence on Patents; Uncertain
Proprietary Protection" and "Patent Protection." There can be no assurance that
the Company will be successful in its attempt to develop or commercialize any of
the proposed failure diagnostic and condition monitoring systems.
ACTIVE MAGNETIC FIELD CONTROL AND CANCELLATION SYSTEMS
The Company is presently investigating two proposed applications for active
magnetic field control and cancellation technology using active control
algorithms. The cores of substation transformers produce strong magnetic fields
in the process of stepping voltage up or down. Other parts of the transformer,
particularly exposed metal surfaces that are attractive to magnetic fields,
cause part of the field to stray away from the core. Whenever stray magnetic
fields are lost, the transformer's efficiency is decreased. Current mitigation
procedures involve heavy passive shielding which due to its size, weight and
cost is impractical for use in larger transformers. The Company is currently
developing an active magnetic field control product that will contain magnetic
fields and prevent them from straying from the core, using algorithms that
evaluate and send controlling signals to magnetic transducers. This will enable
Power Industry customers to use a smaller, lighter (and hence less expensive)
and more efficient transformer.
The Company also intends to pursue a separate active magnetic field
cancellation system that would confine and/or cancel magnetic fields coming from
substation yards and indoor transformer vaults. With computer monitors and other
electrical equipment becoming increasingly commonplace, high levels of magnetic
fields in residential and commercial spaces are a growing problem because of the
adverse effect of magnetic fields on these sensitive devices. Additionally,
there is a perceived risk of health problems from
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continuous exposure to high magnetic field levels. Although scientific studies
investigating a connection between high magnetic field levels and adverse health
effects are inconclusive, it is nevertheless an issue of public concern. The
active magnetic field cancellation products under development by the Company
would use active control algorithms to drive a multi-channel magnetic field
control or cancellation system to cancel magnetic fields emanating from
substations. The Company believes that this multi-channel device will provide a
greater level of control over magnetic fields than can be achieved by other
techniques such as passive shielding or reconfiguration of the substation. In
addition, the Company believes that the active magnetic field cancellation will
also be cost-effective and cause less disruption to substation operations during
installation than these other techniques.
The Company is currently in discussions with companies to enter into joint
development and marketing arrangements in both the United States and Europe with
respect to these proposed products. The Company also intends to pursue all
available intellectual property protection for its proposed active magnetic
field control and cancellation systems. See "Risk Factors--Dependence on
Patents; Uncertain Proprietary Protection" and "Patent Protection." There can be
no assurance that the Company will be successful in its attempt to develop or
commercialize an active magnetic field control or cancellation product.
ADDITIONAL POTENTIAL ACTIVE NOISE CONTROL PRODUCTS
In 1995, the Company chose to narrow the focus of its development efforts to
those applications that the Company believed would have the largest market
potential in the shortest period of time. Accordingly, the Company halted plans
for the development of three additional projects which use the basic active
noise and vibration control technology. Although the Company does not intend to
devote additional development efforts in connection with these products in the
near-term, the Company believes that they may be further developed in the
future.
SILENCERS FOR INTERNAL COMBUSTION POWER GENERATORS ("GENSET
SILENCERS"). Internal combustion generators ("Gensets") are used to augment a
utility's base generation capacity. Typically, Gensets are employed at remote
and rural locations as a cost-effective means of increasing available
electricity. Gensets are driven by large diesel engines and have capacities
ranging from 100 kilowatts to over 10 megawatts. Using traditional passive means
of quieting, Gensets can still produce a significant amount of noise (in excess
of 100 dB). Prototype Genset Silencers were installed by the Company from July
through September 1993, on Gensets located at God's Lake Narrows for Manitoba
Hydro and on the Queen Charlotte Islands for British Columbia Hydro. The active
noise and vibration control technology is used to track changes in noise
amplitude and frequency which allows the Genset Silencers to respond almost
instantaneously. Installation of the Genset Silencer also increases fuel
efficiency by eliminating back pressure in the muffler system.
FORCED DRAFT/INDUCED DRAFT ("FD/ID") FAN QUIETING. Thermoelectric
generation sites use large draft fans as part of the ventilation system for
their boiler units. In August 1994, NCT acquired Active Noise and Vibration
Technologies, Inc. ("ANVT"), a co-licensee of the FD/ID fan quieting technology,
which addresses the noise produced by the fans. These are tonal noises related
to the blade rotation frequency of the fan, and atonal noises related to air
turbulence. The tonal cancellation system uses speakers to serve as actuators
mounted both inside and outside a tubular duct, or manifold, installed to
support the speakers and which functions to improve airflow at the intake. The
improved air flow created by this manifold (or flow improvement device) improves
its energy efficiency and performance.
Prototype FD/ID fan quieting systems were installed by a joint venture
partner of ANVT at two generating facilities of Southern California Edison, the
Coolwater Generating Station in Barstow, California in February 1992, and the
Redondo Beach Generating Station in Redondo Beach, California in February 1993.
Tonal reductions have approached 18dB and atonal reductions have approached 12dB
at Coolwater. In addition, actual measurements have shown that the flow
improvement device has improved
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energy efficiency by 5% to 6.5% at both locations. QuietPower is in negotiations
with the parties involved in these projects to manage further development and
marketing of the FD/ID fan quieting system.
GAS AND STEAM TURBINE QUIETING. Gas and steam turbines produce both high
and low frequency tonal and broadband noise. Silencing is required for both
intake and exhaust ports. Based upon the Company's prior experience with Genset
Silencers and FD/ID fan quieting systems, the Company believes that it can
develop a digitally based multi-channel control system using a modified active
noise and vibration control algorithm that will quiet both broadband and tonal
noise.
CONTRACTUAL AGREEMENTS WITH NCT
The Company's contractual relationships with NCT cover all proprietary
active noise and vibration control technology and products owned by NCT relating
to the Power Industry and to all other products, technologies and territories
not otherwise covered under exclusive arrangements between NCT and other third
parties. See "Risk Factors--Dependence on NCT."
On March 27, 1995, the Company signed a Master Agreement (which was
subsequently amended on March 28, 1995, April 21, 1995, May 21, 1996 and April
9, 1997) (the "NCT Master Agreement") with NCT. The NCT Master Agreement
provides the Company with world-wide exclusive rights to manufacture, market,
sell and distribute transformer quieting systems, and all future products or
applications related to the Power Industry, where the Company chooses to fund
development costs. In addition, the NCT Master Agreement grants the Company an
exclusive world-wide license in connection with active steam and gas turbine
quieting products. See "Additional Potential Active Noise Control Products--Gas
and steam turbine quieting." The NCT Master Agreement terminates upon the
expiration of NCT's rights in the intellectual property that is being licensed.
For these rights, the Company has agreed to pay a non-refundable $750,000
license fee, $250,000 of which has been credited from a payment made in June
1994 under a prior agreement between the Company and NCT, $250,000 of which was
deemed paid upon QuietPower's return to NCT in April 1995 of warrants to
purchase 750,000 shares of NCT's common stock and the remainder of which has
been split into 30 equal monthly installment payments of $8,333 which commenced
in July 1995. To obtain the exclusive world-wide rights to products and
applications both currently specified and to be identified in the future, the
Company has also agreed to fund commercialization costs for such products and
applications. After QuietPower has recouped 150% of its development costs, NCT
shall receive from pre-tax profits a royalty of 9% on the first $6,000,000 of
QuietPower's sales of exclusively licensed products (50% for technology
sublicenses), and 6% of all sales thereafter. On April 18, 1997, the Company
paid a $136,000 installment to NCT in connection with the amount owed by the
Company to NCT for past services and payables. A final installment of $200,000
is payable within thirty days following the closing of this Offering. The
Company intends to utilize a portion of the net proceeds of this Offering to
make such payment. See "Use of Proceeds."
The Company has the right in all instances to manufacture licensed products
or sublicense manufacturing to a third party. Under the NCT Master Agreement,
NCT has agreed to supply QuietPower with all available components at the most
favorable price available to other customers purchasing similar quantities.
With respect to the marketing and distribution of the Headsets, the
Distributor Agreement provides the Company with non-exclusive distribution
rights on the same terms established from time to time by NCT with its stocking
distributors. Under this agreement, the Company purchases a product at a
discount and resells it into the marketplace. This Distributor Agreement
automatically renews each year unless one party notifies the other that it
desires to terminate the Distributor Agreement, at least 90 days prior to the
end of such year.
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JOINT VENTURE AGREEMENTS
GE JOINT VENTURE
On November 13, 1996 the Company entered into the five-year GE JV Agreement
with Prolec-GE, a joint venture between GE and Prolec S.A. de C.V., a
wholly-owned subsidiary of Industrias AXA, S.A. de C.V. Prolec-GE is one of the
largest manufacturers of distribution transformers in the world and also
manufactures and sells other power distribution equipment. The GE JV Agreement
was executed as a result of a year-long feasibility study of the failure
diagnostic and condition monitoring technology by GE's Power Transformer
Division and Baltimore Gas & Electric Company. Upon the successful funding and
development of each proposed product, under the GE JV Agreement, the Company
will grant an exclusive license to the joint venture for both the sale of the
proposed failure diagnostic and condition monitoring systems for newly
manufactured transformers or other substation equipment, including circuit
breakers, load tap changers and high voltage instrument transformers, as well as
for retrofit installations on previously installed transformers or other
substation equipment. It is anticipated that the joint venture will develop,
commercialize, market and install the Company's proposed failure diagnostic and
condition monitoring products world-wide. The GE JV Agreement provides for sole
ownership of all of the failure diagnostic and condition monitoring technology
by QuietPower. Earnings from the joint venture will be shared equally between
QuietPower and Prolec-GE, and each party is obligated, upon approval of each new
project by the parties, to contribute such personnel and resources as shall have
been approved in connection with such project.
ABB JOINT VENTURE
On June 15, 1996 the Company entered into the five-year ABB JV Agreement
with ABB Secheron S.A., an indirect wholly owned subsidiary of ABB. ABB, a
multi-national conglomerate based in Zurich, Switzerland, is, among other
things, the world's largest manufacturer of power transformers. Pursuant to the
ABB JV Agreement, the Company is obligated to grant an exclusive license to the
joint venture to retrofit existing European transformers with transformer
quieting systems, and a right of first refusal to the joint venture for
integration of the transformer quieting systems into new transformers. It is
anticipated that the joint venture will adapt the transformer quieting systems
for use with standard European operation and design, as well as market and
install the transformer quieting systems. The ABB JV Agreement provides for the
sole ownership of the active noise and vibration control technology by
QuietPower. Earnings from the joint venture will be shared equally between
QuietPower and ABB Secheron S.A., and each party is obligated, upon approval by
the parties of a product improvement program, to contribute such personnel and
resources to a project as shall have been approved in connection with such
project.
UTILITY FUNDED DEVELOPMENT PROJECTS
QuietPower has developed applications for the active noise and vibration
control technology with the assistance of companies within the Power Industry at
all stages of commercialization, in some cases through the direct funding of
research and development or product reliability and optimization testing. In
general, with respect to these projects, QuietPower provided engineering
expertise and services, NCT provided engineering expertise and services and
relevant technology rights and the utilities provided funding and specifications
as to utility requirements. Return on investment for some of the participating
utilities for this funding will include purchase incentives (purchase discounts)
and royalties on future commercialized product sales. The Company believes that
participating utilities have a vested interest in the success of introducing
noise reduction products and may therefore provide the Company with marketing
support of these products.
The following table lists utility investments to fund research and
development projects that were received through December 31, 1995. QuietPower
initiated these projects as the first step leading to
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product commercialization. These projects provided significant financial
resources for product development, provided utility input for market validation
and product definition and laid the foundation for selling commercial/industrial
products and systems. The Company recognized cumulative revenues of
approximately $1.37 million for these development contracts. Subsequent to
December 31, 1995, the Company did not engage in any utility funded development
projects in view of its transition in focus to commercial introduction of
product. QuietPower may in the future determine to engage in additional such
projects. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
TABLE 1
UTILITY INVESTMENTS IN QUIETPOWER TECHNOLOGY DEVELOPMENT
<TABLE>
<CAPTION>
UTILITY APPLICATION FUNDING
- ------------------------------------------------- ------------------------------------------------- ------------
<S> <C> <C>
Baltimore Gas & Electric Company Transformer quieting $ 319,000
Baltimore Gas & Electric Company and General Failure diagnostic condition monitoring
Electric Company 184,000
British Columbia Hydro and Power Authority Generator silencers 24,000
British Columbia Hydro and Power Authority Transformer quieting 28,000
Brooklyn Union Gas Company Gas combustion quieting 103,000
Canadian Electrical Association/Asea Brown Transformer quieting
Boveri/Manitoba Hydro 61,000
Commonwealth Edison Transformer quieting 180,000
Jersey Central Power & Light Transformer quieting 156,000
Manitoba Hydro Transformer quieting 161,000
Manitoba Hydro Power plant headsets 120,000
Manitoba Hydro Generator silencers 37,000
TOTAL PROJECTS...................................................................................... $ 1,373,000
</TABLE>
The Baltimore Gas & Electric Company and Manitoba Hydro, together with the
other utilities listed below, were engaged in the development of a prototype
transformer quieting system. QuietPower and NCT were responsible for project
management and engineering. As an inducement to join, most group participants
are to receive a return on funds invested based on a 3% royalty of future
products sold, and 5% purchase discounts, which, when combined, may provide a
return of up to 150% of the amount invested by the utility. Results of the
Company's and NCT's prototype development projects indicated that transformer
quieting systems produced significant cancellation of noise. The Company is
continuing development efforts, independent of funded projects, to lower the
cost of the system components and installation of its initial commercial
transformer quieting product, the ATQ-100. See "Risk Factors - Limited Sales
History; Need for Cost Reduction of ATQ-100 and Modification of Headsets;
Substantial Time Lapse Until Additional Commercial Product Introduction" and
"Active Noise Control Technology and Products--Transformer Noise Quieting."
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The following is a summary of the prototype transformer quieting systems
installed by the Company:
TABLE 2
PROTOTYPE TRANSFORMER QUIETING SYSTEMS
<TABLE>
<CAPTION>
FUNDING
UTILITY LOCATION INSTALLED RECEIVED(1)
- ---------------------------------------------------- ----------------------- ------------------ -------------
<S> <C> <C> <C>
Manitoba Hydro Winnipeg, Manitoba, September 1993 $ 161,000
Canada
Baltimore Gas and Electric Company Annapolis, MD October 1993 $ 163,000
Baltimore Gas and Electric Company Linthicum, MD August 1994 $ 156,000
Jersey Central Power and Light Matawan, NJ October 1994 $ 156,000
Commonwealth Edison Rockford, IL August 1995 $ 180,000
TOTAL FUNDING.................................................................................... $ 816,000
</TABLE>
- ------------------------
(1) Funding amounts received are also included in Table 1.
PATENT PROTECTION
The Company's rights to the active noise and vibration control technology
derive from NCT's patent position. According to publicly available information,
as of December 31, 1996, NCT held or had rights to 231 patents, including 86
United States patents and over 165 corresponding foreign patents relating to the
active noise and vibration control technology. Additionally, as of December 31,
1996, NCT had 204 patent applications pending in the United States and Europe.
See "Contractual Agreements with NCT."
With respect to its failure diagnostic and condition monitoring technology,
the Company has filed patent applications in the United States and pursuant to
the Patent Cooperation Treaty in Canada and other countries. The failure
diagnostic and condition monitoring patents, if issued, are expected to be owned
by QuietPower and licensed to the joint venture between the Company and
Prolec-GE. Such license shall be exclusive, provided that the joint venture
first successfully funds and develops the technology. The Company is currently
preparing a patent application with respect to the active magnetic field
cancellation technology.
There can be no assurance that patents will issue from any of the Company's
patent applications, or that the Company will develop additional products that
are patentable. No assurance can be given as to the range or degree of
protection any patents issued to the Company or licensed from NCT will afford or
that such patents or licenses will provide protection that have commercial
significance or will provide competitive advantages for the Company's products.
With respect to the patents owned by, or licensed to NCT, NCT has indicated to
the Company that it has conducted only limited patent searches and no assurances
can be given by the Company that patents do not exist or will not be issued in
the future that would have an adverse effect on the Company's ability to market
its products or maintain its competitive position with respect to its products.
In the event NCT chooses not to defend against its patent rights, substantial
resources may be required to obtain and defend patent and other rights to
protect present and future technology and other property of the Company. See
"Risk Factors--Dependence on Patents; Uncertain Proprietary Protection."
MANUFACTURING
Currently, the Company uses several manufacturing sources for the components
of its ATQ-100 transformer quieting systems. Some of these sources may have
difficulty delivering large quantities in a timely manner. Therefore,
alternative sources may need to be found in the event sales volume for the
transformer quieting systems significantly increases (of which there can be no
assurance). Headsets are currently manufactured by NCT and the Company purchases
them on a distribution basis. See "Contractual Agreements with NCT." The Company
does not currently intend to undertake the manufacture of any
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products which may derive from the active noise and vibration control
technology. To the extent that the Company does not utilize joint venture
partners to manufacture proposed products, the Company may be required to enter
into arrangements with third parties to undertake these operations. To the
extent that other parties are manufacturing products for the Company, the
Company will have less control over the quality of products and timeliness of
delivery than if manufactured by the Company. See "Risk Factors-- Dependence on
Joint Venture Partners" and "Risk Factors--No Manufacturing Facilities or
Personnel."
GOVERNMENTAL REGULATION
Potential customers of the Company are governed by regulations specifying
permissible noise limits. The regulations governing permitted noise levels are
customarily instituted on a state, county or local level and therefore vary
significantly across the United States and Canada. In general, these regulations
regulate noise levels regardless of source, and do not specifically address
noise produced by utilities. In addition, each regulation may vary in the method
it uses to record noise level; some statutes will only regulate certain
frequencies; some will regulate the overall noise that can be registered in a
given period of time; some will vary permitted noise levels at different times
of day; and some will vary permitted noise levels depending on the use of
neighboring properties (e.g., schools). The Company does not anticipate that
increased stringency in these local ordinances will impose any additional
hurdles for the Company. Rather, the Company believes that these regulations and
any modifications thereto may provide the Power Industry with further incentives
to consider using QuietPower's quieting products. However, there can be no
assurance that such regulations, if any, will be enforced or that they will not
be eliminated.
COMPETITION
NOISE CONTROL
QuietPower is not aware of any company, other than QuietPower and NCT, that
is now developing and/or commercializing active noise control products for the
Power Industry. Potential and existing competition with respect to these
products and systems comes from companies developing their own active noise
reduction systems (direct competition) and companies that use traditional
passive means, such as barrier walls, for noise quieting (indirect). The Company
believes that it has several advantages over both types of competitors.
QuietPower's technology partner, NCT, has developed a wide range of active noise
reduction technologies with applications in a number of noise problem
environments. The Company believes that the effectiveness of these technologies
will give its products performance, functionality and flexibility advantages
over those of its indirect competitors. Although the Company believes that the
initial sales price of the ATQ-100 transformer quieting system has impeded
acceptance of the product, the Company believes that the recent price reduction
of the system in conjunction with its continuing cost reduction efforts will
accelerate market acceptance. See "Use of Proceeds" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations." The Company
believes that active noise and vibration control technology has several
advantages over indirect competition, most notably in quieting low frequency
tonal noise, which the Company believes cannot be done as effectively with
traditional passive means.
There are a limited number of active noise reduction companies which
currently compete outside of the Power Industry. These companies include
Digisonix, a division of Nelson Industries, Inc., Group Lotus PLC, Toshiba
Corporation and Hitachi, Ltd. The Company knows of four companies that sell
active headset products primarily for the aviation market; Bose Corporation,
David Clark Company Inc., Telex Communications, Inc. and Sennheiser Electronic
Corp. To date these companies have not competed with the Company in any of its
identified markets, with the exception of David Clark Company Inc., which has
been marketing, primarily its passive headsets, to the railroad industry. Many
of these companies, as well as the Company's potential competitors, could enter
the active noise and vibration attenuation field as the industry develops.
43
<PAGE>
FAILURE DIAGNOSTICS
While there are several companies that offer transformer diagnostic
products, the Company believes that its failure diagnostic and condition
monitoring system has advantages over other systems that detect partial
discharge (a degradation of the transformer's insulation). To the best of the
Company's knowledge,
there are no other products that combine a continuously monitoring, non-invasive
(where the transformer does not have to be taken off-line) means of detecting
partial discharge with the ability to locate the source of the partial
discharge.
MAGNETIC FIELD CANCELLATION
The Company is not aware of any commercial products available for the
control of magnetic fields inside a transformer. Typical mitigation procedures
for stray magnetic field losses inside the transformer involve heavy metal
shielding installed by the transformer manufacturer. Although there are a few
magnetic field mitigation products on the market for use in the substation, they
employ passive shielding, or a simple, single channel control loop, and
typically must be implemented by a professional as part of a larger mitigation
procedure to achieve desired reductions. To the Company's knowledge, no one else
has employed the multi-channel, adaptive controller to magnetic field
cancellation in either the transformer or substation.
The Company intends to compete in each of these areas on the basis of its
own inventions and intellectual property and its license to NCT's patented
technology, the expertise of its personnel and their knowledge of and access to
the Power Industry, and its comparatively early entry into the market. Current
and potential competitors in the noise control, failure diagnostics and magnetic
field cancellation areas may have substantially greater management, technical,
financial, marketing and product development resources than the Company.
EMPLOYEES
The Company employs ten persons on a full-time basis, including three who
are executive officers, three who are engineers, two who are engaged in
marketing and two who are engaged solely in administration. Additionally, two
executive officers perform a variety of technical and marketing oriented
functions. The Company has no collective bargaining agreements and no employee
is represented by a labor union. The Company has never had a work stoppage and
considers its relationship with its employees to be satisfactory.
The Company's success depends to a significant extent upon a number of key
management and technical employees. The loss of services of one or several of
these key employees could have a material adverse effect on the Company. While
the Company has employment agreements with each of its three executive officers,
none of the Company's other technical and managerial employees is bound by an
employment agreement other than with respect to confidentiality and patent
assignment agreements. Management believes that the future success of the
Company will also depend in large part upon the Company's ability to attract and
retain highly-skilled technical, managerial and marketing personnel. The Company
competes for such personnel with other companies, academic institutions,
governmental entities and other organizations, some of which may have
substantially greater capital resources than the Company. There can be no
assurance that management will be successful in attracting and retaining the
personnel it requires to grow and operate profitably. See "Risk
Factors--Dependence on Key Personnel."
FACILITIES
The Company's principal administrative, sales and marketing, product
development and support facilities are currently located in New York, New York,
and comprise approximately 3,450 square feet. The Company occupies these
premises pursuant to a three-year sublease, which will be terminated May 15,
1997, from Kalkines, Arky, Zall & Bernstein of which William Bernstein, a
director of the Company, is a
44
<PAGE>
partner. The fixed rental is approximately $8,900 per month plus operating
expenses. See "Certain Transactions." The Company has recently signed a ten-year
lease, expiring May 15, 2007, for new facilities located in New York, New York,
which consist of approximately 15,000 square feet. The fixed rental for this
space is approximately $13,125 per month, plus operating expenses. In support of
its joint venture with ABB Secheron S.A., the Company is subleasing
approximately 700 square feet for 18 months from Genevest Consulting Group, in
Geneva, Switzerland, for approximately $1,500 per month, plus operating
expenses. See "Joint Venture Agreements--ABB Joint Venture."
LEGAL PROCEEDINGS
There are no pending legal proceedings to which the Company or its
properties is subject.
45
<PAGE>
MANAGEMENT
The following table sets forth the names, ages and positions of the
executive officers and directors of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH COMPANY
- ------------------------------------ ----------- -------------------------------------------------------------------
<S> <C> <C>
Jonathan M. Charry, Ph.D............ 48 Chairman of the Board, President and Chief Executive Officer
Mark J. Dietrich.................... 38 Vice President--Strategic Marketing
Eric W. Jacobson.................... 42 Vice President, Chief Financial Officer, Secretary and Director
William S. Bernstein, Esq.(1)(2).... 40 Director
S. Carl Horn af Rantzien(1)(2)...... 50 Director
Alfred B. Thacher, Jr.(1)(2)........ 51 Director
</TABLE>
- ------------------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
JONATHAN M. CHARRY, PH.D. has been Chairman of the Board, President and
Chief Executive Officer of the Company since inception. Since 1985, Dr. Charry
has been President and Chief Executive Officer of Environmental Research
Information, Inc. ("ERI"), an environmental engineering consulting firm which
has been operationally inactive since 1992. ERI specialized in consulting to the
utility industry and in environmental impact assessment and risk analysis for
electric power generation, transmission and distribution systems. From 1979 to
1984, he held appointments as Senior Research Scientist in the Laboratory of
Neuropharmacology and Environmental Toxicology at the New York State Institute
for Basic Research and as Assistant Professor at The Rockefeller University.
From 1977 to 1979, Dr. Charry was a Rockefeller Foundation Fellow in
Environmental Affairs at The Rockefeller University, at which time he was a
principal investigator on research grants and contracts from the National
Institutes of Health and the Electric Power Research Institute. For the past ten
years, he has been actively engaged in evaluating environmental issues for the
energy industry. Dr. Charry is past President and Director of the American
Institute of Medical Climatology, and past Chairman of the Section on Air and
Other Environmental Ion Technology of the American Society of Testing and
Materials. He received a Ph.D. from New York University and an A.B. from Tufts
University.
MARK J. DIETRICH has been the Vice President--Strategic Marketing of the
Company since April 1994. From 1988 to 1994, Mr. Dietrich was Vice President and
National Sales Manager for COS Computer Systems Inc., which specializes in the
leasing and trading of large computer and high-technology equipment. From 1988
to 1990, he was Vice President of Equipment Finance for COS Computer Systems
Inc. Mr. Dietrich graduated from Vanderbilt University School of Engineering,
with a B.E.E. in electrical engineering, mathematics and computer science.
ERIC W. JACOBSON has been Vice President, Chief Financial Officer, Secretary
and a director of the Company since inception. Mr. Jacobson has also been Vice
President and Chief Financial Officer of ERI since 1992. From 1987 to 1989, Mr.
Jacobson was Vice President--Finance and Chief Financial Officer for SmartCard
International, Inc., a publicly traded technology company involved with the
technological and market development of smart card (computer in a card) systems.
Mr. Jacobson is a certified public accountant licensed in New York State. Mr.
Jacobson received his bachelors degree from the University of Montana.
WILLIAM S. BERNSTEIN, ESQ. has been a director of the Company since
incorporation. Mr. Bernstein serves as Co-Chairman of the Board and Co-Chief
Executive Officer of Telesis Medical Management, a New York based physician
management company. Mr. Bernstein is a principal of Sterling Health Capital
Management, a consulting firm that manages project financing for hospitals and
other health care facilities
46
<PAGE>
and a founding partner of Kalkines, Arky, Zall & Bernstein, a New York based law
firm. He has also served as Special Assistant to the Executive Secretary of the
Department of Health Education & Welfare, as law clerk to the Honorable Raymond
J. Pettine, United States District Judge for the District of Rhode Island, and
as health care Counsel to the New York City Council President. Mr. Bernstein
received his Bachelors and Masters degrees from Brown University and received
his law degree from New York University School of Law.
S. CARL HORN AF RANTZIEN has been a director of the Company since December
1996. Since 1996, Mr. Horn has been a principal of Horn Konsult/Eapecs, a
Stockholm based private equity management and consulting syndicate. Since 1984,
Mr. Horn has also been a limited partner of Ventana Growth Funds, a venture
capital company, and the principal of Horn Konsult AB, a Stockholm based
investment banking and fund management company. Mr. Horn received his bachelors
degree from Morby College in Sweden.
ALFRED B. THACHER, JR. has been a director of the Company since December
1996. Since December 1993, Mr. Thacher has been a principal of Thacher Vendig &
Company, Inc., a New York based investment banking and corporate development
firm. Between 1991 and 1993, he was a principal of Mitchell & Associates, a
banking house specializing in mergers and acquisitions and advising work in the
industrial market. From 1987 to 1991, Mr. Thacher was a Managing Director at
Bear Stearns in the corporate finance and mortgage finance departments. Mr.
Thacher received his Bachelors degree from Yale University and his Masters of
Business Administration from the Wharton School.
No family relationship exists between any director or executive officer and
any other director or executive officer.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has established a Compensation Committee and an Audit
Committee.
COMPENSATION COMMITTEE. The Compensation Committee has the responsibility
for reviewing the performance of the officers of the Company and recommending to
the Board of Directors of the Company salary and bonus amounts for all officers
of the Company, subject to the terms of existing employment agreements. The
Compensation Committee also has the responsibility for oversight and
administration of the Company's 1993 Stock Option Plan. The Compensation
Committee consists of Messrs. Bernstein, Horn and Thacher.
AUDIT COMMITTEE. The Audit Committee has the responsibility for reviewing
and supervising the financial controls of the Company. The Audit Committee makes
recommendations to the Board of Directors of the Company with respect to the
Company's financial statements and the appointment of independent auditors,
reviews significant audit and accounting policies and practices, meets with the
Company's independent public accountants concerning, among other things, the
scope of audits and reports, and reviews the performance of overall accounting
and financial controls of the Company. The Audit Committee consists of Messrs.
Bernstein, Horn and Thacher.
SUMMARY COMPENSATION TABLE
The following table sets forth information with respect to the compensation
of each of the named executive officers for services provided in all capacities
to the Company in the years ended December 31, 1996, 1995 and 1994. No other
executive officer of the Company received compensation in excess of
47
<PAGE>
$100,000 during the year ended December 31, 1996. For the purposes of this
table, warrants are deemed to be equivalent to stock options.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
-------------
SECURITIES
ANNUAL COMPENSATION UNDERLYING
---------------------- OPTIONS
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) (#)
- ------------------------------------------------------------------ --------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
Jonathan M. Charry,............................................... 1996 $ 157,500 -- 135,000
Chief Executive Officer and President 1995 $ 132,917 -- 100,000
1994 $ 145,000 $ 100,000 1)) 10,260
Eric W. Jacobson,................................................. 1996 $ 110,000 -- 60,000
Vice President and Chief Financial Officer 1995 $ 90,000 -- 15,000
1994 $ 90,000 -- 5,130
</TABLE>
- ------------------------
(1) Granted pursuant to previous employment agreement.
OPTION GRANTS IN 1996
The following table sets forth certain information for each of the named
executive officers with respect to grants of options to purchase Common Stock of
the Company made during the year ended December 31, 1996. For the purposes of
this table, warrants are deemed to be equivalent to stock options.
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
NO. OF % OF TOTAL STOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM(1)
OPTIONS EMPLOYEES PRICE EXPIRATION ----------------------
NAME GRANTED(#) IN YEAR ($/SH) DATE 5% 10%
- --------------------------------------------------- ----------- ----------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Jonathan M. Charry................................. 100,000 33.6% 2.50 4/1/06 $ 157,224 $ 398,436
35,000 11.7% 2.50 12/2/06 $ 55,028 $ 139,452
Eric W. Jacobson................................... 25,000 8.4% 2.50 4/1/06 $ 39,306 $ 99,609
35,000 11.7% 2.50 12/2/06 $ 55,028 $ 139,452
</TABLE>
- ------------------------
(1) In accordance with the rules of the Securities and Exchange Commission (the
"Commission"), shown are the gains or "option spreads" that would exist for
the respective options granted. These gains are based on the assumed rates
of annually compounded stock price appreciation of 5% and 10% from the date
the option was granted over the full option term. These assumed annually
compounded rates of stock price appreciation are mandated by the rules of
the Commission and do not represent the Company's estimates or projection of
future Common Stock prices.
AGGREGATED OPTION EXERCISES DURING 1996 AND YEAR END OPTION VALUES
The following table sets forth certain information for each of the named
executive officers with respect to the exercise of options to purchase Common
Stock during 1996 and the number and value of securities underlying unexercised
options held by the named executive officers as of December 31, 1996.
48
<PAGE>
The Company does not have any outstanding stock appreciation rights. For the
purposes of this table, warrants are deemed to be equivalent to stock options.
<TABLE>
<CAPTION>
VALUE OF
UNEXERCISED
IN-THE-MONEY
NUMBER OF UNEXERCISED OPTIONS
SHARES VALUE OPTIONS AT YEAR END(#) AT YEAR END($)(1)
ACQUIRED ON REALIZED -------------------------- -----------------
NAME EXERCISE(#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE
- ------------------------------------------- ----------------- --------------- ----------- ------------- -----------------
<S> <C> <C> <C> <C> <C>
Jonathan M. Charry......................... 0 0 30,130 215,130 0
Eric W. Jacobson........................... 0 0 6,315 73,815 0
<CAPTION>
NAME UNEXERCISABLE
- ------------------------------------------- -------------
<S> <C>
Jonathan M. Charry......................... 167,400
Eric W. Jacobson........................... 74,400
</TABLE>
- ------------------------
(1) Calculated by determining the difference between the estimated fair market
value of the Company's Common Stock as of December 31, 1996 ($3.74 per
share) and the exercise price for the securities underlying the options.
EMPLOYMENT AGREEMENTS
The Company has employment agreements with the named executive officers
shown on the compensation table above. The employment agreement with Dr.
Jonathan M. Charry, the Chairman of the Board, President and Chief Executive
Officer of the Company, is dated as of March 9, 1995, terminates on March 8,
1998 and obligates the Company to pay Dr. Charry a yearly base salary of
$195,000 per year, subject to a yearly increase based on the Consumer Price
Index. The employment agreement with Mr. Eric W. Jacobson, the Vice President,
Chief Financial Officer and Secretary of the Company is dated as of January 1,
1996, terminates on December 31, 1998 and obligates the Company to pay Mr.
Jacobson a yearly base salary of $150,000 per year, subject to a yearly increase
based on the Consumer Price Index. Included in both agreements are i) provisions
that the officers are not to compete with the Company for 12 months after
termination of their respective agreements, ii) confidentiality provisions, and
iii) entitlement for additional increases to base salary, or bonuses, at the
discretion of the Compensation Committee of the Board of Directors.
STOCK OPTION PLAN
The Company's 1993 Stock Option Plan (the "1993 Plan") was adopted to
attract and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to employees and consultants of
the Company, and to promote the success of the Company's business. Options
granted under the 1993 Plan may be either incentive stock options, as defined in
Section 422 of the Internal Revenue Code of 1986, as amended, or non-qualified
stock options. The Company has reserved 250,000 shares of Common Stock for
issuance under the 1993 Plan. As of December 31, 1996, options to purchase an
aggregate of 239,490 shares were outstanding under the 1993 Plan at a weighted
average exercise price of $4.22, of which options to purchase an aggregate of
110,235 shares were then exercisable at a weighted average exercise price of
$4.07.
The 1993 Plan may be administered by the Board of Directors or a committee
of the Board. The 1993 Plan is currently administered by the Compensation
Committee of the Board. The entity administering the 1993 Plan has the power to
determine the terms of any options granted thereunder, including the exercise
price, the number of shares subject to the option, and the exercisability
thereof. Options granted under the 1993 Plan are generally not transferable, and
each option is exercisable during the lifetime of the optionee only by such
optionee. The exercise price of all incentive stock options granted under the
1993 Plan must be at least equal to the fair market value of the shares of
Common Stock on the date of grant. With respect to any participant who owns
stock possessing more than 10% of the voting power of all classes of stock of
the Company, the exercise price of any stock option granted must be equal at
least 110% of the fair market value on the grant date and the maximum term of
the option must not exceed five years. The term of all other options under the
1993 Plan may not exceed ten years. The specific terms of each option grant are
approved by the Board of Directors and are reflected in a written stock option
agreement.
49
<PAGE>
401(K) PLAN
The Company has a retirement savings plan for eligible full-time employees
pursuant to Section 401(k) of the Internal Revenue Code of 1986, as amended. At
its discretion, the Company may make contributions up to 15% of plan
participants' compensation. The Company made no contributions to the plan for
the years ended December 31, 1995 and December 31, 1996.
COMPENSATION OF DIRECTORS
The directors of the Company do not receive cash compensation, however, the
1993 Plan allows the Company to grant options to all directors of the Company.
On December 2, 1996, the Compensation Committee granted to each of Alfred B.
Thacher, Jr. and S. Carl Horn af Rantzien, ten year warrants to purchase 10,000
shares of Common Stock at an exercise price of $.10 per share, and to each of
Jonathan M. Charry, Eric W. Jacobson and William S. Bernstein, ten year warrants
to purchase 10,000 shares of Common Stock at an exercise price of $2.50 per
share.
KEY PERSON LIFE INSURANCE
The Company is the sole beneficiary of a $1 million term life insurance
policy covering Dr. Charry.
INDEMNIFICATION OF DIRECTORS
The Company's Certificate of Incorporation: (i) eliminates the liability of
the directors of the Company for monetary damages to the fullest extent
permitted by Delaware law and (ii) authorizes the Company to indemnify its
officers and directors to the fullest extent permitted by Delaware law. The By-
Laws of the Company provide broad indemnification for officers and directors
against expenses (including legal fees and judgments) incurred in connection
with any civil or criminal action which arises from the performance of duties
for the Company. The By-Laws of the Company also provide that the Company will
indemnify such persons to the fullest extent permitted by law. The
indemnification provided by the By-Laws applies to any action taken by the
indemnitee while serving as an officer or director of the Company, any of its
subsidiaries (none presently) or at the Company's request as a director,
officer, employee or agent of any of the above. The By-Laws of the Company do
not provide indemnification for any acts or omissions from which a director may
not be relieved of liability under the Delaware Law.
50
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth, certain information as of April 30, 1997,
regarding beneficial ownership of the Company's Common Stock by (i) each
stockholder known by the Company to be the beneficial owner of 5% or more of the
outstanding shares of Common Stock; (ii) each director of the Company; (iii)
each person named in the Summary Compensation Table above; and (iv) all of the
Company's current officers and directors as a group. Except as otherwise
indicated, the Company believes that the beneficial owners of the securities
listed below have sole investment and voting power with respect to such
securities, subject to community property laws where applicable.
<TABLE>
<CAPTION>
PERCENTAGE OF CLASS
BENEFICIALLY OWNED
----------------------------------
<S> <C> <C> <C>
NUMBER OF SHARES OF
COMMON STOCK
NAME AND ADDRESS OF BENEFICIALLY
BENEFICIAL HOLDER OWNED(1) BEFORE OFFERING AFTER OFFERING
- ------------------------------------------------------------ -------------------- ----------------- ---------------
Jonathan M. Charry 1675 Broadway New York, New York 10019... 305,077(2) 28.1% 9.9%
Eric W. Jacobson 1675 Broadway New York, New York 10019..... 39,598(3) 3.9% 1.3%
William S. Bernstein 1675 Broadway New York, New York
10019..................................................... 38,678(4) 3.8% 1.3%
S. Carl Horn af Rantzien 1675 Broadway New York, New York
10019..................................................... 0 0 0
Alfred B. Thacher, Jr. 1675 Broadway New York, New York
10019..................................................... 60,000(5) 5.6% 2.0%
Nordiska Fondkomission Stureplan 19 Box 7362 S-103 90
Stockholm Sweden.......................................... 166,427(6) 15.3% 5.4%
B. Michael Pisani 44 Lake Road Short Hills, New Jersey
07078..................................................... 95,000(7) 9.0% 3.1%
DayStar Partners, L.P. 10600 N. DeAnza Boulevard, Suite 215
Cupertino, California 95014............................... 137,500(8) 12.0% 4.4%
QPS Bridge, LLC 1330 Avenue of the Americas 36th floor New
York, New York 10019...................................... 90,000(9) 8.2% 2.9%
Regent Capital Partners, L.P. 505 Park Avenue 17th floor New
York, New York 10022...................................... 120,000(10) 10.7% 3.8%
Environmental Research Information, Inc. 1675 Broadway New
York, New York 10019...................................... 168,500 16.8% 5.6%
All officers and directors as a group (6 persons)........... 462,103(11) 38.7% 14.5%
</TABLE>
- ------------------------
(1) A person is deemed to be the beneficial owner of securities that can be
acquired by such person upon the exercise of options or warrants within 60
days. Each beneficial owner's percentage ownership is determined by assuming
that options or warrants exercisable within 60 days that are held by such
person (but not those held by any other person) have been exercised.
(2) Includes 57,695 shares of Common Stock underlying options exercisable within
60 days and 25,000 shares of Common Stock underlying warrants exercisable
within 60 days and 168,500 shares owned of
51
<PAGE>
record by Environmental Research, Inc., of which company Dr. Charry is a 10%
stockholder, President and Chief Executive Officer.
(3) Includes 11,348 shares of Common Stock underlying options exercisable within
60 days and 6,250 shares underlying warrants exercisable within 60 days but
does not include shares owned of record by Environmental Research, Inc. of
which company Mr. Jacobson is a 10% stockholder, Vice President and Chief
Financial Officer. Mr. Jacobson disclaims beneficial ownership of these
shares.
(4) Includes 2,000 shares of Common Stock underlying options exercisable within
60 days and 8,333 shares of Common Stock underlying warrants exercisable
within 60 days.
(5) Includes 60,000 shares of Common Stock underlying warrants exercisable
within 60 days.
(6) Includes 86,427 shares of Common Stock underlying warrants exercisable
within 60 days.
(7) Includes 55,000 shares of Common Stock underlying warrants exercisable
within 60 days.
(8) Includes 137,500 shares of Common Stock underlying warrants (and warrants
underlying the warrants) exercisable within 60 days.
(9) Includes 90,000 shares of Common Stock underlying warrants exercisable
within 60 days.
(10) Includes 120,000 shares of Common Stock underlying warrants exercisable
within 60 days.
(11) Includes 89,793 shares of Common Stock underlying options exercisable
within 60 days and 99,583 shares of Common Stock underlying warrants
exercisable within 60 days and 168,500 shares owned of record by
Environmental Research, Inc., of which company Dr. Charry is President and
Chief Executive Officer.
* Less than 1%
52
<PAGE>
CERTAIN TRANSACTIONS
William S. Bernstein, a director of the Company, is also a partner of
Kalkines, Arky, Zall & Bernstein, a New York based law firm ("KAZB"). The
Company subleases approximately 3,450 square feet from KAZB as its principal
place of business. During 1995 and 1996, rental charges due to KAZB were $61,000
and $73,000 respectively. As of December 31, 1996, the Company owed KAZB
$146,000 for past due rental payments and other office services. As of December
31, 1995, the Company owed KAZB $172,000 for past due rental payments and other
office services. In consideration for allowing the Company to defer rental
payments as well as payments for other office services, on August 1, 1995 the
Company granted to KAZB five year warrants to purchase 20,000 shares of Common
Stock at an exercise price of $4.00 per share. In consideration of KAZB allowing
QuietPower to further defer rental payments, on May 10, 1996, the Company
canceled the warrants granted in August 1995 and issued five year warrants to
purchase 25,000 shares at an exercise price of $.01 per share. In an agreement
dated January 2, 1997, the Company satisfied $73,000 of its past due balance
with KAZB for rental payments and other office services by issuing to the
assignee of KAZB's claim against QuietPower, an aggregate 14,692 shares of
Common Stock and warrants to purchase 14,692 shares of Common Stock at $2.50 per
share.
Jonathan M. Charry, Chairman of the Board, President and Chief Executive
Officer of the Company, has personally guaranteed the Company's repayment of
certain investments in the Company totalling $175,000, which were made in
connection with private placements by the Company in 1995 and are currently
payable on demand. These obligations are evidenced by four guaranty agreements,
signed by Mr. Charry as a condition to the investments.
Alfred B. Thacher, a director of the Company, is also a principal in
Thacher, Vendig & Co. ("Thacher Vendig"), a New York based investment banking
and corporate development firm. The Company entered into a letter agreement with
Thacher Vendig dated April 1, 1997, pursuant to which Thacher Vendig shall
receive commissions, based on certain percentages of proceeds obtained by the
Company in connection with certain purchase, financing and venture transactions
(excluding the Offering) for financial and investment banking services. As of
the date hereof, the Company has paid fees to Thacher Vendig totalling $58,000
in 1995, $163,000 in 1996 and $262,500 in 1997, together with warrants to
purchase 60,000 shares of Common Stock at an exercise price of $2.50 per share,
for services including payment of finder's fees with respect to private
placement fund raising activities of the Company, acquisition searches and
targeting, providing valuation analysis of the Company and potential acquisition
targets and evaluation of potential business transactions.
S. Carl Horn af Rantzien, a director of the Company, is also a principal in
Horn Konsult/Eapecs, a Stockholm based private equity management and consulting
syndicate ("Horn Konsult"). Pursuant to an agreement between Horn Konsult and
Thacher Vendig, Horn Konsult and Thacher Vendig share all fees received by
Thacher Vendig from the Company.
The Company has received advances totalling $75,000 from Environmental
Research, Inc. (of which the Chief Executive Officer of the Company is Chairman,
President and a 10% stockholder), the holder of 16.8% of the Company's issued
and outstanding shares of Common Stock, which amount is repayable upon
completion of this Offering. See "Use of Proceeds."
In connection with the Offering, the Company's Board of Directors has
adopted a policy whereby any future transactions between the Company and any of
its subsidiaries, affiliates, officers, directors, principal stockholders or any
affiliates of the foregoing will be on terms no less favorable to the Company
than could reasonably be obtained in "arm's length" transactions with
independent third parties, and any such transactions will also be approved by a
majority of the Company's disinterested outside directors.
53
<PAGE>
DESCRIPTION OF SECURITIES
The authorized capital stock of the Company consists of 10,000,000 shares of
Common Stock, par value $.01 per share, and 10,000 shares of Preferred Stock,
par value $.01 per share, issuable in series and with such relative rights and
preferences as may be designated by the Company's Board of Directors.
COMMON STOCK
Each holder of Common Stock is entitled to one vote for each share held on
all matters properly submitted to the stockholders for their vote. Holders of
shares of outstanding Common Stock are entitled to those dividends declared by
the Board of Directors out of legally available funds; and, in the event of
liquidation, dissolution or winding up of the affairs of the Company, holders
are entitled to receive, ratably, the net assets of the Company available to
holders of shares of Common Stock after distribution is made to preferred
stockholders. Holders of shares of outstanding Common Stock have no preemptive,
conversion, or redemptive rights. All of the issued and outstanding shares of
Common Stock are, and all unissued shares when issued pursuant to the exercise
of options or warrants will be, duly authorized, validly issued, fully paid and
nonassessable.
PREFERRED STOCK
Upon the completion of this Offering, the Company shall be authorized to
issue up to 10,000 shares of Preferred Stock, par value $.01 per share, of which
none will then be outstanding. The Board of Directors has the power, without
further action by the stockholders, to divide any and all shares of Preferred
Stock into one or more series and to fix and determine the relative rights and
preferences of the Preferred Stock, such as the designation of series and the
number of shares constituting such series, dividend rights, redemption and
sinking fund provisions, liquidating and dissolution preferences, conversion or
exchange rights and voting rights, if any. Issuances of Preferred Stock by the
Board of Directors may result in such shares having senior dividend and/or
liquidation preferences to the holders of shares of Common Stock and may dilute
the voting rights of such holders.
WARRANTS
As part of the Securities to be sold in this Offering, the Company is
issuing Warrants to purchase 2,000,000 shares of Common Stock. The following is
a brief summary of certain provisions of the Warrants, but such summary does not
purport to be complete and is qualified in all respects by reference to the
actual text of the Warrant Agreement between the Company, the Representative and
Continental Stock Transfer & Trust Company (the "Warrant Agent"). A copy of the
Warrant Agreement has been filed as an exhibit to the Registration Statement of
which this Prospectus is a part. See "Additional Information."
EXERCISE PRICE AND TERMS. Each Warrant entitles the registered holder
thereof to purchase, at any time over a five-year period commencing on the date
of this Prospectus, one share of Common Stock at a price of $ per share
[150% of the initial public offering price per share of Common Stock], subject
to adjustment in accordance with the anti-dilution and other provisions referred
to below. The holder of any Warrant may exercise such Warrant by surrendering
the certificate representing the Warrant to the Warrant Agent, with the
subscription form thereon properly completed and executed, together with payment
of the exercise price. Subject to compliance with applicable state securities
laws, the Warrants may be exercised at any time in whole or in part at the
applicable exercise price until expiration of the Warrants. No fractional shares
will be issued upon exercise of the Warrants.
The exercise price of the Warrants bears no relationship to any objective
criteria of value and should in no event be regarded as an indication of any
future market price of the securities offered hereby.
ADJUSTMENTS. The exercise price and the number of shares of Common Stock
purchasable upon the exercise of the Warrants are subject to adjustment upon the
occurrence of certain events, including stock
54
<PAGE>
dividends, stock splits, combinations or reclassifications of the Common Stock,
or sale by the Company of shares of its Common Stock or other securities
convertible into Common Stock at a price below the then-applicable exercise
price of the Warrants. Additionally, an adjustment would be made in the case of
a reclassification or exchange of Common Stock, consolidation or merger of the
Company with or into another corporation or sale of all or substantially all of
the assets of the Company in order to enable Warrant holders to acquire the kind
and number of shares of stock or other securities or property receivable in such
event by a holder of the number of shares of Common Stock that might otherwise
have been purchased upon the exercise of the Warrant.
REDEMPTION PROVISIONS. Commencing , 1998 (13 months after the date of
this Prospectus), with the consent of the Representative, the Warrants are
subject to redemption, in whole but not in part, at $0.05 per Warrant on 30
days' prior written notice to the warrantholders, provided that the average
closing sale price of the Common Stock as reported on the American Stock
Exchange equals or exceeds $ per share [150% of the then exercise price
per Warrant] (subject to adjustment for stock dividends, stock splits,
combinations or reclassifications of the Common Stock), for any 20 trading days
within a period of 30 consecutive trading days ending on the fifth trading day
prior to the date of the notice of redemption. In the event the Company
exercises the right to redeem the Warrants, such Warrants will be exercisable
until the close of business on the business day immediately preceding the date
for redemption fixed in such notice. If any Warrant called for redemption is not
exercised by such time, it will cease to be exercisable and the holder will be
entitled only to the redemption price.
TRANSFER, EXCHANGE AND EXERCISE. The Warrants are in registered form and
may be presented to the Warrant Agent for transfer, exchange or exercise at any
time on or prior to their expiration date five years from the date of this
Prospectus, at which time the Warrants become wholly void and of no value. If a
market for the Warrants develops, the holder may sell the Warrants instead of
exercising them. There can be no assurance, however, that a market for the
Warrants will develop or continue.
MODIFICATION OF WARRANTS. The Company and the Warrant Agent may make such
modifications to the Warrants as they deem necessary and desirable that do not
adversely affect the interests of the Warrant holders. The Company may, in its
sole discretion, lower the exercise price of the Warrants for a period of not
less than 30 days on not less than 30 days' prior written notice to the Warrant
holders and the Representative. Modification of the number of securities
purchasable upon the exercise of any Warrant, the exercise price and the
expiration date with respect to any Warrant requires the consent of two-thirds
of the Warrant holders. No other modifications may be made to the Warrants
without the consent of two-thirds of the Warrant holders.
The Warrants are not exercisable unless, at the time of the exercise, the
Company has a current prospectus covering the shares of Common Stock issuable
upon exercise of the Warrants, and such shares have been registered, qualified
or deemed to be exempt under the securities laws of the state of residence of
the exercising holder of the Warrants. Although the Company will use its best
efforts to have all of the shares of Common Stock issuable upon exercise of the
Warrants registered or qualified on or before the exercise date and to maintain
a current prospectus relating thereto until the expiration of the Warrants,
there can be no assurance that it will be able to do so.
The Warrants are separately transferable immediately upon issuance. Although
the Securities will not knowingly be sold to purchasers in jurisdictions in
which the Securities are not registered or otherwise qualified for sale,
purchasers might buy Warrants in the after-market in, or may move to,
jurisdictions in which the shares underlying the Warrants are not so registered
or qualified during the period that the Warrants are exercisable. In this event,
the Company would be unable to issue shares to persons desiring to exercise
their Warrants, and holders of Warrants would have no choice but to attempt to
sell the Warrants in a jurisdiction where such sale is permissible or allow them
to expire unexercised.
55
<PAGE>
RIGHTS OF WARRANTHOLDERS. Holders of the Warrants have no voting rights and
are not entitled to dividends. In the event of liquidation, dissolution, or
winding up of the affairs of the Company, holders of the Warrants will not be
entitled to participate in any liquidation distribution.
REGISTRATION RIGHTS
The Company has granted certain piggyback registration rights to BWM
Investments, an affiliate of Breslow & Walker, LLP, counsel to the Company,
relating to shares underlying warrants to purchase 25,000 shares of Common Stock
at an exercise price of $.01 per share, and to Kalkines, Arky, Zall & Bernstein,
of which William Bernstein, a director of the Company, is a partner, relating to
shares underlying warrants to purchase 25,000 shares of Common Stock at an
exercise price of $.01 per share.
The Company has also granted certain demand and piggyback registration
rights to the Selling Stockholders, whose shares of Common Stock are being
registered hereby and shall be sold pursuant to a concurrent offering. See
"Certain Transactions," "Legal Matters," "Shares Eligible for Future Sale," and
"Concurrent Offering."
ANTI-TAKEOVER PROVISIONS
Upon consummation of this Offering, the Company will be subject to the
provisions of Section 203 of the Delaware Law ("Section 203"). Section 203
provides, with certain exceptions, that a Delaware corporation may not engage in
any of a broad range of business combinations with a person or an affiliate, or
associate of such person, who is an "interested stockholder" for a period of
three years from the date that such person became an interested stockholder
unless: (i) the transaction resulting in a person becoming an interested
stockholder, or the business combination, is approved by the Board of Directors
of the corporation before the person becomes an interested stockholder; (ii) the
interested stockholder acquired 85% or more of the outstanding voting stock of
the corporation in the same transaction that makes such person an interested
stockholder (excluding shares owned by persons who are both officers and
directors of the corporation, and shares held by certain employee stock
ownership plans); or (iii) on or after the date the person becomes an interested
stockholder, the business combination is approved by the corporation's board of
directors and by the holders of at least 66 2/3% of the corporation's
outstanding voting stock at an annual or special meeting, excluding shares owned
by the interested stockholder. Under Section 203, an "interested stockholder" is
defined as any person who is: (i) the owner of 15% or more of the outstanding
voting stock of the corporation; or (ii) an affiliate or associate of the
corporation and who was the owner of 15% or more of the outstanding voting stock
of the corporation at any time within the three-year period immediately prior to
the date on which it is sought to be determined whether such person is an
interested stockholder.
A corporation may, at its option, exclude itself from the coverage of
Section 203 by amending its certificate of incorporation or bylaws, by action of
its stockholders, to exempt itself from coverage, provided that such bylaw or
certificate of incorporation amendment shall not become effective until 12
months after the date it is adopted. The Company has not adopted such an
amendment to its Certificate of Incorporation or Bylaws.
TRANSFER AGENT AND REGISTRAR AND WARRANT AGENT
The Transfer Agent and Registrar for the Common Stock and the Warrant Agent
for the Warrants is Continental Stock Transfer & Trust Company, 2 Broadway, New
York, New York 10004.
56
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
No prediction can be made as to the effect, if any, that sales of shares of
Common Stock or even the availability of such shares for sale will have on the
market prices prevailing from time to time. The possibility that substantial
amounts of Common Stock may be sold in the public market may adversely affect
prevailing market prices for the Common Stock or the Warrants and could impair
the Company's ability to raise capital through the sale of its equity
securities.
Upon the consummation of this Offering, the Company will have 3,004,013
shares of Common Stock and 2,000,000 Warrants outstanding (assuming no exercise
of warrants or options). All of the 2,000,000 shares of Common Stock and
2,000,000 Warrants being offered hereby will be immediately tradeable without
restriction or further registration under the Securities Act. Subject to certain
contractual restrictions as described below and the continued effectiveness of
the separate registration statement relating to these shares, an additional
507,500 shares of Common Stock issuable upon exercise of the Private Placement
Warrants will be freely tradeable. See "Concurrent Offering." The Selling
Stockholders have agreed not to sell any of such securities for a period of
three months from the date of this Prospectus and not to sell 137,500 of such
securities for a period of nine months from the date of this Prospectus without
the prior written consent of the Representative. The 1,004,013 shares of Common
Stock issued and outstanding prior to this Offering are deemed to be "restricted
securities," as that term is defined under Rule 144 promulgated under the
Securities Act and may be sold without registration pursuant to such rule at
varying times, commencing 90 days from the date hereof. In addition, the Company
currently has outstanding options and warrants (not including the Warrants and
Private Placement Warrants) to purchase an additional 1,654,405 shares of Common
Stock. All of the officers and directors of the Company and all holders of 1% or
more of the issued and outstanding Common Stock and all holders of options,
warrants or other securities convertible, exercisable, or exchangeable for 1% or
more of the issued and outstanding Common Stock (except as described above) have
agreed not to, directly or indirectly, issue, offer, agree or offer to sell,
sell, transfer, assign, encumber, grant an option for the purchase or sale of,
pledge, hypothecate or otherwise dispose of any beneficial interest in such
securities for a period of 13 months following the effective date of the
Registration Statement without the prior written consent of the Company and the
Representative. An appropriate legend shall be marked on the face of the
certificates representing all such securities. The Company has granted certain
piggyback registration rights to BWM Investments, an affiliate of Breslow &
Walker, LLP, counsel to the Company, and Kalkines, Arky, Zall & Bernstein, of
which William Bernstein, a director of the Company, is a partner, in each case
as to 25,000 shares of Common Stock underlying warrants. See "Certain
Transactions" and "Legal Matters," "Principal Stockholders," "Description of
Securities," "Risk Factors--Shares Eligible for Future Sale," and
"Underwriting."
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned restricted shares for at
least one year (including the holding period of any prior owner except an
affiliate) would be entitled to sell within any three-month period a number of
shares that does not exceed the greater of (i) one percent of the number of
shares of Common Stock then outstanding (approximately 30,040 shares immediately
after this Offering), or (ii) the average weekly trading volume of the Common
Stock during the four calendar weeks preceding the filing of a Form 144 with
respect to such sale. Sales under Rule 144 are also subject to certain manner of
sale provisions and notice requirements and to the availability of current
public information about the Company. Under Rule 144(k), a person who is not
deemed to have been an affiliate of the Company at any time during the 90 days
preceding a sale, and who has beneficially owned the shares proposed to be sold
for at least two years (including the holding period of any prior owner except
an affiliate), is entitled to sell such shares without complying with the manner
of sale, public information, volume limitation or notice provisions of Rule 144.
In general, Rule 701 permits resales of shares issued pursuant to certain
compensatory benefit plans and contracts 90 days after the Company becomes
subject to the reporting requirements of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), in reliance upon Rule 144, but without
57
<PAGE>
compliance with certain restrictions including the holding period requirements
contained in Rule 144. Shortly after this Offering, the Company intends to file
a registration statement on Form S-8 under the Securities Act covering shares of
Common Stock reserved for issuance under the Company's stock plans. Such
registration statement will automatically become effective upon filing.
Accordingly, shares registered under such registration statement will, subject
to Rule 144 volume limitations applicable to affiliates, be available for sale
in the open market, unless such shares are subject to vesting restrictions with
the Company or the lock-up agreements described above.
58
<PAGE>
UNDERWRITING
The Underwriters named below (the "Underwriters"), for whom National
Securities Corporation is acting as representative (in such capacity, the
"Representative"), have severally agreed, subject to the terms and conditions of
the Underwriting Agreement (the "Underwriting Agreement") to purchase from the
Company and the Company has agreed to sell to the Underwriters on a firm
commitment basis, the respective number of Shares and Warrants set forth
opposite their names:
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
UNDERWRITER SHARES WARRANTS
- -------------------------------------------------------------------- ---------- ----------
<S> <C> <C>
National Securities Corporation.....................................
---------- ----------
Total......................................................... 2,000,000 2,000,000
---------- ----------
---------- ----------
</TABLE>
The Underwriters are committed to purchase all the Shares of Common Stock
and Warrants offered hereby, if any of such Securities are purchased. The
Underwriting Agreement provides that the obligations of the several Underwriters
are subject to conditions precedent specified therein.
The Company has been advised by the Representative that the Underwriters
propose initially to offer the Securities to the public at the initial public
offering prices set forth on the cover page of this Prospectus and to certain
dealers at such prices less concessions not in excess of $ per Share and
$ per Warrant. Such dealers may reallow a concession not in excess of
$ per Share and $ per Warrant to certain other dealers. After
the commencement of the Offering, the public offering prices, concession and
reallowance may be changed by the Representative.
The Representative has informed the Company that it does not expect sales to
discretionary accounts by the Underwriters to exceed five percent (5%) of the
Securities offered hereby.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute to
payments that the Underwriters may be required to make. The Company has also
agreed to pay to the Representative a non-accountable expense allowance equal to
3% of the gross proceeds derived from the sale of the Securities underwritten,
of which $50,000 has been paid to date.
The Company has granted to the Underwriters an Over-allotment option,
exercisable during the forty-five (45) day period from the date of this
Prospectus, to purchase up to an additional 300,000 shares of Common Stock
and/or 300,000 Warrants at the initial public offering price per Share and
Warrant, respectively, offered hereby, less underwriting discounts and the
non-accountable expense allowance. Such option may be exercised only for the
purpose of covering over-allotments, if any, incurred in the sale of the
Securities offered hereby. To the extent such option is exercised in whole or in
part, each Underwriter will have a firm commitment, subject to certain
conditions, to purchase the number of the additional Securities proportionate to
its initial commitment.
In connection with this Offering, the Company has agreed to sell to the
Representative, for nominal consideration, warrants to purchase from the Company
up to 200,000 shares of Common Stock and/or 200,000 Warrants (the
"Representative's Warrants"). The Representative's Warrants are initially
exercisable at a price of $ per share of Common Stock [120% of the
initial public offering price per Share]and $ per Warrant [120% of the
initial public offering price per Warrant] for a period of four (4) years,
commencing at the beginning of the second year after their issuance and sale and
are restricted from sale, transfer, assignment or hypothecation for a period of
twelve (12) months from the date hereof, except to officers of the
Representative. The Representative's Warrants provide for adjustment in the
number of shares of Common Stock and Warrants issuable upon the exercise thereof
and in the exercise price of the Representative's Warrants as a result of
certain events, including subdivisions and combinations of the Common Stock. The
Representative's Warrants grant to the holders thereof certain rights of
registration for the securities issuable upon exercise thereof.
59
<PAGE>
All officers and directors of the Company and all holders of 1% or more of
the issued and outstanding Common Stock and all holders of options, warrants or
other securities convertible, exercisable or exchangeable for 1% or more of the
issued and outstanding Common Stock have agreed not to, directly or indirectly,
issue, offer, agree or offer to sell, sell, transfer, assign, encumber, grant an
option for the purchase or sale of, pledge, hypothecate or otherwise dispose of
any beneficial interest in such securities for a period of thirteen (13) months
following the effective date of the Registration Statement without the prior
written consent of the Company and the Representative. An appropriate legend
shall be marked on the face of certificates representing all such securities.
The Company has agreed not to, without the prior written consent of the
Representative, issue, sell, agree or offer to sell, grant an option for the
purchase or sale of, or otherwise transfer or dispose of any of its securities
for a period of thirteen (13) months following the effective date of the
Registration Statement, except in connection with the exercise of the
Underwriters' Over-allotment Option and the issuance of shares of Common Stock
upon the exercise of currently outstanding options and warrants.
The Company has agreed that, for a period of five (5) years from the
effective date of the Registration Statement, the Representative may designate
for election one person to the Company's Board of Directors. In the event the
Representative elects not to exercise the right, then it may designate one
person to attend all the Company's Board of Directors meetings as an observer.
Such person shall be entitled to attend all meetings and to receive all notices
of meetings of the Company's Board of Directors and all other correspondence and
communications sent by the Company to members of its Board of Directors. The
Company has agreed to reimburse designees of the Representative for their
out-of-pocket expenses incurred in connection with their attendance of meetings
of the Company's Board of Directors.
Prior to this Offering, there has been no public market for the Common Stock
or the Warrants. Consequently, the initial public offering prices of the
Securities have been determined by negotiation between the Company and the
Representative and do not necessarily bear any relationship to the Company's
asset value, net worth or other established criteria of value.
Upon the exercise of any Warrants more than one year after the date of this
Prospectus, which exercise was solicited by the Representative, and to the
extent not inconsistent with the guidelines of the National Association of
Securities Dealers, Inc. and the Rules and Regulations of the Commission, the
Company has agreed to pay the Representative a commission of five percent (5%)
of the aggregate exercise price of such Warrants in connection with bona fide
services provided by the Representative relating to any warrant solicitation
undertaken by the Representative. However, no compensation will be paid to the
Representative in connection with the exercise of the Warrants if (a) the market
price of the Common Stock is lower than the exercise price, (b) the Warrants
were held in a discretionary account, or (c) the Warrants are exercised in an
unsolicited transaction where the holder of the Warrants has not stated in
writing that the transaction was solicited and has not designated in writing the
Representative as soliciting agent. Unless granted an exemption by the
Commission from its Rule 101 under the Securities Act, the Representative and
any soliciting broker-dealers will be prohibited from engaging in any market-
making activities or solicited brokerage activities with regard to the Company's
securities for the periods prescribed by Rule 101 prior to any solicitation of
the exercise of the Warrants until the later of the termination of such
solicitation activity or the termination (by waiver or otherwise) of any right
the Representative or any soliciting broker-dealers may have to receive a fee
for the exercise of the Warrants following such solicitation. As a result, the
Representative and any soliciting broker-dealers may be unable to continue to
provide a market for the Common Stock or Warrants during certain periods while
the Warrants are exercisable. If the Representative has engaged in any of the
activities prohibited by Rule 101 during the periods described above, the
Representative undertakes to waive unconditionally its rights to receive a
commission on the exercise of such Warrants.
In connection with this Offering, certain Underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the
60
<PAGE>
Securities. Such transactions may include stabilization transactions effected in
accordance with Rule 104 of Regulation M, pursuant to which such persons may bid
for or purchase Common Stock or Warrants for the purpose of stabilizing their
respective market prices. The Underwriters also may create a short position for
the account of the Underwriters by selling more Securities in connection with
the Offering than they are committed to purchase from the Company, and in such
case may purchase Securities in the open market following completion of the
Offering to cover all or a portion of such short position. The Underwriters may
also cover all or a portion of such short position by exercising the
Underwriters' Over-allotment Option referred to above. In addition, the
Representative, on behalf of the Underwriters, may impose "penalty bids" under
contractual arrangements with the Underwriters whereby it may reclaim from an
Underwriter (or dealer participating in the Offering) for the account of other
Underwriters, the selling concession with respect to Securities that are
distributed in the Offering but subsequently purchased for the account of the
Underwriters in the open market. Any of the transactions described in this
paragraph may result in the maintenance of the price of the Securities at a
level above that which might otherwise prevail in the open market. None of the
transactions described in this paragraph is required, and, if they are
undertaken, they may be discontinued at any time.
The foregoing is a summary of the principal terms of the agreements
described above and does not purport to be complete. Reference is made to a copy
of each such agreement which are filed as exhibits to the Registration
Statement. See "Additional Information."
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for the
Company by Breslow & Walker, LLP, New York, New York. BWM Investments, an
affiliate of Breslow & Walker, LLP, is the owner of warrants to purchase 25,000
shares of Common Stock at an exercise price of $.01 per share. Orrick,
Herrington & Sutcliffe LLP, New York, New York, has acted as counsel to the
underwriters in connection with this Offering.
EXPERTS
The balance sheet as at December 31, 1996 and the statements of operations,
capital deficiency and cash flows for the years ended December 31, 1995 and 1996
of QuietPower Systems, Inc., appearing in this Prospectus and Registration
Statement have been audited by Richard A. Eisner & Company, LLP, independent
auditors, as set forth in their report thereon appearing elsewhere herein, and
are included in reliance upon such report given upon the authority of such firm
as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission, 450 Fifth Street, N.W.,
Washington, D.C., a Registration Statement on Form SB-2 under the Securities Act
of 1933, as amended, for the registration of Securities offered hereby. This
Prospectus, which is part of the Registration Statement, does not contain all of
the information contained in the Registration Statement. For further information
with respect to the Company and the Securities offered hereby, reference is made
to the Registration Statement, including exhibits thereto, which may be
inspected, without charge, at the office of the Securities and Exchange
Commission, or copies of which may be obtained from the Commission in
Washington, D.C., upon payment of the requisite fees, or from the Commission's
Website at http://www.sec.gov. Statements contained in this Prospectus as to the
intent of any contract or other document referred to are not necessarily
complete, and in each instance reference is made to the copy of such contract or
other document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference.
61
<PAGE>
QUIETPOWER SYSTEMS, INC.
-I N D E X -
<TABLE>
<CAPTION>
PAGE
NUMBER
-------------
<S> <C>
REPORT OF INDEPENDENT AUDITORS......................................................................... F-2
BALANCE SHEET AS AT DECEMBER 31, 1996.................................................................. F-3
STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1995 AND DECEMBER 31, 1996................... F-4
STATEMENTS OF CHANGES IN CAPITAL DEFICIENCY FOR THE YEARS ENDED DECEMBER 31, 1995 AND DECEMBER 31,
1996................................................................................................. F-5
STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1995 AND DECEMBER 31, 1996................... F-6
NOTES TO FINANCIAL STATEMENTS.......................................................................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders of
QuietPower Systems, Inc.
We have audited the accompanying balance sheet of QuietPower Systems, Inc.
as at December 31, 1996 and the related statements of operations, changes in
capital deficiency and cash flows for the years ended December 31, 1995 and
December 31, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements enumerated above present fairly, in
all material respects, the financial position of QuietPower Systems, Inc. as at
December 31, 1996 and the results of its operations and its cash flows for the
years ended December 31, 1995 and December 31, 1996 in conformity with generally
accepted accounting principles.
Richard A. Eisner & Company, LLP
New York, New York
April 29, 1997
F-2
<PAGE>
QUIETPOWER SYSTEMS, INC.
BALANCE SHEET
AS AT DECEMBER 31, 1996
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash.......................................................................... $ 6,000
Accounts receivable (including unbilled of $49,000)........................... 81,000
Other current assets.......................................................... 8,000
----------
Total current assets...................................................... 95,000
Equipment, net.................................................................. 40,000
Technology rights, less accumulated amortization of $172,000.................... 328,000
----------
TOTAL..................................................................... $ 463,000
----------
----------
LIABILITIES AND CAPITAL DEFICIENCY
Current liabilities:
Due to bank................................................................... $ 13,000
Accounts payable and accrued expenses......................................... 359,000
Due to Noise Cancellation Technologies, Inc., including technology rights of
$100,000.................................................................... 312,000
Notes payable................................................................. 65,000
----------
Total current liabilities................................................. 749,000
Advances from stockholder..................................................... 75,000
Due to Noise Cancellation Technologies, Inc., less current portion............ 200,000
Notes payable, less current portion........................................... 446,000
Other liabilities............................................................. 73,000
----------
Total liabilities......................................................... 1,543,000
----------
Commitments and other matters (Notes D and J)
Capital deficiency:
Preferred stock--$.01 par value, 10,000 shares authorized; 1,325 shares of
Series A convertible preferred stock issued and outstanding (liquidation
value $1,325,000)........................................................... 1,059,000
Common stock--$.01 par value, 10,000,000 shares authorized; 684,855 shares
issued and outstanding...................................................... 7,000
Additional paid-in capital.................................................... 2,836,000
Unearned portion of compensatory stock options and warrants................... (303,000)
Accumulated (deficit)......................................................... (4,679,000)
----------
Total capital deficiency.................................................. (1,080,000)
----------
TOTAL..................................................................... $ 463,000
----------
----------
</TABLE>
The accompanying notes to financial statements are an integral part hereof.
F-3
<PAGE>
QUIETPOWER SYSTEMS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------------------
<S> <C> <C>
1995 1996
------------ -------------
Revenues:
Product sales...................................................................... $ 35,000 $ 216,000
Development funding................................................................ 315,000
------------ -------------
Total revenues................................................................. 350,000 216,000
------------ -------------
Costs and expenses:
Cost of sales...................................................................... 29,000 260,000
Development costs.................................................................. 335,000 187,000
Selling, general and administrative................................................ 843,000 1,714,000
------------ -------------
1,207,000 2,161,000
------------ -------------
Interest expense..................................................................... 17,000 333,000
------------ -------------
NET (LOSS)........................................................................... $ (874,000) $ (2,278,000)
------------ -------------
------------ -------------
Net (loss) per common share.......................................................... $ (0.62) $ (1.53)
------------ -------------
------------ -------------
Weighted average number of shares outstanding........................................ 1,402,625 1,484,055
------------ -------------
------------ -------------
</TABLE>
The accompanying notes to financial statements are an integral part hereof.
F-4
<PAGE>
QUIETPOWER SYSTEMS, INC.
STATEMENTS OF CHANGES IN CAPITAL DEFICIENCY
<TABLE>
<CAPTION>
SERIES A UNEARNED
CONVERTIBLE PORTION OF
PREFERRED COMMON STOCK ADDITIONAL COMPENSATORY
STOCK ---------------------- PAID-IN STOCK OPTIONS ACCUMULATED
AMOUNT SHARES AMOUNT CAPITAL AND WARRANTS (DEFICIT) TOTAL
----------- --------- ----------- ----------- ------------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance--December 31, 1994............ 641,399 $ 6,000 $1,326,000 $(1,527,000) $ (195,000)
Stock issued in connection with
private placements.................. 33,456 1,000 174,000 175,000
Fair value of warrants issued with
debt................................ 16,000 16,000
Fair value of stock option issued to
consultant.......................... 2,000 2,000
Warrants issued in consideration of
forbearance of demand payment....... 39,000 39,000
Net (loss) for the year ended December
31, 1995............................ (874,000) (874,000)
--------- ----------- ----------- ------------ ----------
Balance--December 31, 1995............ 674,855 7,000 1,557,000 (2,401,000) (837,000)
Stock issued in connection with
private placement................... 10,000 68,000 68,000
Stock issued in connection with
private placement of Series A
preferred stock, net of expenses of
$266,000............................ $1,059,000 1,059,000
Fair value of warrants issued with
debt................................ 493,000 493,000
Fair value of stock options and
warrants issued to consultants...... 209,000 209,000
Warrants issued in consideration of
forbearance of demand payment....... 169,000 169,000
Compensatory stock options and
warrants issued..................... 340,000 $(303,000) 37,000
Net (loss) for the year ended December
31, 1996............................ (2,278,000) (2,278,000)
----------- --------- ----------- ----------- ------------- ------------ ----------
BALANCE--DECEMBER 31, 1996............ $1,059,000 684,855 $ 7,000 $2,836,000 $(303,000) $(4,679,000) $(1,080,000)
----------- --------- ----------- ----------- ------------- ------------ ----------
----------- --------- ----------- ----------- ------------- ------------ ----------
</TABLE>
The accompanying notes to financial statements are an integral part hereof.
F-5
<PAGE>
QUIETPOWER SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------------
<S> <C> <C>
1995 1996
----------- -------------
Cash flows from operating activities:
Net (loss)............................................................................. $ (874,000) $ (2,278,000)
Adjustments to reconcile net (loss)
to net cash (used in) operating activities:
Depreciation and amortization........................................................ 77,000 78,000
Stock options and warrants issued:
Employee and director compensation................................................. 37,000
Interest........................................................................... 16,000 269,000
Consulting......................................................................... 2,000 209,000
Forbearance of demand payment...................................................... 39,000 169,000
Changes in operating assets and
liabilities:
Decrease (increase) in accounts receivable......................................... 152,000 (71,000)
(Increase) in other current assets................................................. (8,000)
Increase in accounts payable and accrued expenses.................................. 202,000
Increase (decrease) in due to
Noise Cancellation Technologies, Inc............................................. 1,000 (9,000)
----------- -------------
Net cash (used in) operating activities.......................................... (385,000) (1,604,000)
----------- -------------
Cash flows from investing activities:
Purchase of equipment.................................................................. (7,000) (40,000)
Acquisition of technology rights....................................................... (150,000)
----------- -------------
Net cash (used in) investing activities.......................................... (7,000) (190,000)
----------- -------------
Cash flows from financing activities:
Net proceeds from sale of common stock................................................. 175,000 68,000
Advance from bank...................................................................... 13,000
Net proceeds from sale of Series A preferred stock..................................... 1,059,000
Proceeds from notes payable............................................................ 93,000 855,000
Repayment of notes payable............................................................. (213,000)
Net advances (payments) from stockholder............................................... 22,000 (2,000)
----------- -------------
Net cash provided by financing activities........................................ 290,000 1,780,000
----------- -------------
NET (DECREASE) IN CASH AND CASH EQUIVALENTS.............................................. (102,000) (14,000)
Cash--beginning of year.................................................................. 122,000 20,000
----------- -------------
CASH--END OF YEAR........................................................................ $ 20,000 $ 6,000
----------- -------------
----------- -------------
Supplemental disclosure of cash flow information:
Cash paid during the year for interest............................................... $ 11,000
</TABLE>
The accompanying notes to financial statements are an integral part hereof.
F-6
<PAGE>
QUIETPOWER SYSTEMS, INC
NOTES TO FINANCIAL STATEMENTS
(NOTE A)--THE COMPANY:
QuietPower Systems, Inc. (the "Company") was incorporated on May 4, 1992.
The Company (formerly "Active Acoustical Solutions, Inc.") is engaged in the
development, commercialization and marketing of products using two basic
technologies: active noise and vibration control, which is used for transformers
and communication headsets; and failure diagnostic and condition monitoring,
which is used for substation equipment. For active noise and vibration control
the Company is dependent on the proprietary technology which Noise Cancellation
Technologies, Inc. ("NCT") holds or has rights to (see Note C).
The Company has incurred substantial losses since inception and at December
31, 1996 had a working capital deficiency and capital deficiency of $654,000 and
$1,080,000, respectively. These losses have been funded primarily from the net
proceeds of debt and equity securities and from project funding provided by gas
and electric utility companies. The Company has not yet generated any
significant revenues from sales of its products. The Company obtained additional
financing during February, March and April 1997 (see Note L) and is seeking
additional financing through a proposed initial public offering of common stock
and warrants (see Note H[4]). However, there is no assurance when or if such
funding can be obtained or whether it will be sufficient to fund operations.
(NOTE B)--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
[1] USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
[2] EQUIPMENT:
Equipment is stated at cost. Depreciation is provided using the
straight-line method over the estimated useful lives of the assets which range
from three to five years.
[3] FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying value of cash, accounts receivable, accounts payable and notes
payable approximates their fair value.
[4] TECHNOLOGY RIGHTS:
Manufacturing, marketing and distribution rights acquired from NCT (see Note
C) are stated at cost and are being amortized on the straight-line basis over 7
years. The Company evaluates the appropriateness of the amortization period and
related carrying amount using several factors, including the estimated future
undiscounted cash flows from revenues resulting from these rights.
[5] REVENUE RECOGNITION:
Revenue from development contracts and transformer quieting system sales are
recognized as services are performed under the percentage of completion method.
Under the percentage of completion method, revenues and gross profit are
recognized as work is performed based on the relationship between actual costs
incurred and total estimated costs to complete. Estimated losses are recorded
when identified.
F-7
<PAGE>
QUIETPOWER SYSTEMS, INC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(NOTE B)--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
[5] REVENUE RECOGNITION: (CONTINUED)
Revenue from sales of communication headsets are recognized upon shipment.
[6] NET LOSS PER COMMON SHARE:
Net loss per common share is based on the weighted average number of common
shares outstanding during the period. In accordance with Staff Accounting
Bulletin No. 83, common and convertible preferred stock issued and options and
warrants granted during the twelve-month period prior to filing of the proposed
initial public offering ("IPO") have been included in the calculation of common
and common equivalent shares outstanding as if they were outstanding for all
periods presented using the treasury stock method and an assumed public offering
price of $8.50 per share.
[7] STOCK-BASED COMPENSATION:
During 1996 the Company adopted Statement of Financial Accounting Standards
Board No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"). The
provisions of SFAS No. 123 allow companies to either expense the estimated fair
value of stock options or other awards granted to employees or to continue to
follow the intrinsic value method set forth in APB Opinion 25, "Accounting for
Stock Issued to Employees" ("APB 25") but disclose the pro forma effects on net
income (loss) had the fair value of the options been expensed. The Company has
elected to apply APB 25 in accounting for stock options and warrants (see Note
H). Accordingly, the Company accounts for the difference between the exercise
price of compensatory stock options and warrants and the fair value of the stock
as "Unearned compensatory stock options and warrants," which the Company charges
to operations over the vesting period.
(NOTE C)--LICENSED TECHNOLOGY RIGHTS:
The Company entered into a master agreement (the "NCT Agreement") in March
1995, which was amended in April 1995 and May 1996, with NCT which superseded
previous agreements entered into in 1993 (the "1993 Agreements"). Under the NCT
Agreement, the Company was granted an exclusive and worldwide license, under
patents and patent applications owned or controlled by NCT, to manufacture,
market, sell and distribute transformer quieting products and gas turbine
quieting products and all future products funded by the Company related to the
electric power generation, transmission, distribution and supply industries. The
NCT Agreement provides that after the Company recoups 150% of its development
costs from pre-tax profit, it shall pay a royalty of 9% on the first $6,000,000
in sales of noise reduction systems and 6% of sales thereafter. For these rights
the Company agreed to pay a license fee to NCT of $750,000, $250,000 of which
the Company paid to NCT in June of 1994 pursuant to the 1993 Agreements, and the
balance payable in equal monthly installments. In April 1995 the Company also
returned a warrant to purchase 750,000 shares of NCT's common stock granted
pursuant to the 1993 Agreements and the $500,000 balance due NCT for the
technology rights was reduced to $250,000 to be paid in 30 monthly installments
of $8,333. Accordingly, the Company recorded technology rights of $250,000 in
1993 and an additional $250,000 in 1995 which is being amortized over seven
years. Amortization for the years ended December 31, 1995 and December 31, 1996
was $68,000 and $63,000, respectively. At December 31, 1996 the balance due for
technology rights was $100,000, payable in monthly installments of $8,333.
F-8
<PAGE>
QUIETPOWER SYSTEMS, INC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(NOTE C)--LICENSED TECHNOLOGY RIGHTS: (CONTINUED)
In addition, in October 1994, the Company entered into a distributor
agreement with NCT relating to industrial communication headsets. The agreement
provides that the Company shall have nonexclusive distribution rights.
In April 1997 the Company amended the NCT Agreement whereby the Company paid
$136,000 to NCT in April 1997 and is required to pay $200,000 upon the earlier
of (a) the closing date of the contemplated IPO, or (b) January 1, 1998. The
amended agreement also requires the Company to repay the $200,000 due to NCT by
applying towards repayment, 15% of all funds received after April 21, 1997 from
all financing activities other than the proposed IPO. The agreement also
requires that the Company pay NCT interest at 10% per annum on the balance
outstanding after July 1, 1997. As a result of this amendment the Company
classified $200,000 as a noncurrent liability due to NCT at December 31, 1996.
(NOTE D)--JOINT VENTURE AGREEMENTS:
On November 13, 1996 the Company entered into a five year joint venture (the
"GE JV Agreement") with Prolec-GE, S. de R.L. de C.V. ("Prolec-GE"), a joint
venture between General Electric Company and Prolec S.A. de C.V., to develop,
market and sell failure diagnostic and condition monitoring systems. The GE JV
Agreement provides for sole ownership of all of the acoustically-based failure
diagnostic and condition monitoring technology by the Company. Earnings and
losses from the joint venture will be shared equally and each party is
obligated, upon approval of each new project by the parties, to contribute such
personnel and resources as shall have been approved in connection with such
project.
On June 15, 1996 the Company entered into a five year joint venture (the
"ABB JV Agreement") with ABB Secheron SA, an indirect wholly owned subsidiary of
ABB Asea Brown Boveri Limited ("ABB"), to further develop, market and sell
active noise and vibration control systems for transformers for the European
market. The ABB JV Agreement provides for the sole ownership of the active noise
and vibration control technology by the Company. Earnings and losses from the
joint venture will be shared equally and each party is obligated, upon approval
by the parties of a product improvement program, to contribute such personnel
and resources to a project as shall have been approved in connection with such
project.
The joint venture agreements do not specify dollar amounts to be funded and
as of December 31, 1996 the Company has not been requested to provide funds for
either joint venture. Services charged to or incurred by the joint ventures were
not material.
(NOTE E)--EQUIPMENT:
At December 31, 1996 equipment consists of the following:
<TABLE>
<S> <C>
Furniture and fixtures............................................. $ 2,000
Computers.......................................................... 44,000
Field equipment.................................................... 23,000
---------
Total.......................................................... 69,000
Less accumulated depreciation...................................... 29,000
---------
Net............................................................ $ 40,000
---------
---------
</TABLE>
F-9
<PAGE>
QUIETPOWER SYSTEMS, INC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(NOTE F)--ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
At December 31, 1996 accounts payable and accrued expenses consists of the
following:
<TABLE>
<S> <C>
Professional fees................................................. $ 107,000
Occupancy costs (Note K).......................................... 73,000
Interest.......................................................... 54,000
Others............................................................ 125,000
---------
$ 359,000
---------
---------
</TABLE>
(NOTE G)--NOTES PAYABLE:
The notes payable at December 31, 1996 consist of the following:
<TABLE>
<S> <C>
Note bearing interest at 6% per annum, convertible into 6,250 shares of common
stock, guaranteed by the president of the Company, and due on demand (1)........ $ 25,000
Notes bearing interest at 12% per annum, convertible into 28,382 shares of common
stock and due on demand (1)..................................................... 175,000
Notes bearing interest at 12% per annum through November 1996 and 15% thereafter,
due in four quarterly installments of $133,750 beginning February 1997 (face
value $535,000, effective interest rate ranging from 194% to 246%), and
collateralized by all of the assets of the Company. The loan agreement, among
other matters, requires that certain officers and significant stockholders of
the Company grant proxies for their shares of the Company in the event of
default with respect to any payments (2)........................................ 311,000
---------
511,000
Less current maturities........................................................... 65,000
---------
$ 446,000
---------
---------
</TABLE>
- ------------------------
(1) In conjunction with the issuance of these notes, the Company granted
investors warrants to purchase 29,926 shares of common stock at an exercise
price ranging from $3.625 to $6.80 per share. During the years ended
December 31, 1996 and December 31, 1995 the Company charged to interest
$23,000 and $3,000, respectively, representing the fair value of these
warrants. On April 8, 1997, certain noteholders elected to receive 39,466
shares of common stock in lieu of principal and interest of $200,000 and
$27,144, respectively. As a result of these elections $200,000 of this
liability is classified as long-term debt at December 31, 1996.
(2) In conjunction with the issuance of these notes (the "Secured Notes") the
Company granted the investors 107,000 units, at $0.01 per unit (the "Unit")
each comprised of one share of common stock and a warrant to purchase one
share of common stock at 150% of the IPO price. The Company valued these
units at $362,000, which is being accounted for as debt discount. In April
1997 the Secured Notes were amended whereby the Company paid the principal
payment due February 24, 1997 of $133,750 plus accrued interest of $16,752
and the remaining principal of $401,250 and accrued interest is due at the
earlier of the closing of an initial public offering or a private offering
greater than $3 million, but no later than January 15, 1998. In connection
therewith the Company granted the holders
F-10
<PAGE>
QUIETPOWER SYSTEMS, INC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(NOTE G)--NOTES PAYABLE: (CONTINUED)
26,750 additional Units at $0.01 per unit. The Company valued these warrants
at $170,000 representing the fair value at date of grant which will be
charged to operations. As a result of this amendment, $277,000 of this
liability is classified as long-term debt at December 31, 1996.
In addition, during 1995 and 1996 the Company issued notes of $68,000 and
$145,000, respectively, which were repaid in 1996. In conjunction with these
notes and certain extensions granted, the Company issued warrants. The Company
charged to interest $13,000 and $108,000 for the years ended December 31, 1995
and December 31, 1996, respectively, for the fair value of these warrants.
(NOTE H)--CAPITAL DEFICIENCY:
[1] PREFERRED STOCK:
During 1996 the Board of Directors designated a total of 1,325 shares of
preferred stock as Series A convertible preferred stock. The holders of Series A
preferred stock are entitled to (i) convert on a one-for-two hundred basis to
common stock plus five-year warrants to purchase 200 shares of common stock at
$2.50 per share subject to adjustment, as defined, (ii) voting rights equivalent
to voting rights of common stockholders at 200 hundred votes per share (iii)
liquidation preferences of $1,000 per preferred share and (iv) dividends when
declared equal to 200 times the amount of any cash dividend payable to holders
of common stock. The Series A preferred stock will automatically convert into
265,000 shares of common stock and 265,000 warrants to purchase common stock
upon the completion of an IPO. The number of shares of common stock and warrants
are subject to adjustment to the extent the investors do not receive a 35%
annual rate of return on the amount invested, based on the value of the
securities received upon conversion at the IPO.
[2] STOCK OPTIONS:
The Company applies APB 25 in accounting for stock based compensation to
employees and, accordingly, recognizes compensation expense for the difference
between the fair value of the underlying common stock and the exercise price of
the option and warrant at the date of grant. The effect of applying SFAS No. 123
on 1995 and 1996 pro forma net loss is not necessarily representative of the
effects on reported net loss for future years due to, among other things, (1)
the vesting period of the stock options and (2) the fair value of additional
stock options that may be granted in future years. Had compensation cost for the
Company's warrants and stock options granted to employees been determined based
upon the fair value at the grant date consistent with the methodology prescribed
under SFAS No. 123, the Company's net loss in 1995 and 1996 would have been
approximately $(893,000) and $(2,364,000) or $(0.64) per share and $(1.59) per
share, respectively. The weighted average fair value of the options and warrants
granted during 1995 and 1996 are estimated at $1.21 and $1.88, respectively, on
the date of grant using the Black-Scholes option-pricing model with the
following assumptions: dividend yield 0%, volatility of 30%, risk-free interest
rates ranging from 5.8% to 6.2% for 1995 and 5.2% to 5.8% for 1996, and expected
life of four years for five year options and warrants and six years for ten year
options and warrants.
The Company's 1993 stock option plan (the "1993 Plan") provides for the
granting of options to purchase up to 250,000 shares of common stock, pursuant
to which officers, directors, key employees and consultants are eligible to
receive incentive and/or nonstatutory stock options. Options granted under the
1993 Plan are exercisable for a period of up to 10 years from date of grant at
an exercise price which is not
F-11
<PAGE>
QUIETPOWER SYSTEMS, INC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(NOTE H)--CAPITAL DEFICIENCY: (CONTINUED)
less than the fair value on date of grant, except that the exercise price of
options granted to a stockholder owning more than 10% of the outstanding capital
stock may not be less than 110% of the fair value of the common stock at date of
grant. Options generally vest 25% annually on the anniversary of the date of
grant.
Additional information with respect to the 1993 Plan activity is summarized
as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
<S> <C> <C> <C> <C>
1995 1996
---------------------- ----------------------
<CAPTION>
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Outstanding at beginning of year...................................... 88,390 $ 3.80 210,990 $ 4.20
Options granted....................................................... 127,600 $ 4.47 36,000 $ 4.48
Options cancelled or expired.......................................... (5,000) $ 4.00 (7,500) $ 5.00
--------- ---------
Outstanding at end of year............................................ 210,990 $ 4.20 239,490 $ 4.22
--------- ---------
Options exercisable at year end....................................... 48,733 $ 3.57 110,235 $ 4.07
--------- ---------
--------- ---------
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- ------------------------
<S> <C> <C> <C> <C> <C>
WEIGHTED
AVERAGE
REMAINING WEIGHTED WEIGHTED
RANGE OF CONTRACTUAL AVERAGE AVERAGE
EXERCISE NUMBER LIFE EXERCISE NUMBER EXERCISE
PRICE OUTSTANDING (IN YEARS) PRICE EXERCISABLE PRICE
- ---------------- ----------- --------------- ----------- ----------- -----------
$ 2.50 27,500 3.77 $ 2.50 23,500 $ 2.50
$ 4.00 to $5.00 196,890 7.73 $ 4.11 80,445 $ 4.17
$ 8.77 15,100 3.97 $ 8.77 6,290 $ 8.77
----------- -----------
Total 239,490 7.04 $ 4.22 110,235 $ 4.07
----------- -----------
----------- -----------
</TABLE>
As of December 31, 1996, options for the purchase of 10,510 shares were
available for future grant under the 1993 Plan.
F-12
<PAGE>
QUIETPOWER SYSTEMS, INC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(NOTE H)--CAPITAL DEFICIENCY: (CONTINUED)
[3] WARRANTS:
The Company has the following warrants outstanding for the purchase of its
common stock:
<TABLE>
<CAPTION>
EXERCISE DECEMBER 31,
PRICE --------------------
PER SHARE EXPIRATION DATE 1995 1996
- --------- ------------------------------------------------------------------------------- --------- ---------
<S> <C> <C> <C>
$ .01 May 2001....................................................................... 157,000(1)
.10 December 2006.................................................................. 20,000(2)
2.50 August 2001.................................................................... 5,000
2.50 October 2001................................................................... 45,000
2.50 December 2001.................................................................. 85,500
2.50 April 2006..................................................................... 125,000(2)
2.50 December 2006.................................................................. 165,500(2)
3.625 March/April 2001............................................................... 24,852
4.00 July 2000...................................................................... 40,000
6.00 July/August 2000............................................................... 25,000 25,000
6.00 August 2001.................................................................... 30,000
6.80 October 2000................................................................... 24,706 14,706
6.80 February/March 2001............................................................ 12,500
8.77 August 2001.................................................................... 2,000
--------- ---------
Total.......................................................................... 89,706 712,058
--------- ---------
--------- ---------
Weighted average exercise price................................................ $ 5.33 $ 2.38
--------- ---------
--------- ---------
</TABLE>
As of December 31, 1996 there were 401,558 warrants exercisable at a
weighted-average exercise price of $2.40.
- ------------------------
(1) Includes 107,000 shares of common stock underlying the Units issued in
conjunction with the Secured Notes.
(2) Warrants unexercisable at December 31, 1996. Generally, these warrants are
exercisable at 25% per annum on each anniversary of the date of grant.
[4] PROPOSED PUBLIC OFFERING:
The Company has signed a letter of intent with an underwriter with respect
to a proposed public offering of the Company's securities. There is no assurance
that such offering will be consummated. In connection therewith the Company
anticipates incurring substantial expenses which, if the offering is not
consummated, will be charged to expense.
(NOTE I)--INCOME TAXES:
At December 31, 1996, the Company had approximately $4,340,000 of net
operating loss carryforwards for federal income tax purposes which expire
through 2011.
At December 31, 1996, the Company had a deferred tax asset of approximately
$2,070,000 representing the benefits of its net operating loss carryforwards and
certain expenses not currently deductible. The
F-13
<PAGE>
QUIETPOWER SYSTEMS, INC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(NOTE I)--INCOME TAXES: (CONTINUED)
Company has provided a valuation reserve against the full amount of its deferred
tax asset since the likelihood of realization cannot be determined. The
difference between the statutory tax rate of 34% and the Company's effective tax
rate of 0% is substantially due to the increase in the valuation allowance of
$370,000 (1995) and $1,020,000 (1996), respectively.
Section 382 of the Internal Revenue Code contains provisions which may limit
the loss carryforwards available if significant changes occur in stockholder
ownership interests. These limitations will apply if the proposed public
offering is consummated. Accordingly, the Company would be subject to a
significant annual limitation on the utilization of its net operating losses.
(NOTE J)--COMMITMENTS AND OTHER MATTERS:
[1] LEASE:
The Company is obligated under a lease with a related party (see Note K[1])
for office space expiring September 1999. Minimum lease payments are as follows:
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31,
- ----------------------------------------------------------------------------------
<S> <C>
1997.......................................................................... $ 107,000
1998.......................................................................... 107,000
1999.......................................................................... 80,000
----------
Total..................................................................... $ 294,000
----------
----------
</TABLE>
The lease provides for escalations for increases in real estate taxes and
certain operating expenses.
Rent expense (net of sublease income) was approximately $61,000 and $73,000
for the years ended December 31, 1995 and December 31, 1996, respectively.
[2] EMPLOYMENT AGREEMENTS:
In March 1995, the Company entered a three year employment agreement with
the President which provides for annual base salary of $195,000 (subject to
yearly increase based on the Consumer Price Index) and bonuses at the discretion
of the Compensation Committee.
In addition, effective January 1, 1996, the Company entered into employment
agreements with two officers which provide for annual base salaries aggregating
$300,000 (subject to yearly increase based on the Consumer Price Index and
bonuses at the discretion of the Compensation Committee) expiring on January 1,
1999.
[3] 401(K) PLAN:
The Company has a retirement savings plan for eligible full-time employees
pursuant to Section 401(k) of the Internal Revenue Code. The Company at its
discretion may make contributions up to 15% of plan participants' compensation.
The Company made no contributions to the plan for the years ended December 31,
1995 and December 31, 1996.
F-14
<PAGE>
QUIETPOWER SYSTEMS, INC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(NOTE J)--COMMITMENTS AND OTHER MATTERS: (CONTINUED)
[4] MAJOR CUSTOMERS--CONCENTRATION OF RISK:
Two customers accounted for 60% and 22% of revenues for the year ended
December 31, 1996 and 9% and 35% for the year ended December 31, 1995 and an
additional customer accounted for 50% of revenues for year ended December 31,
1995.
[5] ROYALTIES:
Through December 31, 1995 the Company and certain utilities were engaged in
the development of active noise and vibration control and failure diagnostic and
condition monitoring technologies. In connection therewith, these utilities
provided development funding. In some cases, as an inducement to provide funding
the Company agreed to pay royalties based on 3% of future products sold and 5%
purchase discounts which in the aggregate may provide returns of up to 200% of
the amount funded by the utilities or approximately $2.2 million.
(NOTE K)--RELATED PARTY TRANSACTIONS:
[1] The Company leases office space from a law firm of which certain
partners are directors/ stockholders of the Company (see Note J[1]). Amounts
owed to this related party aggregated approximately $146,000 as of December 31,
1996. During the year ended December 31, 1995 the Company granted the law firm a
warrant to purchase 20,000 shares of common stock at $4.00 per share, which was
valued at $19,000 and charged to operations. During the year ended December 31,
1996 the Company cancelled the warrant granted in 1995 and granted new warrants
to purchase 25,000 shares of common stock at $0.01 per share, which were valued
at $85,000 and charged to operations. In January 1997, the Company issued the
law firm 14,692 units each comprised of one share of common stock and a warrant
to purchase one share of common stock at $2.50 a share, to satisfy $73,000 of
$146,000 due at December 31, 1996. Accordingly, $73,000 of this liability is
classified as long-term.
[2] At December 31, 1996 the advances from a stockholder of $75,000 are
noninterest bearing and are payable at the earlier of the closing of an IPO or
January 15, 1998.
[3] For the years ended December 31, 1995 and December 31, 1996
approximately $58,000 and $163,000, respectively, was incurred for services
provided by an investment banking firm, of which one partner is also a director
of the Company. Another director is a principal of a firm which has an agreement
whereby it will share in the fees received by the investment banking firm from
the Company. During the year ended December 31, 1996 the Company granted the
investment banking firm 60,000 warrants valued at $127,000 which were charged to
operations.
In April 1997 the Company entered into an agreement with the investment
banking firm whereby the investment banking firm is to receive commissions,
based on certain percentages of proceeds obtained by the Company in connection
with certain purchase, financing and venture transactions (excluding an IPO) for
financial and investment banking services.
(NOTE L)--SUBSEQUENT EVENTS:
Through April 18, 1997, in contemplation of its proposed IPO, the Company
issued subordinated convertible promissory notes (the "Subordinated Notes") in
the principal amount of $625,000, and paid $63,000 of offering costs to the
related party referred to in Note K[3]. The Subordinated Notes bear interest at
10% per annum and are due and payable together with accrued but unpaid interest
at the
F-15
<PAGE>
QUIETPOWER SYSTEMS, INC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(NOTE L)--SUBSEQUENT EVENTS: (CONTINUED)
option of the holder, on the earliest of the closing of an initial public
offering of the Company's common stock, but no later than one year after the
date of execution of the Subordinated Notes. After an IPO, the note holders may
convert the notes into common stock at the IPO price. In conjunction with the
issuance of the Subordinated Notes, the Company issued warrants to purchase
16,667 shares of common stock exercisable at the lower of (i) one-half of the
IPO price per share, or (ii) $6.00 per share. The Company valued the warrants at
$40,000 representing the fair value at the date of grant and is being accounted
for as debt discount.
In April 1997, in contemplation of its proposed IPO, the Company issued
bridge notes (the "Bridge Notes") in the principal amount of $2,000,000, for
which the Company received proceeds, net of offering costs (which include
$200,000 paid to the related party referred to in Note K[3]), of approximately
$1,594,000. The Bridge Notes bear interest at 11% per annum and are due and
payable on the earlier of (a) the closing of an initial public offering of the
Company's common stock, or (b) one year after the date of execution of the
Bridge Notes.
The Bridge Notes are collateralized by all of the assets of the Company
pursuant to an agreement with the Secured Note holders whereby the Bridge Notes
are subordinate to the Secured Notes. The loan agreement, among other matters,
restricts the Company from entering into new indebtedness senior to the Bridge
Notes, paying of indebtedness subordinate to the Bridge Notes and declaring or
paying dividends. In conjunction with the issuance of the Bridge Notes, the
Company issued warrants to purchase 240,000 shares of common stock exercisable
at the lower of (i) one-half of the IPO price per share, or (ii) $3.75 per
share. The Company valued the warrants at $856,000 representing the fair value
at the date of grant and is being accounted for as debt discount.
F-16
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO UNDERWRITER, DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY
UNDERWRITER. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE
HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY SECURITIES OFFERED HEREBY BY ANYONE IN ANY JURISDICTION
IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON
MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM
IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary............................... 3
Risk Factors..................................... 8
Concurrent Offering.............................. 20
Use of Proceeds.................................. 21
Dividend Policy.................................. 23
Capitalization................................... 24
Dilution......................................... 25
Selected Financial Data.......................... 27
Management's Discussion and Analysis of Financial
Condition and Results of Operations............ 29
Business......................................... 35
Management....................................... 52
Principal Stockholders........................... 58
Certain Transactions............................. 60
Description of Securities........................ 62
Shares Eligible for Future Sale.................. 66
Underwriting..................................... 68
Legal Matters.................................... 71
Experts.......................................... 71
Additional Information........................... 71
Index to Financial Statements.................... F-1
</TABLE>
------------------------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
QUIETPOWER SYSTEMS, INC.
2,000,000 SHARES OF COMMON STOCK
AND
2,000,000 REDEEMABLE COMMON STOCK
PURCHASE WARRANTS
---------------------
PROSPECTUS
---------------------
NATIONAL SECURITIES CORPORATION
, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
[(ALTERNATE PAGES FOR SELLING STOCKHOLDER PROSPECTUS)]
SUBJECT TO COMPLETION, DATED MAY 8, 1997
PROSPECTUS
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
QUIETPOWER SYSTEMS, INC.
507,500 SHARES OF COMMON STOCK
------------------
All of the 507,500 shares of Common Stock (the "Common Stock") of QuietPower
Systems, Inc. ("QuietPower" or the "Company") offered hereby are issuable upon
exercise of certain warrants (and warrants underlying certain of those warrants)
that were issued in connection with private placement financings of the Company
(the "Private Placement Warrants") and are being sold by Selling Stockholders
named herein. The Company will not receive any of the proceeds from the sale of
the shares offered hereby.
The distribution of shares of Common Stock offered hereby by the Selling
Stockholders may be effected in one or more transactions that may take place on
the over-the-counter market, including ordinary broker's transactions, privately
negotiated transactions or through sales to one or more dealers for sale of such
securities as principals, at market prices prevailing at the time of sale, at
prices relating to such prevailing market prices or at negotiated prices. Usual
and customary or specifically negotiated brokerage fees or commissions may be
paid by the Selling Stockholders.
------------------------
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE
SUBSTANTIAL DILUTION. SEE "RISK FACTORS" COMMENCING ON PAGE 8 AND "DILUTION."
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATES SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The Selling Stockholders and intermediaries through whom such securities are
sold may be deemed "underwriters" within the meaning of the Securities Act of
1933, as amended (the "Securities Act"), with respect to the securities offered,
and any profits realized or commissions received may be deemed underwriting
compensation.
The Company will not receive any of the proceeds from the sale of the shares
of the Common Stock by the Selling Stockholders, although it will receive
proceeds from the exercise of the Private Placement Warrants. Expenses of this
offering, other than fees and expenses of counsel to the Selling Stockholders
and selling commissions, will be paid by the Company. See "Plan of
Distribution."
On the date of this Prospectus, a registration statement including a
prospectus of even date filed under the Securities Act with respect to an
underwritten public offering by the Company of 2,000,000 shares of Common Stock
and 2,000,000 Redeemable Common Stock Purchase Warrants and up to an additional
300,000 shares of Common Stock and/or 300,000 Redeemable Common Stock Purchase
Warrants ("Warrants") to cover over-allotments, if any, was declared effective
by the Securities and Exchange Commission (the "Commission"). The Company will
receive net proceeds of approximately $12,730,000 from the sale of the
securities included in the underwritten public offering, and will receive
approximately $14,782,000 in additional net proceeds if the overallotment option
is exercised in full after payment of underwriting discounts and commissions and
estimated expenses of the underwritten public offering. See "Concurrent
Offering."
THE DATE OF THIS PROSPECTUS IS , 1997
<PAGE>
[ALTERNATE]
THE OFFERING
<TABLE>
<S> <C>
Securities
Offered:................................... 507,500 Shares of Common Stock.
Common Stock
Outstanding:............................... 3,004,013 shares(1)
Use of Proceeds:............................. The Company intends to use the proceeds from
the exercise of the Warrants for working
capital and general corporate purposes.
Risk Factors:................................ Investment in the Common Stock offered hereby
is highly speculative and involves a high
degree of risk and immediate and substantial
dilution to the purchasers in this Offering.
See "Risk Factors" and "Dilution."
Proposed American Stock
Exchange Symbol:...........................
Common Stock................................. KWT
</TABLE>
- ------------------------
(1) Assumes the issuance of 2,000,000 shares of Common Stock to be issued in
connection with an underwritten public offering by the Company. Does not
include (i) 1,414,915 shares of Common Stock issuable upon exercise of
outstanding warrants (which number includes warrants to purchase 265,000
shares of Common Stock that will be issued upon completion of this Offering
and warrants to purchase 133,750 shares of Common Stock that are issuable
upon exercise of nominally priced warrants), with a weighted average
exercise price of $3.44 per share, (ii) 250,000 shares of Common Stock
subject to options available under the Company's 1993 Stock Option Plan (the
"1993 Plan"), of which options to purchase an aggregate of 239,490 shares of
Common Stock with a weighted average exercise price of $4.22 per share have
been granted, and options to purchase 10,510 shares of Common Stock remain
available for future grants, and (iii) 83,333 shares of Common Stock
issuable upon conversion of convertible promissory notes in the aggregate
principal amount of $625,000 (assuming an initial public offering price of
$7.50 per share of Common Stock). See "Management's Discussion and Analysis
of Financial Condition and Results of its Operations," "Use of Proceeds" and
"Management--Stock Option Plan."
5
<PAGE>
[ALTERNATE]
CONCURRENT OFFERING
On the date of this Prospectus, a registration statement including a
prospectus of even date filed under the Securities Act with respect to an
underwritten public offering by the Company of 2,000,000 shares of Common Stock
and 2,000,000 Redeemable Common Stock Purchase Warrants and up to an additional
300,000 shares of Common Stock and/or 300,000 Redeemable Common Stock Purchase
Warrants to cover over-allotments, if any, was declared effective by the
Securities and Exchange Commission (the "Commission"). The Company will receive
net proceeds of approximately $12,730,000 from the sale of shares of Common
Stock included in the underwritten public offering, and will receive
approximately $14,782,000 in additional net proceeds if the over-allotment is
exercised in full after payment of underwriting discounts and commissions and
estimated expenses of the underwritten public offering.
18
<PAGE>
[ALTERNATE]
PLAN OF DISTRIBUTION
The Selling Stockholders have advised the Company that, depending on market
conditions and other factors, it may sell shares of Common Stock from time to
time as market conditions permit in the over-the-counter market, or otherwise,
at prices and terms then prevailing or at prices related to the then-current
market price, or in negotiated transactions. The shares may be sold by one or
more of the following methods, without limitation: (a) a block trade in which a
broker or dealer so engaged will attempt to sell the shares as agent but may
position and resell a portion of the block as principal to facilitate the
transaction; (b) purchasers by a broker or dealer as principal and resale by
such broker or dealer for its account pursuant to this Prospectus; (c) ordinary
brokerage transactions and transactions in which the broker solicits purchases;
and (d) face to face transactions between sellers and purchaser without a broker
or dealer. In effecting sales, brokers or dealers engaged by the Selling
Stockholders may arrange for other brokers or dealers to participate. Such
brokers or dealers may receive commissions or discounts from Selling
Stockholders in amounts to be negotiated. Such brokers, dealers and any other
participating brokers or dealers may be deemed to be "underwriters" within the
meaning of the Securities Act, in connection with such sales.
The Company will bear all costs and expenses of the registration of the
Common Stock under the Securities Act and certain state securities laws, other
than fees of counsel for the Selling Stockholders and any discounts or
commissions payable with respect to sales of such Common Stock. The Selling
Stockholders will pay any transaction costs associated with effecting any sales
that occur.
The Selling Stockholders are not restricted as to the price or prices at
which they may sell shares of Common Stock acquired upon the exercise of the
Private Placement Warrants. Such sales may have an adverse effect on the market
price of the Common Stock. Moreover, the Selling Stockholders are not restricted
a to the number of shares of Common Stock that may be sold at any one time, and
it is possible that a significant number of shares could be sold at the same
time, which also may have an adverse effect on the market price of the Common
Stock.
The shares offered hereby are subject to an agreement between the holders
thereof and the Representative, pursuant to which the Selling Stockholders have
agreed not to sell any of such shares prior to three months from the date of
this Prospectus and not to sell 133,750 of such shares prior to nine months from
the date of this Prospectus, without the prior written consent of the
Representative.
19
<PAGE>
[ALTERNATE]
SELLING STOCKHOLDERS
Pursuant to two private placement transactions consummated in May 1996 and
April 1997, respectively, the Company has issued Private Placement Warrants to
purchase an aggregate of 507,500 shares of Common Stock. 133,750 of the Private
Placement Warrants have an exercise price of $.01 per share and are to purchase
133,750 shares of Common Stock and additional Private Placement Warrants to
purchase 133,750 shares of Common Stock at an exercise price of $ per
share, and the remaining 240,000 Private Placement Warrants have an exercise
price of $ per share. Payment to the Company upon exercise of all such
Private Placement Warrants would be $ . The Company has agreed to include
the 507,500 shares in the Registration Statement of which this Prospectus is a
part.
The following table sets forth the present record and beneficial ownership
of securities by the Company owed by the Selling Stockholders as of the date of
this Prospectus.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF SELLING STOCKHOLDER SECURITIES(1) PERCENTAGE AFTER OFFERING
- --------------------------------------------------------------------------- ------------ -----------------------------
<S> <C> <C>
DayStar Partners, L.P...................................................... 137,500 0
10600 DeAnza Boulevard, Suite 215
Cuperinto, CA 95014
Douglas C. Lee............................................................. 17,500 0
2100 Garden Road, Suite 306
Monterey, CA 93940
The Smith 1987 Family Trust................................................ 12,500 0
2415 South Court
Palo Alto, CA 94301
J. Thomas Bentley.......................................................... 50,000 0
171 Estates Drive
Piedmont, CA 94611
Westminster Associates, Ltd................................................ 50,000 0
Ragnall House
18 Peel Road
Douglas, Isle of Man
British Isles
QPS Bridge, LLC............................................................ 90,000 0
1330 Avenue of the Americas, 36th floor
New York, NY 10019
Anderson, Weinroth & Co., L.P.............................................. 30,000 0
1330 Avenue of the Americas, 36th Floor
New York, New York 10019
Regent Capital Partners, L.P............................................... 120,000 0
505 Park Avenue, 17th floor
New York, NY 10022
</TABLE>
- ------------------------
(1) The number of shares listed indicates both the amount of securities owned by
the holder prior to the offering and the amount to be offered for the
stockholder's account.
Each of the Selling Stockholders will be entitled to receive all of the
proceeds from the future sale of the shares of Common Stock underlying their
respective warrants. The Company will not receive any proceeds from the future
sale of any of the aforementioned shares by their respective holders.
The Selling Stockholders will bear all the expenses of any offering by them
of their shares, including the costs of their counsel and any sales commissions
incurred.
None of the above-listed Selling Stockholders have had a material
relationship with the Company within the past three years.
53
<PAGE>
[ALTERNATE]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO UNDERWRITER, DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY
UNDERWRITER. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE
HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY SECURITIES OFFERED HEREBY BY ANYONE IN ANY JURISDICTION
IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON
MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM
IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary.............................. 3
Risk Factors.................................... 8
Concurrent Offering............................. 20
Plan of Distribution............................ 21
Dividend Policy................................. 22
Capitalization.................................. 23
Dilution........................................ 24
Selected Financial Data......................... 26
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 28
Business........................................ 34
Management...................................... 51
Principal Stockholders.......................... 57
Selling Stockholders............................ 59
Certain Transactions............................ 61
Description of Securities....................... 63
Shares Eligible for Future Sale................. 67
Underwriting.................................... 69
Legal Matters................................... 72
Experts......................................... 72
Additional Information.......................... 72
Index to Financial Statements................... F-1
</TABLE>
QUIETPOWER SYSTEMS, INC.
507,500 SHARES OF COMMON STOCK
---------------------
PROSPECTUS
---------------------
, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Under Section 145 of the Delaware General Corporation Law the registrant may
or shall, subject to various exceptions and limitations, indemnify its directors
or officers and may purchase and maintain insurance therefor.
The Company has included in its Certificate of Incorporation pursuant to
Section 102(b)(7) of the Delaware General Corporation Law a provision
eliminating the personal liability of directors to the Company or its
stockholders for damages for breach of fiduciary duty. The principal effect of
this provision in the Company's Certificate of Incorporation is to eliminate
potential monetary damage actions against any director for breach of his duties
as a director except (a) for any breach of the director's duty of loyalty to the
corporation or its stockholders, (b) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (c) under
Section 174 of the Delaware General Corporation Law, which relates to a willful
or negligent violation of Section 160 (regarding the illegal purchase or
redemption of stock by a corporation) or 173 (regarding a corporation's illegal
declaration or payment of dividends) of the Delaware General Corporation Law, or
(d) for any transaction from which the director derived an improper benefit.
This provision does not affect the liability of any director for acts or
omissions occurring prior to the date of adoption of this provision. In
addition, Section 145 of the Delaware General Corporation Law empowers a
corporation (a) to grant indemnification to any officer or director where it is
determined that he acted in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the corporation, and, with respect
to any criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful and (b) to advance to an officer or director the expenses
of defending claims upon receipt of his undertaking to repay any amount to which
it is later determined he is not entitled. The Company's By-laws provide that
the Company will indemnify and advance expenses of defense to its officers and
directors substantially to the full extent authorized by the Delaware General
Corporation Law.
The foregoing statement is subject to the detailed provisions of Sections
102 and 145 of the Delaware General Corporation Law.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses of the Company in connection with the issuance and
distribution of the securities being registered hereby are as follows:
<TABLE>
<S> <C>
Registration Fee (Securities and Exchange Commission)............. $ 19,645
Registration Fee (American Stock Exchange)........................ 42,500
NASD Filing Fee................................................... 6,984
Printing and Engraving Expenses................................... 60,000
Accounting Fees and Expenses...................................... 40,000
Legal Fees and Expenses........................................... 275,000
Transfer and Warrant Agent's Fees................................. 1,500
Blue Sky Fees and Expenses........................................ 25,000
Miscellaneous Expenses............................................ $ 23,371
---------
Total....................................................... $ 494,000
---------
</TABLE>
II-1
<PAGE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
Since January 1, 1994, the Company has, through a series of private
placements, sold 186,547 shares of Common Stock, 1,325 shares of Series A
Convertible Preferred Stock, $3,473,000 of promissory notes and warrants to
purchase an aggregate of 527,167 shares of Common Stock, for an aggregate
purchase price of approximately $6,059,000*. The Company sold these securities
pursuant to Rule 506 of the Regulations promulgated under the Securities Act by
virtue of the fact that sales were made exclusively to accredited investors. The
Company did not make any offers by means of general solicitations or general
advertisements and it paid commissions in connection with four of these sales.
<TABLE>
<CAPTION>
DATE SECURITIES OFFERING PRICE PROCEEDS EXEMPTION FEES
- ----------------------- ----------------------- ----------------------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C>
January 1994 Common Stock $2.50 per Share $ 50,000 Rule 506 $ 0
January 1994 Common Stock $3.75 per Share $ 41,000* Rule 506 $ 0
November 1994 Units--Common Stock and $8.77 per Unit
Warrants $ 853,900 Rule 506 $ 0
July 1995 Units--Common Stock and $4.00 per Unit
Warrants $ 75,000 Rule 506 $ 0
July 1995 Promissory Notes with N/A
Warrants $ 25,000 Rule 506 $ 0
October 1995 Units--Common Stock and $6.80 per Unit
Warrants $ 100,000 Rule 506 $ 0
November 1995 - January Promissory Notes with N/A
1996 Warrants $ 88,000 Rule 506 $ 0
February 1996 Common Stock $6.80 per Share $ 68,000 Rule 506 $ 0
April 1996 Promissory Notes with N/A
Warrants $ 25,000 Rule 506 $ 0
March--April 1996 Convertible Promissory N/A
Notes $ 175,000 Rule 506 $ 0
May 1996 Promissory Notes and N/A
Warrants $ 535,000 Rule 506 $ 41,400
December 1996 Units--Preferred Stock $1,000 per Unit
and Warrants $ 1,325,000 Rule 506 $ 127,500
January 1997 Units--Common Stock and N/A
Warrants $ 73,000* Rule 506 $ 0
January--April 1997 Promissory Notes with N/A
Warrants $ 625,000 Rule 506 $ 62,500
April 1997 Promissory Notes with N/A
Warrants $ 2,000,000 Rule 506 $ 300,000
</TABLE>
- ------------------------
* In January 1994 and January 1997, the Company satisfied $41,000 and $73,000,
respectively, of its past due balance with KAZB for rental payments and
other office services by issuing (i) in January 1994, 11,033 shares of
Common Stock, and (ii) in January 1997, units consisting of 14,692 shares of
Common Stock and warrants to purchase 14,692 shares of Common Stock.
II-2
<PAGE>
ITEM 27. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT # DOCUMENT
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement*
3.1 Certificate of Incorporation of the Company
3.2 By-laws of the Company
4.1 Form of Common Stock Certificate
4.2 Form of Warrant Agreement between the Company, Continental Stock Transfer & Trust Company and
National Securities Corporation*
4.3 Specimen Form of Warrant Certificate* (contained in Exhibit 4.4)
4.4 Form of Representative's Warrant Agreement (including form of Warrant Certificate) between the
Company and National Securities Corporation*
5. Opinion of counsel to the Company concerning the legality of the securities being offered
10.1 Employment Agreement between the Company and Jonathan M. Charry, dated as of March 9, 1995
10.2 Employment Agreement between the Company and Eric W. Jacobson, dated as of January 1, 1996
10.3 Employment Agreement between the Company and Mark J. Dietrich, dated as of March 8, 1995
10.4 Master Agreement between Noise Cancellation Technologies, Inc. and the Company, dated March 27, 1995
(as amended)
10.5 Distributor Agreement between Noise Cancellation Technologies, Inc. and the Company, dated October 7,
1994
10.6 Form of Note Purchase Agreement between the Company, DayStar Partners, L.P. and certain purchasers,
dated May 24, 1996
10.7 Form of Promissory Note issued by the Company to DayStar Partners, L.P. and certain purchasers
10.8 Form of Warrant issued by the Company to DayStar Partners, L.P. and certain purchasers
10.9 Form of Security Agreement between the Company, DayStar Partners, L.P. and certain purchasers, dated
as of May 24, 1996
10.10 Form of Registration Rights Agreement among DayStar Partners, L.P. and certain purchasers, dated as
of May 24, 1996
10.11 Form of Intercreditor Agreement among the Company, DayStar Partners, L.P. and certain other
purchasers, dated as of May 24, 1996
10.12 Letter Agreements amending payment terms of the Promissory Notes issued by the Company to DayStar
Partners, L.P. and certain purchasers
10.13 Securities Purchase Agreement among the Company, QPS Bridge, LLC and Regent Capital Partners, L.P.,
dated as of April 17, 1997
10.14 Form of Promissory Note issued by the Company to QPS Bridge, LLC and Regent Capital Partners, L.P.,
dated April 17, 1997
10.15 Registration Rights Agreement among the Company, QPS Bridge, LLC and Regent Capital Partners, L.P.,
dated as of April 17, 1997
10.16 Security Agreement among the Company, QPS Bridge LLC and Regent Capital Partners, L.P., dated as of
April 17, 1997
10.17 Intercreditor Agreement among the Company, DayStar Partners, individually and as Agent for certain of
the lenders, QPS Bridge, LLC and Regent Capital Partners, L.P., dated as of April 17, 1997
10.18 Collateral Assignment of Intellectual Property between the Company and QPS Bridge, LLC, dated as of
April 17, 1996
10.19 Form of Warrant issued by the Company to QPS Bridge, LLC and Regent Capital Partners, L.P., dated
April 17, 1997
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT # DOCUMENT
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
10.20 Joint Venture Agreement between Prolec-GE, S. de R.L. de C.V. and the Company, dated November 13,
1996
10.21 Joint Venture Agreement between ABB Secheron SA and the Company, dated June 15, 1996
10.22 Restated Letter Agreement between the Company and Thacher Vendig & Company, Inc., dated April 1, 1997
10.23 1993 Company Stock Option Plan
10.24 Sub-Lease Agreement between the Company and Kalkines, Arky, Zall & Bernstein, dated April 20, 1996
10.25 Agreement between the Company and KEQ Partners I, dated January 2, 1997 regarding settlement of claim
10.26 Form of Lease Agreement between the Company and 460 West 34th Street Associates
21. List of the Company's Subsidiaries
23. (a) Consent of Richard A. Eisner & Company, LLP
(b) Consent of Breslow & Walker, LLP (contained in the opinion filed as Exhibit 5.1)
27. Financial Data Schedule
</TABLE>
- ------------------------
* To be filed by amendment
ITEM 28. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than payment by the Registrant of expenses incurred or paid
by a director, officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by final adjudication of
such issue.
The undersigned Registrant will:
(1) For purposes of determining any liability under the Securities Act,
treat the information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
Prospectus filed by the Registrant pursuant to Rule 424(b)(1), or (4) or 497(h)
under the Securities Act as part of this Registration Statement as of the time
the Commission declared it effective.
(2) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of Prospectus as a new
registration statement for the securities offered in the registration statement,
and that offering of the securities at that time as the initial bona fide
offering of those securities.
The undersigned Registrant hereby undertakes that it will:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this Registration Statement to:
II-4
<PAGE>
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which, individually
or together, represent a fundamental change in the information in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in
the effective registration statement;
(iii) Include any additional or changed material information on the plan
of distribution.
(2) For determining any liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the Offering.
II-5
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this Registration
Statement to be signed on its behalf by the undersigned, in the City of New
York, State of New York, on May 7, 1997.
QUIETPOWER SYSTEMS, INC.
BY: /S/ JONATHAN M. CHARRY
-----------------------------------------
Jonathan M. Charry
PRESIDENT AND CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
BY: /S/ ERIC W. JACOBSON
-----------------------------------------
Eric W. Jacobson
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Jonathan M. Charry, as his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him and his name, place and stead, in any and all capacities, to sign any
and all amendments (including post-effective amendments) to this Registration
Statement, and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorney-in-fact and agent, full power and authority to do and perform
each and every act and thing requisite and necessary to be done in connection
therewith, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his substitute or substitutes, may lawfully do or cause to be done by
virtue thereof.
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates stated.
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
/s/ JONATHAN M. CHARRY Director
- ------------------------------ May 7, 1997
Jonathan M. Charry
/s/ ERIC W. JACOBSON Director
- ------------------------------ May 7, 1997
Eric W. Jacobson
/s/ WILLIAM S. BERNSTEIN Director
- ------------------------------ May 7, 1997
William S. Bernstein
Director
- ------------------------------ ,1997
Carl Horn
/s/ ALFRED B. THACHER, JR. Director
- ------------------------------ May 7, 1997
Alfred B. Thacher, Jr.
II-6
<PAGE>
EXHIBIT 3.1.1
CERTIFICATE OF INCORPORATION
OF
ACTIVE ACOUSTICAL SOLUTIONS, INC.
The undersigned, a natural person, for the purpose of organizing a
corporation for conducting the business and promoting the purposes hereinafter
stated, under the provisions and subject to the requirements of the laws of the
State of Delaware (particularly Chapter 1, Title 8 of the Delaware Code and the
acts amendatory thereof and supplemental thereto, and known, identified and
referred to as the "General Corporation Law of the State of Delaware"), hereby
certifies that:
FIRST: The name of the corporation (hereinafter sometimes called the
"Corporation") is Active Acoustical Solutions, Inc.
SECOND: The address, including street, number, city and county of the
registered office of the Corporation in the State of Delaware is 32 Loockerman
Square, Suite L-100, Dover 19901, County of Kent; and the name of the registered
agent of the Corporation in the State of Delaware at such address is The
Prentice-Hall Corporation System, Inc.
THIRD: The nature of the business and of the purposes to be conducted and
promoted by the Corporation shall be to engage in any lawful act or activity for
which corporations may be organized under the General Corporation Law of the
State of Delaware.
<PAGE>
FOURTH: The total number of shares of stock which the Corporation shall
have the authority to issue is Twenty Thousand (20,000) shares of stock
consisting of: (1) Ten Thousand (10,000) shares of preferred stock, par value
$.01 per share (hereinafter referred to as "Preferred Stock"); and (2) Ten
Thousand (10,000) shares of common stock, par value $.01 per share (hereinafter
referred to as "Common Stock").
A. Preferred Stock
1. Shares of Preferred Stock may be issued from time to time in one
or more series, as may from time to time be determined by the Board of Directors
of the Corporation, each of said series to be distinctly designated. All shares
of any series of Preferred Stock shall be alike in every particular except that
there may be different dates from which dividends thereon, if any, shall be
cumulative, if made cumulative. The designation, relative rights, preferences
and limitations of each series may differ from those of any and all other series
at any time outstanding. The Board of Directors of the Corporation is hereby
expressly granted authority to fix, prior to the issuance of any shares of a
particular series of Preferred Stock, the designation, relative rights,
preferences and limitations of such series, including, but without limiting the
generality of the foregoing, the following:
(a) The distinctive designation and the number of shares of
Preferred Stock which shall constitute such series;
(b) The rate and times at which, and the terms and conditions
upon which, dividends, if any, on the Preferred Stock of
2
<PAGE>
such series shall be paid, the extent of the preference or relation, if any, of
such dividends to the dividends payable on any other class or classes, or series
of the same or other classes of stock and whether such dividends shall be
cumulative or non-cumulative;
(c) The right, if any, of the holders of Preferred Stock of
such series to convert the same into or exchange the same for shares of any
other class or classes or of any series of the same or any other class or
classes of stock of the Corporation and the terms and conditions of such
conversion or exchange;
(d) Whether or not Preferred Stock of such series shall be
subject to redemption, and the redemption price or prices and the time or times
at which, and the terms and conditions upon which, Preferred Stock of such
series may be redeemed;
(e) The rights, if any, of the holders of Preferred Stock of
such series upon the voluntary or involuntary liquidation, merger,
consolidation, distribution or sale of assets, dissolution or winding-up of the
affairs of the Corporation;
(f) The terms of the sinking fund or redemption or purchase
account, if any, to be provided for the Preferred Stock of such series; and
(g) The voting powers, if any, of the holders of such series
of Preferred Stock which may, without limiting the generality of the foregoing,
include the right, voting as a series or by itself or together with other series
of Preferred Stock or all series of Preferred Stock as a class, to elect one or
more
3
<PAGE>
directors of the Corporation if there shall have been a default in the payment
of dividends on any one or more series of Preferred Stock or under such other
circumstances and on such conditions as the Board of Directors may determine.
B. Common Stock
1. After the requirements with respect to preferential dividends on
Preferred Stock (fixed in accordance with the provisions of Paragraph A of this
ARTICLE FOURTH), if any, shall have been met and after the Corporation shall
have complied with all the requirements, if any, with respect to the setting
aside of sums as sinking funds or redemption or purchase account (fixed in
accordance with the provisions of Paragraph A of this ARTICLE FOURTH), and
subject further to any conditions which may be fixed in accordance with the
provisions of Paragraph A of this ARTICLE FOURTH, then, and not otherwise, the
holders of Common Stock shall be entitled to receive such dividends as may be
declared from time to time by the Board of Directors.
2. After distribution, in full, of the preferential amount (fixed in
accordance with the provisions of Paragraph A of this ARTICLE FOURTH), to be
distributed to the holders of Preferred Stock in the event of a voluntary or
involuntary liquidation, distribution or sale of assets, dissolution or winding
up of the affairs of the Corporation, the holders of the Common Stock shall be
entitled to receive, ratably in proportion to the number of shares of Common
Stock held by them, all of the remaining assets of
4
<PAGE>
the Corporation, tangible and intangible, of whatever kind available for
distribution to shareholders.
FIFTH: No holder of any of the shares of the stock of the Corporation,
whether now or hereafter authorized and issued, shall be entitled as of right to
purchase or subscribe for (1) any unissued stock of any class, or (2) any
additional shares of any class to be issued by reason of any increase in the
authorized capital stock of the Corporation of any class, or (3) bonds,
certificates of indebtedness, debentures or other securities convertible into
stock of the Corporation, or carrying any right to purchase stock of any class,
but any such unissued stock or such additional authorized issued of any stock or
of other securities convertible into stock, or carrying any right to purchase
stock, may be issued and disposed of pursuant to resolution of the Board of
Directors to such persons, firms, corporation or associations and upon such
terms deemed advisable by the Board of Directors in the exercise of its
discretion.
SIXTH: The name and the mailing address of the incorporator is as follows:
Eric W. Jacobson
c/o Environmental Research Information,Inc.
800 Summer Street - Suite 500
Stamford, Connecticut 06901
SEVENTH: The Corporation is to have perpetual existence.
EIGHTH: The original By-Laws of the Corporation shall be adopted by the
incorporator. Thereafter, the power to make, alter, or repeal the By-Laws, and
to adopt any new By-Law, except a By-Law
5
<PAGE>
classifying directors for election for staggered terms, shall be vested in the
Board of Directors.
NINTH: The personal liability of the directors of the Corporation is
hereby eliminated to the fullest extent permitted by paragraph (7) of subsection
(b) of Section 102 of the General Corporation Law of the State of Delaware, as
the same may be amended and supplemented.
TENTH: The Corporation shall, to the fullest extent permitted by Section
145 of the Delaware General Corporation Law as the same may hereafter be amended
or supplemented, indemnify any and all persons whom it shall have power to
indemnify under said Section from and against any and all of the expenses,
liabilities, or other matters referred to in or covered by said Section; and the
indemnification provided for herein shall not be deemed exclusive of any other
rights to which those indemnified may be entitled under any By-Law, agreement,
vote of stockholders or disinterested directors or otherwise, both as to action
in his official capacity and as to action in another capacity while holding such
office, and shall continue as to a person who has caused to be a director,
officer, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of such a person.
ELEVENTH: From time to time any of the provisions of this Certificate of
Incorporation may be amended, altered or repealed, and other provisions
authorized by the laws of the State of Delaware at the time in force may be
added or inserted in the manner and at the time prescribed by said laws, and all
rights at
6
<PAGE>
any time conferred upon the stockholders of the Corporation by this Certificate
of Incorporation are granted subject to the provisions of this Article ELEVENTH.
Executed at New York, New York 10022
March 11, 1992
/s/ Eric W. Jacobson
----------------------------------
Eric W. Jacobson
Environmental Research
Information, Inc.
800 Summer Street - Suite 500
Stamford, Connecticut 06901
7
<PAGE>
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
ACTIVE ACOUSTICAL SOLUTIONS, INC.
It is hereby certified that:
1. The name of the corporation (hereinafter called the "Corporation") is
Active Acoustical Solutions, Inc.
2. The Certificate of Incorporation of the Corporation is hereby amended
by striking out Article Fourth thereof and by substituting in lieu of said
Article the following new Article:
"FOURTH: The total number of shares of stock which the Corporation
shall have the authority to issue is ten million ten thousand (10,010,000)
shares of stock consisting of: (1) ten thousand (10,000) shares of
preferred stock, par value $.01 per share (hereinafter referred to as
"Preferred Stock"); and (2) ten million (10,000,000) shares of Common
Stock, par value $.01 per share (hereinafter referred to as ("Common
Stock").
A. Preferred Stock
1. Shares of Preferred Stock may be issued from time to time in one
or more series, as may from time to time be determined by the Board of
Directors of the Corporation, each of said series to be distinctly
designated. All shares of any series of Preferred Stock shall be alike in
every particular except that there may
<PAGE>
be different dates from which dividends thereon, if any, shall be
cumulative, if made cumulative. The designation, relative rights,
preferences and limitations of each series may differ from those of any
and all other series at any time outstanding. The Board of Directors of
the Corporation is hereby expressly granted authority to fix, prior to the
issuance of any shares of a particular series of Preferred Stock, the
designation, relative rights, preferences and limitations of such series,
including, but without limiting the generality of the foregoing, the
following:
(a) The distinctive designation and the number of shares of
Preferred Stock which shall constitute such series;
(b) The rate and times at which, and the terms and conditions
upon which, dividends, if any, on the Preferred Stock of such series shall
be paid, the extent of the preference or relation, if any, of such
dividends to the dividends payable on any other class or classes, or
series of the same or other classes of stock and whether such dividends
shall be cumulative or non-cumulative;
(c) The right, if any, of the holders of Preferred Stock of
such series to convert the same into or exchange the same for shares of
any other class or classes or of any series of the same or any other class
2
<PAGE>
or classes of stock of the Corporation and the terms and conditions of
such conversion or exchange;
(d) Whether or not Preferred Stock of such series shall be
subject to redemption, and the redemption price or prices and the time or
times at which, and the terms and conditions upon which, Preferred Stock
of such series may be redeemed;
(e) The rights, if any, of the holders of Preferred Stock of
such series upon the voluntary or involuntary liquidation, merger,
consolidation, distribution or sale of assets, dissolution or winding-up
of the affairs of the Corporation;
(f) The terms of the sinking fund or redemption or purchase
account, if any, to be provided for the Preferred Stock of such series;
and
(g) The voting powers, if any, of the holders of such series
of Preferred Stock which may, without limiting the generality of the
foregoing, include the right, voting as a series or by itself or together
with other series of Preferred Stock or all series of Preferred Stock as a
class, to elect one or more directors of the Corporation if there shall
have been a default in the payment of dividends on any one or more series
of Preferred Stock or under such other circumstances and on such
conditions as the Board of Directors may determine.
3
<PAGE>
B. Common Stock
1. After the requirements with respect to preferential
dividends on Preferred Stock (fixed in accordance with the provisions of
Paragraph A of this ARTICLE FOURTH), if any, shall have been met and after
the Corporation shall have complied with all the requirements, if any,
with respect to the setting aside of sums as sinking funds or redemption
or purchase account (fixed in accordance with the provisions of Paragraph
A of this ARTICLE FOURTH), and subject further to any conditions which may
be fixed in accordance with the provisions of Paragraph A of this ARTICLE
FOURTH, then, and not otherwise, the holders of Common Stock shall be
entitled to receive such dividends as may be declared from time to time by
the Board of Directors.
2. After distribution, in full, of the preferential amount (fixed in
accordance with the provisions of Paragraph A of this ARTICLE FOURTH), to
be distributed to the holders of Preferred Stock in the event of a
voluntary or involuntary liquidation, distribution or sale of assets,
dissolution or winding up of the affairs of the Corporation, the holders
of the Common Stock shall be entitled to receive, ratably in proportion to
the number of shares of Common Stock held by them, all of the remaining
assets of the Corporation,
4
<PAGE>
tangible and intangible, of whatever kind available for distribution to
shareholders.
Upon the filing in the Office of the Secretary of State of the State of
Delaware of a Certificate of Amendment to the Certificate of Incorporation of
the Corporation whereby this Article Fourth is amended to read as set forth
herein (the "Filing"), each share of Common Stock, par value $.01 per share, of
the Corporation issued and outstanding and held of record by each stockholder of
the Corporation immediately prior to the Filing shall, automatically and without
the need for any further action on the part of any stockholder, become Five
Hundred (500) shares of validly issued, fully paid and non-assessable shares of
Common Stock, par value $.01 per share."
3. The amendment of the Certificate of Incorporation herein certified has
been duly adopted by resolution of the Board of Directors of the Corporation any
by the written consent of holders of a majority of the outstanding shares of
Common Stock of the Corporation entitled to vote thereon in accordance with
Section 228 of the General Corporation Law of the State of Delaware (with
written notice delivered to those stockholders who did not so consent in
writing, as provided by Section 228(d) of the General Corporation Law), all in
accordance with the provisions of Section 242 of the General Corporation Law of
the State of Delaware.
4. The effective time of the amendment herein certified shall be upon its
filing with the Secretary of State of the State of Delaware.
5
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Amendment to be signed by its President and attested to by its Secretary this
31st day of December, 1993.
/s/ Jonathan Charry
--------------------------------------
Jonathan Charry
President
/s/ Eric Jacobson
--------------------------------------
Eric Jacobson
Secretary
6
<PAGE>
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
ACTIVE ACOUSTICAL SOLUTIONS, INC.
It is hereby certified that:
1. The name of the corporation (hereinafter called the "Corporation") is
Active Acoustical Solutions, Inc.
2. The Certificate of Incorporation of the Corporation is hereby amended
by striking out Article First thereof and by substituting in lieu of said
Article the following new Article:
"FIRST: The name of the corporation is QuietPower Systems, Inc."
3. The amendment of the Certificate of Incorporation herein certified has
been duly adopted by the unanimous written consent of the Board of Directors of
the Corporation and by the written consent of holders of a majority of the
outstanding shares of Common Stock of the Corporation entitled to vote thereon
in accordance with Section 228 of the General Corporation Law of the State of
Delaware (with written notice delivered to those stockholders who did not so
consent in writing, as provided by Section 228(d) of the General Corporation
Law), and in accordance with the provisions of Section 242 of the General
Corporation Law of the State of Delaware.
<PAGE>
4. The effective time of the amendment herein certified shall be upon its
filing with the Secretary of State of the State of Delaware.
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Amendment to be signed by its President and attested to by its Secretary this
28th day of February, 1994.
/s/ Jonathan Charry
--------------------------------------
Jonathan Charry
President
/s/ Eric Jacobson
--------------------------------------
Eric Jacobson
Secretary
2
<PAGE>
SERIES A CONVERTIBLE PREFERRED STOCK
of
QUIETPOWER SYSTEMS, INC.
(Pursuant to Section 151 of the
Delaware General Corporation Law)
------------------------------------
QuietPower Systems, Inc., a corporation organized and existing under the
General Corporation Law of the State of Delaware (hereinafter called the
"Corporation"), hereby certifies that the following resolution was adopted by
the Board of Directors of the Corporation as required by Section 151 of the
General Corporation Law at a meeting duly called and held on June 28, 1996:
RESOLVED, that pursuant to the authority granted to and vested in the
Board of Directors of this Corporation (hereinafter called the "Board of
Directors" or the "Board") in accordance with the provisions of the Certificate
of Incorporation, the Board of Directors hereby creates a series of Preferred
Stock, par value $.01 per share (the "Preferred Stock"), of the Corporation and
hereby states the designation and number of shares, and fixes the relative
rights, preferences, and limitations thereof as follows:
Series A Convertible Preferred Stock:
Section 1. Designation and Amount. The shares of such series shall be
designated as "Series A Convertible Preferred Stock" (the "Series A Preferred
Stock") and the number of shares constituting the Series A Preferred Stock shall
be 1,275. Such number of shares may be increased or decreased by resolution of
the Board of Directors; provided, that no decrease shall reduce the number of
shares of Series A Preferred Stock to a number less than the number of shares
then outstanding plus the number of shares reserved for issuance upon the
exercise of outstanding options, rights or warrants or upon the conversion of
any outstanding securities issued by the Corporation convertible into Series A
Preferred Stock.
Section 2. Dividends and Distributions.
(A) Subject to the rights of the holders of any shares of any series of
Preferred Stock (or any similar stock) ranking prior and superior to the Series
A Preferred Stock with respect to dividends, the holders of shares of Series A
Preferred Stock shall be entitled to receive, when, as and if declared by the
Board of Directors out of funds legally available for the purpose, dividends
payable in cash and equal to 200 times the amount of any cash dividends payable
to holders of the Corporation's Common Stock, par value $.01 per share (the
"Common Stock"). In the event the Corporation shall at any time declare or pay
any dividend on the Common Stock payable in shares of Common Stock, or effect a
subdivision or combination or consolidation of the outstanding shares of Common
Stock (by reclassification or otherwise than by payment of a dividend in shares
of Common Stock) into a greater or lesser number of shares of Common
1
<PAGE>
Stock, then the amount of cash dividends payable to holders of the Series A
Preferred Stock shall be adjusted by multiplying such amount by a fraction, the
numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
(B) The Corporation shall declare a cash dividend on the Series A
Preferred Stock as provided in paragraph (A) of this Section immediately after
it declares a cash dividend on the Common Stock, which dividend shall be paid no
later than the date of payment of the cash dividend on the Common Stock.
(C) The Corporation shall declare a dividend of property (other than a
dividend payable in shares of Common Stock) on the Series A Preferred Stock
immediately after it declares a dividend of property on the Common Stock (other
than a dividend payable in shares of Common Stock), which dividend shall be
equal to 200 times the amount of any dividend of property payable to holders of
the Common Stock, and shall be paid no later than the date of payment of the
dividend of property on the Common Stock (other than a dividend payable in
shares of Common Stock). Notwithstanding the foregoing, such dividend shall
always be payable in that ratio provided for in paragraph (A) of this section,
relating to cash dividends.
Section 3. Voting Rights. The holders of shares of Series A Preferred
Stock shall have the following voting rights:
(A) Subject to the provision for adjustment hereinafter set forth, each
share of Series A Preferred Stock shall entitle the holder thereof to 200 votes
on all matters submitted to a vote of the stockholders of the Corporation. In
the event the Corporation shall at any time declare or pay any dividend on the
Common Stock payable in shares of Common Stock, or effect a subdivision or
combination or consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares of Common
Stock) into a greater or lesser number of shares of Common Stock, then in each
such case the number of votes per share to which holders of shares of Series A
Preferred Stock were entitled immediately prior to such event shall be adjusted
by multiplying such number by a fraction, the numerator of which is the number
of shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
(B) Except as provided by law or as otherwise provided herein, in any
other Certificate of Designations creating a series of Preferred Stock or any
similar stock, or by law, the holders of shares of Series A Preferred Stock and
the holders of shares of Common Stock and any other capital stock of the
Corporation having general voting rights shall vote together as one class on all
matters submitted to a vote of stockholders of the Corporation.
(C) Except as set forth herein, or as otherwise provided by law, holders
of Series A Preferred Stock shall have no special voting rights and their
consent shall not be required for taking any corporate action.
2
<PAGE>
Section 4. Reacquired Shares. Any shares of Series A Preferred Stock
purchased or otherwise acquired by the Corporation in any manner whatsoever
shall be retired and cancelled promptly after the acquisition thereof. All such
shares shall upon their cancellation become authorized but unissued shares of
Preferred Stock and may be reissued as part of a new series of Preferred Stock
subject to the conditions and restrictions on issuance set forth herein, in the
Certificate of Incorporation, or in any other Certificate of Designations
creating a series of Preferred Stock or any similar stock or as otherwise
required by law.
Section 5. Liquidation, Dissolution or Winding Up. Upon any liquidation,
dissolution or winding up of the Corporation, no distribution shall be made (1)
to the holders of shares of Common Stock or any other stock ranking junior
(either as to dividends or upon liquidation, dissolution or winding up) to the
Series A Preferred Stock unless, prior thereto, the holders of shares of Series
A Preferred Stock shall have received $1,000 per share, plus an amount equal to
any accrued and unpaid dividends and distributions thereon, whether or not
declared, to the date of such payment, or (2) to the holders of shares of stock
ranking on a parity (upon liquidation, dissolution or winding up) with the
Series A Preferred Stock, except distributions made ratably on the Series A
Preferred Stock and all such parity stock in proportion to the total amounts to
which the holders of all such shares are entitled upon such liquidation,
dissolution or winding up.
Section 6. Consolidation, Merger, etc. In case the Corporation shall enter
into any consolidation, merger, combination or other transaction in which the
shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case each share of
Series A Preferred Stock shall at the same time be similarly exchanged or
changed into an amount per share, subject to the provision for adjustment
hereinafter set forth, equal to 200 times the aggregate amount of stock,
securities, cash and/or any other property (payable in kind), as the case may
be, into which or for which each share of Common Stock is changed or exchanged.
In the event the Corporation shall at any time declare or pay any dividend on
the Common Stock payable in shares of Common Stock, or effect a subdivision or
combination or consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares of Common
Stock) into a greater or lesser number of shares of Common Stock, then in each
such case the amount set forth in the preceding sentence with respect to the
exchange or change of shares of Series A Preferred Stock shall be adjusted by
multiplying such amount by a fraction, the numerator of which is the number of
shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
Section 7. Conversion. The Series A Preferred Stock shall automatically
convert upon the completion of the Corporation's initial public offering
("IPO"), into a number of shares of the Corporation's Common Stock determined by
dividing $1,000 by the lower of $5.00 or such price at which the Common Stock is
offered in the IPO (the "IPO Price"), and an equal number of five-year warrants
to purchase shares of Common Stock at a price per share equal to the lower of
$2.50 or one-half of the IPO Price. In determining the IPO Price, no value shall
be allocated to any warrants contained in Units. Prior to the IPO, each share of
Series A Preferred Stock may be converted, at the option of the holder, into 200
shares of Common Stock and five-year warrants to purchase an aggregate of 200
shares of Common Stock at $2.50 per
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<PAGE>
share. In the event the Corporation shall at any time declare or pay any
dividend on the Common Stock payable in shares of Common Stock, or effect a
subdivision or combination or consolidation of the outstanding shares of Common
Stock (by reclassification or otherwise than by payment of a dividend in shares
of Common Stock) into a greater or lesser number of shares of Common Stock, then
the $5.00 conversion price available upon completion of the IPO and the $2.50
exercise price of the five-year warrants to be received upon completion of the
IPO or upon conversion prior to the IPO shall be adjusted by multiplying such
amounts by a fraction the numerator of which is the number of shares of Common
Stock outstanding immediately prior to such event and the denominator of which
is the number of shares of Common Stock that were outstanding immediately after
such event, and the 200 shares of Common Stock and five-year warrants into which
each share of Series A Preferred Stock converts at anytime prior to the IPO,
shall be adjusted by multiplying such amounts by a fraction the numerator of
which is the number of shares of Common Stock outstanding immediately after such
event and the denominator of which is the number of shares of Common Stock that
were outstanding immediately prior to such event.
Section 8. No Redemption. The shares of Series A Preferred Stock shall not
be redeemable.
Section 9. Rank. The Series A Preferred Stock shall rank, with respect to
the payment of dividends and the distribution of assets, junior to all series of
any other class of the Corporation's Preferred Stock.
Section 10. Amendment. The Certificate of Incorporation of the Corporation
shall not be amended in any manner which would materially alter or change the
powers, preferences or special rights of the Series A Preferred Stock so as to
affect them adversely without the affirmative vote of the holders of at least
two-thirds of the outstanding shares of Series A Preferred Stock, voting
together as a single class.
IN WITNESS WHEREOF, this Certificate of Designations is executed on behalf
of the Corporation by its President and attested by its Secretary this 9th day
of September, 1996.
QUIETPOWER SYSTEMS, INC.
By: /s/ Jonathan M. Charry
------------------------------
Jonathan M. Charry
President
Attest:
By: /s/ Eric W. Jacobson
------------------------------
Eric W. Jacobson
Secretary
4
<PAGE>
AMENDED
CERTIFICATE OF DESIGNATION
OF
QUIETPOWER SYSTEMS, INC.
(Pursuant to Section 151 of the
Delaware General Corporation Law)
-----------------------------------
QuietPower Systems, Inc., a corporation organized and existing under the
General Corporation Law of the State of Delaware (hereinafter called the
"Corporation"), hereby certifies as follows:
FIRST: The name of the corporation is QuietPower Systems, Inc.
SECOND: The following resolutions amending a series of Preferred shares
established in a Certificate of Designation filed with the Secretary of State
of Delaware on the 26th day of September, 1996, were adopted by the Board of
Directors in accordance with Section 151 of the General Corporation Laws of the
State of Delaware:
RESOLVED, that the Corporation amend it Certificate of Designation
relating to its Series A Convertible Preferred Stock, to increase
the number of shares covered thereunder to 1,325.
RESOLVED, that each of the Officers of Corporation be and each
hereby is, authorized to execute any documents that may be necessary
and appropriate in order to effectuate the foregoing resolution.
IN WITNESS WHEREOF, this Amendment to the Certificate of Designation is
executed on behalf of the Corporation by its President and attested by its
Secretary this 6th day of December, 1996.
QUIETPOWER SYSTEMS, INC.
By: /s/ Jonathan M. Charry
------------------------------
Jonathan M. Charry
President
Attest:
By: /s/ Eric W. Jacobson
-----------------------------
Eric W. Jacobson
Secretary
<PAGE>
EXHIBIT 3.2
ACTIVE ACOUSTICAL SOLUTIONS, INC.
(A Delaware Corporation)
BY-LAWS
ARTICLE I
OFFICES
Section 1. Principal Office The principal office of the Corporation shall
be as set forth in its Certificate of Incorporation.
Section 2. Additional Offices The Corporation may have such additional
offices at such other place within or without the State of Delaware as the Board
of Directors may from time to time determine or as the business of the
Corporation may require.
ARTICLE II
STOCKHOLDERS' MEETINGS
Section 1. Annual Meeting An annual meeting of stockholders shall be
held in each year during the month of January on a day to be designated by the
Board of Directors, and at the time and place (either within or without the
State of Delaware) as shall be fixed by the Board of Directors and specified in
the notice of meeting for the purpose of electing directors and transacting such
other business as may properly be brought before the meeting.
Section 2. Special Meeting A Special Meeting of stockholders may be called
at any time by the President or by the Board of Directors or by the President or
the Secretary at the request in writing by the holders of a majority of the
issued and outstanding
<PAGE>
shares of the capital stock of the corporation entitled to vote at such meeting.
Any such request shall state the purpose or purposes of the proposed meeting.
Special meetings shall be held at such time and place (either within or without
the State of Delaware) as shall be specified in the notice thereof. Business
transacted at any special meeting of stockholders shall be confined to the
purposes set forth in the notice thereof.
Section 3. Notice of Meetings Written notice of the time, place and
purpose of every meeting or stockholders, (and, if other than an annual meeting,
indicating the person or persons at whose direction the meeting is being
convoked), shall be given to each stockholder of record entitled to vote at such
meeting and to each stockholder who, by reason of any action proposed at such
meeting, would be entitled to have his stock appraised if such action were
taken, not less than ten nor more than sixty days prior to the date set for the
meeting, either personally or by mailing said notice by first class mail to each
stockholder at his address appearing on the stock book of the Corporation or at
such other address supplied by him in writing to the Secretary of the
Corporation for the purpose of receiving notice. Notice by mail shall be deemed
to be given when deposited, postage prepaid, in a post office or official
depository under the exclusive care and custody of the United States Post Office
Department. The record date for determining the stockholders entitled to such
notice shall be determined by the Board of Directors in accordance with Section
6 of ARTICLE SIXTH of these By-Laws.
2
<PAGE>
A written waiver of notice setting forth the purposes of the meeting for
which notice is waived, signed by the person or persons entitled to such notice,
whether before or after the time of the meeting stated therein, shall be deemed
equivalent to the giving of such notice. The attendance by a stockholder at a
meeting either in person or by proxy without protesting the lack of notice
thereof shall constitute a waiver of notice of such stockholder.
All notice given with respect to an original meeting shall extend to any
and all adjournments thereof and such business as might have been transacted at
the original meeting may be transacted at any adjournment thereof; no notice of
any adjourned meeting need be given if an announcement of the time and place of
the adjourned meeting is made at the original meeting.
Section 4. Quorum The holders of a majority of the shares of stock issued
and outstanding and entitled to vote thereat, present in person or represented
by proxy, shall be requisite and shall constitute a quorum at all meetings of
stockholders for the transaction of business except as otherwise provided by
statute. If, however, a quorum shall not be present or represented at any
meeting of stockholders, the stockholders entitled to vote thereat, present in
person or represented by proxy, shall have power to adjourn the meeting from
time to time, without notice other than announcement at the meeting, until a
quorum shall be present or represented. At such adjourned meeting at which a
quorum shall be present or represented, any business may be transacted which
might have been transacted at the meeting as originally notified. When a
3
<PAGE>
quorum is once present to organize a meeting, such quorum is not deemed broken
by the subsequent withdrawal of any stockholders.
Section 5. Voting Every stockholder entitled to vote at any meeting shall
be entitled to one vote for each share of stock entitled to vote and held by him
of record on the date fixed as the record date for said meeting and may so vote
in person or by proxy. At all elections of directors when a quorum is present, a
plurality of the votes cast by the holders of shares entitled to vote shall
elect and any other corporate action, when a quorum is present, shall be
authorized by a majority of the votes cast by the holders of shares entitled to
vote thereon except as may otherwise be provided by statute.
Section 6. Proxies Every proxy must be signed by the stockholder entitled
to vote or by his duly authorized attorney-in-fact and shall be valid only if
filed with the Secretary of the Corporation or with the Secretary of the meeting
prior to the commencement of voting on the matter in regard to which said proxy
is to be voted. No proxy shall be valid after the expiration of eleven months
from the date of its execution unless otherwise expressly provided in the proxy.
Every proxy shall be revocable at the pleasure of the person executing it except
as otherwise provided by Section 212 of the General Corporation Law. Unless the
proxy by its terms provides for a specific revocation date and except as
otherwise provided by statute, revocation of a proxy shall not be effective
unless and until such revocation is executed in writing by the stockholder who
executed such proxy and the
4
<PAGE>
revocation is filed with the Secretary of the Corporation or with the Secretary
of the Meeting prior to the voting of the proxy.
Section 7. Stockholders' List A list of stockholders as of the record
date, certified by the Secretary of the Corporation or by a transfer agent
appointed by the Board of Directors shall be prepared for every meeting of
stockholders and shall be produced by the Secretary or some other officer of the
Corporation thereat.
Section 8. Inspectors at Meetings In advance of any stockholders' meeting,
the Board of Directors may appoint one or more inspectors to act at the meeting
or at any adjournment thereof and if not so appointed the person presiding at
any such meeting may, and at the request of any stockholder entitled to vote
thereat shall, appoint one or more inspectors. Each inspector, before entering
upon the discharge of his duties as set forth in Section 231 of the General
Corporation Law, shall take and sign an oath faithfully to execute the duties of
inspector at such meeting with strict impartiality and according to the best of
his ability.
Section 9. Conduct of Meeting All meetings of stockholders shall be
presided over by the President, or if he is not present by a chairman thereby
chosen by the stockholders at the meeting. The Secretary of the Corporation, or
in his absence, an Assistant Secretary, shall act as secretary of every meeting
but if neither the Secretary nor the Assistant Secretary is present the Chairman
of the meeting shall appoint any person present to act as secretary of the
meeting.
5
<PAGE>
Section 10. Stockholder Action Without Meetings Any action required by the
General Corporation Law to be taken at any annual or special meeting of
stockholders, or any action which may be taken at any annual or special meeting
of stockholders, may be taken without a meeting, without prior notice and
without a vote, if a consent in writing, setting forth the action so taken,
shall be signed by the holders of outstanding stock having not less than the
minimum number of votes that would be necessary to authorize or take such action
at a meeting at which all shares entitled to vote thereon were present and
voted. Prompt notice of the taking of the corporate action without a meeting by
less than unanimous written consent shall be given to those stockholders who
have not consented in writing. Action taken pursuant to this paragraph shall be
subject to the provisions of Section 228 of the General Corporation Law.
ARTICLE III
BOARD OF DIRECTORS
Section 1. Function and Definition The business and property of the
Corporation shall be managed by its Board of Directors who may exercise all the
powers of the Corporation and do all such lawful acts and things as are not by
statute or by the Certificate of Incorporation or by these By-Laws directed or
required to be exercised or done by the stockholders.
Section 2. Number and Qualification The number of directors constituting
the entire Board shall consist of one or more members,
6
<PAGE>
as may be fixed by resolution of the Board of Directors or by the stockholders
entitled to vote for the election of directors at an annual meeting, provided
that any such action of the Board shall require the vote of a majority of the
entire Board. The phrase "entire Board" as used herein means the total number of
directors which the Corporation would have if there were no vacancies. The term
of any incumbent director shall not be shortened by any such action by the Board
of Directors or by the stockholders.
Each director shall be at least twenty-one years of age. A director need
not be a stockholder, a citizen of the United States or a resident of the State
of Delaware.
Section 3. Election, Term and Vacancies Except as otherwise provided in
this Section, all directors shall be elected at an annual meeting of
stockholders, and all directors who are elected in the interim to fill vacancies
and newly created directorships, shall hold office until the next annual meeting
of stockholders and until their respective successors have been elected and
qualified.
In the interim between annual meetings of stockholders or of special
meetings of stockholders called for the election of directors and/or the removal
of one or more directors and for the filling of any vacancy in that connection,
newly created directorships resulting from the increase in the number of
directors or from vacancies occurring in the Board, but not, except as
hereinafter provided, in the case of a vacancy occurring by
7
<PAGE>
reason of removal of a director by the stockholders, may be filled by the vote
of a majority of the directors, then remaining in office, although less than a
quorum may exist.
In the case of a vacancy occurring in the Board of Directors by reason of
the removal of one or more directors by action of the stockholders, such vacancy
may be filled by the stockholders at a special meeting duly called for such
purpose.
In the event a vacancy is not filled by such election by stockholders,
whether or not the vacancy resulted from the removal of a director with or
without cause, a majority of the directors then remaining in office, although
less than a quorum, may fill any such vacancy.
Section 4. Removal The Board of Directors may, at any time, with cause,
remove any director.
The stockholders entitled to vote for the election of directors may, at
any time, remove any or all of the directors with or without cause.
Section 5. Meetings The annual meeting of the Board of Directors for the
election of officers and the transaction of such other business as may come
before the meeting, shall be held, without notice, immediately following the
annual meeting of stockholders, at the same place at which such stockholders'
meeting is held.
Regular meetings of the Board of Directors shall be held at such time and
place, within or outside of the State of Delaware, as may be fixed by resolution
of the Board, and when so fixed, no
8
<PAGE>
further notice thereof need be given. Regular meetings not fixed by resolution
of the Board may be held on notice at such time and place as shall be determined
by the Board.
Special meetings of the Board of Directors may be called on notice at any
time by the President or by a majority of the directors then in office and shall
be called by the President or the Secretary at the written request of a majority
of the directors then in office.
Section 6. Notice of Meeting In the case of all special meetings and of
regular meetings not fixed by resolution of the Board, written notice of the
time, place and purposes of each such meeting shall be mailed to each director,
addressed to his residence or usual place of business, not less than four days
before the date on which such meeting is to be held, or shall be sent to such
address by telegraph, or be given personally, or by telephone, not less than two
days before the date on which such meeting is to be held.
Any meeting of the Board of Directors for which notice is required by
these By-Laws or by statute need not be given to any director who submits a
signed waiver of notice whether before or after the meeting, or who attends the
meeting without protesting prior thereto or at its commencement the lack of
notice to him. All signed waivers of notice shall be filed with the minutes of
the meeting.
Section 7. Conduct of Meetings The President, if present, shall preside at
all meetings of directors. At all meetings at
9
<PAGE>
which the President is not present, any other director chosen by the Board,
shall preside.
Section 8. Quorum, Adjournment, Voting A majority of the entire Board
shall be requisite and shall constitute a quorum at all meetings of the Board of
Directors for the transaction of business, except where a vacancy or vacancies
prevents such majority, whereupon a majority of the directors then in office
shall constitute a quorum, provided such majority shall constitute at least
one-third of the entire Board.
A majority of the directors present at any meeting, whether or not a
quorum is present, may adjourn the meeting to another time and place without
further notice other than an announcement at the meeting.
When a quorum is present at any meeting, a majority of the directors
present shall decide any question brought before such meeting and the act of
such majority shall be the act of the Board.
Any action required or permitted to be taken by the Board or any Committee
thereof may be taken without a meeting if all members of the Board or Committee
consent in writing to the adoption of a resolution authorizing the action.
Section 9. Compensation of Directors Directors, as such, shall not receive
any stated salary for their services, but, by resolution of the Board, a fixed
sum and expenses of attendance, if any, may be allowed for attendance at any
meeting of the Board of Directors or of any committee thereof. Nothing herein
contained shall be construed to preclude any director from serving the
10
<PAGE>
Corporation in any other capacity and receiving reasonable compensation
therefor.
Section 10. Committees The Board of Directors, by resolution of a majority
of the entire Board, may designate from among its members one or more
committees, each consisting of three or more directors, and each of which, to
the extent provided in such resolution, shall have all the authority of the
Board except that no such committee shall have authority as to any of the
following matters:
(a) The submission to stockholders of any action as to which stockholders'
authorization or approval is required by statute, the Certificate of
Incorporation or by these By-Laws;
(b) the filling of vacancies in the Board of Directors or in any committee
thereof;
(c) the fixing of compensation of the directors for serving on the Board
or on any committee thereof;
(d) the amendment or repeal of these By-Laws or the adoption of new
By-Laws; and
(e) the amendment or repeal of any resolution of the Board of Directors
which by its terms shall not be so amendable or repealable.
The Board may designate one or more directors as alternate members of any
such committee who may replace any absent member or members at any meeting of
such committee.
Each such committee shall serve at the pleasure of the Board. The Board of
Directors shall have power at any time to fill
11
<PAGE>
vacancies in, to change the membership of, or to discharge any such committee.
Committees shall keep minutes of their proceedings and shall report the same to
the Board of Directors at the meeting of the Board next succeeding, and any
action by the committee shall be subject to revision and alteration by the Board
of Directors, provided that no rights of a third person shall be affected by any
such revision or alteration.
Section 11. Written Action Any action required or permitted to be taken at
any meeting of the Board of Directors or any committee thereof may be taken
without a meeting if all members of the Board or committee, as the case may be,
consent thereto in writing, and the writing or writings are filed with the
minutes of proceedings of the Board or committee.
ARTICLE IV
OFFICERS
Section 1. Executive Officers The officers of the Corporation shall be a
Chief Executive Officer, a President, a Treasurer, a Secretary, and, if deemed
necessary, expedient or desirable by the Board of Directors, a Chairman of the
Board, a Vice-Chairman of the board, an Executive Vice President, one or more
other Vice Presidents, one or more Assistant Treasurers, one or more Assistant
Secretaries, and such other officers with such titles as the resolution of the
Board of Directors choosing them shall designate. Except as may otherwise be
provided in the resolution of the Board of Directors choosing him, no officer
other than the Chairman or
12
<PAGE>
Vice-President of the Board, if any, need be a director. Any two or more offices
may be held by the same person.
Section 2. Term Unless otherwise provided in the resolution choosing him,
officers shall hold office until the meeting of the Board held immediately
following the next annual meeting of stockholders and until their successors
have been elected and qualified. A vacancy in any office arising from any cause
may be filled for the unexpired portion of the term by the Board of Directors.
Section 3. Removal Any officer may be removed from office by the Board at
any time with or without cause.
Section 4. Powers All officers of the corporation shall have such
authority and perform such duties in the management and operation of the
corporation as shall be prescribed in the resolutions of the Board of Directors
designating and choosing such officers and prescribing their authority and
duties, and shall have such additional authority and duties as are incident to
their office except to the extent that such resolutions may be inconsistent
therewith. The Secretary or an Assistant Secretary of the corporation shall
record all of the proceedings of all meetings and actions in writing of
stockholders, directors, and committees of directors, and shall exercise such
additional authority and perform such additional duties as the Board shall
assign to him. The Board of Directors may from time to time delegate the powers
or duties of any officer of the Corporation, in the event of his
13
<PAGE>
absence or failure to act otherwise, to any other officer or director or person
whom they may select.
Section 5. Compensation The compensation of each officer shall be such as
the Board of Directors may from time to time determine.
ARTICLE V
RESIGNATIONS
Any director or officer of the Corporation, or any member of any committee
of the Board of Directors of the Corporation, may resign at any time by giving
written notice to the Board of Directors, the President or the Secretary. Any
such resignation shall take effect at the time specified therein or, if the time
is not specified therein, upon the receipt thereof, irrespective of whether any
such resignation shall have been accepted.
ARTICLE VI
CERTIFICATES REPRESENTING SHARES
Section 1. Form of Certificates Each stockholder shall be entitled to a
certificate or certificates in such form as prescribed by the General
Corporation Law and by any other applicable statute, which certificate shall
represent and certify the number, kind and class of shares owned by him in the
Corporation. The Certificates shall be numbered and registered in the order in
which they are issued and upon issuance the name in which each certificate has
been issued together with the number of shares represented thereby and the date
of issuance shall be
14
<PAGE>
entered in the stock book of the Corporation by the Secretary or by the transfer
agent of the Corporation. Each Certificate shall be signed by the President and
counter-signed by the Secretary or Treasurer and shall be sealed with the
Corporate Seal or a facsimile thereof. The signature of the officers upon a
certificate may also be facsimiles if the certificate is counter-signed by a
transfer agent or registered by a registrar other than the Corporation itself or
an employee of the Corporation. In case any officer who has signed or whose
facsimile signature has been placed upon a certificate shall have ceased to be
such officer before the certificate is issued, such certificate may be issued by
the Corporation with the same effect as if the officer had not ceased to be such
at the time of its issue.
Section 2. Consideration A certificate representing shares shall not be
issued until the full amount of consideration therefor has been paid to the
Corporation, except if otherwise permitted by Section 156 of the General
Corporation Law.
Section 3. Lost Certificates The Board of Directors may direct a new
certificate or certificates to be issued in place of any certificate or
certificates theretofore issued by the Corporation, alleged to have been lost,
mutilated, stolen or destroyed, upon the making of an affidavit of that fact by
the person so claiming and upon delivery to the Corporation, if the Board of
Directors shall so require, of a bond in such form and with such surety or
sureties as the Board may direct, sufficient in amount to indemnify the
Corporation and its transfer agent against any claim which may be
15
<PAGE>
made against it or them on account of the alleged loss, destruction, theft or
mutilation of any such certificates or the issuance of any such new certificate.
Section 4. Fractional Share Interests The Corporation may issue
certificates for fractions of a share where necessary to effect transactions
authorized by the General Corporation Law; or it may pay in cash the fair market
value of fractions of a share as of the time when those entitled to receive such
fractions are determined; or it may issue scrip in registered or bearer from
over the manual of facsimile signature of an officer of the Corporation or of
its agents, exchangeable as therein provided for full shares, but such scrip
shall not entitle the holder to any rights of a stockholder except as therein
provided.
Section 5. Share Transfers Upon compliance with provisions restricting the
transferability of shares, if any, transfers of shares of the Corporation shall
be made only on the share record of the Corporation by the registered holder
thereof, or by his duly authorized attorney, upon the surrender of the
certificate or certificates for such shares properly endorsed with payment of
all taxes thereon.
Section 6. Record Date For Stockholders For the purpose of determining the
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof or to express consent or dissent from any proposal
without a meeting, or for the purpose of determining the stockholders entitled
to receive payment of any dividend or the allotment of any rights, or for the
16
<PAGE>
purpose of any other action, the Board of Directors may fix, in advance, a date
as the record date for any such determination of stockholders. Such date shall
not be more than sixty nor less than ten days before the date of any meeting nor
more than sixty days prior to any action taken without a meeting, the payment of
any dividend or the allotment of any rights, or any other action. When a
determination of stockholders of record entitled to notice of or to vote at any
meeting of stockholders has been made as provided in this Section, such
determination shall apply to any adjournment thereof, unless the Board fixes a
new record date under this Section for the adjourned meeting.
Section 7. Stockholders of Record The Corporation shall. be entitled to
treat the holder of record of any share or shares of stock as the holder in fact
thereof and, accordingly, shall not be bound to recognize any equitable or other
claim to or interest in such share on the part of any other person whether or
not it shall have express or other notice thereof, except as otherwise provided
by the laws of the State of Delaware.
ARTICLE VII
STATUTORY NOTICES
The Board of Directors may appoint the Treasurer or any other officer of
the Corporation to cause to be prepared and furnished to stockholders entitled
thereto any special financial notice and/or statement which may be required by
the General Corporation Law or by any other applicable statute.
17
<PAGE>
ARTICLE VIII
FISCAL YEAR
The fiscal year of the Corporation shall begin the first day of January of
each year. By resolution duly adopted, the Board of Directors may alter such
fiscal year.
ARTICLE IX
CORPORATE SEAL
The Corporate seal shall have inscribed thereon the name of the
Corporation, the year of its incorporation and the words "Corporate Seal" and
"Delaware" and shall be in such form and contain such other words and/or figures
as the Board of Directors shall determine. The Corporate seal may be used by
printing, engraving, lithographing, stamping or otherwise making, placing or
affixing, or causing to be printed, engraved, lithographed, stamped or otherwise
made, placed or affixed, upon any paper or document, by any process whatsoever,
an impression, facsimile or other reproduction of said Corporate seal.
ARTICLE X
BOOKS AND RECORDS
There shall be maintained at the principal office of the Corporation books
of account of all of the Corporation's business and transactions.
There shall be maintained at the office of the Corporation's transfer
agent in New York, a record containing the name and
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<PAGE>
addresses of all stockholders, the number and class of shares held by each and
the dates when they respectively became the owners of record thereof.
ARTICLE XI
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES
AND AGENTS
Any person made or threatened to be made a party to an action or
proceeding, whether civil or criminal, by reason of the fact that he, his
testator or intestate, then is or was a director, officer, employee or agent of
the Corporation, or then serves or has served any other corporation in any
capacity at the request of the Corporation, shall be indemnified by the
Corporation against reasonable expenses, judgments, fines and amounts actually
and necessarily incurred in connection with the defense of such action or
proceeding or in connection with an appeal therein, to the fullest extent
permissible by the laws of the State of Delaware. Such right of indemnification
shall not be deemed exclusive of any other rights to which such person may be
entitled.
ARTICLE XII
AMENDMENTS
The stockholders entitled at the time to vote in the election of directors
and the Board of Directors by vote of a majority of the entire Board, shall have
the power to amend or repeal these Bylaws and to adopt new by-laws provided,
however, that any by-law
19
<PAGE>
adopted, amended or repealed by the Board of Directors may be amended or
repealed by the stockholders entitled to vote thereon as herein provided.
20
<PAGE>
- ------------------------------------------------------------------
------------------------------------
NUMBER
QP
------------------------------------
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(C) SECURITY-COLUMBIAN UNITED STATES BANKNOTE CORPORATION
COMMON STOCK
--------------
QuietPower Systems, Inc. SHARES
--------------
INCORPORATED UNDER THE LAWS SEE REVERSE FOR CERTAIN DEFINITIONS
OF THE STATE OF DELAWARE CUSIP
- --------------------------------------------------------------------------------
THIS CERTIFIES THAT
IS THE OWNER OF
- --------------------------------------------------------------------------------
FULLY PAID AND NON-ASSESSABLE SHARES OF THE PAR VALUE OF
$.01 EACH OF THE COMMON STOCK OF
QuietPower Systems, Inc.
CERTIFICATE OF STOCK
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney upon surrender of this certificate properly
endorsed.
This certificate is not valid unless countersigned and registered by the
Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures of
its duly authorized officers.
Dated:
QuietPower Systems, Inc.
CORPORATE
SEAL
1992
DELAWARE
SECRETARY PRESIDENT
COUNTERSIGNED AND REGISTERED:
CONTINENTAL STOCK TRANSFER & TRUST COMPANY
(Jersey City, NJ)
TRANSFER AGENT
AND REGISTRAR,
BY
AUTHORIZED OFFICER
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
<S> <C>
AMERICAN BANK NOTE COMPANY PRODUCTION COORDINATOR: TRICIA LUNA: 215-830-2197
680 BLAIR MILL ROAD PROOF OF APRIL 30, 1997
HORSHAM, PA 19044 QUIETPOWER SYSTEMS, INC.
(215) 657-3480 H 50342fc
- ---------------------------------------------------------------------------------------------------------
SALES: R. JOHNS: 212-557-9100 OPERATOR: KOSHY
- ---------------------------------------------------------------------------------------------------------
/NET/BANKNOTE/HOME46/Q2%/QuietPower50342/bk NEW
- ---------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
The Corporation will furnish without charge to each stockholder who so
requests a statement of the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or series
thereof and the qualifications, limitations or restrictions of such preferences
and/or rights.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<CAPTION>
<S> <C>
TEN COM -- as tenants in common UNIF GIFT MIN ACT -- ..............Custodian.................
TEN ENT -- as tenants by the entireties (Cust) (Minor)
JT TEN -- as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants Act.....................................
in common (State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
Fro value received, _______________________________ hereby sell, assign and
transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- ---------------------------------------
- ---------------------------------------
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE OF ASSIGNEE)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- -------------------------------------------------------------------------shares
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
- -----------------------------------------------------------------------Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated
-------------------------------
-----------------------------------------------------------------------
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS
WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
SIGNATURE(S) GUARANTEED:
- --------------------------------------------------------------
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR
INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS
AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE
GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
<S> <C>
AMERICAN BANK NOTE COMPANY PRODUCTION COORDINATOR: TRICIA LUNA: 215-830-2197
680 BLAIR MILL ROAD PROOF OF APRIL 30, 1997
HORSHAM, PA 19044 QUIETPOWER SYSTEMS, INC.
(215) 657-3480 H 50342BK
- ---------------------------------------------------------------------------------------------------------
SALES: R. JOHNS: 212-557-9100 OPERATOR: KOSHY
- ---------------------------------------------------------------------------------------------------------
/NET/BANKNOTE/HOME46/Q2%/QuietPower50342/bk NEW
- ---------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
EXHIBIT 5
BRESLOW & WALKER, LLP
767 THIRD AVENUE
NEW YORK, NEW YORK 10017
May 8, 1997
Board of Directors
QuietPower Systems, Inc.
1675 Broadway
New York, New York 10019
Gentlemen:
It is our opinion that the securities being registered with the Securities
and Exchange Commission pursuant to the Registration Statement of QuietPower
Systems, Inc. on Form SB-2 will, when sold, be legally issued, fully paid and
nonassessable.
We consent to the filing of this opinion as an exhibit to the aforesaid
Registration Statement and further consent to the reference made to us under the
caption "Legal Matters" in the Prospectus constituting part of such Registration
Statement.
Very truly yours,
/s/ BRESLOW & WALKER, LLP
Breslow & Walker, LLP
<PAGE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made as of the 1st day of March
9, 1995, by and between Jonathan M. Charry, an individual residing at 5450
Palisade Avenue, Riverdale NY, 10471 ("Employee"), and QuietPower Systems, Inc.,
a Delaware corporation (the "Company"), with principal offices at 1675 Broadway,
Suite 2600, New York, NY 10019.
WHEREAS, the Company is engaged in the business of research, development,
marketing, engineering and distribution of advanced technology, including active
noise control products and technology to the electric and gas utility industries
(the "Business"); and
WHEREAS, Employee is a key employee of the Company and has a significant
degree of managerial and technical expertise in the Company's field of business;
and
WHEREAS, the Company wishes to employ Employee, and Employee wishes to
work for the Company, in the capacity of President and Chief Executive Officer.
NOW THEREFORE, in consideration of the premises and the mutual covenants
and agreements herein contained, the parties hereto agree as follows:
1. TERM OF AGREEMENT
This Agreement shall be effective from the date first above written
("Effective Date") and shall continue in effect through the third anniversary of
the Effective Date (the "Term"). The Agreement shall automatically be renewed
for successive one year periods (each such period also a "Term") unless at least
one hundred eighty (180) days prior to the end of the Term either party hereto
gives written notice to the other party of its intention not to renew this
Agreement. The Agreement may also be terminated at any time in accordance with
the terms and conditions of Subsection 11.1 hereof.
2. EMPLOYMENT
2.1 Position. The Company hereby employs Employee in a professional and
technical capacity with the title of President and Chief Executive Officer of
the Company, and Employee hereby accepts such employment and undertakes and
agrees to serve in such capacity. As President and Chief
1
<PAGE>
Executive Officer of the Company, Employee shall have such powers, perform such
duties and fulfill such responsibilities consistent with his positions. Employee
shall report directly to the Board of Directors of the Company.
2.2 Scope of Service. During the term of this Agreement, except as may be
mutually agreed upon by Employee and the Company, Employee will not be
transferred or otherwise required to change his residence or to render his
services hereunder other than in the New York, New York metropolitan, or
Stamford Connecticut areas, except that Employee agrees to make such business
trips necessary in the performance of services under this Agreement.
3. COMPENSATION.
3.1 Base Salary
(a) In consideration of the services rendered hereunder, the Company
shall pay Employee during the term of this Agreement a base salary of ONE
HUNDRED SEVENTY FIVE THOUSAND DOLLARS ($175,000) per annum ("Base Salary"). Such
Base Salary shall increase by a percentage each year equal to the percentage
increase, if any, in the Consumer Price Index published by the U.S. Department
of Labor, Bureau of Labor Statistics, for the New York, NY areas (now known as
the "CPI - U for all urban consumers"). The Compensation Committee of the Board
of Directors (the "Committee") shall conduct an annual review of Employee's
performance. The Base Salary may be subject to temporary or permanent increase
by the Committee if it shall determine that economic conditions and Employee's
performance so warrant.
(b) The Base Salary for each such year shall be payable by the
Company to Employee in equal monthly installments on the last business day of
each month.
3.2 Incentive Compensation
(a) Yearly Bonus. Annually the Committee shall provide a bonus plan
to the Employee. Compensation under the bonus plan, attached hereto on Schedule
A, shall be contingent upon the Company meeting certain milestones related to
revenues, earnings or other important Company objectives.
(b) Additional Discretionary Bonus. The Committee may, in its sole
discretion, pay Employee such other bonus or bonuses during any full or partial
fiscal year of the Company which encompasses any part of the term of this
Agreement as the Committee deems appropriate in is sole discretion based on
Employee's and the Company's performance during that portion of the term of this
Agreement.
2
<PAGE>
(c) Stock Options. The Committee may, in its sole discretion, grant
options to purchase the Company's stock as stipulated by its 1993 Stock Option
Plan. Stock options granted upon the signing of this Agreement are established
and made a part hereof in Schedule A.
3.3 Fringe Benefits. In addition to the compensation provided for above,
so long as Employee is employed by the Company under this Agreement, he shall be
entitled to receive all other fringe benefits as are from time to time generally
provided to senior officers by the Company (other than termination or severance
pay, which is provided for in this Agreement).
4. BUSINESS EXPENSES
Employee is authorized to incur, and the Company shall pay and reimburse
him for, all reasonable and necessary business expenses incurred in the
performance of his duties hereunder including expenses for entertainment, travel
and other items in accordance with guidelines adopted by the Board or Committee.
The Company will pay and reimburse Employee for all such expenses upon the
presentation by Employee, from time to time, of an itemized account of such
expenditures and proper documentation thereof as evidence that such expenses
have been incurred.
5. VACATION
In addition to the usual national public holidays, Employee shall be
entitled to a vacation of four (4) weeks during each year during which time he
shall be remunerated in full. Any vacation time up to a maximum of two (2) weeks
which if not used in one year may be carried over to the next succeeding year,
but not beyond.
6. SICKNESS
Without prejudice to the Company's rights pursuant to Section 11
hereinafter, Employee shall receive his usual rate of remuneration in respect of
any period when he is absent from work due to sickness, disability or injury for
a period of up to sixty (60) days in any continuous period of three hundred
sixty five (365) days. Any payment thereafter shall be at the discretion of the
Company.
7. CONFIDENTIALITY
7.1 Nondisclosure. During his employment by the Company and for two (2)
years thereafter, Employee agrees to keep confidential, except as the Company
may otherwise consent in writing, and not to disclose, publish, disseminate or
make use of any inventions, trade secrets, confidential
3
<PAGE>
information, knowledge, data or other information of the Company relating to
products, processes, know-how, programs, designs, formulas, test data, customer
lists, customer requirements, business operations or techniques, corporate or
business plans, marketing plans and strategies, pricing strategies, or other
subject matter pertaining to the Business of the Company or any business of its
clients, customers, consultants, licensees or affiliates, which Employee may
produce, obtain or otherwise acquire during the course of his employment.
Employee further agrees not to deliver, reproduce or in any way allow any such
inventions, trade secrets, confidential information, knowledge, data or other
information, or any documentation relating thereto, to be delivered or used by
any third parties without specific direction or consent of a duly authorized
representative of the Company.
7.2 Exceptions to Confidentiality. The obligation set forth in Section 7.1
hereof shall immediately cease for any invention, trade secret, confidential
information, knowledge, data or other information of the Company, as described
therein, at the time that any such invention, trade secret, confidential
information, knowledge, data or other information of the Company, as described
therein, at the time that any such invention, trade secret, confidential
information, knowledge, data or other information (i) enters the public domain
through no wrongful act of Employee or (ii) is lawfully received by Employee
from a third party without similar restrictions thereon regarding nondisclosure;
provided, however, that no exceptions to the obligations set forth in Section
7.1 shall apply to any invention, trade secret, confidential information,
knowledge, data or other information produced, obtained or otherwise acquired by
Employee in connection with any contract between the Company and any client,
customer, consultant, licensee or affiliate to the extent that such exception
would in any way conflict with or decrease the scope of any confidentiality or
nondisclosure obligations set forth in such contract.
7.3 Documents. Upon the termination of this Agreement or at any time upon
the Company's request, Employee shall deliver forthwith to the Company all
memoranda, notes, records, reports and other documents (including all copies
thereof) relating to all confidential matters, as described in Subsection 7.1
hereof, and to the Business of the Company which Employee may then possess or
have under his control.
7.4 Breach of Contract. Employee represents and warrants that his
performance of all of the terms of this Agreement does not and will not breach
any agreement not to compete or any agreement to keep in confidence proprietary
information, knowledge or data acquired by him in confidence or in trust prior
to his employment with the Company. Employee agrees not to enter into any
agreement,
4
<PAGE>
either written or oral, in conflict herewith.
8. OWNERSHIP OF INVENTIONS AND IDEAS
Employee acknowledges that the Company shall be the sole owner of all the
fruits and proceeds of Employee's services hereunder, including, but not limited
to, all inventions, developments, discoveries and other improvements, whether
patentable or not patentable, which Employee, in connection with and during the
course of his employment, may develop, create or first actually reduce to
practice during the term of this Agreement and for ninety (90) days thereafter,
either alone or in combination with others, free and clear of any claims by
Employee (or any successor or assignee of Employee) of any kind or character
whatsoever. Employee shall disclose such inventions and ideas to the Company
promptly and in writing. Employee agrees that he shall, at the request of the
Board of Directors, execute such assignments, certificates or other instruments
as the Board of Directors from time to time deems reasonably necessary or
desirable to evidence, establish, maintain, perfect, protect, enforce or defend
the Company's right, title and interest in or to any such properties.
9. NON-COMPETITION
During his employment by the Company and for twelve (12) months
thereafter, Employee shall not compete with the Company in any activity relating
to the Business of the Company as conducted by the Company during the term of
this Agreement; provided, however, that Employee shall be permitted to resume
activities of substantially the same type as those activities conducted by
Employee prior to his employment by the Company. For purposes of the preceding
sentence, competition shall include, without limitation, direct or indirect
competition by Employee, whether as an owner, officer, director, employer,
partner, consultant, advisor, contractor, principal, agent, licensor, employee
or affiliate of a person, firm, venture or corporation that so competes with
Company and shall apply only as to any clients or customers with whom Employee
shall have had contact on or before the date his employment ceases and for whom
Company has provided services within one (1) year of such date. Without the
prior written approval of the Board of Directors, Employee further agrees that
during his employment by the Company and for twelve (12) months thereafter he
will not hire, contract with or solicit for employment or contract any employee
of the Company or any former employee of the Company who left such employment
less than six (6) months earlier, unless such employee was terminated by the
Company on the grounds described in Section 11.1 (a) (iii) hereof.
5
<PAGE>
10. SPECIFIC PERFORMANCE
10.1 Damages. The parties hereby declare that the rights of the Company
under Sections 7 through 9 hereof are of unique nature, the loss of which may
cause irreparable harm, and that it may be impossible to measure in money the
damages which will accrue to the Company by reason of the loss of such rights or
a failure by Employee to perform or adhere to any of the obligations under
Sections 7 through 9 hereof.
10.2 Equitable Relief. In the event of any breach or threatened breach of
Sections 7 through 9 hereof, the Company shall be entitled, as a matter of
right, to a final order, from a court of competent jurisdiction, of injunctive
and other equitable relief, and if the Company shall institute any action or
proceeding to enforce by specific performance or other equitable relief the
provisions hereof, Employee hereby waives the claim or defense thereto that the
Company has an adequate remedy at law, and Employee shall not urge in any such
action or proceeding the claim or defense that such remedy at law exists.
10.3 Remedies at Law. This Section 10 shall not limit or constrain the
right of the Company to pursue and recover damages at law for breaches of this
Agreement, including breaches of Sections 7 through 9 hereof.
11. TERMINATION
11.1 Termination of Employment
(a) The Company shall have the right to terminate this Agreement
upon thirty (30) days prior written notice to Employee (except for any
continuing rights and obligations expressly provided for in this Section 11) on
the earliest to occur of the following events:
(i) willful failure by Employee substantially to perform
the duties and obligations of his employment;
(ii) commission by Employee of willful misconduct,
actionable negligence, fraud, acts of dishonesty,
disloyalty or breach of trust against the Company or
other illegal or improper acts or omissions; or
(iii) termination of Employee by the Company for any reason
6
<PAGE>
(b) The Company shall have the right to terminate this Agreement
upon prior written notice to Employee in the event of Employee's permanent
disability. For the purpose of this Section 11, permanent disability shall mean
Employee's inability, whether mental or physical, to perform the regular duties
of his employment on a full-time basis for three (3) consecutive months. If the
Company and Employee are unable to agree whether he is so disabled, the question
shall be decided by a panel of three (3) physicians, one (1) to be designated by
the Company, one (1) by Employee and one (1) by the first two (2) so designated.
The determination of the panel shall be final and binding upon the parties. The
Company shall pay the costs of the panel.
(c) In the event of Employee's death, this Agreement shall terminate
without notice.
(d) Employee shall have the right to terminate this Agreement upon
thirty (30) days prior written notice to Company in the event Company fails to
make a Base Salary payment to Employee within fifteen (15) days after written
notification from Employee that such payment is due in accordance with the terms
of Section 3 hereof. Upon such termination, Employee shall be released from all
obligations imposed by the terms and conditions of this Agreement with the
exception of those imposed by Sections 7 through 9 hereof. Company agrees to
make a good faith effort to make Base Salary payments to Employee to the extent
salary payments due and payable on a comparable basis are made to any other
employee of the Company.
(e) The Base Salary and fringe benefits provided to Employee under
Section 3 of this Agreement, to the extent not then accrued, shall terminate on
the date of termination of this agreement, except for any continuing rights and
obligations set forth in Subsection 11.2 hereof or expressly provided for in the
Company's fringe benefit plans or programs. Any accrued and unpaid bonus for any
fiscal year of the Company or portion thereof which occurs on or before the date
of termination of this Agreement shall continue to be due and payable as
provided in Subsection 3.2 hereof.
11.2 Termination Payments
(a) If this Agreement is terminated pursuant to Subsections 11.1 (a)
(i) or 11.1 (a) (ii) hereof, no severance or termination pay whatsoever shall be
due Employee. Employee however shall receive any unpaid Base Salary payments
accrued prior to the date of termination.
(b) If this Agreement is terminated pursuant to Subsection 11.1 (c)
hereof due to Employee's death, his estate or designated beneficiary (which
beneficiary Employee may designate by filling a written notice with the Company
that shall be effective when filed and that may be altered or
revoked by Employee at any time) shall receive payments totalling one million
dollars ($1,000,000).
7
<PAGE>
Company shall purchase and maintain "Key Man Insurance" containing customary
terms and conditions on Employee in a amount which would be sufficient to cover
such termination payments. Company shall have all incidents of ownership in such
insurance policy but the proceeds of such insurance shall be payable to the
Employee's designated beneficiary.
(c) If this Agreement is terminated pursuant to Subsection 11.1 (b)
hereof due to Employee's permanent disability, Employee shall receive the amount
of any benefits payable under any group disability insurance program
administered and offered to Employee by the Company.
(d) If this Agreement is terminated pursuant to Subsection
11.1(a)(iii) or 11.1(d) hereof, Company must pay Employee an amount equal to the
lesser of Employee's annual Base Salary on the date of such termination or the
total Base Salary due Employee during the remainder of the Term in effect on the
date of termination; provided, however, that such amount shall not be less than
the total of Employee's Base Salary payments for a one hundred twenty day
period. Company may elect to pay this amount (i) as a lump sum within sixty (60)
days of the date of termination or (ii) ratably in monthly installments during
the remainder of the Term in effect on the date of termination.
(e) If the Company elects not to renew this Agreement pursuant to
Section 1 hereof, the Company shall pay Employee a severance payment equal to
Employee's Base Salary payments for a one hundred twenty day period. Company may
elect to pay this amount (i) as a lump sum on the last day of the Term or (ii)
ratably in monthly installments during the three-month period following the last
day of the Term.
(f) Employee shall not be required to mitigate the amount of any
termination payment provided for in this Subsection 11.2 hereof by seeking other
employment or by other means.
8
<PAGE>
12. MISCELLANEOUS
12.1 Assignment. This Agreement and the rights of Employee hereunder are
personal to Employee, and neither this Agreement nor any right or interest
herein or arising hereunder shall be subject to voluntary or involuntary
alienation, assignment or transfer by Employee nor may Employee, his estate or
designated beneficiary use this Agreement or any right of payment hereunder as a
pledge or collateral for any loan; provided, however, that this Agreement shall
be binding upon and shall inure to the benefit of the successors and assigns of
the Company.
12.2 Governing Law. This Agreement shall be governed by, and shall be
construed and interpreted in accordance with, the laws of the State of New York
without giving effect to the doctrine of conflict of laws.
12.3 Notices. Any notice which the Company is required or may desire to
give Employee shall be given by personal delivery or by registered or certified
mail, with postage prepaid, addressed to Employee at his address of record with
the Company, or at such other place as Employee may from time to time designate
to the Company in writing. Any notice which Employee is required or may desire
to give to the Company hereunder shall be given by personal delivery or by
registered or certified mail, with postage prepaid, addressed to the Company may
from time to time designate to Employee in writing. Such notice shall be deemed
given when delivered personally or, if mailed, given two (2) days after the date
of mailing.
12.4 Waiver. If either party should waive any breach of any provision of
this Agreement, such party shall not thereby be deemed to have waived any
proceeding or succeeding breach of the same or any other provision of this
Agreement.
12.5 Entire Agreement; Modification; Severability. This Agreement
constitutes the entire agreement of these parties with respect to the subject
matter hereof, and all other prior or contemporaneous agreements of the parties
with respect to such subject matter, whether oral or written, are hereby merged
into this Agreement. This Agreement shall not be changed, modified or amended
other than by a further written agreement signed (i) by a duly authorized member
of the Company's Compensation Committee and (ii) by Employee. If, for any
reason, any immaterial part of this Agreement is declared by a court of
competent jurisdiction to be void or unenforceable, the remainder of this
Agreement shall not be affected thereby and shall remain in full force and
effect.
12.6 Counterparts. This Agreement may be signed in two counterparts, each
of which shall be deemed an original and both of which together shall constitute
one agreement.
12.7 Arbitration. Any and all disputes, claims and controversies between
the parties hereto
9
<PAGE>
concerning the validity, interpretation, performance, termination or breach of
this Agreement, which cannot be resolved by the parties within ninety (90) days
after such dispute, claim or controversy arises, shall, at the option of either
party, be referred to and finally settled by arbitration. Such arbitration shall
be initiated by the initiating party giving notice (the "Arbitration Notice") to
the other party (the"Respondent") that it intends to submit such dispute, claim
or controversy to arbitration. Each party shall, within thirty (30) days of the
date the Arbitration Notice is received by the Respondent, designate a person to
act as an arbitrator within the time specified herein, the arbitration shall be
conducted by the sole designated arbitrator. The two arbitrators appointed by
the parties shall, within thirty (30) days after their designation, appoint a
third arbitrator who shall act as presiding arbitrator (the "Presiding
Arbitrator"). If the two arbitrators designated by the parties are unable to
appoint a Presiding Arbitrator, the Presiding Arbitrator shall be appointed
according to the rules of the American Arbitration Association as in effect on
the date the notice of submission to arbitration is given (the "Rules").
Such arbitration shall be held in New York, New York, in accordance with
the Rules, except as otherwise expressly provided herein. The arbitrators shall,
by majority vote, render a written decision stating reasons therefor in
reasonable detail within three (3) months after the appointment of all
arbitrators. Each party shall bear its own costs and attorney's fees. All other
costs and expenses of arbitration shall be apportioned between the parties by
the arbitrators. The award of the arbitrators shall be made in United States
currency and shall be final and binding, and judgement thereon may be rendered
by any court having jurisdiction thereof, or application may be made to such
court for the judicial acceptance of the award and an order of enforcement, as
the case may be.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement with legal and binding effect as of the day and year first above
written.
/s/ Jonathan M. Charry
-------------------------------------
Jonathan M. Charry ("Employee")
10
<PAGE>
/s/ Eric W. Jacobson
-------------------------------------------
QuietPower Systems, Inc.,
a Delaware corporation ("Company")
/s/ William S. Bernstein
-------------------------------------------
William S. Bernstein
Compensation Committee
of the Board of Directors of Active
Acoustical Solutions, Inc. ("Committee")
11
<PAGE>
Amendment to Employment Agreement between Jonathan M. Charry and QuietPower
Systems, Inc. Dated March 9, 1995
SCHEDULE A
Base Salary: $195,000
Stock Options: 100,000 shares at an exercise price of $2.50
Yearly Bonus: The bonus plan for 1995 shall be based upon the
milestones listed below. The bonus shall become payable in the
amounts stipulated below upon the achievement of these
milestones up to a maximum of $50,000.
Milestone $ Bonus
--------- -------
Upon reaching $1.7 million in revenues 25,000
Upon reaching $3.4 million in revenues 25,000
12
<PAGE>
EXHIBIT 10.2
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made as of the 1st day of
January, 1996, by and between Eric W. Jacobson, an individual residing at 640
West End Avenue #7A, New York, NY 10024 ("Employee"), and QuietPower Systems,
Inc., a Delaware corporation (the "Company"), with principal offices at 1675
Broadway, New York, NY 10019.
WHEREAS, the Company is engaged in the business of research, consultation,
marketing, engineering and distribution of active noise control products and
technology to the electric and gas utility industries (the "Business"); and
WHEREAS, Employee is a key employee of the Company and has a significant
degree of managerial, technical and financial expertise in the Company's field
of business; and
WHEREAS, the Company wishes to employ Employee, and Employee wishes to
work for the Company, in the capacity of Vice President - Finance and Chief
Financial Officer.
NOW THEREFORE, in consideration of the premises and the mutual covenants
and agreements herein contained, the parties hereto agree as follows:
1. TERM OF AGREEMENT
This Agreement shall be effective from January 1, 1996 and shall continue
in effect through the third anniversary of the Effective Date (the "Term"). The
Agreement shall automatically be renewed for successive one year periods (each
such period also a "Term") unless at least one hundred eighty (180) days prior
to the end of the Term either party hereto gives written notice to the other
party of its intention not to renew this Agreement. The Agreement may also be
terminated at any time in accordance with the terms and conditions of Subsection
11.1 hereof.
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<PAGE>
2. EMPLOYMENT
2.1 Position. The Company hereby employs Employee in a professional and
technical capacity with the title of Vice President - Finance and Chief
Financial Officer of the Company, and Employee hereby accepts such employment
and undertakes and agrees to serve in such capacity. As Vice President - Finance
and Chief Financial Officer of the Company, Employee shall have such powers,
perform such duties and fulfill such responsibilities consistent with his
positions. Employee shall report directly to the Board of Directors of the
Company.
2.2 Scope of Service. During the term of this Agreement, except as may be
mutually agreed upon by Employee and the Company, Employee will not be
transferred or otherwise required to change his residence or to render his
services hereunder other than in the New York, or New York metropolitan areas,
except that Employee agrees to make such business trips necessary in the
performance of services under this Agreement.
3. COMPENSATION.
3.1 Base Salary
(a) In consideration of the services rendered hereunder, the Company
shall pay Employee during the term of this Agreement a base salary of ONE
HUNDRED FIFTY THOUSAND DOLLARS ($150,000) per annum ("Base Salary"). Such Base
Salary shall increase by a percentage each year equal to the percentage
increase, if any, in the Consumer Price Index published by the U.S. Department
of Labor, Bureau of Labor Statistics, for the New York, NY areas (now known as
the "CPI - U for all urban consumers"). The Compensation Committee of the Board
of Directors (the "Committee") shall conduct an annual review of Employee's
performance. The Base Salary may be subject to temporary or permanent increase
by the Committee if it shall determine that economic conditions and Employee's
performance so warrant.
(b) The Base Salary for each such year shall be payable by the
Company to Employee in equal monthly installments on the last business day of
each month.
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<PAGE>
3.2 Incentive Compensation
(a) Yearly Bonus. Annually the Committee shall provide a bonus plan
to the Employee. Compensation under the bonus plan, attached hereto on Schedule
A, shall be contingent upon the Company meeting certain milestones related to
revenues, earnings or other important Company objectives.
(b) Discretionary Bonus. The Committee may, in its sole discretion,
pay Employee such other bonus or bonuses during any full or partial fiscal year
of the Company which encompasses any part of the term of this Agreement as the
Committee deems appropriate in is sole discretion based on Employee's and the
Company's performance during that portion of the term of this Agreement.
(c) Stock Options. The Committee may, in its sole discretion, grant
options to purchase the Company's stock as stipulated by its 1993 Stock Option
Plan.
3.3 Fringe Benefits. In addition to the compensation provided for above,
so long as Employee is employed by the Company under this Agreement, he shall be
entitled to receive all other fringe benefits as are from time to time generally
provided to senior officers by the Company (other than termination or severance
pay, which is provided for in this Agreement).
4. BUSINESS EXPENSES
Employee is authorized to incur, and the Company shall pay and reimburse
him for, all reasonable and necessary business expenses incurred in the
performance of his duties hereunder including expenses for entertainment, travel
and other items in accordance with guidelines adopted by the Board or Committee.
The Company will pay and reimburse Employee for all such expenses upon the
presentation by Employee, from time to time, of an itemized account of such
expenditures and proper documentation thereof as evidence that such expenses
have been incurred.
5. VACATION
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In addition to the usual national public holidays, Employee shall be
entitled to a vacation of four (4) weeks during each year during which time he
shall be remunerated in full. Any vacation time up to a maximum of two (2) weeks
which if not used in one year may be carried over to the next succeeding year,
but not beyond.
6. SICKNESS
Without prejudice to the Company's rights pursuant to Section 11
hereinafter, Employee shall receive his usual rate of remuneration in respect of
any period when he is absent from work due to sickness, disability or injury for
a period of up to sixty (60) days in any continuous period of three hundred
sixty five (365) days. Any payment thereafter shall be at the discretion of the
Company.
7. CONFIDENTIALITY
7.1 Nondisclosure. During his employment by the Company and for two (2)
years thereafter, Employee agrees to keep confidential, except as the Company
may otherwise consent in writing, and not to disclose, publish, disseminate or
make use of any inventions, trade secrets, confidential information, knowledge,
data or other information of the Company relating to products, processes,
know-how, programs, designs, formulas, test data, customer lists, customer
requirements, business operations or techniques, corporate or business plans,
marketing plans and strategies, pricing strategies, or other subject matter
pertaining to the Business of the Company or any business of its clients,
customers, consultants, licensees or affiliates, which Employee may produce,
obtain or otherwise acquire during the course of his employment. Employee
further agrees not to deliver, reproduce or in any way allow any such
inventions, trade secrets, confidential information, knowledge, data or other
information, or any documentation relating thereto, to be delivered or used by
any third parties without specific direction or consent of a duly authorized
representative of the Company.
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7.2 Exceptions to Confidentiality. The obligation set forth in Section 7.1
hereof shall immediately cease for any invention, trade secret, confidential
information, knowledge, data or other information of the Company, as described
therein, at the time that any such invention, trade secret, confidential
information, knowledge, data or other information of the Company, as described
therein, at the time that any such invention, trade secret, confidential
information, knowledge, data or other information (i) enters the public domain
through no wrongful act of Employee, (ii) is lawfully received by Employee from
a third party without similar restrictions thereon regarding nondisclosure, or
(iii) disclosure of such information is compelled by judicial or other
governmental action provided that the Employee notifies the Company of such
action and cooperates with the Company (at the Company's expense) in obtaining
any available protective order or the equivalent; provided, however, that no
exceptions to the obligations set forth in Section 7.1 shall apply to any
invention, trade secret, confidential information, knowledge, data or other
information produced, obtained or otherwise acquired by Employee in connection
with any contract between the Company and any client, customer, consultant,
licensee or affiliate to the extent that such exception would in any way
conflict with or decrease the scope of any confidentiality or nondisclosure
obligations set forth in such contract.
7.3 Documents. Upon the termination of this Agreement or at any time upon
the Company's request, Employee shall deliver forthwith to the Company all
memoranda, notes, records, reports and other documents (including all copies
thereof) relating to all confidential matters, as described in Subsection 7.1
hereof, and to the Business of the Company which Employee may then possess or
have under his control.
7.4 Breach of Contract. Employee represents and warrants that his
performance of all of the terms of this Agreement does not and will not breach
any agreement not to compete or any agreement to keep in confidence proprietary
information, knowledge or data acquired by him in confidence or in trust prior
to his employment with the Company. Employee agrees not to enter into any
agreement, either written or oral, in conflict herewith.
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8. OWNERSHIP OF INVENTIONS AND IDEAS
Employee acknowledges that the Company shall be the sole owner of all the
fruits and proceeds of Employee's services hereunder, including, but not limited
to, all inventions, developments, discoveries and other improvements, whether
patentable or not patentable, which Employee, in connection with and during the
course of his employment, may develop, create or first actually reduce to
practice during the term of this Agreement and for ninety (90) days thereafter,
either alone or in combination with others, free and clear of any claims by
Employee (or any successor or assignee of Employee) of any kind or character
whatsoever. Employee shall disclose such inventions and ideas to the Company
promptly and in writing. Employee agrees that he shall, at the request of the
Board of Directors, execute such assignments, certificates or other instruments
as the Board of Directors from time to time deems reasonably necessary or
desirable to evidence, establish, maintain, perfect, protect, enforce or defend
the Company's right, title and interest in or to any such properties.
9. NON-COMPETITION
During his employment by the Company and for twelve (12) months
thereafter, Employee shall not compete with the Company in any activity relating
to the Business of the Company as conducted by the Company during the term of
this Agreement; provided, however, that Employee shall be permitted to resume
activities of substantially the same type as those activities conducted by
Employee prior to his employment by the Company. For purposes of the preceding
sentence, competition shall include, without limitation, direct or indirect
competition by Employee, whether as an owner, officer, director, employer,
partner, consultant, advisor, contractor, principal, agent, licensor, employee
or affiliate of a person, firm, venture or corporation that so competes with
Company and shall apply only as to any clients or customers with whom Employee
shall have had contact on or before the date his employment ceases and for whom
Company has provided services within one (1) year of such date. Without the
prior written approval of the Board of Directors,
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Employee further agrees that during his employment by the Company and for twelve
(12) months thereafter he will not hire, contract with or solicit for employment
or contract any employee of the Company or any former employee of the Company
who left such employment less than six (6) months earlier, unless such employee
was terminated by the Company on the grounds described in Section 11.1 (a) (iii)
hereof.
10. SPECIFIC PERFORMANCE
10.1 Damages. The parties hereby declare that the rights of the Company
under Sections 7 through 9 hereof are of unique nature, the loss of which may
cause irreparable harm, and that it may be impossible to measure in money the
damages which will accrue to the Company by reason of the loss of such rights or
a failure by Employee to perform or adhere to any of the obligations under
Sections 7 through 9 hereof.
10.2 Equitable Relief. In the event of any breach or threatened breach of
Sections 7 through 9 hereof, the Company shall be entitled, as a matter of
right, to a final order, from a court of competent jurisdiction, of injunctive
and other equitable relief, and if the Company shall institute any action or
proceeding to enforce by specific performance or other equitable relief the
provisions hereof, Employee hereby waives the claim or defense thereto that the
Company has an adequate remedy at law, and Employee shall not urge in any such
action or proceeding the claim or defense that such remedy at law exists.
10.3 Remedies at Law. This Section 10 shall not limit or constrain the
right of the Company to pursue and recover damages at law for breaches of this
Agreement, including breaches of Sections 7 through 9 hereof.
11. TERMINATION
11.1 Termination of Employment
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(a) The Company shall have the right to terminate this Agreement
upon thirty (30) days prior written notice to Employee (except for any
continuing rights and obligations expressly provided for in this Section 11) on
the earliest to occur of the following events:
(i) willful failure by Employee substantially to perform the
duties and obligations of his employment;
(ii) commission by Employee of willful misconduct, actionable
negligence, fraud, acts of dishonesty, disloyalty or
breach of trust against the Company which causes harm to
the Company, or other illegal or improper acts or
omissions; or
(iii) termination of Employee by the Company for any reason
(b) The Company shall have the right to terminate this Agreement
upon prior written notice to Employee in the event of Employee's permanent
disability. For the purpose of this Section 11, permanent disability shall mean
Employee's inability, whether mental or physical, to perform the regular duties
of his employment on a full-time basis for three (3) consecutive months. If the
Company and Employee are unable to agree whether he is so disabled, the question
shall be decided by a panel of three (3) physicians, one (1) to be designated by
the Company, one (1) by Employee and one (1) by the first two (2) so designated.
The determination of the panel shall be final and binding upon the parties. The
Company shall pay the costs of the panel.
(c) In the event of Employee's death, this Agreement shall terminate
without notice.
(d) Employee shall have the right to terminate this Agreement upon
thirty (30) days prior written notice to Company in the event Company fails to
make a Base Salary payment to Employee within fifteen (15) days after written
notification from Employee that such payment is due in accordance with the terms
of Section 3 hereof. Upon such termination, Employee shall be released from all
obligations imposed by the terms and conditions of this Agreement with the
exception of those imposed by Sections 7 through 9 hereof. Company agrees to
make a good faith
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effort to make Base Salary payments to Employee to the extent salary payments
due and payable on a comparable basis are made to any other employee of the
Company.
(e) The Base Salary, Incentive Compensation and Fringe Benefits
provided to Employee under Section 3 of this Agreement, to the extent not then
accrued, shall terminate on the date of termination of this agreement, except
for any continuing rights and obligations set forth in Subsection 11.2 hereof or
expressly provided for in the Company's fringe benefit plans or programs. Any
accrued and unpaid bonus for any fiscal year of the Company or portion thereof
which occurs on or before the date of termination of this Agreement shall
continue to be due and payable as provided in Subsection 3.2 hereof.
11.2 Termination Payments
(a) If this Agreement is terminated pursuant to Subsections 11.1 (a)
(i) or 11.1 (a) (ii) hereof, no severance or termination pay whatsoever shall be
due Employee. Employee however shall receive any unpaid Base Salary payments
accrued prior to the date of termination.
(b) If this Agreement is terminated pursuant to Subsection 11.1 (c)
hereof due to Employee's death, his estate or designated beneficiary (which
beneficiary Employee may designate by filling a written notice with the Company
that shall be effective when filed and that may be altered or revoked by
Employee at any time) shall receive payments totalling five hundred thousand
dollars ($500,000). Company shall purchase and maintain "Key Man Insurance"
containing customary terms and conditions on Employee in an amount which would
be sufficient to cover such termination payments. Company shall have all
incidents of ownership in such insurance policy but the proceeds of such
insurance shall be payable to the Employee's designated beneficiary.
(c) If this Agreement is terminated pursuant to Subsection 11.1 (b)
hereof due to Employee's permanent disability, Employee shall receive the amount
of any benefits payable under any group disability insurance program
administered and offered to Employee by the Company.
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(d) If this Agreement is terminated pursuant to Subsection
11.1(a)(iii) or 11.1(d) hereof, Company must pay Employee an amount equal to the
lesser of Employee's annual Base Salary on the date of such termination or the
total Base Salary due Employee during the remainder of the Term in effect on the
date of termination; provided, however, that such amount shall not be less than
the total of Employee's Base Salary payments for a one hundred eighty day
period. Company may elect to pay this amount (i) as a lump sum within sixty (60)
days of the date of termination or (ii) ratably in monthly installments during
the lesser of the remainder of the Term in effect on the date of termination or
six months.
(e) If the Company elects not to renew this Agreement pursuant to
Section 1 hereof, the Company shall pay Employee a severance payment equal to
Employee's Base Salary payments for a one hundred eighty day period. Company may
elect to pay this amount (i) as a lump sum on the last day of the Term or (ii)
ratably in monthly installments during the three-month period following the last
day of the Term.
(f) Employee shall not be required to mitigate the amount of any
termination payment provided for in this Subsection 11.2 hereof by seeking other
employment or by other means.
12. MISCELLANEOUS
12.1 Assignment. This Agreement and the rights of Employee hereunder are
personal to Employee, and neither this Agreement nor any right or interest
herein or arising hereunder shall be subject to voluntary or involuntary
alienation, assignment or transfer by Employee nor may Employee, his estate or
designated beneficiary use this Agreement or any right of payment hereunder as a
pledge or collateral for any loan; provided, however, that this Agreement shall
be binding upon and shall inure to the benefit of the successors and assigns of
the Company.
12.2 Governing Law. This Agreement shall be governed by, and shall be
construed and interpreted in accordance with, the laws of the State of New York
without giving effect to the doctrine of conflict of laws.
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12.3 Notices. Any notice which the Company is required or may desire to
give Employee shall be given by personal delivery or by registered or certified
mail, with postage prepaid, addressed to Employee at his address of record with
the Company, or at such other place as Employee may from time to time designate
to the Company in writing. Any notice which Employee is required or may desire
to give to the Company hereunder shall be given by personal delivery or by
registered or certified mail, with postage prepaid, addressed to the Company may
from time to time designate to Employee in writing. Such notice shall be deemed
given when delivered personally or, if mailed, given two (2) days after the date
of mailing.
12.4 Waiver. If either party should waive any breach of any provision of
this Agreement, such party shall not thereby be deemed to have waived any
proceeding or succeeding breach of the same or any other provision of this
Agreement.
12.5 Entire Agreement; Modification; Severability. This Agreement
constitutes the entire agreement of these parties with respect to the subject
matter hereof, and all other prior or contemporaneous agreements of the parties
with respect to such subject matter, whether oral or written, are hereby merged
into this Agreement. This Agreement shall not be changed, modified or amended
other than by a further written agreement signed (i) by a duly authorized member
of the Company's Compensation Committee and (ii) by Employee. If, for any
reason, any immaterial part of this Agreement is declared by a court of
competent jurisdiction to be void or unenforceable, the remainder of this
Agreement shall not be affected thereby and shall remain in full force and
effect.
12.6 Counterparts. This Agreement may be signed in two counterparts, each
of which shall be deemed an original and both of which together shall constitute
one agreement.
12.7 Arbitration. Any and all disputes, claims and controversies between
the parties hereto concerning the validity, interpretation, performance,
termination or breach of this Agreement, which cannot be resolved by the parties
within ninety (90) days after such dispute, claim or controversy arises, shall,
at the option of either party, be referred to and finally settled by
arbitration. Such arbitration shall be initiated by the initiating party giving
notice (the "Arbitration Notice") to the other party (the"Respondent") that it
intends to submit such dispute, claim or
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controversy to arbitration. Each party shall, within thirty (30) days of the
date the Arbitration Notice is received by the Respondent, designate a person to
act as an arbitrator within the time specified herein, the arbitration shall be
conducted by the sole designated arbitrator. The two arbitrators appointed by
the parties shall, within thirty (30) days after their designation, appoint a
third arbitrator who shall act as presiding arbitrator (the "Presiding
Arbitrator"). If the two arbitrators designated by the parties are unable to
appoint a Presiding Arbitrator, the Presiding Arbitrator shall be appointed
according to the rules of the American Arbitration Association as in effect on
the date the notice of submission to arbitration is given (the "Rules").
Such arbitration shall be held in New York, New York, in accordance with
the Rules, except as otherwise expressly provided herein. The arbitrators shall,
by majority vote, render a written decision stating reasons therefor in
reasonable detail within three (3) months after the appointment of all
arbitrators. Each party shall bear its own costs and attorney's fees. All other
costs and expenses of arbitration shall be apportioned between the parties by
the arbitrators. The award of the arbitrators shall be made in United States
currency and shall be final and binding, and judgement thereon may be rendered
by any court having jurisdiction thereof, or application may be made to such
court for the judicial acceptance of the award and an order of enforcement, as
the case may be.
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IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement with legal and binding effect as of the day and year first above
written.
/s/Eric W. Jacobson
-------------------------------------
Eric W. Jacobson ("Employee")
/s/ Jonathan M. Charry
--------------------------------------
QuietPower Systems, Inc.,
a Delaware corporation ("Company")
/s/William S. Bernstein
--------------------------------------
William S. Bernstein
Compensation Committee
of the Board of Directors of QuietPower
Systems, Inc. ("Committee")
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Amendment to Employment Agreement between Eric W. Jacobson and QuietPower
Systems, Inc. Dated January 1, 1996
SCHEDULE A
Base Salary: $150,000
Stock Options: To be granted from time to time at the Committee's sole
discretion. Vesting of such option grants shall occur at a
rate of 25% per year upon each anniversary of the grant.
Yearly Bonus: The bonus plan for 1996 shall be based upon the milestones
listed below. The bonus shall become payable in the amounts
stipulated below upon the achievement of these milestones. In
no event will the cumulative bonus exceed $22,500.
Milestone
---------
$15,000 bonus upon achieving $1.7 million in revenues
$10,000 bonus upon achieving $3.4 million in revenues
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EXHIBIT 10.3
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made as of the 1st day of March
8, 1995, by and between Mark J. Dietrich, an individual residing at 438 West
23rd. Street, New York, NY 10011 ("Employee"), and QuietPower Systems, Inc., a
Delaware corporation (the "Company"), with principal offices at 1675 Broadway,
Suite 2600, New York, NY 10019.
WHEREAS, the Company is engaged in the business of research, consultation,
marketing, engineering and distribution of active noise control products and
technology to the electric and gas utility industries (the "Business"); and
WHEREAS, Employee is a key employee of the Company and has a significant
degree of managerial, technical and marketing expertise in the Company's field
of business; and
WHEREAS, the Company wishes to employ Employee, and Employee wishes to
work for the Company, in the capacity of Vice President, Applications
Engineering.
NOW THEREFORE, in consideration of the premises and the mutual covenants
and agreements herein contained, the parties hereto agree as follows:
1. TERM OF AGREEMENT
This Agreement shall be effective from the effective date of the Company's
intended $1.0 to $1.5 million private placement through Redstone Securities, or
the effective date of such other offering of securities in the amount of at
least $1.0 million ("Effective Date") and shall continue in effect through the
third anniversary of the Effective Date (the "Term"). The Agreement shall
automatically be renewed for successive one year periods (each such period also
a "Term") unless at least one hundred eighty (180) days prior to the end of the
Term either party hereto gives written
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notice to the other party of its intention not to renew this Agreement. The
Agreement may also be terminated at any time in accordance with the terms and
conditions of Subsection 11.1 hereof.
2. EMPLOYMENT
2.1 Position. The Company hereby employs Employee in a professional and
technical capacity with the title of Vice President, Applications Engineering of
the Company, and Employee hereby accepts such employment and undertakes and
agrees to serve in such capacity. As Vice President, Applications Engineering of
the Company, Employee shall have such powers, perform such duties and fulfill
such responsibilities consistent with his positions.
2.2 Scope of Service. During the term of this Agreement, except as may be
mutually agreed upon by Employee and the Company, Employee will not be
transferred or otherwise required to change his residence or to render his
services hereunder other than in the New York, or New York metropolitan areas,
except that Employee agrees to make such business trips necessary in the
performance of services under this Agreement.
3. COMPENSATION.
3.1 Base Salary
(a) In consideration of the services rendered hereunder, the Company
shall pay Employee during the term of this Agreement a base salary of NINETY
EIGHT THOUSAND FIVE HUNDRED DOLLARS ($98,500) per annum ("Base Salary"). Such
Base Salary shall increase by a percentage each year equal to the percentage
increase, if any, in the Consumer Price Index published by the U.S. Department
of Labor, Bureau of Labor Statistics, for the New York, NY areas (now known as
the "CPI - U for all urban consumers"). The Compensation Committee of the Board
of Directors (the "Committee") shall conduct an annual review of Employee's
performance. The Base Salary may be subject to temporary or permanent increase
by the Committee if it shall determine that economic conditions and Employee's
performance so warrant.
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(b) The Base Salary for each such year shall be payable by the
Company to Employee in equal monthly installments on the last business day of
each month.
3.2 Incentive Compensation
(a) Yearly Bonus. Annually the Committee shall provide a bonus plan
to the Employee. Compensation under the bonus plan, attached hereto on Schedule
A, shall be contingent upon the Company meeting certain milestones related to
revenues, earnings or other important Company objectives.
(b) Additional Discretionary Bonus. The Committee may, in its sole
discretion, pay Employee such other bonus or bonuses during any full or partial
fiscal year of the Company which encompasses any part of the term of this
Agreement as the Committee deems appropriate in is sole discretion based on
Employee's and the Company's performance during that portion of the term of this
Agreement.
(c) Stock Options. The Committee may, in its sole discretion, grant
options to purchase the Company's stock as stipulated by its 1993 Stock Option
Plan.
3.3 Fringe Benefits. In addition to the compensation provided for above,
so long as Employee is employed by the Company under this Agreement, he shall be
entitled to receive all other fringe benefits as are from time to time generally
provided to senior officers by the Company (other than termination or severance
pay, which is provided for in this Agreement).
4. BUSINESS EXPENSES
Employee is authorized to incur, and the Company shall pay and reimburse
him for, all reasonable and necessary business expenses incurred in the
performance of his duties hereunder including expenses for entertainment, travel
and other items in accordance with guidelines adopted by the Board or Committee.
The Company will pay and reimburse Employee for all such expenses upon the
presentation by Employee, from time to time, of an itemized account of such
expenditures and proper documentation thereof as evidence that such expenses
have been incurred.
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5. VACATION
In addition to the usual national public holidays, Employee shall be
entitled to a vacation of four (4) weeks during each year during which time he
shall be remunerated in full. Any vacation time up to a maximum of two (2) weeks
which if not used in one year may be carried over to the next succeeding year,
but not beyond.
6. SICKNESS
Without prejudice to the Company's rights pursuant to Section 11
hereinafter, Employee shall receive his usual rate of remuneration in respect of
any period when he is absent from work due to sickness, disability or injury for
a period of up to sixty (60) days in any continuous period of three hundred
sixty five (365) days. Any payment thereafter shall be at the discretion of the
Company.
7. CONFIDENTIALITY
7.1 Nondisclosure. During his employment by the Company and for two (2)
years thereafter, Employee agrees to keep confidential, except as the Company
may otherwise consent in writing, and not to disclose, publish, disseminate or
make use of any inventions, trade secrets, confidential information, knowledge,
data or other information of the Company relating to products, processes,
know-how, programs, designs, formulas, test data, customer lists, customer
requirements, business operations or techniques, corporate or business plans,
marketing plans and strategies, pricing strategies, or other subject matter
pertaining to the Business of the Company or any business of its clients,
customers, consultants, licensees or affiliates, which Employee may produce,
obtain or otherwise acquire during the course of his employment. Employee
further agrees not to deliver, reproduce or in any way allow any such
inventions, trade secrets, confidential information, knowledge, data or other
information, or any documentation relating thereto, to be
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delivered or used by any third parties without specific direction or consent of
a duly authorized representative of the Company.
7.2 Exceptions to Confidentiality. The obligation set forth in Section 7.1
hereof shall immediately cease for any invention, trade secret, confidential
information, knowledge, data or other information of the Company, as described
therein, at the time that any such invention, trade secret, confidential
information, knowledge, data or other information of the Company, as described
therein, at the time that any such invention, trade secret, confidential
information, knowledge, data or other information (i) enters the public domain
through no wrongful act of Employee, (ii) is lawfully received by Employee from
a third party without similar restrictions thereon regarding nondisclosure, or
(iii) disclosure of such information is compelled by judicial or other
governmental action provided that the Employee notifies the Company of such
action and cooperates with the Company (at the Company's expense) in obtaining
any available protective order or the equivalent; provided, however, that no
exceptions to the obligations set forth in Section 7.1 shall apply to any
invention, trade secret, confidential information, knowledge, data or other
information produced, obtained or otherwise acquired by Employee in connection
with any contract between the Company and any client, customer, consultant,
licensee or affiliate to the extent that such exception would in any way
conflict with or decrease the scope of any confidentiality or nondisclosure
obligations set forth in such contract.
7.3 Documents. Upon the termination of this Agreement or at any time upon
the Company's request, Employee shall deliver forthwith to the Company all
memoranda, notes, records, reports and other documents (including all copies
thereof) relating to all confidential matters, as described in Subsection 7.1
hereof, and to the Business of the Company which Employee may then possess or
have under his control.
7.4 Breach of Contract. Employee represents and warrants that his
performance of all of the terms of this Agreement does not and will not breach
any agreement not to compete or any agreement to keep in confidence proprietary
information, knowledge or data acquired by him in
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confidence or in trust prior to his employment with the Company. Employee agrees
not to enter into any agreement, either written or oral, in conflict herewith.
8. OWNERSHIP OF INVENTIONS AND IDEAS
Employee acknowledges that the Company shall be the sole owner of all the
fruits and proceeds of Employee's services hereunder, including, but not limited
to, all inventions, developments, discoveries and other improvements, whether
patentable or not patentable, which Employee, in connection with and during the
course of his employment, may develop, create or first actually reduce to
practice during the term of this Agreement and for ninety (90) days thereafter,
either alone or in combination with others, free and clear of any claims by
Employee (or any successor or assignee of Employee) of any kind or character
whatsoever. Employee shall disclose such inventions and ideas to the Company
promptly and in writing. Employee agrees that he shall, at the request of the
Board of Directors, execute such assignments, certificates or other instruments
as the Board of Directors from time to time deems reasonably necessary or
desirable to evidence, establish, maintain, perfect, protect, enforce or defend
the Company's right, title and interest in or to any such properties.
9. NON-COMPETITION
During his employment by the Company and for twelve (12) months
thereafter, Employee shall not compete with the Company in any activity relating
to the Business of the Company as conducted by the Company during the term of
this Agreement; provided, however, that Employee shall be permitted to resume
activities of substantially the same type as those activities conducted by
Employee prior to his employment by the Company. For purposes of the preceding
sentence, competition shall include, without limitation, direct or indirect
competition by Employee, whether as an owner, officer, director, employer,
partner, consultant, advisor, contractor, principal, agent, licensor, employee
or affiliate of a person, firm, venture or corporation that so competes with
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Company and shall apply only as to any clients or customers with whom Employee
shall have had contact on or before the date his employment ceases and for whom
Company has provided services within one (1) year of such date. Without the
prior written approval of the Board of Directors, Employee further agrees that
during his employment by the Company and for twelve (12) months thereafter he
will not hire, contract with or solicit for employment or contract any employee
of the Company or any former employee of the Company who left such employment
less than six (6) months earlier, unless such employee was terminated by the
Company on the grounds described in Section 11.1 (a) (iii) hereof.
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10. SPECIFIC PERFORMANCE
10.1 Damages. The parties hereby declare that the rights of the Company
under Sections 7 through 9 hereof are of unique nature, the loss of which may
cause irreparable harm, and that it may be impossible to measure in money the
damages which will accrue to the Company by reason of the loss of such rights or
a failure by Employee to perform or adhere to any of the obligations under
Sections 7 through 9 hereof.
10.2 Equitable Relief. In the event of any breach or threatened breach of
Sections 7 through 9 hereof, the Company shall be entitled, as a matter of
right, to a final order, from a court of competent jurisdiction, of injunctive
and other equitable relief, and if the Company shall institute any action or
proceeding to enforce by specific performance or other equitable relief the
provisions hereof, Employee hereby waives the claim or defense thereto that the
Company has an adequate remedy at law, and Employee shall not urge in any such
action or proceeding the claim or defense that such remedy at law exists.
10.3 Remedies at Law. This Section 10 shall not limit or constrain the
right of the Company to pursue and recover damages at law for breaches of this
Agreement, including breaches of Sections 7 through 9 hereof.
11. TERMINATION
11.1 Termination of Employment
(a) The Company shall have the right to terminate this Agreement
upon thirty (30) days prior written notice to Employee (except for any
continuing rights and obligations expressly provided for in this Section 11) on
the earliest to occur of the following events:
(i) willful failure by Employee substantially to perform the
duties and obligations of his employment;
(ii) commission by Employee of willful misconduct, actionable
negligence, fraud, acts of dishonesty, disloyalty or
breach of
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trust against the Company which cause harm to the
Company, or other illegal or improper acts or omissions;
or
(iii) termination of Employee by the Company for any reason
(b) The Company shall have the right to terminate this Agreement
upon prior written notice to Employee in the event of Employee's permanent
disability. For the purpose of this Section 11, permanent disability shall mean
Employee's inability, whether mental or physical, to perform the regular duties
of his employment on a full-time basis for three (3) consecutive months. If the
Company and Employee are unable to agree whether he is so disabled, the question
shall be decided by a panel of three (3) physicians, one (1) to be designated by
the Company, one (1) by Employee and one (1) by the first two (2) so designated.
The determination of the panel shall be final and binding upon the parties. The
Company shall pay the costs of the panel.
(c) In the event of Employee's death, this Agreement shall terminate
without notice.
(d) Employee shall have the right to terminate this Agreement upon
thirty (30) days prior written notice to Company in the event Company fails to
make a Base Salary payment to Employee within fifteen (15) days after written
notification from Employee that such payment is due in accordance with the terms
of Section 3 hereof. Upon such termination, Employee shall be released from all
obligations imposed by the terms and conditions of this Agreement with the
exception of those imposed by Sections 7 through 9 hereof. Company agrees to
make a good faith effort to make Base Salary payments to Employee to the extent
salary payments due and payable on a comparable basis are made to any other
employee of the Company.
(e) The Base Salary, incentive compensation and fringe benefits
provided to Employee under Section 3 of this Agreement, to the extent not then
accrued, shall terminate on the date of termination of this agreement, except
for any continuing rights and obligations set forth in Subsection 11.2 hereof or
expressly provided for in the Company's fringe benefit plans or programs, as
described in Section 3.3. Any accrued and unpaid bonus for any fiscal year of
the
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Company or portion thereof which occurs on or before the date of termination of
this Agreement shall continue to be due and payable as provided in Subsection
3.2 hereof.
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11.2 Termination Payments
(a) If this Agreement is terminated pursuant to Subsections 11.1 (a)
(i) or 11.1 (a) (ii) hereof, no severance or termination pay whatsoever shall be
due Employee. Employee however shall receive any unpaid Base Salary payments
accrued prior to the date of termination.
(b) If this Agreement is terminated pursuant to Subsection 11.1 (c)
hereof due to Employee's death, his estate or designated beneficiary (which
beneficiary Employee may designate by filling a written notice with the Company
that shall be effective when filed and that may be altered or revoked by
Employee at any time) shall receive payments totalling five hundred thousand
dollars ($500,000). Company shall purchase and maintain "Key Man Insurance"
containing customary terms and conditions on Employee in an amount which would
be sufficient to cover such termination payments. Company shall have all
incidents of ownership in such insurance policy but the proceeds of such
insurance shall be payable to the Employee's designated beneficiary.
(c) If this Agreement is terminated pursuant to Subsection 11.1 (b)
hereof due to Employee's permanent disability, Employee shall receive the amount
of any benefits payable under any group disability insurance program
administered and offered to Employee by the Company.
(d) If this Agreement is terminated pursuant to Subsection
11.1(a)(iii) or 11.1(d) hereof, Company must pay Employee an amount equal to the
lesser of Employee's annual Base Salary on the date of such termination or the
total Base Salary due Employee during the remainder of the Term in effect on the
date of termination; provided, however, that such amount shall not be less than
the total of Employee's Base Salary payments for a one hundred eighty day
period. Company may elect to pay this amount (i) as a lump sum within sixty (60)
days of the date of termination or (ii) ratably in monthly installments during
the lesser of the remainder of the Term in effect on the date of termination or
six months.
(e) If the Company elects not to renew this Agreement pursuant to
Section 1 hereof, the Company shall pay Employee a severance payment equal to
Employee's Base Salary payments for a one hundred eighty day period.
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Company may elect to pay this amount (i) as a lump sum on the last day of the
Term or (ii) ratably in monthly installments during the three-month period
following the last day of the Term.
(f) Employee shall not be required to mitigate the amount of any
termination payment provided for in this Subsection 11.2 hereof by seeking other
employment or by other means.
12. MISCELLANEOUS
12.1 Assignment. This Agreement and the rights of Employee hereunder are
personal to Employee, and neither this Agreement nor any right or interest
herein or arising hereunder shall be subject to voluntary or involuntary
alienation, assignment or transfer by Employee nor may Employee, his estate or
designated beneficiary use this Agreement or any right of payment hereunder as a
pledge or collateral for any loan; provided, however, that this Agreement shall
be binding upon and shall inure to the benefit of the successors and assigns of
the Company.
12.2 Governing Law. This Agreement shall be governed by, and shall be
construed and interpreted in accordance with, the laws of the State of New York
without giving effect to the doctrine of conflict of laws.
12.3 Notices. Any notice which the Company is required or may desire to
give Employee shall be given by personal delivery or by registered or certified
mail, with postage prepaid, addressed to Employee at his address of record with
the Company, or at such other place as Employee may from time to time designate
to the Company in writing. Any notice which Employee is required or may desire
to give to the Company hereunder shall be given by personal delivery or by
registered or certified mail, with postage prepaid, addressed to the Company may
from time to time designate to Employee in writing. Such notice shall be deemed
given when delivered personally or, if mailed, given two (2) days after the date
of mailing.
12.4 Waiver. If either party should waive any breach of any provision of
this Agreement, such party shall not thereby be deemed to have waived any
proceeding or succeeding breach of the same or any other provision of this
Agreement.
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12.5 Entire Agreement; Modification; Severability. This Agreement
constitutes the entire agreement of these parties with respect to the subject
matter hereof, and all other prior or contemporaneous agreements of the parties
with respect to such subject matter, whether oral or written, are hereby merged
into this Agreement. This Agreement shall not be changed, modified or amended
other than by a further written agreement signed (i) by a duly authorized member
of the Company's Compensation Committee and (ii) by Employee. If, for any
reason, any immaterial part of this Agreement is declared by a court of
competent jurisdiction to be void or unenforceable, the remainder of this
Agreement shall not be affected thereby and shall remain in full force and
effect.
12.6 Counterparts. This Agreement may be signed in two counterparts, each
of which shall be deemed an original and both of which together shall constitute
one agreement.
12.7 Arbitration. Any and all disputes, claims and controversies between
the parties hereto concerning the validity, interpretation, performance,
termination or breach of this Agreement, which cannot be resolved by the parties
within ninety (90) days after such dispute, claim or controversy arises, shall,
at the option of either party, be referred to and finally settled by
arbitration. Such arbitration shall be initiated by the initiating party giving
notice (the "Arbitration Notice") to the other party (the"Respondent") that it
intends to submit such dispute, claim or controversy to arbitration. Each party
shall, within thirty (30) days of the date the Arbitration Notice is received by
the Respondent, designate a person to act as an arbitrator within the time
specified herein, the arbitration shall be conducted by the sole designated
arbitrator. The two arbitrators appointed by the parties shall, within thirty
(30) days after their designation, appoint a third arbitrator who shall act as
presiding arbitrator (the "Presiding Arbitrator"). If the two arbitrators
designated by the parties are unable to appoint a Presiding Arbitrator, the
Presiding Arbitrator shall be appointed according to the rules of the American
Arbitration Association as in effect on the date the notice of submission to
arbitration is given (the "Rules").
Such arbitration shall be held in New York, New York, in accordance with
the Rules, except as otherwise expressly provided herein. The arbitrators shall,
by majority vote, render a written decision stating reasons therefor in
reasonable detail within three (3) months after the
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appointment of all arbitrators. Each party shall bear its own costs and
attorney's fees. All other costs and expenses of arbitration shall be
apportioned between the parties by the arbitrators. The award of the arbitrators
shall be made in United States currency and shall be final and binding, and
judgement thereon may be rendered by any court having jurisdiction thereof, or
application may be made to such court for the judicial acceptance of the award
and an order of enforcement, as the case may be.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement with legal and binding effect as of the day and year first above
written.
/s/Mark J. Dietrich
-------------------------------------
Mark J. Dietrich ("Employee")
/s/Jonathan M. Charry
--------------------------------------
QuietPower Systems, Inc.,
a Delaware corporation ("Company")
/s/William S. Bernstein
--------------------------------------
William S. Bernstein
Compensation Committee
of the Board of Directors of QuietPower
Systems, Inc. ("Committee")
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Amendment to Employment Agreement between Mark J. Dietrich and QuietPower
Systems, Inc. Dated March 8, 1995
SCHEDULE A
Base Salary: $150,000
Stock Options: To be granted from time to time at the Committee's sole
discretion. Vesting of such option grants shall occur at a
rate of 25% per year upon each anniversary of the grant.
Yearly Bonus: The bonus plan for 1995 shall be based upon the milestones
listed below. The bonus shall become payable in the amounts
stipulated below upon the achievement of these milestones. In
no event will the cumulative bonus exceed $50,000.
Milestone
---------
$25,000 upon reaching $1.7 million in revenues
$25,000 upon reaching $1.7 million in revenues
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EXHIBIT 10.4
MASTER AGREEMENT
This Master Agreement (the "Agreement"), made this 27th day of March,
1995, by and between Noise Cancellation Technologies, Inc., a Delaware
corporation, having its principal place of business at 800 Summer Street,
Stamford, Connecticut 06901 ("NCT"), and QuietPower Systems, Inc. (formerly
Active Acoustical Solutions, Inc.), a Delaware corporation, having its principal
place of business at 1675 Broadway, Suite 2600, New York, New York 10019
("QuietPower").
W I T N E S S E T H:
WHEREAS, QuietPower and NCT have previously entered into a series of
marketing and distribution agreements pursuant to which NCT, among other things,
has granted certain exclusive licenses and non-exclusive marketing rights to
QuietPower;
WHEREAS, QuietPower and NCT desire to expand the scope of their current
relationship;
WHEREAS, it is the intent of both QuietPower and NCT to make QuietPower
the development and distribution channel for active noise control products for
the electric and gas power generation, transmission, distribution, and supply
industries.
NOW, THEREFORE, in consideration of the covenants set forth herein, the
parties hereto agree as follows:
<PAGE>
1. Definitions.
1.1 Active System. Active System shall mean all components of an
Exclusive Product, including non-electronic components, such as brackets and
other mounting devices, cable and other equipment, the purpose of which is
integral to the functioning of a system which reduces noise and/or vibration.
1.2 Actual Cost. Actual Cost shall mean direct out-of-pocket costs
of (a) labor (plus associated fringe benefits); and (b) materials.
1.3 Affiliate. Affiliate shall mean, with respect to each party, any
corporation or other legal entity that directly or indirectly controls, is
controlled by, or is under common control with, the party, but only for so long
as such control continues. For purpose of this definition, "control" means the
power, whether or not normally exercised, to direct the management and affairs
of another corporation or other legal entity, directly or indirectly, whether
through the ownership of voting securities, by contract, or otherwise.
1.4 Exclusive Products. Exclusive Products shall mean all products
to which QuietPower has received an exclusive license from NCT. Exclusive
Products shall include the products and applications described in Section 2.1
hereof (i.e., transformer quieting products and steam and gas turbine quieting
products), the Funded Products, and the New Products described in Section 2.2(b)
hereof.
1.5 Far East. The Far East shall mean China, Indonesia, Japan,
Korea, Malaysia, Singapore, Thailand, and Taiwan.
1.6 Funded Product. Funded Product shall mean any New Product to
which QuietPower commits to provide Funding as set forth in Section 4.2 hereof.
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1.7 Funding. Funding shall mean all amounts necessary to develop and
commercialize the Transformer Quieting Products, the Turbine Quieting Products,
and a New Product as set forth in the applicable Development Schedule.
1.8 Gross Revenues. Gross Revenues shall mean, for the purposes of
determining the commissions and other amounts due and payable under this
Agreement, the revenues received by a party net of packing and transportation
costs, insurance costs, applicable sale, excise, value-added, and other taxes
not based on income, applicable customs duties, fees, and charges, but not net
of commissions or fees payable to other parties under agreements between NCT or
QuietPower, as the case may be, and any such other party. "Revenues", for
purposes of Gross Revenues, may include, without limitation, product sale
revenues, license fees and royalties.
1.9 Industry. Industry shall mean the electric and gas power
generation, transmission, distribution, and supply industries, including (a)
electric and gas utilities; (b) independent power producers; (c) cogeneration
facilities; (d) commercial entities that produce, transmit, distribute, or
supply power for their own internal usage; (e) engineering firms servicing the
power industry; and (f) distributors and manufacturers selling products directly
to the power industry.
1.10 Licensed Patents. Licensed Patents shall mean all patents and
patent applications, together with any continuations or continuations in part
thereof, and all patents issuing thereon including reissues, patents of
addition, and any registration or confirmation patents corresponding thereto,
that are now or hereafter owned or controlled by NCT or its Affiliates, to the
extent such patents and patent applications relate to the Active Systems.
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1.11 Licensed Products. Licensed Products shall mean, collectively,
the Exclusive Products and the Non-Exclusive Products.
1.12 New Product. New Product shall mean any product or application
that has not been identified and covered in this Agreement that has application
within the Industry.
1.13 Non-Exclusive Products. Non-Exclusive Products shall mean all
of NCT's active noise and vibration control products or applications, other than
(a) Exclusive Products; (b) active headsets; (c) active mufflers/silencers; and
(d) products to which NCT has granted or will grant exclusive licenses to third
parties.
1.14 Technical Information. Technical Information shall mean all
information and know-how now or hereafter owned or controlled by NCT or any of
its Affiliates relating to the Active Systems.
1.15 Transformer Quieting Product. Transformer Quieting Product
shall mean a multiple input multiple output active noise and vibration control
system designed to quiet the low frequency tonal hum of stationary electrical
equipment such as transformers. The method of control is either through direct
alteration of the surface vibration patterns or through the coupling of
anti-noise with propagating acoustic waves that are generated by surface
deflections. The system is typically comprised of three components: sensors
monitoring the transformer tones, digital controller software which processes
the sensor information and computes an opposite signal for cancellation, and
actuators which physically produce the anti-noise.
1.16 Turbine Quieting Product. Turbine Quieting Product shall mean a
multiple input multiple output active noise control system designed to quiet the
tonal and broad band noise associated with the inlet and outlet fans of bypass
turbofan engines. Control is
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achieved with the coupling of sound from the noise source with anti-noise waves.
The system typically has five main components: an inflow control device,
reference sensors, an algorithm with filters to generate the control signals,
control sources in the form of speakers or other transducers mounted on the
inlet of the engine or in the far field, and error sensors which provide
feedback on the residual noise.
2. Grant of Licenses.
2.1 Grant of Exclusive License. NCT hereby grants to QuietPower the
exclusive and worldwide license under the Licensed Patents and to the Technical
Information to manufacture (to the extent set forth in Section 5.2 hereto),
market, sell, and distribute the following products and applications for use
within the Industry:
(a) Transformer Quieting Products (including all upgrades and
improvements thereto); provided, however, that NCT shall, solely with Japanese
owned companies, maintain the right to manufacture, market, sell, and license
Transformer Quieting Products in the Far East, and, provided further, that
QuietPower shall otherwise have the exclusive license to manufacture, market,
sell, and distribute Transformer Quieting Products in the Far East; and
(b) Turbine Quieting Products (including all upgrades and
improvements thereto), to the extent of NCT's current rights therein. Schedule
2.1 sets forth a list of all rights of entities other than NCT in the Turbine
Quieting Products as of the date hereof.
2.2 Right to Obtain Exclusive License.
(a) Funded Products. NCT shall grant to QuietPower the
exclusive and worldwide license under the Licensed Patents and to the Technical
Information to manufacture
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(to the extent set forth in Section 5.2 hereof), market, sell, and distribute
all Funded Products. The Funding for each New Product shall constitute the
entirety of all payments by QuietPower to NCT necessary to obtain the licenses
for such Funded Product, and no additional license fees shall be required by
NCT.
(b) Products That NCT Does Not Develop. In the event that (i)
NCT chooses not to, or is unable to, develop a New Product as described in
Section 4.2(b) hereof; or (ii) NCT and QuietPower fail to agree on the cost or
other material terms of developing the Transformer Quieting Products or the
Turbine Quieting Products as described in Section 4.1(c) hereof or a New Product
as described in Section 4.2(e) hereof, then NCT shall grant to QuietPower the
exclusive and worldwide license under the Licensed Patents and using the
Technical Information to develop, manufacture, market, distribute, and sell such
product to the Industry.
2.3 Non-Exclusive Marketing Rights. QuietPower's non-exclusive and
worldwide rights to market, sell, and distribute the Non-Exclusive Products
shall be governed by the Marketing Agreement, dated the date hereof (the
"Marketing Agreement").
2.4 Term of Licenses. Each of the licenses granted under Sections
2.1 and 2.2 hereof shall terminate upon expiration of NCT's intellectual
property rights in the Licensed Patents or upon the events set forth in Section
12 hereof.
2.5 Sublicense Rights. The licenses granted under Sections 2.1 and
2.2 hereof include the right of QuietPower to grant sublicenses to Affiliates of
QuietPower, and to unaffiliated third parties with the written consent of NCT,
which consent shall not be unreasonably withheld. Any sublicense agreement shall
be consistent with the terms of this Agreement.
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<PAGE>
2.6 Retention of Property Rights. QuietPower acknowledges that all
right, title and interest in, to, and under the Licensed Patents and the
Technical Information shall remain the property of NCT, and QuietPower shall
have no right or interest therein other than as set forth in this Agreement.
2.7 Certain Bankruptcy Issues. QuietPower and NCT hereby agree that
(a) the Licensed Patents are protected patents under title 35, United States
Code; (b) the Licensed Patents and Technical Information constitute
"intellectual property" as that term is used in Section 101(35A) of title 11,
United States Code; and (c) this Agreement is governed by Section 365(n) of
title 11, United States Code, in the event that NCT files or is subject to a
case under title 11, United States Code.
3. Fees and Payments.
3.1 Exclusivity Fee. In order to obtain and maintain its exclusive
license to the Exclusive Products, QuietPower shall pay to NCT a non-refundable
exclusivity fee of $750,000 (the "Exclusivity Fee") of which $250,000 was paid
by QuietPower in June 1994 in connection with the Marketing, Engineering
Services and Distribution Agreement, relating to Retrofit Transformer Products,
dated May 15, 1993. The balance of $500,000 shall be payable in 30 equal monthly
installments of $16,666.67, commencing on the first day of the month succeeding
the execution of this Agreement; provided, however, that such $500,000 (or, such
lesser amount remaining after any payment of monthly installments) shall be
payable within 90 days of the closing date of an initial public offering or
private placement of QuietPower's securities in an amount in excess of
$2,000,000 (but not including the currently contemplated bridge/private
placement through Redstone Securities).
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3.2 Royalties to NCT.
(a) Exclusive Products Generally. Subject to Sections 4.1(c),
4.1(d), 4.2(b), 4.2(e), 4.2(h), and 5.2(a) hereof, QuietPower shall pay to NCT a
royalty of (i) 6% on Gross Revenues received by QuietPower from the sale by
QuietPower of Active Systems; or (ii) 50% on Gross Revenues received by
QuietPower from the sublicense by QuietPower of its rights under this Agreement;
provided, however, that a royalty shall be paid only after QuietPower has
recouped out of its pre-tax profits 150% of the Funding payments relating to the
Active System (it being understood that there shall be no duplication of
recoupment of Funding payments); and, provided, further, however, that
QuietPower shall deduct from Gross Revenues relating to Transformer Quieting
Products the amount of royalties QuietPower pays on NCT's behalf to certain
utilities (based upon agreements between NCT and such utilities) in return for
the funding such utilities provided to research and develop the Transformer
Quieting Products. The royalty obligations set forth in Sections 4.1(c), 4.1(d),
4.2(b), 4.2(e), and 4.2(h) hereof shall be in lieu of any royalty obligations
set forth in this Section 3.2(a).
(b) Payment Terms. Within 30 days following the end of each
quarter during the term of the Agreement, QuietPower shall (i) provide a
quarterly statement to NCT setting forth the amount of royalties payable to NCT
from the transactions described and referred to in this Section 3.2 during the
prior quarter as well as an analysis of the method by which such calculations
were made; and (ii) pay such amounts set forth in the quarterly statement to
NCT.
(c) No Duplication of Royalties. Except as set forth in
Section 5.2(a) hereof, for each Active System sold by QuietPower, NCT shall be
entitled to no more than one royalty of 6% on Gross Revenues received by
QuietPower. NCT shall be entitled to no more
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than one royalty of 50% on Gross Revenues received by QuietPower for the
sublicense by QuietPower of its right under the Agreement.
3.3 Royalties to QuietPower.
(a) Transformer Quieting Products in the Far East. NCT shall
pay to QuietPower a royalty of (i) 6% on Gross Revenues received by NCT from
sales of Transformer Quieting Products in the Far East; and (ii) 50% on the
Gross Revenues received by NCT from licensing Transformer Quieting Products in
the Far East, as described in Section 2.1(a) hereof.
(b) Exclusive Products Applicable Outside Industry. QuietPower
shall receive a royalty of (i) 6% on Gross Revenues received by NCT for
Exclusive Products (or products substantially similar to Exclusive Products,
regardless of operating environment) sold by NCT, and (ii) 50% of the Gross
Revenues received by NCT through the licensing of Exclusive Products (or
products substantially similar to Exclusive Products, regardless of operating
environment), outside the Industry to parties other than QuietPower, as
described in Section 4.4(b) hereof. Simultaneously with its approval of the
Development Schedule for an Exclusive Product applicable outside the Industry,
QuietPower shall elect whether or not to obtain non-exclusive marketing rights
to sell and/or license such Exclusive Product outside the Industry. If
QuietPower obtains the non-exclusive marketing rights in accordance with Section
2.3 hereof, then QuietPower shall receive the royalties payable by NCT set forth
in the first sentence of this Section 3.3(b) only until QuietPower has recouped
out of its pre-tax profits 150% of the Funding payments relating to such
Exclusive Product. If QuietPower does not obtain non-exclusive marketing rights,
then QuietPower shall receive royalties payable by NCT set forth in the first
sentence of this Section 3.3(b) only until QuietPower has recouped out of its
pre-tax profits 300% of the Funding payments related to such Exclusive Product.
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(c) Payment Terms. Within 30 days following the end of each
quarter during the term of this Agreement, NCT shall (i) provide a quarterly
statement to QuietPower setting forth the amount of royalties payable to
QuietPower from the transactions described in this Section 3.3 during the prior
quarter as well as an analysis of the method by which such calculations were
made; and (ii) pay such amounts set forth in the quarterly statement to
QuietPower.
(d) No Duplication of Royalties. For each product sold by NCT,
QuietPower shall be entitled to no more than one royalty of 6% on Gross Revenues
received by NCT. For each product licensed by NCT, QuietPower shall be entitled
to no more than one royalty of 50% of the Gross Revenues received by NCT.
3.4 Additional Payment Terms.
(a) Currency. Amounts payable under this Agreement shall be
paid in U.S. dollars or in such other currency as the parties may agree upon in
writing. Such payments shall be subject to applicable law and regulations
existing at the place of remittance. Sales of Licensed Products not denominated
in U.S. dollars and any amounts payable thereon shall first be determined in the
currency in which such Licensed Products were sold and shall then be converted
into the equivalent number of U.S. dollars at (i) the official closing rate, two
days prior to the date of payment under this Agreement, established by the
official central bank or by the exchange control authority in each such country;
or (ii) if no such official rate is available or if conversion pursuant to such
official rate cannot be effectuated by NCT or QuietPower, as the case may be,
two days prior to the date of payment hereunder, at the rate established by The
Chase Manhattan Bank.
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(b) Place of Payment. All payments under this Agreement shall
be made to NCT or QuietPower, as the case may be, at their respective addresses
as set forth above, or to such other address as either party shall hereafter
specify in accordance with Section 13.1 hereof.
4. Exclusive Products.
4.1 Transformer Quieting Products and Turbine Quieting Products.
(a) Development Schedule. NCT shall submit to QuietPower for
its review and approval, which approval shall not be unreasonably withheld, a
schedule (the "Development Schedule") setting forth in reasonable detail (i) a
development plan and timetable for the Transformer Quieting Products and the
Turbine Quieting Products, including a schedule of milestones within each
quarter that are readily measurable; and (ii) a schedule of all monthly costs,
including, but not limited to, itemized personnel and facilities costs to be
applied to each respective product, of implementing the development plan and
timetable, which shall be on the basis of Actual Cost, plus overhead as agreed
by the parties.
(b) Cost of and Resources Dedicated to Development. In the
event that QuietPower determines that (i) the cost of implementing the
development plan as set forth in the Development Schedule submitted by NCT is
unreasonably high; (ii) the timetable set forth in the Development Schedule is
unduly long; or (iii) the personnel, materials, or facilities set forth in the
Development Schedule are inadequate to implement the development plan,
QuietPower shall so notify NCT, and QuietPower and NCT shall thereupon enter
into good faith negotiations in an effort to produce a mutually agreeable
Development Schedule.
(c) Failure to Agree. In the event that, after a six month
period commencing from the date QuietPower informed NCT that the Development
Schedule was
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unacceptable, such issues have not been resolved, then (i) NCT shall assign to
QuietPower the exclusive and worldwide license to develop, manufacture, market,
distribute, and sell such Transformer Quieting Product or Turbine Quieting
Product to the Industry, provided that QuietPower agrees to fund its development
using its internal resources or through a third party; (ii) QuietPower shall pay
a royalty to NCT of (A) 6% on Gross Revenues received by QuietPower from the
sale of such product, or (B) 50% on Gross Revenues received by QuietPower from
the sublicense by QuietPower of its rights under the Agreement; provided,
however, that a royalty relating to such product shall be paid only after
QuietPower has recouped out of the pre-tax profits relating to such product 150%
of all costs incurred by QuietPower in the development of such product (it being
understood that there shall be no duplication of recoupment of costs incurred);
and (iii) after the Transformer Quieting Product or the Turbine Quieting Product
has been commercially developed, NCT shall have no obligation to manufacture
components for use with such product or supply such components (unless such
components are then-currently commercially available) pursuant to Section 5.2(c)
hereof.
(d) Funding Payments to NCT; Missed Milestones. Prior to the
commencement of each quarter as set forth on the applicable Development
Schedule, QuietPower shall pay NCT in advance the quarterly Funding payment as
set forth in the Development Schedule. NCT shall, within seven days from the end
of each quarter as set forth in the Development Schedule, notify QuietPower
whether or not it has completed the milestones scheduled for such quarter. If
NCT has not completed all of the milestones as scheduled, QuietPower shall
nonetheless pay the next quarterly Funding payment, and shall notify NCT that
NCT is not in compliance with the Development Schedule. If NCT fails to complete
all such milestones by the end of the next quarterly period as set forth in the
Development Schedule,
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other than a failure by NCT primarily caused by inappropriate action of
QuietPower, then QuietPower shall, immediately effective upon written notice to
NCT, have the right to develop and commercialize such product itself or engage
an entity other than NCT to develop and commercialize such product, and in such
event (i) NCT shall no longer be entitled to the applicable Funding payments;
and (ii) QuietPower shall pay a royalty to NCT of (A) 6% on Gross Revenues
received by QuietPower from the sales of such product, and (B) 50% on Gross
Revenues received by QuietPower from the sublicense by QuietPower of its rights
under this Agreement; provided, however, that a royalty relating to such product
shall be paid only after QuietPower has recouped out of the pre-tax profits
relating to such product 150% of all costs incurred by QuietPower in the
development of such product (it being understood that there shall be no
duplication of recoupment of costs incurred). In the event that QuietPower
exercises such right, NCT shall deliver to QuietPower all partially completed
products and applications and work-in-process, including full title thereto,
including all models, drawings, parts, molds, designs, papers, files, notes,
processes, test data, data, information in any form, plans, renderings, computer
hardware, software and programs, contained in documentary form or electronic
medium relating to such product.
(e) Obligations of NCT. Except as set forth in Section 4.1(c),
NCT shall, until the Transformer Quieting Products and Turbine Quieting Products
are fully commercialized, provide the necessary personnel, materials, and
facilities to fully develop and commercialize the Transformer Quieting Products
and the Turbine Quieting Products in accordance with the applicable Development
Schedule.
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4.2 Funded Products.
(a) Identification of New Products. From time to time, either
QuietPower or NCT may identify a New Product. In the event that a party
identifies a New Product, such party shall submit to the other party a proposal,
describing the New Product and the proposed market for such New Product.
(b) NCT's Decision Not to or Inability to Develop New Product.
After the receipt of a New Product proposal from QuietPower, NCT shall promptly
inform QuietPower of its decision to develop such New Product. In the event that
NCT chooses not to develop a New Product, or is unable to satisfactorily
demonstrate its ability to develop a New Product, due to financial, legal,
physical, or technological constraints, then NCT shall assign to QuietPower the
exclusive and worldwide license to develop, manufacture, market, distribute, and
sell such New Product to the Industry, provided that QuietPower agrees to fund
its development using internal resources or through a third party, and
QuietPower shall pay a royalty to NCT of (A) 6% on Gross Revenues received by
QuietPower from the sales of such New Product, and (B) 50% on Gross Revenues
received by QuietPower from the sublicense by QuietPower of its rights under
this Agreement; provided, however, that a royalty relating to such New Product
shall be paid only after QuietPower has recouped out of the pre-tax profits
relating to such New Product 150% of all costs incurred by QuietPower in the
development of such New Product (it being understood that there shall be no
duplication of recoupment of costs).
(c) Development Schedule. In the event that NCT chooses to
develop the New Product, NCT shall promptly submit to QuietPower for its review
and approval, which approval shall not be unreasonably withheld, a Development
Schedule setting forth in reasonable detail (i) a development plan and timetable
for the New Product, including a schedule of
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milestones within each quarter that are readily measurable; and (ii) a schedule
of all monthly costs, including, but not limited to, itemized personnel and
facilities costs to be applied to each respective product, of implementing the
development plan and timetable, which shall be on the basis of Actual Cost, plus
overhead as agreed by the parties.
(d) Cost of and Resources Dedicated to Development. In the
event that QuietPower determines that (i) the cost of implementing the
development plan as set forth in the Development Schedule submitted by NCT is
unreasonably high; (ii) the timetable set forth in the Development Schedule is
unduly long; or (iii) the personnel, materials, or facilities set forth in the
Development Schedule are inadequate to implement the development plan,
QuietPower shall so notify NCT, and QuietPower and NCT shall thereupon enter
into good faith negotiations in an effort to produce a mutually agreeable
Development Schedule.
(e) Failure to Agree. In the event that, after a six month
period commencing from the date QuietPower informed NCT that the Development
Schedule was unacceptable, such issues have not been resolved, then (i) NCT
shall assign to QuietPower the exclusive and worldwide license to develop,
manufacture, market, distribute, and sell such New Product to the Industry,
provided that QuietPower agrees to fund its development using its internal
resources or through a third party; (ii) QuietPower shall pay a royalty to NCT
of (A) 6% on Gross Revenues received by QuietPower from the sales of such New
Product, or (B) 50% on Gross Revenues received by QuietPower from the sublicense
by QuietPower of its rights under this Agreement; provided, however, that a
royalty relating to such New Product shall be paid only after QuietPower has
recouped out of the pre-tax profits relating to such New Product 150% of all
costs incurred by QuietPower in the development of such New Product (it being
understood that there shall be no duplication of recoupment of costs incurred);
and (iii) after the
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New Product has been commercially developed, NCT shall have no obligation to
manufacture components for use with a New Product or supply such components
(unless such components are then-currently commercially available) pursuant to
Section 5.2(c) hereof.
(f) Timing of QuietPower's Decision to Fund. Upon the
determination of the market for the New Product, as supported by a Development
Schedule approved by each of QuietPower and NCT, QuietPower shall have six
months from the date the Development Schedule has been approved by QuietPower to
elect to obtain the exclusive license and to commit to provide Funding for such
New Product.
(g) Third Party Proposals. If a third party approaches NCT
with a proposal to develop a New Product that is applicable only to the
Industry, then NCT shall not accept such proposal, and shall refer the third
party to QuietPower. If a third party approaches NCT with a proposal to develop
a New Product whose primary use is in the Industry, then, if NCT decides to seek
development of such New Product, NCT shall promptly submit a Development
Schedule to QuietPower, which shall then have six months to elect to commit to
provide Funding for such New Product. If QuietPower decides not to provide
Funding for such New Product, NCT shall then have six months from the date
QuietPower informed NCT of its decision to substantially commence development of
such New Product itself or through a third party; provided, however, that NCT
must have a genuine intent to develop the New Product in good faith. If NCT does
not substantially commence development during such six month period, and if NCT
wishes to pursue such development, NCT shall then again submit the Development
Schedule for such New Product to QuietPower, and QuietPower's right to develop
the New Product as set forth above shall be reinstated.
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(h) Funding Payments to NCT; Missed Milestones. Prior to the
commencement of each quarter as set forth on the applicable Development
Schedule, QuietPower shall pay NCT in advance the quarterly Funding payment as
set forth on the Development Schedule. NCT shall, within seven days from the end
of each quarter as set forth in the Development Schedule, notify QuietPower
whether or not it has completed the milestones as scheduled. If NCT has not
completed all of the milestones as scheduled, QuietPower shall nonetheless pay
the next quarterly Funding payment and shall notify NCT that NCT is not in
compliance with the Development Schedule. If NCT fails to complete all of such
milestones by the end of the next quarterly period as set forth in the
Development Schedule, other than a failure by NCT primarily caused by
inappropriate action of QuietPower, then QuietPower shall, immediately effective
upon written notice to NCT, have the right to develop and commercialize such
product itself or engage an entity other than NCT to develop and commercialize
such product, and in such event (i) NCT shall no longer be entitled to the
applicable Funding payments; and (ii) QuietPower shall pay a royalty to NCT of
(A) 6% on Gross Revenues received by QuietPower from the sale of such product,
and (B) 50% on Gross Revenues received by QuietPower from the sublicense of its
rights under this Agreement; provided, however, that a royalty relating to such
product shall be paid only after QuietPower has recouped out of the pre-tax
profits relating to such product 150% of all costs incurred by QuietPower in the
development of such product (it being understood that there shall be no
duplication of recoupment of costs incurred). In the event that QuietPower
exercises such right, NCT shall deliver to QuietPower all partially completed
products and applications and work-in-process, including full title thereto,
including all models, drawings, parts, molds, designs, papers, files, notes,
processes, test data, data, information in any form, plans, renderings, computer
hardware,
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software and programs, contained in documentary form or electronic medium
relating to such Funded Product.
(i) Obligations of NCT. Subject to Sections 4.2(b) and (e)
hereof, NCT shall, throughout the term of this Agreement, provide the necessary
personnel, materials, and facilities to fully develop and commercialize each
Funded Product in accordance with the applicable Development Schedule.
4.3 Loss of Exclusive License.
(a) Failure to Pay Exclusivity Fee. In the event that
QuietPower fails to pay an installment of the Exclusivity Fee when due, and such
failure is not corrected within 60 days after written notice by NCT of such
failure has been delivered to QuietPower, then:
(i) QuietPower shall lose its exclusive license to the
Exclusive Products (except to the extent as had been granted pursuant to the
Marketing, Engineering Services and Distribution Agreement dated May 15, 1993);
(ii) All Exclusive Products (other than Retrofit
Transformer Products) shall become Non-Exclusive Products; and
(iii) QuietPower shall be entitled to receive
commissions pursuant to the Marketing Agreement.
(b) Failure to Make Funding Payments. In the event that
QuietPower fails to make a scheduled Funding payment when due, and such failure
is not corrected within 60 days after written notice by NCT of such failure has
been delivered to QuietPower, then, as sole remedy for such failure:
(i) QuietPower shall lose its exclusive license to such
Exclusive Product;
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(ii) QuietPower shall receive a non-exclusive right to
market, sell, and distribute such product or application (i.e., such Exclusive
Product shall become a NonExclusive Product pursuant to the Marketing
Agreement);
(iii) QuietPower shall be entitled to receive
commissions pursuant to the Marketing Agreement; and
(iv) After NCT has recouped 100% of its Actual Cost
incurred in the development and commercialization of such product, NCT shall pay
to QuietPower (A) 3% of the Gross Revenues received by NCT from the sale of each
such product or application, and (B) 1/3 of the Gross Revenues received by NCT
from the license of each such product or application, until QuietPower has
received 100% of the Funding payments made by QuietPower relating to such
product or application.
4.4 Rights of NCT in Exclusive Products.
(a) Product Only Applicable to Industry. To the extent an
Exclusive Product is only applicable to the Industry, NCT shall not sell or
license for sale such Exclusive Product other than through QuietPower.
(b) Product Applicable Outside Industry. To the extent an
Exclusive Product may also be utilized outside the Industry, (i) NCT shall not
market such Exclusive Product directly to companies or other entities in the
Industry; and (ii) with respect to sales or fees obtained by NCT for Exclusive
Products sold or licensed by NCT outside the Industry to parties other than
QuietPower, NCT shall pay a royalty to QuietPower in accordance with Section
3.3(b) hereof.
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5. Manufacturing Exclusive Products.
5.1 Manufacture by NCT. Except as set forth in Section 5.2(a)
hereof, NCT shall manufacture or cause to be manufactured the Exclusive
Products.
5.2 Manufacture by QuietPower.
(a) QuietPower's Right to Manufacture. Notwithstanding Section
5.1 hereof, QuietPower shall have the right to manufacture the Active System
itself or sublicense the manufacture of the Active System in the following
circumstances:
(i) in the event NCT does not participate in the
development of a Transformer Quieting Product or a Turbine Quieting Product as
described in Section 4.1(c) hereof or a New Product as described in Sections
4.2(b) and (e) hereof;
(ii) in the event that NCT does not desire to
manufacture or have manufactured, or is not financially able to manufacture or
have manufactured, the Active System;
(iii) in the event that QuietPower exercises its right
to develop and commercialize a Transformer Quieting Product or a Turbine
Quieting Product as described in Section 4.1(d) hereof or a New Product as
described in Section 4.2(h) hereof; or
(iv) at any time; provided, however, that if QuietPower
elects to exercise its right to manufacture the Exclusive Product pursuant to
this Section 5.2(a)(iv), then QuietPower shall, in addition to the royalty set
forth in Section 3.2(a) hereof, pay to NCT a royalty of 6% of the alternatively
manufactured cost; provided, further, however, that NCT shall be entitled to
this additional royalty only if NCT in good faith attempted to provide
acceptable product manufacturing.
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(b) No Additional Royalties. Except as set forth in Section
5.2(a)(iv) hereof, NCT shall not be entitled to any additional royalties, other
than the royalties described in and referred to in Section 3.2(a) hereof, if
QuietPower exercises its right to manufacture an Active System itself or
sublicense its manufacture.
(c) Option to Purchase Components. In the event that
QuietPower manufactures an Active System itself or utilizes a third party
manufacturer, QuietPower shall have the option to purchase from NCT, and NCT
shall sell to QuietPower, some or all of the electronic and/or other integral
components that it has then-currently commercially available at the same
discount or price available to any other customer of NCT purchasing the same
volume of components. If NCT has more than one discount or price, QuietPower
shall be entitled to the best such discount or price.
(d) Integrated Systems. In certain applications, the Active
System may not be a stand-alone product. It may be combined with other
technologies, or be comprised of a series of components that are retrofitted or
in some way attached to an existing noise source, or be one component of a much
larger complex system whose primary function is not the attenuation of noise or
vibration. In such event, QuietPower shall, at its option, fabricate or
manufacture this larger integrated system itself or through a third party,
including any components, such as special brackets and mounts or other
components that facilitate the integration of the Active System into the larger
integrated system. In such an event, NCT shall maintain its rights to
manufacture the active components subject to Section 5.1 and this Section 5.2.
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6. Patent Filing, Maintenance, and Extension.
6.1 Patent Filing. NCT shall (a) prosecute all patent applications
constituting Licensed Patents at NCT's sole cost and expense; (b) keep
QuietPower fully and promptly informed of the status of the prosecution of such
applications; and (c) consult with QuietPower on all aspects of the prosecution
of such applications.
6.2 NCT's Failure to Prosecute. In the event that NCT fails to
prosecute any of the aforementioned patent applications, QuietPower shall have
the right to prosecute such application on behalf of NCT.
6.3 Patent Maintenance. During the term of this Agreement, NCT shall
take all steps and pay all expenses necessary to maintain all Licensed Patents
for the full lives thereof. If NCT decides not to do so, NCT shall inform
QuietPower of such decision in writing as soon as practicable, and QuietPower
shall have the right, but not the obligation, to take such steps on behalf of
NCT, at the cost and expense of QuietPower.
7. Patent Infringement.
7.1 Infringement Action by a Third Party.
(a) Right of NCT to Defend. In the event that any infringement
action is brought by a third party against any party, or the Affiliates,
licensees, or distributors of any party, on account of the manufacture,
marketing, sale, or distribution of the Licensed Products, such party shall
promptly notify the other party of such action. NCT shall then have the initial
right to manage solely the defense against any such action. If NCT elects to
exercise such right, (i) QuietPower shall, at NCT's request, take all
appropriate or necessary actions to assist in the defense of such action; (ii)
QuietPower shall be reimbursed by NCT for the reasonable external out-of-pocket
expenses paid to attorneys and consultants retained in connection with taking
such
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requested actions; and (iii) NCT shall bear its own internal and external legal
and other costs and expenses (including, without limitation, the costs
associated with management of the defense of the action), together with all
other costs and expenses associated with the action (including, without
limitation, court costs).
(b) Right of QuietPower to Defend. If NCT does not elect to
exercise its right to manage solely the defense against an infringement action
pursuant to Section 7.1(a) hereof, or if NCT fails to take appropriate and
diligent action with respect to such defense, then QuietPower shall have the
right to assume such defense, at its own cost and expense.
7.2 Infringement Action Against a Third Party.
(a) Rights of NCT to Prosecute. If any third party shall, in
the reasonable opinion of any party, infringe any of the Licensed Patents, such
party shall promptly notify the other party. NCT shall then have the initial
sole right to bring a legal action for infringement against the third party,
together with the right to enforce and collect any judgment thereon. If NCT
elects to exercise such right, (i) QuietPower shall, at NCT's request, take all
appropriate or necessary actions to assist in the prosecution of such action;
(ii) QuietPower shall be reimbursed by NCT for the reasonable external
out-of-pocket expenses paid, with NCT's authorization, to attorneys and
consultants retained in connection with taking such requested actions and (iii)
NCT shall bear its own internal and external legal and other costs and expenses
(including, without limitation, the costs associated with management of the
prosecution of the action), together with all other costs and expenses
associated with the action (including, without limitation, court costs).
(b) Rights of QuietPower to Prosecute. Should NCT not take
appropriate and diligent action with respect to any such infringement, then
QuietPower shall
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have the right to take such action, at its own expense, in its own name or in
the name of one of its Affiliates, and the right to enforce and collect any
judgment thereon, any such judgment to be divided equally between NCT and
QuietPower.
7.3 Ownership of New Patents.
(a) Generally. NCT and QuietPower understand that new products
and techniques may be developed pursuant to, or in the course of the
effectuation of, this Agreement (the "Inventions"). Each of the parties shall
reasonably promptly notify the other of any Inventions.
(b) Patents Not Relating to Active Noise. Inventions relating
to and arising from Funded Product activity and not relating to the attenuation,
isolation, control, and/or cancellation of noise and/or vibrations shall be the
property of and patentable by QuietPower; provided, however, that NCT shall have
a sub-licensable non-exclusive license to make, have made, use and sell such
Inventions insofar as they relate to Active Systems, and no additional
compensation shall be due QuietPower except as provided in this Agreement.
(c) Patents Relating to Active Noise. Inventions relating to
the attenuation, isolation, control, and/or cancellation of noise and/or
vibrations shall be the property of and patentable by NCT.
8. Representations of NCT. NCT represents and warrants the following:
(a) Power and Authority; No Breach. NCT has the power and authority
to execute, deliver, and perform its obligations under this Agreement, and
neither the execution nor delivery nor the performance of its obligations under
this Agreement shall constitute a breach of the terms or provisions of any
contract or violate the rights of any third party. This Agreement has been duly
executed and delivered by NCT and constitutes a legal, valid, and binding
obligation of NCT, enforceable in accordance with its terms, subject to
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applicable bankruptcy, reorganization, insolvency, moratorium, or other similar
laws affecting the enforcement of creditors' rights generally from time to time
in effect, and subject to equitable principles.
(b) Grant of Licenses. NCT has the full right and power to
grant to QuietPower the licenses under the Licensed Patents and to the Technical
Information, and there are no outstanding agreements, assignments, or
encumbrances inconsistent with the provisions of this Agreement.
9. Other Covenants.
9.1 Covenants of NCT.
(a) Use of Funding Payments. NCT shall utilize the Funding
payments exclusively for the purposes of developing and commercializing the
Transformer Quieting Products, the Turbine Quieting Products, and the Funded
Products, as applicable.
(b) Patent Status. Within 10 days of the date hereof, NCT
shall provide QuietPower with a list of countries in which NCT has filed to date
for Patent protection. Thereafter, NCT shall provide QuietPower with a revised
and updated list of such countries within 10 days of a request by QuietPower.
(c) Progress Reports. NCT shall submit to QuietPower a
quarterly report of its progress in the development and commercialization of the
Transformer Quieting Products, the Turbine Quieting Products, and the Funded
Products relating to the applicable Development Schedule.
9.2 Covenants of Both Parties.
(a) Further Assurances. The parties hereto shall do or cause
to be done or performed all such further acts and things and shall execute and
deliver all such other
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agreements, certificates, instruments, and documents as the other party hereto
may reasonably request in order to carry out the intent and accomplish the
purpose of this Agreement.
(b) Record Keeping and Inspection. During the term of this
Agreement and for a period of three years thereafter, each of the parties hereto
shall keep complete, legible, and accurate books and records with respect to its
financial obligations under this Agreement, all in accordance with standard
accounting and control procedures. Each party may carry out an inspection at its
expense of those books and records of the other party which pertain to the
determination of the commissions and other amounts payable under this Agreement
at reasonable intervals and during normal business hours, in order to determine
and verify the performance by the other party of its obligations under this
Agreement.
(c) Compliance With Laws. Neither party shall take any action
which would, or fail to take any action when such failure would directly or
indirectly, result in or constitute a violation by either party of any
applicable law, treaty, ruling, or regulation, including, without limitation,
laws and regulations relating to the import, export, resale, and distribution of
the Licensed Products.
10. Covenant Not to Compete and Non-Disclosure.
10.1 Covenant Not To Compete. QuietPower shall not, at any time
during the term hereof, represent, in any capacity, producers, distributors or
sellers of any product which compete with commercially developed products
relating to the attenuation, isolation, control and/or cancellation of noise
and/or vibrations then being marketed by NCT, nor shall QuietPower introduce,
offer for sale, or otherwise market or sell as principal, agent, employee,
consultant, independent contractor or otherwise any such product; provided,
however, that QuietPower may sell or incorporate any passive methods into its
products to control noise and/or
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vibration problems, and QuietPower may sell any commercially available active
system that NCT has not commercially developed, is not in the process of
commercially developing and declines QuietPower's request to develop (with
QuietPower funding) pursuant to this Agreement. Notwithstanding the foregoing,
QuietPower may license from a third party any patent or patents that relate to
the attenuation, isolation, control and/or cancellation of noise and/or
vibrations so long as such license is offered, on terms substantially equivalent
to those obtained by QuietPower, to NCT for use in products outside of the
Industry.
10.2 Non-Disclosure.
(a) QuietPower. QuietPower agrees that it shall not during the
term of this Agreement, and for a period of five years following the termination
of this Agreement, for any reason, disclose to any third party any information,
document, or material pertaining to the specifications, development, manufacture
and technical methods relating to the Licensed Products, the Licensed Patents,
or Technical Information or any other information, document, or material
concerning the business affairs of NCT or any information related to the
pricing, marketing, or sale of any of the Licensed Products.
(b) NCT. NCT agrees that it shall not, during the term of this
Agreement, and for a period of five years following the termination of this
Agreement, for any reason, disclose to any third party any information,
documents, or material disclosed by QuietPower to NCT, or obtained by NCT in the
course of its performance under this Agreement, that is intended to be kept
confidential.
(c) Exemptions. The obligations of Sections 10.2(a) and (b)
hereof shall not apply to information that is (i) in the public domain; (ii)
disclosed through no breach of this Agreement by QuietPower or NCT, as the case
may be, in the course of performing their
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duties under this Agreement; (iii) disclosed to a licensee, distributor, or
agent under a confidentiality agreement with provisions essentially the same as
contained in this Agreement; or (iv) disclosed pursuant to a court order or with
respect to any litigation between the parties hereto or with third parties.
11. Indemnification.
11.1 Indemnification by QuietPower. QuietPower shall indemnify,
defend, and hold NCT harmless from and against any and all claims, damages,
loss, liabilities, payments, costs, obligations, and expenses (including,
without limitation, all reasonable legal fees and disbursements) (the "Damages")
to the extent the Damages arise out of:
(a) any breach or violation of any covenant, agreement, or
undertaking made by QuietPower in this Agreement; or
(b) any negligence or willful misconduct committed by
QuietPower.
11.2 Indemnification by NCT. NCT shall indemnify, defend, and hold
QuietPower harmless from and against any and all Damages to the extent the
Damages arise out of:
(a) any inaccuracy or breach of any representation or warranty
of NCT contained in this Agreement;
(b) any breach or violation of any covenant, agreement or
undertaking made by NCT in this Agreement; or
(c) any negligence or willful misconduct committed by NCT.
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12. Termination.
(a) Events of Termination. NCT or QuietPower, as applicable,
shall each have the right to terminate this Agreement upon the occurrence of any
of the following events with respect to the status or actions of the other:
(i) A decree or order shall have been entered by a court
of competent jurisdiction adjudging NCT or QuietPower, as the case may be,
bankrupt or insolvent, or approving as properly filed a petition seeking
reorganization, readjustment, arrangement, composition, liquidation, or similar
relief for NCT or QuietPower, as the case may be, under any bankruptcy law or
any other similar applicable statute, law or regulation, or a decree or order of
a court of competent jurisdiction shall have been entered for the appointment of
a receiver or liquidator or trustee or assignee in bankruptcy or insolvency of
NCT or QuietPower, as the case may be, or a substantial part of its property, or
for its property, or for the winding up or liquidation of its affairs;
(ii) NCT or QuietPower, as the case may be, shall
institute proceedings to be adjudicated a voluntary bankrupt, or shall consent
to the filing of a bankruptcy petition against it, or shall file a petition or
answer or consent seeking reorganization, readjustment, arrangement,
composition, liquidation or similar relief under any bankruptcy law or any other
similar applicable statute, law or regulation, or shall consent to the
appointment of a receiver or liquidator or trustee or assignee in bankruptcy or
insolvency of it or of a substantial part of its property, or shall make an
assignment for the benefit of creditors, or shall be unable to pay its debts
generally as they become due, or shall cease the active conduct of its business,
or shall take any corporate action in furtherance of any of the foregoing; or
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(iii) Either NCT or QuietPower shall commit a material
breach of the terms of this Agreement and the same and all of its effects shall
not be remedied, including reimbursement to the other party of any losses
occurred on account thereof, within 60 days after written notice thereof is
given by the other party to such defaulting party. Notwithstanding the
foregoing, in the event that QuietPower fails to make a scheduled Funding
payment when due, and such failure is not corrected within 60 days after written
notice by NCT of such failure has been delivered to QuietPower, then NCT may
terminate this Agreement only as to the specific product relating to such late
Funding payment, and the Agreement shall continue in full force and effect as to
all other products; and, provided, further, however, that in the event that NCT
or QuietPower shall commit a material breach of the terms of any other agreement
relating to a specific product, this Agreement shall nevertheless continue in
full force and effect.
(b) Procedure for Termination. The party desiring to terminate
this Agreement upon the occurrence of an event of termination described in
Section 12(a) hereof and the expiration of the applicable remedial period
without the elimination or correction of the event of termination shall do so by
giving written notice thereof to the other, which notice shall specifically
identify the reason for such termination. This Agreement shall terminate
effective immediately upon the giving of such notice, or such later time as the
notice of termination may specify, subject to the terms and conditions and the
obligations of the parties hereunder.
13. Miscellaneous.
13.1 Notices. All notices, requests, demands, 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 if delivered personally,
sent by overnight mail, transmitted by telex or
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facsimile transmission device, or sent by registered mail, return receipt
requested, postage pre-paid, to the parties hereto at their respective addresses
as set forth above, or to such other address as either party hereto shall
hereafter specify by notice similarly given.
13.2 Modifications and Waivers. This Agreement may not be modified
or amended, nor may any right hereunder be waived, except by an instrument
signed by an authorized officer of the party against whom the same is sought to
be enforced. A waiver by any party hereto or a breach of any term or provision
of this Agreement shall not be construed as a waiver of any subsequent breach.
13.3 Entire Agreement. The Agreement (including any Schedules and
Exhibits thereto) constitutes the entire agreement between the parties and
supersedes all prior agreements, understandings, and arrangements, oral or
written, with respect to the subject matter hereof, including (a) the Agreement
in Principle dated October 4, 1994; (b) the Marketing, Engineering Services and
Distribution Agreement, relating to Retrofit Transformer Products, dated May 15,
1993; (c) the Marketing Agreement, relating to Non-retrofit Utility Products,
dated May 15, 1993; (d) the Marketing Agreement, relating to Feeder Bowls, dated
May 15, 1993; and (e) the Teaming Agreement, dated September 29, 1993, each of
which shall be deemed void and of no further force or effect upon the execution
of this Agreement, but excluding the Marketing Agreement, the Distribution
Agreement, relating to Active Headsets, dated October 7, 1994 and the Marketing
Agreement, relating to Active Industrial Silencers, between Walker Noise
Cancellation Technologies and QuietPower, dated May 9, 1994, neither of which
shall be deemed to be superseded by this Agreement.
13.4 Severability. Any term or provision of this Agreement which is
invalid or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of
31
<PAGE>
such invalidity or unenforceability without rendering invalid or unenforceable
the remaining terms and provisions of this Agreement or effecting the validity
or enforceability of any of the terms or provisions of this Agreement in any
other jurisdiction.
13.5 Assignability. This Agreement may be assigned (a) by any party
upon the written consent of the other party, which consent shall not be
unreasonably withheld; and (b) by any party to any Affiliate of such party. In
the event that NCT or QuietPower files or is subject to a case under title 11,
United States Code, each of QuietPower and NCT agree that in order to provide
"adequate assurance of future performance" of this Agreement for purposes of
Section 365(f) of title 11, United States Code, any assignee of such party must
assume such party's obligations under this Agreement and must have the technical
and financial ability to perform the obligations under this Agreement.
13.6 Force Majeure.
(a) Except for the obligation to pay for products already
delivered or services already rendered, either party shall be relieved from
liability thereunder for any failure to perform its obligations hereunder, from
the time and to the extent such failure to perform is due to a force caused by
war or acts of the public enemy, insurrection, riot, action of any governmental
authority, embargo, strike, lockout, flood, explosion, fire or other casualty,
accident, act of God, shortage of labor, materials or fuel, delay or
interruptions in transportation, epidemic or quarantine, compliance with any
kind or character reasonably beyond the control of the party failing to perform,
whether similar to or dissimilar from the enumerated causes.
(b) If either party is unable to carry out its obligations
under this Agreement as a result of the foregoing force majeure situations,
other than to make payments
32
<PAGE>
due hereunder, such party shall give notice and full particulars, including the
expected duration of such force majeure, in writing to the other party not later
than three days after the occurrence relied upon, and upon the giving of such
notice the obligations of the party giving such notice, so far as they are
affected by such force majeure, shall be suspended during the continuation of
any inability so caused but for no longer, and such cause shall be so far as
possible remedied with all possible dispatch. Notwithstanding the above, neither
party shall be required to resolve a strike, lockout or other labor problem in a
manner which, in the exercise of its sole discretion it deems improper or
inadvisable for it.
(c) Upon the cessation of the cause or causes of any such
failure or delay, performance hereof shall be resumed, but such delay shall not,
except by mutual agreement, operate to extend the term of this Agreement.
13.7 Relationship of Parties. It is understood and agreed that this
Agreement does not create any relationship of association, partnership, or joint
venture between the parties, or create any implied license, or constitute either
party as the agent or legal representative of the other for any purpose
whatsoever. Neither party is granted any right or authority to create any
obligation or responsibility, express or implied, on behalf or in the name of
the other, or to bind the other in any manner whatsoever.
13.8 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York, without giving
effect to the principles of conflict of laws thereof.
13.9 Section Headings. The section headings contained in the
Agreement are for reference purposes only and shall not effect in any way the
meaning or interpretation of this Agreement.
33
<PAGE>
13.10 Counterparts. The Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original, but all which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed on the day and year first above written.
NOISE CANCELLATION TECHNOLOGIES, INC.
By: /s/ Stephen J. Fogarty
---------------------------
QUIETPOWER SYSTEMS, INC.
By: /s/ Jonathan M. Charry
---------------------------
34
<PAGE>
Schedule 2.1
List of Third Party Rights In Turbine Quieting Products
<PAGE>
Memorandum
DATE: March 28, 1995 REF: 503281
TO: Jonathan Charry, President, QuietPower Systems, Inc.
FROM: Steve Fogarty, CFO, NCT
RE: Amendment Number 1 to the Master Agreement Dated March 27,
1995 Between NCT and QPS
CC: Jay Haft, M. Parrella, J. Hiney, C. Hammond
In connection with the Master Agreement signed March 27, 1995 between QuietPower
Systems, Inc. (QPS) and Noise Cancellation Technologies, Inc. (NCT), the
following are binding terms relative to that agreement:
1) Within two weeks of closing their bridge financing, in no event later than
May 15, 1995, QPS agrees to pay to NCT the full amount of outstanding
billed account receivables. As of February 28, NCT approximates billed
accounts receivable to be $500,000 and unbilled accounts receivables to be
$70,000. Simultaneously, NCT will repay any amounts owing to QPS,
currently approximated at $40,000 by QPS. The amounts above are subject to
final review and approval by both parties.
2) In the event that QPS does not pay the receivables above prior to or on
May 15, 1995, NCT may, at its sole option, void the Master Agreement
anytime thereafter, regardless of partial payments.
3) Until NCT and QPS have agreed to the first development schedule, QPS will
fund the salary, benefits and overhead costs of up to three people to work
on the transformer development program. These costs will become part of
that development schedule. NCT will not commit to expend any interim
funding without the express written consent of QPS.
4) These terms are Amendment Number 1 to the Master Agreement dated March 27,
1995, referenced above.
Agreed to on this 28th Day of March by:
/s/ Jonathan M. Charry /s/ Stephen J. Fogarty
- --------------------------------- --------------------------------
Jonathan Charry, QPS, Inc. (Seal) Stephen J. Fogarty, NCT, Inc. (Seal)
_____________________ ___________________
Date Date
<PAGE>
April 21, 1995
Mr. Jay Haft
Noise Cancellation Technologies, Inc.
c/o Parker Duryee Rosoff & Haft
529 Fifth Avenue
New York, NY 10017
Dear Jay:
Pursuant to our discussions regarding the retirement of our Noise
Cancellation Technologies, Inc. ("NCT") Warrants in exchange for a reduction of
the license fee payable under the Master Agreement (the "Master Agreement")
dated March 27, 1995 between NCT and QuietPower Systems, Inc. ("QuietPower"),
and a deferral of outstanding payables owing to NCT, the following represents
the terms agreed upon:
1. QuietPower shall surrender for cancellation its five year warrants to
purchase 750,000 shares of the Common Stock, par value $.01, of NCT
exercisable at $3.00 per share, that were issued pursuant to Section 3(j)
of the Marketing Agreement (Non-retrofit Utility Products) dated May 15,
1993 between QuietPower and NCT.
2. The $500,000 exclusivity fee payable pursuant to Section 3.1 of the Master
Agreement shall be reduced to $250,000. Payment shall commence 90 days
from the signing of this agreement in thirty (30) monthly installments of
$8,333.33 each.
3. The schedule of debt payment to NCT by QuietPower, as prescribed by the
letter agreement dated March 28, 1995 between NCT and QuietPower (the
"Debt"), shall be amended. The revised payment date shall be the earlier
of i) May 15, 1996, or ii) upon the closing of a financing (public or
private) to the extent that such financing exceeds $1.5 million.
4. The Debt shall be evidenced by a promissory note (the "Note"), bearing
annual interest at 6%. The interest and principal shall be paid based upon
item (3) above. Non-payment under the terms of the Note shall constitute
an event of termination as defined in Section 12(a) of the Master
Agreement.
Please sign in space provided below to indicate your acceptance of these terms.
<PAGE>
Mr. Jay Haft
April 21, 1995
Page 2
Sincerely,
/s/ Eric Jacobson
--------------------------
Eric Jacobson
Vice President and
Chief Financial Officer
Agreed to and accepted as of the date first above written:
Noise Cancellation Technologies, Inc.
By: /s/ Jay Haft
---------------------------
Jay Haft, Chairman
<PAGE>
May 21, 1996
Dr. Jonathan Charry
QuietPower Systems, Inc.
1675 Broadway, Suite 2600
New York, NY 10019
Dear Jonathan:
This letter, when countersigned by you on behalf of QuietPower Systems, Inc.
("QuietPower"), will constitute a further amendment to the Master Agreement
dated March 27, 1995 as amended by the memorandum signed by you on behalf of
QuietPower on March 29, 1995, and Stephen J. Fogarty on behalf of Noise
Cancellation Technologies, Inc. ("NCT") on March 28, 1995, and the Letter
Agreement dated April 21, 1995 (collectively the "Master Agreement").
1. The exclusivity fee payable to NCT pursuant to Section 3.1 of the Master
Agreement shall be paid as follows:
(a) $25,000.00 shall be paid at the closing of the first $200,000.00 tranche
of financing to be provided by Sundance Venture Partners ("Sundance") to
QuietPower, and
(b) all outstanding arrearages under the payment schedule set forth in the
April 21, 1995 Letter Agreement shall be paid at the closing of the second
$300,000.00 tranche of the Sundance financing.
In no event shall such $25,000.00 payment be made any later than June 1, 1996
and in no event shall payment of the full amount of such arrearages be made
later than June 15, 1996. In the event either of such payments have not been
made on or before the applicable date set forth in the immediately preceding
sentence, the Master Agreement and all rights granted to QuietPower shall
immediately terminate and no longer be of any force or effect, and all amounts
to be paid to NCT by QuietPower under the Master Agreement, the Note provided
for therein and this letter which remain unpaid shall be immediately due and
payable in full without further notice or demand.
2. The "Debt" owed to NCT described in paragraph 3 of the April 21, 1995 Letter
Agreement shall be paid as follows:
(a) $25,000.00 shall be paid at the closing of the second tranche of the
Sundance financing described in paragraph 1 above, and
(b) the balance of such Debt and all other indebtedness not hereinbefore
specifically provided for shall be paid in monthly installments of
$15,000.00 each on the first
<PAGE>
day of each month commencing with the first day of the month following the
month in which the closing of the second tranche of Sundance financing
occurs. In addition, one half of the total amount of such indebtedness
which remains unpaid at the closing of the contemplated $1,000,000.00
private placement to be managed by Ringhorne, Horn, Konsult AB shall be
paid to NCT at such closing and the full amount thereof shall be paid no
later than thirty (30) days following the closing of QuietPower's
contemplated public offering of securities.
Any default in the timely payment of any of the payments set forth in this
paragraph 2 shall cause the immediate termination of the Master Agreement and
any and all rights and licenses granted to QuietPower thereunder and all amounts
remaining due and payable to NCT by QuietPower under the Master Agreement, the
Note provided for therein and this letter which remain unpaid shall be
immediately due and payable in full without further notice or demand. With
respect to any $15,000.00 monthly installment described in clause (b) above,
payment shall be deemed to have been timely made if received by NCT within ten
(10) days of NCT's notice to QuietPower that such installment has not been
received.
3. Clause (a) of Section 2.1 of the Master Agreement is hereby amended to remove
the qualifications to QuietPower's exclusive rights in the Far East provided,
however, that in the event QuietPower's activities in the Far East give rise to
any claims by third parties for a sales commission, fees or other compensation
or consideration related to such activities whether sought from NCT or
QuietPower, QuietPower shall be solely responsible for the full payment of such
claims.
4. Sections 4.1 and 4.2 of the Master Agreement are amended to provide that
QuietPower is free to fund product development work itself or through a third
party without the precondition of first negotiating with NCT a mutually
acceptable "Development Schedule" as therein defined provided, however, that
nothing in this amendment shall reduce in any way QuietPower's royalty
obligations to NCT.
5. Clause (a)(iv) of Section 5.2 is amended to eliminate QuietPower's obligation
to pay NCT a "royalty of six percent (6%) of the alternatively manufactured
cost" provided for therein and Clause (a)(i) of Section 3.2 is amended to
increase the royalty on the Gross Revenues provided for therein from six percent
(6%) of all such Gross Revenues received by QuietPower to nine percent (9%) of
the first $6,000,000.00 of such Gross Revenues received by QuietPower and six
percent (6%) of all such Gross Revenues received by QuietPower in excess of
$6,000,000.00.
6 It is understood that QuietPower intends to purchase piezo ceramic actuators
for transformer quieting applications from NCT provided NCT can meet the cost,
quality and deliverability requirements of QuietPower.
<PAGE>
Kindly signify QuietPower's agreement to the foregoing by executing a
counterpart of this letter in the space provided below and returning it by
facsimile transmission confirmed by delivery of an executed copy of regular
mail.
Sincerely,
/s/ Michael J. Parrella
- -----------------------
Michael J. Parrella
President
AGREED AND ACCEPTED:
QUIETPOWER SYSTEMS, INC.
By: /s/ Jonathan M. Charry
-------------------------------
Jonathan M. Charry, President
<PAGE>
April 9, 1997
Dr. Jonathan Charry
QuietPower Systems, Inc.
1675 Broadway
New York, NY 10019
Dear Jonathan:
This letter, when countersigned by you on behalf of QuietPower Systems, Inc.
("QuietPower"), will constitute a further amendment to the Master Agreement
dated March 27, 1995 as amended by the memorandum signed by you on behalf of
QuietPower on March 29, 1995, and Stephen J. Fogarty on behalf of Noise
Cancellation Technologies, Inc. ("NCT") on March 28, 1995, the Letter Agreement
dated April 21, 1995 and the Letter Agreement dated May 21, 1996 (collectively
the "Master Agreement").
1. As of the date hereof there is an outstanding balance payable by QuietPower
to NCT with respect to the exclusivity fee as provided under Section 3.1 of the
Master Agreement, as amended. This amount shall continue to be paid at the rate
of $8,3333.00 per month, payable on the twenty-first day of each month until
payment in full has been received.
2. As of the date hereof there is an outstanding balance payable by QuietPower
to NCT with respect to the "Debt" owed to NCT described in Paragraph 3 of the
April 21, 1995 Letter Agreement. QuietPower is in arrears with respect to the
payments of the Debt which were to be made under the terms of the April 21, 1995
Letter Agreement. Accordingly, instead of being paid on the dates set forth in
such Letter Agreement, this amount shall be paid to NCT by QuietPower as
follows:
(a) $125,000 shall be paid on or before April 21, 1997
(b) $200,000 shall be paid upon the earlier of: (I) the closing date of the
contemplated initial public offering of QuietPower's common stock
scheduled to occur in June 1997, or (ii) January 1, 1998.
(c) Until both of the payments described in clauses (a) and (b) above have
been received by NCT, QuietPower will pay NCT 15% of all funds received by
QuietPower after April 21, 1997 from all financing activities other than
the public offering referred to in clause (b)(i) and NCT shall credit all
amounts received by it under this clause (c) against the amount owed by
QuietPower with respect to the Debt.
(d) After July 1, 1997, QuietPower shall pay interest to NCT at the rate of
10% per annum on the unpaid balance of the Debt, such interest to be paid
quarterly on the first day of each calendar quarter.
<PAGE>
The foregoing amounts do not include the amount of $11,107.55 which QuietPower
owes to NCT for headset products delivered to or for the account of QuietPower
during 1996. This amount (the "Headset Amount") shall be paid to NCT by
QuietPower by April 21, 1997.
3. All payments made to NCT hereunder shall be due on the dates set forth herein
without further notice of being due and shall be made by wire transfer in
accordance with NCT's instructions or by delivery of QuietPower's good,
collectible check, drawn on immediately available New York, New York funds.
4. In the event any payment provided for herein is not received by NCT on the
applicable date and in the form set forth in Paragraph 3 above, NCT shall have
the right to terminate the Master Agreement and all rights granted thereunder to
QuietPower forthwith. Such termination shall be effective at 5:00 p.m. New York,
New York time on the 10th day after the date on which NCT gives QuietPower
notice of termination and all amounts to be paid by NCT by QuietPower under the
Master Agreement with respect to the exclusivity fee, the Debt (in the full
amount outstanding on the date hereof irrespective of the amounts set forth in
Paragraph 2 above) and the Headset Amount which remain unpaid shall be
immediately due and payable in full without further notice or demand. Such
notice shall be in writing and may be delivered by hand, facsimile transmission,
regular mail or overnight delivery service.
5. Upon execution of this Letter Agreement, QuietPower shall be deemed not in
default under the Master Agreement on the date hereof.
Kindly signify QuietPower's agreement to the foregoing by executing a
counterpart of this letter in the space provided below and returning it by
facsimile transmission confirmed by delivery of an executed copy by regular
mail.
Sincerely,
/s/ Michael J. Parrella
- -------------------------------
Michael J. Parrella, President
AGREED AND ACCEPTED:
QUIETPOWER SYSTEMS, INC.
By: /s/ Jonathan M. Charry
-------------------------------
Jonathan M. Charry, President
<PAGE>
EXHIBIT 10.5
DISTRIBUTOR AGREEMENT
Agreement made this 7th day of October, 1994, between Noise Cancellation
Technologies, Inc. a Delaware corporation, having its principal office at 800
Summer Street, Stamford, Connecticut 06901 ("NCT"), and Quiet Power a New York
corporation having its principal office at 1675 Broadway, Suite 2600, NY, NY
10019 ("Distributor").
WHEREAS, NCT has developed proprietary technology in the field of
attenuation, isolation, cancellation and/or control of noise and/or vibration by
electronic means;
WHEREAS, NCT has designed and developed certain products incorporating or
based upon its technology as such products are hereinafter defined and desires
to appoint Distributor upon the terms and conditions hereinafter set forth as a
non-exclusive distributor of such products for resale within the geographic
territory hereinafter defined; and
WHEREAS, Distributor is willing to act as a non-exclusive independent
distributor of NCT for the marketing, distribution and resale of such products
upon the terms and conditions hereinafter set forth.
NOW THEREFORE in consideration of the mutual covenants herein contained
the parties agree as follows:
<PAGE>
1. DEFINITIONS
(a) "Products" means the products listed and described in Schedule A as
the same may be supplemented or revised from time to time by a written amendment
to this Agreement signed by both parties, (individually a "Product" and
collectively the "Products").
(b) "Territory" means the geographic area described in Schedule B as the
same may be supplemented or revised from time to time by a written amendment to
this Agreement signed by both parties.
(c) "Purchasers" means all present and future purchasers of products from
Distributor except those entities listed and described in Schedule C as the same
may be supplemented or revised from time to time by a written amendment to this
Agreement signed by both parties.
2. APPOINTMENT
(a) Appointment. NCT hereby appoints Distributor to act as its
non-exclusive independent distributor for the marketing and sale of Products to
Purchasers in the Territory.
(b) Acceptance. Distributor accepts the foregoing appointment by NCT and
agrees to act as the non-exclusive independent distributor of NCT for the
marketing and sale of Products to Purchasers in the Territory in accordance with
the further terms and conditions of this Agreement. Distributor also agrees not
to sell Products to or approach the entities listed and described in Schedule C
without NCT's prior written consent.
<PAGE>
(c) Non-Exclusivity.Distributor acknowledges that because of the
nonexclusive nature of its appointment, NCT has the right to sell Products and
to appoint others to sell Products to any party in the Territory or elsewhere.
3. DISTRIBUTOR'S RESPONSIBILITIES AND DUTIES
Distributor represents that it is technically and commercially
knowledgeable with respect to the Products and the markets for the Products and
is qualified to perform its responsibilities and duties in accordance with the
further terms of this Agreement.
Distributor shall actively and diligently promote and extend sales of the
Products to the Purchasers and obtain orders for the Products in such manner as
Distributor determines consistent with good commercial practices in order to
achieve the maximum sales potential of the Products. Without limiting the
generality of the preceding sentence Distributor shall:
(i) Develop, with NCT, a sales plan including Product volume requirements
and target account action plans and use its best efforts to achieve the sales
objectives contained in such plans;
(ii) Provide and maintain at its own expense a suitable place of business
with adequate and efficient sales personnel, field engineers and facilities;
(iii) Appoint such qualified agents, as it deems necessary or appropriate
to achieve adequate sales coverage provided, however, Distributor shall be
solely responsible for such appointments and for the acts and omissions of any
such agents;
(iv) Arrange for, and be responsible for all charges relating to, shipping
Products to
<PAGE>
Purchasers, other than the shipping described in Paragraph 5 below;
(v) Provide all installation of the Products;
(vi) Provide all before-sale, after-sale and warranty service with respect
to the Products that may be required by Purchasers;
(vii) Provide secure storage and handling of Products in accordance with
sound business practices and any. instructions furnished by NCT;
(viii) Employ a sufficient number of technically qualified personnel to
provide all field installation, before-sale, after-sale and warranty service and
all such other service as may be necessary or appropriate, including, but not be
limited to, regular calls on established accounts, a continuing effort to
develop accounts, a prompt thorough handling of all customer inquires, and
distributing up-to-date sales and technical literature to customers;
(ix) Deliver to NCT monthly reports concerning Products purchased by
Distributor's customers, and sales and service visits with Purchasers and
potential purchasers and keep NCT reasonably informed of potential sales and
problems pertaining to the Products and furnish NCT such additional sales and
inventory reports as NCT may reasonably require;
(x) Assist in gathering market data by providing NCT, from time to time,
with sales forecasts, field reports and other information regarding sales and
use of Products and participate with NCT in discussions regarding Product sales
and distribution;
(xi) Assume all credit risk in reselling the Products;
(xii) Effectively use NCT sales aides and product literature;
(xiii) Promptly distribute to Purchasers all operating instructions,
maintenance manuals and safety information about the Products which is disclosed
to Distributor during the term of this Agreement; and
<PAGE>
(xiv) In order to be able to effectively respond to customer needs,
purchase at least the minimum annual qualifying quantity of Products as set
forth in Paragraph 4.
4. ANNUAL PERFORMANCE REQUIREMENTS
If in any contract year, Distributor fails to purchase the minimum
quantity of Products for discounted price qualification as set forth in Schedule
D, NCT may terminate this Agreement upon thirty (30) days written notice to
Distributor as provided in Subparagraph 10 (c) below, without any liability to
NCT whatsoever.
5. ORDER, DELIVERY AND ACCEPTANCE
(a) Order and Acceptance. Distributor shall order Products from NCT in
accordance with NCT's standard ordering procedures and in sufficient time to
meet any applicable installation date. All orders are subject to written
acceptance by NCT. Acceptance of all orders and delivery thereunder are subject
to the condition that Distributor's credit standing is acceptable, in NCT's sole
judgment.
(b) Shipping and Delivery. NCT shall ship orders for Products within sixty
(60) days to Distributor. Shipments shall be made by a Distributor designated
shipper and shall be FOB place of manufacture or FOB point of shipment with
shipping charges billed to Distributor by the shipper. Ownership and
responsibility (including risk of loss) for Products shall transfer from NCT to
Distributor at place of manufacture or point of shipment. Distributor shall pay
all costs of insurance, packaging and transportation together with all sales,
excise, V.A.T. and other taxes not based on income and all customs duties, fees,
charges and expenses.
<PAGE>
(c) Returns. Distributor shall not return Products and NCT shall have no
obligation to accept the return of any Product except when such return is made
in compliance with NCT's standard return policy as then in effect or in
compliance with Section 14 below.
(d) Force Majeure. NCT shall not be liable for delays which are caused by
events that are beyond its reasonable control including, but not limited to,
acts of God, acts of Distributor, acts of civil or military authority, fires,
casualties, accidents, strikes or other difficulties, floods, earthquakes,
epidemics, quarantine instructions, wars, insurrections, riots, police actions,
civil commotion and demonstrations. In the event of a Product shortage NCT may
allocate its available products among its distributors and other customers in
such manners as it deems best. Whenever NCT delivers to a common carrier any
Products ordered by Distributor, regardless of whether the particular carrier
shall have been designated in Distributor's order or shipping instructions, such
carrier shall be Distributor's agent and NCT shall not be liable for any delay,
loss or damages in shipment. NCT shall prepare all Products for shipment in
accordance with its established procedures.
6. PRICE AND PAYMENT
(a) Price. The price NCT charges Distributor for Products sold and
delivered hereunder will be NCT's stocking distributor schedule price in effect
at the time of shipment pursuant to Distributor's individual order for Products
hereunder. During the term of this Agreement, NCT shall provide Distributor with
price schedule revisions at least seven (7) days in advance of the effective
date of such revision. NCT will honor existing prices for Product orders
received from Distributor up to and including the day preceding the effective
date of revised prices providing
<PAGE>
orders are for taking possession of Product within thirty (30) days of the price
revision effective date.
(b) Payment. Terms of payment for all Products sold hereunder shall be net
thirty (30) days from the date of NCT's invoice which date shall not be earlier
than the date of shipment of Products to Distributor hereunder. Invoices not
paid within said term shall be subject to a one and one-half (1 1/2%) percent
per month interest charge on any outstanding balance, or the maximum interest
allowed by law, whichever is less.
7. HANDLING OF PRODUCTS
(a) No Modification of Products. Unless otherwise expressly agreed to in
writing, Distributor agrees that nothing will be done while Products are in
Distributor's possession that would modify, alter or change in any manner
whatsoever the Products or their physical, operating or performance
characteristics.
(b) Distributor Packaging. If Distributor packages or re-packages Products
delivered hereunder, Distributor will select proper and safe containers and
packaging appropriate for the Products and will employ suitable production and
quality control procedures for such packaging or re-packaging;
<PAGE>
8. COOPERATION.
(a) NCT Undertaking. NCT shall cooperate with Distributor in the marketing
and sale of Products to Purchasers. NCT will provide such continuing technical
support to Distributor as NCT considers reasonably appropriate and necessary to
support the distribution and sale of Products in the Territory. Such technical
support shall be reviewed and agreed upon by the parties from time to time
during the term of this Agreement.
(b) Purchaser's Complaints. Distributor shall promptly report to NCT all
Purchaser complaints, reports of incidents- or any other adverse matters of
which Distributor has knowledge concerning Purchasers' use of Products sold to
Distributor hereunder. Distributor shall cooperate with NCT in the appropriate
handling of such complaints, incidents or other matters. NCT will accept only
those returns allowed after compliance with its returns policy as provided in
Paragraph 5(c) above.
(c) Access to Facilities. NCT shall have the right to visit facilities
where Products are being stored and handled by Distributor at such times as are
reasonably requested by NCT to observe Distributor's facilities used for storing
and handling Products provided NCT agrees to comply with Distributor's
reasonable instructions with respect to such visits.
9. DESIGNATION; TRADEMARKS.
(a) Designation. During the term of this Agreement, Distributor shall
represent to third
<PAGE>
parties that it is NCT's non-exclusive, independent distributor of the Products
in the Territory.
(b) Use of NCT Trademarks. During the term of this Agreement, Distributor
is authorized to and shall market and sell Products only under NCT's trademarks,
trade names and logos and in accordance with NCT's instructions as to their use.
Except as otherwise provided herein this Agreement does not convey any right,
license or other authorization to use any of NCT's trademarks, trade names or
logos in conjunction with the distribution and resale of Products or in any
other manner. Upon termination of this Agreement, Distributor shall cease to use
any of such marks, names or logos and shall remove any reference to NCT from its
advertising and promotional material.
(c) Notice of Infringement. Distributor agrees to notify NCT in writing
promptly after it becomes aware of any adoption, use or registration by a third
party of any trademark, trade name, tradedress or decorative design or logo
which would infringe or which may impair or tend to impair NCT's rights to the
trademarks, trade names, tradedress or decorative design or logo appearing on
NCT's labels, literature, packaging or materials for Products.
10. TERM AND TERMINATION.
(a) Term. This Agreement shall take effect immediately following its
execution by Distributor and NCT and shall be activated following receipt by NCT
of the initial qualifying buy-in order from Distributor. This Agreement shall
continue for one (1) year following activation and each year thereafter shall be
automatically renewed for one (1) year unless either
<PAGE>
party provides the other with written notice of its desire to terminate this
Agreement ninety (90) days prior to the end of the initial term or either party
provides the other with ninety (90) days written notice of its desire to
terminate this Agreement during a renewal term.
(b) Events of Termination. NCT or Distributor, as applicable, shall each
have the right to terminate this Agreement upon the occurrence of any of the
following events with respect to the status or actions of the other:
(i) A decree or order shall have been entered by a Court of
competent jurisdiction adjudging NCT or the Distributor, as the case may be,
bankrupt or insolvent, or approving as properly filed a petition seeking
reorganization, readjustment, arrangement, composition or similar relief for NCT
or the Distributor, as the case may be, under any bankruptcy law or any other
similar applicable statute, law or regulation,. where a decree or order of a
Court of competent jurisdiction shall have been entered for the appointment of a
receiver or liquidator or trustee or assignee in bankruptcy or insolvency of NCT
or the Distributor, as the case may be, or a substantial part of its property,
or for its property, or for the winding up or liquidation of its affairs.
(ii) NCT or the Distributor, as the case may be, shall institute
proceedings to be adjudicated a voluntary bankrupt, or shall consent to the
filing of a bankruptcy petition against it, or shall file a petition or answer
or consent seeking reorganization, readjustment, arrangement, composition,
liquidation or similar relief under any bankruptcy law or any other similar
applicable statue, law or regulation, or shall consent to the appointment of a
receiver or liquidator or trustee or assignee in bankruptcy or insolvency of it
or of a substantial part of its
<PAGE>
property, or shall make an assignment for the benefit of creditors, or shall be
unable to pay its debts generally as they become due, or shall cease the active
conduct of its business, or shall take any corporate action in furtherance of
any of the foregoing.
(iii) Either NCT or Distributor shall commit a material breach of the
terms of this Agreement and the same and all of its effects shall not be
remedied, including reimbursement to the other party of any losses occurred on
account thereof, within thirty (30) days after written notice thereof as given
by the other party to such defaulting party.
(iv) Distributor shall fail to pay, within thirty (30) days after the same
shall become due and payable any obligation owed to NCT and such failure to pay
shall not be remedied, including payment to NCT of any interest that may have
accrued on such indebtedness and reimbursement to NCT of any cost of collection,
within three (3) days after notice of such failure is given to Distributor
by NCT.
(c) Procedure for Termination. The party desiring to terminate this
Agreement upon the occurrence of an event of termination described in
Sub-paragraph 10 (b) above and the expiration of the applicable remedial period
without the elimination or correction of the event of termination shall do so by
giving written notice thereof to the other, which notice shall specifically
identify the reason for such termination. This Agreement shall terminate
effective immediately upon the giving of such notice, or such later time as the
notice of termination may specify, subject to the terms and conditions and the
obligations of the parties hereunder.
(d) Return of Products. In the event of the termination of this
Agreement as provided in this Section 10 or otherwise, NCT shall have the right,
in its sole discretion, to obtain from
<PAGE>
Distributor all Products then in the possession or under the control of
Distributor or such other parties thereof as NCT may determine upon notice to
Distributor delivered within sixty (60) days of such termination. Upon receipt
of such notice, Distributor shall deliver the Products specified in said notice
to NCT properly packaged and in accordance with the delivery instructions
contained in said notice. Upon receipt, NCT shall reimburse Distributor for the
purchase price paid by Distributor to NCT for all Products delivered to NCT
unopened, undamaged and unused together with the costs of delivering the same to
NCT.
11. PROPRIETARY INFORMATION.
Distributor agrees that it shall not during the term of this Agreement,
and for a period of five (5) years following the termination of this Agreement,
for any reason, disclose to any third party any information, documents or
materials pertaining to the specifications, development, manufacture and
technical methods relating to the Products or any other information, documents
or materials concerning the business affairs of NCT or any information related
to the pricing, marketing or sale of any of the Products, except where in the
public domain or where disclosed through no breach of this Agreement by
Distributor in the course of performing its duties under this Agreement, or
unless disclosure is necessary pursuant to court order or with respect to any
litigation between the parties hereto or with third parties, and then subject
only to a protective order that shall be on notice to Distributor and/or NCT, as
the case may be.
<PAGE>
12. EXCLUSION OF AGENCY.
Distributor's relationship with NCT under this Agreement shall at all
times be that of an independent contractor and Distributor shall have no
authority or power to act as agent of NCT for any purpose and shall not on
behalf of NCT either (i) enter into any contract or agreement of any sort or,
(ii) make any promise, warranty or representation with respect to Products or to
any other matter, NCT shall not be bound by the acts, omissions or conduct of
Distributor or any of its employees or agents. Distributor shall at all times
properly identify its foregoing relationship with NCT.
13. PRODUCT EXCLUSIVITY.
In order to further NCT's development and enable NCT to gain access to the
relevant markets for the Products, Distributor agrees during the term of this
Agreement and for six (6) months thereafter not to distribute or sell products
or equipment (or components or parts thereof) which have the same or
substantially similar uses as the Products and which are manufactured by or for
a party other than NCT.
14. WARRANTIES.
NCT warrants that each Product it sells to Distributor, when delivered and
properly installed will be free of defects in workmanship and materials. If any
failure to conform to this warranty becomes apparent within one hundred eighty
(180) days of delivery to Distributor or
<PAGE>
ninety (90) days of delivery to the Purchaser thereof, whichever shall first
occur, NCT shall upon prompt written notice and upon compliance by Distributor
with such instructions as NCT may give as to return of defective Products,
correct or cause to be corrected such defects by repair or replacement of the
defective Products. Correction in the foregoing manner shall constitute a
fulfillment of all liabilities and obligations of NCT with respect to the
quality of Products. This warranty shall not apply in any case where a Product
is altered or modified from the specifications relating to the design,
development, installation and operation of such Product or where such Product is
not installed, used or maintained in accordance with the manufacturer's
instructions, or subject to misuse, neglect or accident.
THE WARRANTY AND REMEDIES SET FORTH ABOVE ARE EXCLUSIVE AND IN LEU OF ALL
OTHERS, WHETHER ORAL OR WRITTEN, EXPRESSED OR IMPLIED. NCT SPECIFICALLY
DISCLAIMS ANY AND ALL IMPLIED WARRANT'S, INCLUDING, WITHOUT LIMITATION,
WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. No
agent or employee of NCT is authorized to make any modification, extension
or addition to this warranty.
NCT IS NOT RESPONSIBLE FOR SPECIAL, INCIDENTAL, OR CONSEQUENTIAL DAMAGES
RESULTING FROM ANY BREACH OF WARRANTY OR UNDER ANY OTHER LEGAL THEORY,
INCLUDING BUT NOT LIMITED TO LOST PROFITS, DOWNTIME, DAMAGE TO GOODWILL,
DAMAGE TO OR REPLACEMENT OF EQUIPMENT AND PROPERTY, OR FAILURE TO MEET OR
COMPLY WITH THE REQUIREMENTS OF ANY SAFETY, ENERGY, BUILDING OR
ENVIRONMENTAL LAW, ORDNANCE, CODE OR REGULATION OF ANY COUNTRY OR
POLITICAL SUBDIVISION THEREOF.
15. SUCCESSORS AND ASSIGNS.
This Agreement shall be binding upon and inure to the benefit of the
respective successors and permitted assigns of each of the parties hereto but
any assignment of this Agreement by Distributor or delegation of its obligations
hereunder without the prior written
<PAGE>
consent of NCT shall be void.
16. ENTIRE AGREEMENT.
This Agreement, together with the Schedules attached hereto, constitutes
the entire agreement between the parties hereto and supersedes all prior
agreements, understandings and arrangements, oral or written, with respect to
the subject matter hereof.
17. MODIFICATIONS AND WAIVERS.
No modification of this Agreement or waiver of the terms and conditions
hereof shall be binding upon either party unless approved in writing by an
authorized representative of such party nor shall the terms and conditions of
this Agreement be effected by the acknowledgment or acceptance of purchase
orders or other forms containing additional or different terms or conditions
whether or not signed by an authorized representative of such party. To the
degree that either of both parties find it convenient to employ a standard form
of purchase order or acknowledgment of order in administering the terms of this
Agreement it may do so but none of the terms and conditions printed or otherwise
appearing on such forms shall be applicable except to the extent that it sets
forth information required to be furnished hereunder unless provided to the
contrary and such provision to the contrary is specifically acknowledged in
writing by authorized representatives of both parties hereto.
<PAGE>
18. SEVERABILITY.
Any term or provision of this Agreement which is invalid or unenforceable
in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent
of such invalidity or unenforceability without rendering invalid or
unenforceable the remaining terms and provisions of this Agreement or effecting
the validity or enforceability of any of the terms or provisions of this
Agreement in any other jurisdiction.
19. NOTICES.
All notices, requests, demands 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 if delivered personally, transmitted by telex or
facsimile transmission device, or sent by registered mail, return receipt
requested, postage pre-paid to the parties hereto at their respective addresses
as set forth above, or to such other address as either party hereto shall
hereafter specify by notice similarly given.
20. COMPLIANCE WITH LAWS.
Neither Distributor nor NCT shall take any action which would, or fail to
take any action when such failure would directly or indirectly, result in or
constitute a violation by either party of any applicable law, treaty, ruling or
regulation, including, without limitation, laws and regulations relating to the
import, export, resale and distribution of the Products
<PAGE>
21. FURTHER ASSURANCES.
The parties hereto shall do or perform or cause to be done or performed
all such further acts and things and shall execute and deliver all such other
agreements, certificates, instruments and documents as the other party hereto
may reasonably request in order to carry out the intent and accomplish the
purposes of this Agreement.
22. GOVERNING LAW.
This Agreement shall be governed by and construed in accordance with the
laws of the State of New York and of the United States of America.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
hereabove written.
NOISE CANCELLATION TECHNOLOGIES, INC.
By:/s/ Art Garofalo
---------------------------
V.P. Sales
------------------------------
By: /s/ Jonathan M. Charry
---------------------------
President and CEO
<PAGE>
SCHEDULE D
Annual Minimum Quantities
To Be Purchased
For Discounted Pricing*
ProActive Discount Schedule
Annual Order Quantity Discount off List
- --------------------- -----------------
1-25 List
26-100 15%
100-249 20%
250-499 25%
500 RFQ
- ----------
* To qualify for discounted pricing, Distributor must purchase the following
minimum percentage of the specified annual total by the end of each quarter for
the year in question:
First Quarter 15%
Second Quarter 40%
Third Quarter 65%
Fourth Quarter 100%
<PAGE>
SCHEDULE B
Territory
Non-exclusive territory:
<PAGE>
SCHEDULE C
Purchaser Exceptions
Distributor shall not sell Products to or approach the entities listed below
without NCT's prior written consent:
None
<PAGE>
EXHIBIT 10.6
NOTE PURCHASE AGREEMENT
This Agreement, dated as of May 24, 1996, is entered into by and between
QUIETPOWER SYSTEMS, INC., a Delaware corporation ("QPS"), and___________________
_______________________ , a___________________ ("Purchaser").
FACTUAL BACKGROUND
Purchaser wishes to purchase from QPS, and QPS wishes to sell to
Purchaser, a promissory note (a "Bridge Loan Note") and warrants to purchase
shares of QPS's Common Stock. Purchaser and QPS desire to provide for the
foregoing purchase and sale and to establish various rights and obligations in
connection therewith. DayStar Partners, L.P. ("DayStar") has purchased a similar
Bridge Loan Note, and others are expected to do so. A complete list of all the
Purchasers (which term includes Purchaser and Daystar) will be attached hereto
as Schedule 1.
In consideration of the mutual promises and covenants contained in this
Agreement, the parties hereto agree as follows:
1. SALE OF PROMISSORY NOTE AND WARRANT.
Subject to the terms and conditions of this Agreement, at the
Closing (as defined below), QPS will sell and issue to Purchaser, and Purchaser
will purchase, a secured promissory note in the original principal amount of
$___________ substantially in the form of Exhibit A hereto (the "Note") and QPS
will issue to Purchaser a Common Stock Purchase Warrant (the "Warrant")
substantially in the form of Exhibit B hereto. The shares of Common Stock
issuable upon exercise of the Warrant are referred to as the "Warrant Shares."
The Warrant Shares shall be subject to a Registration Rights Agreement (the
"Registration Rights Agreement"), substantially in the form of Exhibit D hereto.
The Note shall be secured by all assets of QPS pursuant to a Security Agreement,
substantially in the form of Exhibit C hereto.
2. THE CLOSING. The closing ("Closing") of this transaction shall take
place at the offices of Coblentz, Cahen, McCabe & Breyer, LLP, 222 Kearny
Street, 7th Floor, San Francisco, California 94108 at such time and date as are
mutually agreeable to QPS and Purchaser. Neither the parties hereto nor their
counsel need attend the Closing in person. At the Closing, QPS shall execute and
deliver to Purchaser the Note and the Warrant, in each case registered in the
name of Purchaser, and all collateral documents relating thereto (including
without limitation, the Security Agreement, the UCC-1 Financing Statement, the
Registration Rights Agreement, and any ancillary documents thereto
(collectively, the "Collateral Documents"), against payment to QPS by wire
transfer or cashier's check of the $___________ purchase price therefor.
Note Purchase Agreement - Generic
Page 1
<PAGE>
3. REPRESENTATIONS OF QPS. QPS hereby represents and warrants to Purchaser
as follows:
3.1 ORGANIZATION AND STANDING. QPS is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware
and has full corporate power and authority to conduct its business as presently
conducted and as proposed to be conducted by it and to enter into and perform
this Agreement and to carry out the transactions contemplated by this Agreement.
QPS is duly qualified to do business as a foreign corporation and is in good
standing in all states and jurisdictions in which the nature of the business
conducted or property owned by QPS make such qualification necessary. QPS has
offered to furnish to Purchaser copies of QPS's Certificate of Incorporation and
Bylaws.
3.2 DUE AUTHORIZATION. QPS has all right, power and authority to
enter into this Agreement and the Note, the Warrant, and the Collateral
Documents, and to consummate the transactions contemplated hereby and thereby.
The execution and delivery of this Agreement, the Note, the Warrant and each of
the Collateral Documents, the issuance and sale of the Note and the Warrant
Shares by QPS, and the consummation by QPS of the transactions contemplated
hereby and thereby have been duly authorized by all necessary corporate action
on behalf of QPS. This Agreement, the Note, the Warrant and each of the
Collateral Documents have been (or, when executed and delivered, will have been)
duly executed and delivered by QPS and constitute (or, in the case of the
Warrant Shares, when executed and delivered, will constitute) valid and binding
agreements of QPS, enforceable in accordance with their respective terms.
3.3 CAPITALIZATION. The authorized capital stock of QPS consists of
10,000,000 shares of Common Stock, of which 684,856 shares are outstanding, and
10,000 shares of Preferred Stock $0.01 par value per share, of which no shares
are issued or outstanding. All of the issued and outstanding shares of Common
Stock have been duly authorized and validly issued and are fully paid and
nonassessable. Except as disclosed on Schedule 3.3 attached hereto, QPS does not
have outstanding securities convertible into or exchangeable for any shares of
QPS's capital stock.
3.4 ISSUANCE OF SHARES. The issuance, sale and delivery of the Note,
Warrant and Warrant Shares in accordance with this Agreement have been duly
authorized by all necessary corporate action on the part of QPS, and all the
Warrant Shares have been duly reserved for issuance. The Warrant Shares, when
issued and delivered against payment therefor in accordance with the provisions
of the Warrant will be duly and validly issued, fully paid and non-assessable.
The Warrant Shares are not subject to any preemptive rights or any right of
first refusal right nor will the issuance of the Warrant Shares give rise to any
such rights.
3.5 SUBSIDIARIES. QPS has no subsidiaries and does not own, directly
or indirectly, shares of stock or other interests in any other corporation,
association, joint venture, or business organization.
Note Purchase Agreement - Generic
Page 2
<PAGE>
3.6 MATERIAL CONTRACTS AND OBLIGATIONS. Schedule 3.6 hereto sets
forth a list of all agreements or commitments to which QPS is a party or by
which it is bound, involving (a) the provision of goods or services to QPS where
there is no reasonably available second source, or (b) more than 25% of QPS's
current or anticipated revenues. QPS has delivered to Purchaser or its counsel
copies of the foregoing and of all other agreements QPS deems material to its
business, including those involving the licensing of patents or technology. All
of such material agreements are valid, binding, enforceable and in full force
and effect. No party is in default in any material respect under any of such
agreements.
3.7 COMPLIANCE WITH OTHER INSTRUMENTS, NONE BURDENSOME, ETC. QPS is
not in violation of any term of its Certificate of Incorporation or Bylaws, or
in any material respect of any mortgage, indenture, contract, agreement,
instrument, or, to QPS's best knowledge, any judgment, decree, order, statute,
rule, or regulation applicable to it. The execution, delivery, and performance
by QPS of this Agreement and the Note, the Warrant and the Collateral Documents,
and the issuance and sale of the Note, Warrant and Warrant Shares pursuant
hereto, will not result in any such violation or be in conflict with or
constitute a default under any such term, or cause the acceleration of maturity
of any loan or material obligation to which QPS is a party or by which it is
bound or with respect to which it is an obligor or guarantor, or result in the
creation or imposition of any material lien, claim, charge, restriction, equity
or encumbrance of any kind whatsoever upon, or, to QPS's best knowledge give to
any other person any interest or right (including any right of termination or
cancellation) in or with respect to any of the material properties, assets,
business or agreements of QPS. To QPS's best knowledge, no such term or
condition materially adversely affects the business, property, prospects,
condition, affairs, or operations of QPS.
3.8 FINANCIAL STATEMENTS. QPS has furnished to Purchaser a complete
and correct copy of the unaudited balance sheets of QPS (the "Balance Sheets")
as of December 31, 1995 and March 31, 1996 and the related statements of income
for the 12 months and 3 months preceding such dates, all as compiled by QPS
(collectively, the "Financial Statements"). The term "Balance Sheet Date" means
March 31, 1996. The Financial Statements are complete and correct, are in
accordance with the books and records of QPS and present fairly the financial
condition and results of operations of QPS, as at the dates and for the periods
indicated, and have been prepared in accordance with generally accepted
accounting principles consistently applied, except that the Financial Statements
have been prepared for the internal use of management and may not be in
accordance with generally accepted accounting principles because of the absence
of footnotes normally contained therein and are subject to normal year-end audit
adjustments which in the aggregate will not be material.
3.9 GOVERNMENTAL CONSENTS. No consent, approval, order or
authorization of, or registration, qualification, designation, declaration or
filing with, any governmental authority is required on the part of QPS in
connection with the execution and delivery of this Agreement or the offer,
issuance, sale and delivery of the Note and Warrant. Based in part on the
representations made by Purchaser in Section 4 hereof, the offer and sale of the
Note, the Warrant
Note Purchase Agreement - Generic
Page 3
<PAGE>
and the Warrant Shares to Purchaser will be in compliance with applicable
Federal and state securities laws.
3.10 LITIGATION. There is no action, suit or proceeding, or
governmental inquiry or investigation, pending, or, to the best of QPS's
knowledge, any basis therefor or threat thereof, against QPS or its properties
which questions the validity of this Agreement or the Note, the Warrant and the
Collateral Documents, the issuance of the Note, Warrant or the Warrant Shares or
which might result, either individually or in the aggregate, in any material
adverse change in the business, prospects, assets or condition, financial or
otherwise, of QPS.
3.11 REGISTRATION RIGHTS. Except as set forth on Schedule 3.11 or as
required by the provisions hereof, QPS is not under any obligation to register
any of its presently outstanding securities or any of its securities which may
hereafter be issued.
3.12 COMPLIANCE. QPS has complied, in all material respects, with
all laws, regulations and orders applicable to its present and proposed business
and has all material, franchises, certificates, permits, licenses and other
authorizations required thereby.
3.13 EMPLOYEES.
(a) None of the employees of QPS is represented by any labor
union, and there is no labor strike or other labor trouble pending with respect
to QPS (including, without limitation, any organizational drive) or, to the best
of QPS's knowledge, threatened. Other than as set forth on Schedule 3.13, no
employee has any agreement or contract regarding his or her employment.
(b) No accumulated funding deficiency (as defined in Section
302 of Employee Retirement Income Security Act of 1974, as amended ("ERISA") or
Section 412 of the Internal Revenue Code (the "Code")), whether or not waived,
exists with respect to any pension plan of QPS. No liability to the PBGC has
been, or is reasonably likely to be incurred with respect to any such pension
plan by QPS, or any ERISA affiliate. QPS is not a "party in interest" (as
defined in Section 3(14) of ERISA) or a "disqualified person" (as defined in
Section 4975(e)(2) of the Code) with respect to Purchaser. To the best knowledge
of QPS, no fiduciary of or "party in interest" or "disqualified person" with
respect to any employee benefit plan (as defined in Section 3(3) of ERISA)
maintained or contributed to by QPS or any of its subsidiaries, for the benefit
of their respective employees (each an "Employee Plan") has engaged in or caused
any Employee Plan to engage in any "prohibited transaction" (within the meaning
of Section 4975 of the Code and Sections 406 or 407 of ERISA) that has resulted
in the imposition of any tax or penalty imposed under Section 4975 of the Code
or Section 502 of ERISA that has not been satisfied. Each Employee Plan has been
maintained and administered in compliance with all applicable law including
ERISA and the Code. Each Employee Plan which is intended to qualify under
Section 401(a) of the Code has been so qualified during the period from its
adoption to date. There are no pending IRS audits or controversies with respect
to any pension plan. QPS
Note Purchase Agreement - Generic
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<PAGE>
has no trade or business, whether or not incorporated, which, together with QPS,
is under common control, as described in Section 414(b) or (c) of the Code.
3.14 ABSENCE OF CHANGES. Since the Balance Sheet Date, there has
been no material adverse change in the business, prospects, financial condition
or results of operations of QPS, except for losses incurred in the ordinary
course of business.
3.15 ABSENCE OF LIABILITIES. QPS did not have, at the Balance Sheet
Date, any liabilities of any type which in the aggregate exceeded $50,000,
whether absolute or contingent, which were not fully reflected in the Financial
Statements for such date, and, since such date, QPS has not incurred or
otherwise become subject to any such liabilities or obligations except in the
ordinary course of business.
3.16 TAXES. The March 31, 1996 Balance Sheet provision for taxes is
sufficient for payment of all accrued and unpaid Federal, state, county, local
and foreign taxes for the period then ended and all prior periods. QPS has filed
or has obtained presently effective extensions with respect to all Federal,
state, county, local and foreign tax returns which are required to be filed by
it, such returns are true and correct and all taxes shown thereon to be due have
been timely paid with exceptions not material to QPS. QPS has not been the
subject of an audit by any governmental entity with respect to any tax return
filed by QPS.
3.17 TITLE TO AND CONDITION OF PROPERTIES. QPS has good and
marketable title to all its tangible and intangible property and assets,
including those reflected in the Financial Statements (except such property or
assets as have since the Balance Sheet Date been sold or otherwise disposed of
in the ordinary course of business), and such property and assets are subject to
no mortgage or security interest, conditional sales contract, charge, lien or
encumbrance (except for the lien of current taxes not yet due and payable and
such imperfections of title, easements and encumbrances, if any, as are not
substantial in character, amount or extent and do not materially detract from
the value of, or interfere with the present use of the properties subject
thereto or affected thereby, or otherwise materially impair QPS's business
operations), and subsequent to the Balance Sheet Date, QPS has not sold or
disposed of any of its property and assets or obligated itself to do so except
in the ordinary course of business. Except for such minor defects as are not
substantial in character and which do not have a materially adverse effect upon
the validity thereof, all material real and personal property leases to which
QPS is a party are valid and effective, and there is not under any such lease
any existing material default or event which with notice or lapse of time or
both would constitute a material default.
3.18 PATENTS, TRADEMARKS, ETC. All of QPS's patents and patent
applications are identified and described on Schedule 3.18. QPS will not assign
or transfer any such patent to any person or entity besides Purchaser until the
Note has been fully paid. QPS agrees to promptly amend Schedule 3.18 to add any
patents that is applies for or obtains after the date hereof. Except as set
forth on Schedule 3.18, QPS owns and possesses or licenses all patents, patent
applications, licenses, trademarks, service marks, trade names, brand names,
inventions, trade secrets, processes, formulae, copyrights, hardware and
software necessary for the operation
Note Purchase Agreement - Generic
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<PAGE>
of its business as now conducted and as proposed to be conducted (the
"Intellectual Property"). Schedule 3.18 also includes a complete list and
summary description of all license agreements and contracts of QPS which affect
its rights to own or use any and all of the Intellectual Property. QPS has not
received any notice or claim of infringement of any rights, trademarks, trade
names, trade secrets, copyrights or other intellectual property or proprietary
rights of others with respect to QPS's operation of its business. To the
knowledge of QPS, except as set forth on Schedule 3.18, the Intellectual
Property does not infringe upon or violate any rights, trademarks, trade names,
trade secrets, copyrights or other intellectual property or proprietary rights
of any person or entity.
3.19 COMPLIANCE WITH LEGISLATION REGULATING ENVIRONMENTAL QUALITY.
Except where non-compliance is not reasonably likely to have a material adverse
effect on QPS, the facilities which currently are owned, operated or leased by
QPS are, and, to the knowledge of QPS, at all times have been, maintained and
operated in compliance with all applicable federal, state and local
environmental protection, occupational, health and safety or similar laws,
ordinances, restrictions, orders, regulations and licenses (collectively
"Environmental Laws") including but not limited to the Federal Water Pollution
Control Act (33 U.S.C. ss. 1251 et seq.), Resource Conservation & Recovery Act
(42 U.S.C. ss. 6901 et seq.), Safe Drinking Water Act (21 U.S.C. ss.349, 42
U.S.C. ss.ss. 201, 300f), Toxic Substances Control Act (15 U.S.C. ss. 2601 et
seq.), Clean Air Act (42 U.S.C. ss. 7401 et seq.), Comprehensive Environmental
Response, Compensation and Liability Act (42 U.S.C. ss. 9601 et seq.),
California Health & Safety Code (ss. 25100 et seq., ss. 39000 et seq.), and
California Water Code (ss. 13000 et seq.). To the knowledge of QPS, no
materials, substances, or products have been at any time placed, held, located,
disposed of or released on, under, at, within, or about the facilities which may
reasonably be expected to result in a regulatory agency or other governmental
entity requiring clean up, removal or other remedial action by QPS under
Environmental Laws with such exceptions as would not in the aggregate have a
material adverse effect on QPS. To the knowledge of QPS, no hazardous or toxic
substance, waste or material (collectively "Hazardous Materials") has at any
time been used, stored, treated, transported or handled by QPS or any of its
consultants, contractors or agents on, under, at, within, or about the
facilities except Hazardous Materials that are used, stored, treated,
transported or handled on, under, at, within or about the Facilities in material
compliance with Environmental Laws. No litigation, administrative enforcement
actions, proceedings or notices of potential liability have (x) received, served
or, to the best knowledge of QPS, filed or threatened against QPS or (y) to the
actual knowledge of QPS, received, served, filed or threatened against any
predecessor business or landowner or with respect to any facility owned or
leased by QPS, in each case, relating to damage, contribution, cost recovery,
compensation, loss or injury resulting from any Hazardous Materials or arising
out of the use, generation, storage, treatment, release, discharge,
transportation, handling or disposal of Hazardous Materials or resulting from a
violation or alleged violation of Environmental Laws.
3.20 INSURANCE. QPS has adequate insurance, with (to its knowledge)
financially sound and reputable insurers, with respect to its properties and
business which are of a character customarily insured by corporations of
established reputation engaged in the same or a similar business and similarly
situated, against loss or damage of the kinds customarily insured against
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by such corporations, which insurance is of such types (including public
liability and workmen's compensation insurance) as are customarily carried under
similar circumstances by such other corporations.
3.21 USE OF PROCEEDS. The net proceeds from the sale of the Note
shall be used (i) to finance the expenses of the anticipated initial public
offering of QPS's securities, (ii) to pay amounts due to NCT, (iii) to pay
certain short-term notes and other current liabilities, and (iv) for working
capital to finance the operations of QPS substantially as set forth in the
budgets and business plans delivered by QPS to Purchaser in connection herewith.
QPS shall not directly or indirectly use such proceeds for any other purposes.
3.22 OFFERING OF SECURITIES. Neither QPS nor any person acting on
its behalf has offered the Warrant or the Warrant Shares or any similar
securities of QPS from or otherwise approached or negotiated with respect to QPS
with any person other than Purchaser and other "Accredited Investors" (as
defined in Rule 501(a) under the Securities Act of 1933, as amended). Neither
QPS nor any person acting on its behalf has taken or will take any action
(including, without limitation, any offering of any securities of QPS under
circumstances which would require the integration of such offering with the
offering of the Warrant or the Warrant Shares under the Securities Act and the
rules and regulations of the Commission thereunder) which could reasonably be
expected to subject the offering, issuance or sale of the Warrant or of the
Warrant Shares to the registration requirements of Section 5 of the Securities
Act.
3.23 IPO. QPS has received a letter of intent dated November 29,
1995 from Gaines, Berland, Inc., a full, true and correct copy of which is
attached hereto as Schedule 3.23, and such letter has not been amended or
modified orally or in writing. At the date hereof, QPS reasonably believes that
the IPO registration statement will be filed in September or October, 1996.
3.24 DISCLOSURE. Neither this Agreement, the Schedules and the
Exhibits hereto, the Note, the Warrant and the Collateral Documents, the
Financial Statements, nor any other document delivered to Purchaser or its
counsel or agents in connection herewith contains any untrue statement of a
material fact or omits to state a material fact necessary in order to make the
statements contained herein or therein not misleading. To the best of QPS's
knowledge, there is no fact (or facts) which (individually or in the aggregate)
materially adversely affects the business, prospects, condition, affairs, or
operations of QPS or its properties or assets which has (or have) not been set
forth in this Agreement, such Schedules and Exhibits, the Note, the Warrant and
the Collateral Documents or such Financial Statements.
4. REPRESENTATIONS OF PURCHASER. Purchaser hereby represents and warrants
to QPS as follows:
4.1 INVESTMENT. Purchaser is acquiring the Note and Warrant for its
own account for investment and not with a view to, or for sale in connection
with, any distribution thereof, nor with any present intention of distributing
or selling the same.
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4.2 AUTHORITY. Purchaser has full power and authority to enter into
and to perform this Agreement in accordance with its terms.
4.3 EXPERIENCE. Purchaser has sufficient knowledge and experience in
investing in companies similar to QPS so as to be able to evaluate the risks and
merits of its investment in QPS.
4.4 LEGEND. Purchaser understands that the stock certificate
representing the Warrant Shares shall bear a legend substantially to the
following effect:
THE SHARES REPRESENTED BY THE CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE
OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED
UNLESS AND UNTIL SUCH SHARES ARE REGISTERED UNDER SUCH ACT OR AN
OPINION OF COUNSEL SATISFACTORY TO QPS IS OBTAINED TO THE EFFECT
THAT SUCH REGISTRATION IS NOT REQUIRED.
4.5 ACCREDITED INVESTOR. Purchaser is an "accredited investor"
within the meaning of Regulation D promulgated under the Securities Act.
5. COVENANTS OF QPS. QPS hereby covenants and agrees as follows, with the
covenants set forth in 5.1, 5.2, 5.3, 5.5, 5.6, 5.7, 5.8, 5.9, 5.10 and 5.11
terminating upon the effectiveness of an IPO with net proceeds to QPS of not
less than $3,000,000:
5.1 INVESTIGATION BY PURCHASER. QPS shall allow Purchaser during
regular business hours and upon reasonable notice through Purchaser's employees,
agents and representatives to make such investigation of the business,
properties, books and records of QPS, and to conduct such examination of the
condition of QPS, as Purchaser deems reasonably necessary or advisable to
familiarize itself with such business, properties, books, records, condition and
other matters, and to verify the representations and warranties of QPS
hereunder.
5.2 CONSENTS AND BEST EFFORTS. Subject to the terms and conditions
provided herein, QPS covenants and agrees to use its commercially reasonable
best efforts to take, or cause to be taken, all action or do, or cause to be
done, all things necessary, proper or advisable under applicable laws and
regulations to consummate and make effective the transactions contemplated
hereby and to cause the fulfillment of its obligations hereunder.
5.3 NOTIFICATION OF CERTAIN MATTERS. QPS shall give prompt notice to
Purchaser, and Purchaser shall give prompt notice to QPS, of (i) the occurrence,
or failure to occur, of any event which occurrence or failure would be likely to
cause any representation or warranty contained in this Agreement to be untrue or
inaccurate in any material respect as of the Closing Date and (ii) any material
failure of QPS or Purchaser, as the case may be, to comply
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with or satisfy any covenant, condition or agreement to be complied with or
satisfied by it hereunder, and each party shall use all reasonable efforts to
remedy same.
5.4 BASIC FINANCIAL INFORMATION. Following the Closing, QPS will
deliver to Purchaser (or to Daystar as Purchaser's Agent) as soon as practicable
after the end of each fiscal year of QPS, and in any event within 90 days
thereafter, consolidated and consolidating balance sheets of QPS and its
subsidiaries, if any, as at the end of such fiscal year, and consolidated and
consolidating statements of income and surplus and consolidated and
consolidating statements of changes in financial position of QPS and its
subsidiaries, if any, for such year, prepared in accordance with generally
accepted accounting principles consistently applied and setting forth in each
case in comparative form the figures for the previous fiscal year, all in
reasonable detail, and, if QPS's shares are then publically traded, certified by
independent public accountants of recognized national standing selected by or
reasonably acceptable to QPS. Concurrently therewith, QPS shall also deliver
copies of any management letters provided by QPS's auditors in connection with
its annual audit.
5.5 ADDITIONAL FINANCIAL AND OTHER INFORMATION. Until the date on
which QPS is required to file a report with the Securities Exchange Commission
(the "SEC") pursuant to Section 13 of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), QPS will deliver the materials described below in
this Section 5.5 to all holders of the Bridge Loan Notes with principal balances
of $100,000 or more, the Warrant (or similar warrants) with an exercise price of
at least $100,000, or Warrant Shares the exercise price for which was at least
$100,000.
(A) MONTHLY REPORTS. As soon as practicable after the end of
each calendar month and in any event within thirty (30) days thereafter,
unaudited consolidated and consolidating balance sheets of QPS and its
subsidiaries, if any, as at the end of such month, and unaudited consolidated
and consolidating statements of income, of costs and expenses and of
shareholders equity, and cash flow statements for each month and for the current
fiscal year to date, all containing actual financial information prepared in
accordance with generally accepted accounting principles consistently applied,
except that such statements shall have been prepared for the internal use of
management and may not be in accordance with generally accepted accounting
principles because of the absence of footnotes normally contained therein and
are subject to normal year-end audit adjustments which in the aggregate will not
be material. Such monthly financial statements shall include comparisons to the
projected results previously given to Purchaser for the relevant fiscal period,
in reasonable detail, and shall be signed by the principal financial officer of
QPS.
(B) BUDGETS. Not later than one month prior to the beginning
of each fiscal year, the budget approved by QPS's Board of Directors, including
projected financial statements of QPS and each material subsidiary. Within ten
days after a material change is made in the projected financial results, as
compared to the projection previously delivered, such change shall be disclosed
to each Purchaser.
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(C) VISITATION. Any such holder who has signed an appropriate
confidentiality agreement may from time to time request the right to visit and
inspect any of the properties of QPS or any of its subsidiaries (including their
books and records), and to discuss it and their affairs, finances and accounts
with its and their officers, all at such reasonable times and as often as may be
reasonably requested.
(D) MINUTES. Copies of the minutes of proceedings of QPS's
Board of Directors and Shareholders to any holder who has signed an appropriate
confidentiality agreement.
(E) BOARD PACKAGES; SEC FILINGS. QPS will, promptly after such
material becomes available, furnish to Purchaser (or to DayStar as Purchaser's
Agent) a copy of any other documents provided to QPS's directors and of all of
QPS's filings with the SEC, provided that Purchaser shall have signed an
appropriate confidentiality agreement.
(F) COMPLIANCE CERTIFICATE. QPS will promptly furnish to
Purchaser (or to DayStar as Purchaser's Agent) copies of any compliance
certificates furnished to lenders in respect of indebtedness of QPS and such
other financial and other data of QPS as Purchaser may reasonably request.
5.6 BOARD VISITATION RIGHTS. QPS shall allow the Purchasers to have
one observer present at all meetings of the Board of Directors and committees of
the Board of Directors and such observer shall be entitled to participate in
discussions and consult with the Board of Directors and committees of the Board
of Directors, without voting, provided that any such observer shall have signed
an appropriate confidentiality agreement.
5.7 NONDISCLOSURE AGREEMENTS. QPS shall require all key management
persons now or hereafter employed by QPS who have access to confidential and
proprietary information of QPS to enter into nondisclosure agreements in a form
that is commercially reasonable.
5.8 PREEMPTIVE RIGHTS. In the event of a financing of QPS effected
by the sale by QPS of its Common Shares (or any other voting or other security
of QPS or security convertible into or exercisable for such Common Shares) in a
private offering prior to an IPO, the Purchasers shall be entitled to purchase
shares in such sale on a pro rata basis in respect of the Common Shares then
beneficially owned by them, on a fully diluted basis (assuming exercise of the
Warrant and all other outstanding warrants and options), so that following such
sale, each Purchaser will, if it has elected to purchase the securities to be
sold, beneficially own the same percentage of the equity ownership of QPS on a
fully diluted basis as it had before such sale (assuming in each case exercise
of the Warrant and all other outstanding warrants). QPS shall provide Purchaser
with a minimum of ten (10) business days notice of the anticipated pricing of
such offering, which notice shall indicate the anticipated size and range of
pricing of the offering, and based on such notice, Purchaser shall advise QPS
within five (5) business days as to whether it elects to exercise its rights
under this Section 5.8, and if it so elects, Purchaser shall tender
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payment for the same securities, at the same time, and in the same manner as the
other purchaser(s) in such offering.
5.9 COMPLIANCE. QPS shall maintain all licenses, permits,
governmental approvals, rights, privileges and franchises necessary for the
conduct of its business; conduct its business in an orderly and regular manner;
and comply with the provisions of all documents pursuant to which QPS is
organized and/or which govern QPS's continued existence and with the
requirements of all laws, rules, regulations and orders of a governmental agency
applicable to QPS or its business, to the extent that the failure to maintain or
comply with any of the above would have a material adverse effect on the
business and properties of QPS taken as a whole.
5.10 TAXES AND OTHER LIABILITIES. QPS shall (i) pay and discharge
when due any and all material indebtedness, obligations, assessments and taxes,
both real or personal and including federal and state income taxes, except such
as QPS may in good faith contest or as to which a bona fide dispute may arise,
provided provision is made to the reasonable satisfaction of QPS for eventual
payment thereof in the event that it is found that the same is an obligation of
QPS, and (ii) promptly give notice in writing to Purchaser of any pending
assessment or adjustment by any taxing authority against QPS.
5.11 NEGATIVE COVENANTS. Without the consent of a two-thirds
majority in interest of the Purchasers, QPS shall not:
(A) NO MERGER. Unless the Note is prepaid concurrently
therewith, permit QPS to merge into or with or consolidate with any corporation
or other entity (unless the stockholders of QPS immediately prior thereto hold
more than 50% of the voting securities of the surviving entity), nor make any
substantial change in the nature of its business, nor sell, lease, transfer or
otherwise dispose of all or any substantial or material part of its assets other
than in the ordinary course of business.
(B) NO GUARANTEES. Guarantee or become liable in any way as
surety, endorser (other than as endorser of negotiable instruments for deposit
or collection in the ordinary course of business), accommodation endorser or
otherwise for, nor pledge or hypothecate any assets of QPS as security for, any
liabilities or obligations of any other person or entity (other than a
wholly-owned subsidiary of QPS).
(C) NO INDEBTEDNESS. Unless unsecured or, if secured,
satisfactorily subordinated to the Note, create, incur, assume or suffer to
exist, any indebtedness.
(D) NO DIVIDENDS. Declare or make, or agree to declare or
make, any payment of dividends (except stock splits effected in the form of a
stock dividend) or distributions of any assets of any kind whatsoever in respect
of its capital stock, or purchase, redeem or otherwise acquire, or agree to
purchase, redeem or otherwise acquire, any ownership interest, outstanding
capital stock or other securities of QPS.
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(E) REPAYMENT OF CERTAIN DEBT. Repay any indebtedness owed to
any officers or directors of QPS (including former officers and directors) or
debt guaranteed by QPS (other than in accordance with the terms of guaranty)
until the Note has been paid in full.
5.12 NONAVOIDANCE COVENANT. QPS will not, by amendment of its
Certificate of Incorporation or through reorganization, consolidation, merger,
dissolution or sale of assets, or by any other voluntary act, deed or omission,
avoid or seek to avoid the performance or observance of any of the covenants,
stipulations or conditions to be performed or observed by QPS as set forth
herein, or in the Note, the Warrant, or the Collateral Documents, but will at
all times in good faith assist, insofar as it is able, in the carrying out of
all provisions of this Agreement, the Note, the Warrant, and the Collateral
Documents and in the taking of all other action which may be reasonably
necessary in order to protect the rights of Purchaser.
All of the covenants in this Article 5 shall terminate upon the
indefeasible payment of all of the Bridge Loan Notes.
6. CLOSING CONDITIONS. The obligations of Purchaser hereunder are subject
to Purchaser's satisfaction in its sole discretion with the results of its due
diligence investigation and to the fulfillment or waiver on or before the
Closing of the following conditions:
6.1 REPRESENTATIONS AND WARRANTIES TRUE. All representations and
warranties of QPS made in Section 3 or otherwise under or pursuant to this
Agreement shall be true on the Closing Date and, if requested by Purchaser, QPS
shall have delivered to Purchaser a certificate of an authorized officer of QPS
dated the Closing Date, certifying to such effect.
6.2 INSTRUMENTS AND PROCEEDINGS TO BE SATISFACTORY. All instruments
and corporate proceedings relating to the sale of the Note and the Warrant
hereunder by QPS or otherwise relating to the transactions contemplated hereby
shall be satisfactory to Purchaser.
6.3 OTHER AGREEMENTS. All documents and instruments specified for
delivery at the Closing shall have been executed and delivered by QPS and
Purchaser, as appropriate.
6.4 CERTIFICATES AND DOCUMENTS. QPS shall have delivered to
Purchaser or counsel to Purchaser:
(a) The Certificate of Incorporation of QPS, as amended and in
effect as of the Closing Date, certified by the Secretary of State of the State
of Delaware;
(b) Certificates or the appropriate state officials, as of the
most recent practicable dates, as to the corporate good standing of QPS in
Delaware, Maryland, and New York;
(c) By-laws of QPS, certified by its Secretary or Assistant
Secretary as of the Closing Date;
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(d) Resolutions of the Board of Directors of QPS, authorizing
and approving all matters in connection with this Agreement and the transactions
contemplated hereby, certified by the Secretary or Assistant Secretary of QPS as
of the Closing Date; and
(e) All consents, approvals and waivers, in form and substance
reasonably satisfactory to Purchaser, from any person necessary to permit QPS to
consummate the transactions contemplated by this Agreement and each of the
collateral agreements hereto shall have been obtained.
6.5 LEGAL FEES. QPS shall pay at the Closing or promptly upon demand
all of the fees and expenses of counsel to the Purchasers incurred by them in
connection with the preparation and negotiation of this Agreement and the Note,
the Warrant and the Collateral Documents, and the Closing of the transactions
contemplated hereby and thereby. In addition, QPS shall pay all fees and
expenses of counsel for the Purchasers in connection with any amendment of any
document contemplated hereby, any waiver under such document and any
consultation or action related to enforcement thereof.
6.6 LEGAL OPINION. Breslow & Walker as counsel to QPS, shall have
executed and delivered to Purchaser a legal opinion substantially in the form
attached hereto as Exhibit E satisfactory in form and substance to counsel for
Purchaser.
6.7 NO SUIT. No suit, action, investigation, inquiry or other
proceeding by any person shall have been instituted or threatened which
questions the validity or legality of, or seeks to enjoin or invalidate, the
transactions contemplated hereby and which is reasonably likely to succeed and
which, if successful, is reasonably likely to materially and adversely affect
the value of the Note, the Warrant or the Warrant Shares, Purchaser's
registration rights, or QPS.
6.8 OTHER MATTERS. All corporate and other proceedings in connection
with the transactions contemplated by this Agreement and all documents and
instruments incident to such transactions (including the materials provided to
Purchaser and its special counsel) shall be reasonably satisfactory in substance
and form to Purchaser and its special counsel, and Purchaser and their special
counsel shall have received all such counterpart originals or certified or other
copies of such documents as they may reasonably request.
6.9 COMMITMENT FROM CERTAIN SHAREHOLDERS. Jonathan Charry,
Environmental Research, Eric Jacobson, Richard Zall, George Kalkines, and
William Bernstein shall have signed and delivered to Purchaser a Commitment
Letter substantially in the form of Exhibit G hereto.
7. CONDITION TO THE OBLIGATIONS OF QPS. The obligations of QPS hereunder
are subject to the fulfillment or waiver of the following conditions on or
before the Closing:
7.1 ACCURACY OF REPRESENTATIONS AND WARRANTIES. The representations
and warranties of Purchaser contained in Section 4 shall be true on the Closing
Date.
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7.2 PURCHASE PRICE. Payment of the applicable purchase price to QPS
as set forth in Section 2 hereof.
7.3 NO SUIT. No suit, action, investigation, inquiry or other
proceeding by any person shall have been instituted or threatened which
questions the validity or legality of, or seeks to enjoin or invalidate, the
transactions contemplated hereby and which is reasonably likely to succeed and
which, if successful, is reasonably likely to materially and adversely effect
QPS.
8. GENERAL.
8.1 INDEMNITY.
(a) Each party agrees to indemnify and save harmless the other
party hereto and such other party's officers, directors, employees and agents,
and each person who controls such other party within the meaning of the
Securities Act or the Exchange Act, from and against any and all costs,
expenses, damages, claims, actions, diminution in value or other liabilities,
including costs of investigation and defense (collectively, "Damages") suffered
or incurred by the indemnified party as a result of any breach by the
indemnifying party of any of its agreements, representations, warranties or
covenants contained in this Agreement or the Note, the Warrant or the Collateral
Documents, other than Damages resulting, directly or indirectly from the breach
by the indemnified party of any of its agreements, representations, warranties
or covenants contained herein; provided, however, that if and to the extent that
such indemnification is unenforceable for any reason, the indemnifying party
shall make the maximum contribution to the payment and satisfaction of such
indemnified liability which shall be permissible under applicable law.
(b) The indemnified party under this Section 8.1 will,
promptly after the receipt of notice of the commencement of any action against
such indemnified party in respect of which indemnity may be sought from the
indemnifying party on account of an indemnity agreement contained in this
Section 8.1, notify the indemnifying party in writing of the commencement
thereof. The omission of any indemnified party to so notify the indemnifying
party of any such action shall not relieve the indemnifying party from any
liability which it may have to such indemnified party except to the extent the
indemnifying party shall have been materially prejudiced by the omission of such
indemnified party to so notify the indemnifying party, pursuant to this Section
8.1. In case any such action shall be brought against any indemnified party and
it shall notify the indemnifying party of the commencement thereof, the
indemnifying party shall be entitled to participate therein and, to the extent
that it may wish, to assume the defense thereof, with counsel reasonably
satisfactory to such indemnified party, and after notice from the indemnifying
party to such indemnified party of its election so to assume the defense
thereof, the indemnifying party will not be liable to such indemnified party
under this Section 8.1 for any legal or other expense subsequently incurred by
such indemnified party in connection with the defense thereof nor for any
settlement thereof entered into without the consent of the indemnifying party;
provided, however, that (i) if the indemnifying party shall elect not to assume
the defense of such claim or action or (ii) if the indemnified party reasonably
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determines (x) that there may be a conflict between the positions of the
indemnifying party and of the indemnified party in defending such claim or
action or (y) that there may be legal defenses available to such indemnified
party different from or in addition to those available to the indemnifying
party, then separate counsel for the indemnified party shall be entitled to
participate in and conduct the defense, in the case of (i) and (ii)(x), or such
different defenses, in the case of (ii)(y), and the indemnifying party shall be
liable for any reasonable legal or other expenses incurred by the indemnified
party in connection with such defense(s);
(c) All representations and warranties made by the parties
herein or in any instrument or document furnished in connection herewith shall
survive the Closing and any investigation at any time made by or on behalf of
the parties hereto. All such representations and warranties shall expire on the
second anniversary of the respective Closing Dates, except for claims, if any,
asserted in writing prior to such second anniversary, which shall survive until
finally resolved and satisfied in full. All claims and actions for indemnity
pursuant to this Section 8 for breach of any representation or warranty shall be
asserted or maintained in writing by a party hereto on or prior to the
expiration of such two-year period.
8.2 NOTICES. All notices, requests, consents, and other communications
under this Agreement shall be in writing and shall be delivered by hand, by
reputable overnight courier or mailed by first class certified or registered
mail, return receipt requested, postage prepaid:
If to QPS: QuietPower Systems, Inc.
1675 Broadway, Suite 2600
New York, NY 10019
Attention: President
With copy to: Breslow & Walker
875 Third Avenue
New York, NY 10022
Attention: Gary Moomjian, Esq.
If to Purchaser: _______________________________
_______________________________
_______________________________
_______________________________
_______________________________
With copy to: Coblentz, Cahen, McCabe & Breyer, LLP
222 Kearny Street, 7th Floor
San Francisco, CA 94108
Attention: Barry Reder, Esq.
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Notices provided in accordance with this Section 8.2 shall be deemed
delivered upon personal delivery, one business day after deposit with a
reputable overnight delivery service, or two business days after deposit in the
mail. Any party may change its address for notice by notice similarly given.
8.3 FURTHER ASSURANCES. Upon the terms and subject to the conditions
contained herein, each of the parties hereto agrees, both before and after the
Closing, (i) to use all reasonable efforts to take, or cause to be taken, all
actions and to do, or cause to be done, all things necessary, proper or
advisable to consummate and make effective the transactions contemplated by this
Agreement and the Note, the Warrant and the Collateral Documents, (ii) to
execute any documents, instruments or conveyances of any kind which may be
reasonably necessary or advisable to carry out any of the transactions
contemplated hereunder or thereunder, and (iii) to cooperate with each other in
connection with the foregoing, including, without limitation, using their
respective best efforts (A) to obtain all consents, approvals and waivers from
any person necessary to permit the consummation of the transactions contemplated
by this Agreement and the Note, the Warrant and the Collateral Documents, and
(B) to fulfill all conditions to this Agreement.
8.4 SPECIFIC ENFORCEMENT. Purchaser, on the one hand, and QPS, on
the other, acknowledge and agree that irreparable damage would occur in the
event that any of the provisions of this Agreement were not performed in
accordance with their specific terms or were otherwise breached. It is
accordingly agreed that the parties shall be entitled to an injunction to
prevent breaches of the provisions of this Agreement and to enforce specifically
the terms and provisions hereof in any court of competent jurisdiction, this
being in addition to any other remedy to which they may be entitled at law or
equity.
8.5 ENTIRE AGREEMENT. This Agreement embodies the entire agreement
and understanding between the parties hereto with respect to the subject matter
hereof and supersedes all prior agreements and understandings relating to such
subject matter.
8.6 AMENDMENTS AND WAIVERS. Any term of this Agreement may be
amended and the observance of any term of this Agreement may be waived (either
generally or in a particular instance and either retroactively or
prospectively), with the written consent of QPS and Purchaser. No waivers of or
exceptions to any term, condition or provision of this Agreement, in any one or
more instances, shall be deemed to be, or construed as, a further or continuing
waiver of any such term, condition or provision.
8.7 SURVIVAL. The representations, warranties, covenants, and
agreements made herein shall survive the Closing of the transactions
contemplated hereby, notwithstanding any investigation made by Purchaser.
8.8 SUCCESSORS AND ASSIGNS. All covenants and agreements contained
herein shall bind and inure to the benefit of the parties hereto and their
respective successors and
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assigns, provided, however, that QPS may not assign any of its rights or
delegate its duties without the prior written consent of Purchaser.
8.9 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original, but all of which
shall be one and the same document.
8.10 SEVERABILITY. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement.
8.11 GOVERNING LAW; JURISDICTION; VENUE. Because QPS is a Delaware
corporation, this Agreement shall be governed by and construed in accordance
with the laws of the State of Delaware as applied to contracts executed and
entirely performed within Delaware. Any litigation or arbitration between the
parties which arises out of this Agreement shall be instituted and prosecuted
only in the appropriate California or Federal court or other tribunal, situated
in San Francisco, California. QPS specifically submits itself and its properties
to the exclusive jurisdiction of such courts for purposes of any such action and
the enforcement of any judgment or order arising therefrom. QPS waives any right
to a change of venue and any and all objections to the jurisdiction of the
California courts. Notwithstanding the foregoing, Purchaser may take such
actions in a foreign jurisdiction which Purchaser deems necessary and
appropriate to enforce or collect any court judgment in any dispute arising out
of this Agreement or to seek and obtain other relief as is necessary to enforce
the terms of this Agreement. Each party agrees that service upon such party in
any such action or proceeding may be made by first class mail, certified or
registered, return receipt requested as provided for the giving of notices in
Section 8.2.
Executed as of the date first written above.
QPS:
QUIETPOWER SYSTEMS, INC., a
Delaware corporation
By:
--------------------------------------
Title:
-----------------------------------
PURCHASER:
By:
--------------------------------------
Title:
-----------------------------------
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LIST OF EXHIBITS AND SCHEDULES
EXHIBITS
Exhibit A - Note
Exhibit B - Warrant
Exhibit C - Security Agreement
Exhibit D - Registration Rights Agreement
Exhibit E - Opinion of Counsel to QPS
SCHEDULES
Schedule 1 - List of Purchasers of Bridge Loan Notes
Schedule 3.3 - Outstanding Convertible or Exchangeable Securities
Schedule 3.6 - Material Contracts
Schedule 3.11 - Registration Rights
Schedule 3.13 - Employee Matters
Schedule 3.18 - Patent & Technology Agreements
Schedule 3.23 - Investment Banking Firm's Letter of Intent
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SCHEDULE 1
PURCHASERS OF QPS BRIDGE LOAN NOTES
Amount
$250,000 DayStar Partners, L.P.
10600 N. DeAnza Blvd., Suite 215
Cupertino, CA 95014
$35,000 Douglas Lee
2100 Garden Road, #306
Monterey, CA 93940
$25,000 The Smith 1987 Family Trust
Richard Dunham Smith and Patricia Ann Smith,
Trustees
2415 South Court
Palo Alto, CA 94301
$ ----------- -----------------------------------
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$ ----------- -----------------------------------
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Updated through _________, 1996
Note Purchase Agreement - Generic
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EXHIBIT 10.7
SECURED PROMISSORY NOTE
(Bridge Loan)
$_____________ New York, New York
12% p.a. ____________, 1996
For value received, QUIETPOWER SYSTEMS, INC., a Delaware corporation whose
principal place of business is 1675 Broadway, Suite 2600, New York, New York
10019 ("Maker"), hereby promises to pay to the order of _____________________,
("Payee"), at its principal place of business, _______________________________
______________________________, or at such other place as Payee may from time
specify, the principal sum of _________________ Thousand Dollars ($__________)
plus interest thereon from the date hereof, in legal and lawful money of the
United States of America. This Note is one of several Bridge Loan Notes being
sold by Maker in a series of related transactions. Payee and the other
purchasers of such Bridge Loan Notes are collectively referred to as
"Purchasers".
1. Rate of Interest. Interest (calculated on the basis of a year of 360
days and the actual number of days elapsed) shall accrue on the principal
outstanding hereunder at the rate of twelve percent (12%) per annum, provided,
however, that if this Note has not been paid in full by the Initial Maturity
Date (as defined below), interest shall thereafter accrue on any unpaid amounts
at the rate of fifteen percent (15%) per annum.
2. Terms of Payment.
(a) Interest. Maker shall pay interest monthly, in arrears, on the
first day of each month beginning July 1, 1996.
(b) Principal. As used herein, the Initial Maturity Date means the
earliest of (i) six (6) months after the date of the $250,000.00 Bridge Loan
Note sold to DayStar Partners, L.P., (ii) five (5) business days after the
closing of any offering of Maker's securities registered under the Securities
Act of 1933, as amended, in which Maker receives gross proceeds of not less than
$3,000,000 (an "IPO"), or (iii) the closing of any acquisition of Maker, the
sale by Maker of substantially all of its assets, or any dissolution or
winding-up or total or partial liquidation or reorganization of Maker. This
Note, including accrued and unpaid interest, shall be due and payable on the
Initial Maturity Date, provided, however, that if an IPO has not occurred by the
Initial Maturity Date, the maturity of this Note shall be extended as follows:
(x) interest shall thereafter accrue at the rate of fifteen
percent (15%) per annum from the Initial Maturity Date;
(y) interest shall continue to be paid monthly, in arrears, on
the first day of each month;
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(z) principal shall be due in four equal quarterly
installments beginning nine (9) months from the date of this Note.
(c) Application. Payments hereunder shall be applied first to late
charges, legal expenses, and other costs of Payee payable hereunder, then to
interest accrued through the payment date, and then to principal. Payments shall
be deemed made upon receipt by Payee.
(d) Prepayment. This Note may be prepaid in whole or in part at any
time or times at the option of Maker without penalty, but only if the other
Bridge Loan Notes are prepaid proportionately at the same time.
(e) Business Days. If any payment shall become due on a Saturday,
Sunday, or a public holiday under the laws of Delaware, such payment shall be
due and made on the next succeeding business day and such extension of time
shall be included in computing interest in connection with such payment.
(f) Default. If any payment due hereunder is not made when due, and
within three (3) days thereafter, then during the period of such delinquency (i)
the interest rate otherwise payable hereunder shall be increased by three
percentage points (3%) per year and (ii) the Payee shall have the option to
accelerate Maker's obligations hereunder and declare all amounts owed hereunder
to be immediately due and payable.
3. Terms of Other Loans of Maker. If Maker, within six months after the
date of this Note, enters into any loan arrangement with any lender besides the
Purchasers, Maker shall notify Payee in writing of the terms of such loan within
five (5) days after the date such other loan is funded. If Payee determines, in
its sole discretion, that such terms are as a whole more favorable to the lender
than the terms contained herein, Maker agrees upon written request of Payee to
amend this Note to incorporate all of such other terms into this Note and any
related documents, in replacement of all original terms.
4. Warrant. As additional consideration to Payee, Maker is concurrently
issuing to Payee a Common Stock Purchase Warrant.
5. Security. Payment of the Bridge Loan Notes is secured by a security
interest in all assets of Maker pursuant to a Security Agreement dated as of May
24, 1996 (the "Security Agreement").
6. Waivers and Consents. Maker hereby waives diligence, demand,
presentment for payment, notice of non-payment, protest and notice of protest,
and specifically consents to and waives notice of any renewals or extensions of
this Note, whether made to or in favor of Maker or any other person or persons.
The pleading of any statute of limitations as a defense to any demand against
Maker is expressly waived by each and all of said parties to the fullest extent
permitted by law. The waiver by Payee of any breach or violation of, or default
under, any
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provision of this Note shall not be a waiver by such party of any other
provision or of any subsequent breach or violation of this Note or default
hereunder.
7. Governing Law and Venue. Because Maker is a Delaware corporation, this
Note is governed by and is to be construed and enforced in accordance with the
laws of the State of Delaware. Any litigation or arbitration between the parties
which arises out of this Note shall be instituted and prosecuted only in the
appropriate California or Federal court or other tribunal, situated in San
Francisco, California. The parties hereto each specifically submits to the
exclusive jurisdiction of such courts for purposes of any such action and the
enforcement of any judgment or order arising therefrom. The parties hereto each
waive any right to a change of venue and any and all objections to the
jurisdiction of the California courts. Notwithstanding the foregoing, the Payee
may take such actions in a foreign jurisdiction which the Payee deems necessary
and appropriate to enforce or collect any court judgment in any dispute arising
out of this Note or to seek and obtain other relief as is necessary to enforce
the terms of this Note. Each party agrees that service upon such party in any
such action or proceeding may be made as provided for the giving of notices in
the Security Agreement.
8. Payee's Rights and Remedies. The rights, powers and remedies of Payee
under this Note shall be in addition to all rights, powers and remedies given to
Payee by virtue of any statute or rule of law, including but not limited to the
Delaware Commercial Code. All such rights, powers and remedies shall be
cumulative and may be exercised successively or concurrently in Payee's sole
discretion. Any forbearance, failure or delay by Payee in exercising any right,
power or remedy shall not preclude further exercise thereof, and every right,
power or remedy of Payee shall continue in full force and effect until such
right, power or remedy is specifically waived in a writing executed by Payee.
9. Limitation on Interest. Notwithstanding any provision herein, Payee and
Maker intend that the total liability for payments in the nature of interest
shall not exceed the applicable limits imposed by any applicable state or
federal interest rate laws. If any payments in the nature of interest,
additional interest, and other charges made hereunder are held to be in excess
of the applicable limits imposed by any applicable state or federal laws, it is
agreed that any such amount held to be in excess shall be considered payment of
principal and the indebtedness evidenced thereby shall be reduced by such amount
in the inverse order of maturity so that the total liability for payments in the
nature of interest, additional interest and other charges shall not exceed the
applicable limits imposed by any applicable state or federal interest rate laws.
10. Costs; Attorneys' Fees. Maker agrees to pay the following costs,
expenses, and attorneys' fees paid or incurred by any holder of this Note, or
adjudged by a Court: (a) all reasonable legal costs incurred by Payee in
negotiating and documenting this loan; (b) all costs of collection, costs,
expenses, and attorneys' fees paid or incurred in connection with the
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collection or enforcement of this Note, whether or not suit is filed; and (c)
costs of suit and such other sum as the Court may adjudge as attorneys' fees in
an action to enforce payment of this Note or any part of it.
IN WITNESS WHEREOF, this Note has been executed and delivered as of the
date first above written by the duly authorized representative of Maker.
QUIETPOWER SYSTEMS, INC., a Delaware
corporation 1675 Broadway, Suite 2600 New
York, New York 10019
By:
--------------------------------------
Title:
-----------------------------------
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EXHIBIT 10.8
NEITHER THIS WARRANT NOR THE COMMON STOCK ISSUABLE HEREUNDER HAS BEEN
REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR WITH ANY STATE
SECURITIES COMMISSIONER. NEITHER THIS WARRANT NOR THE COMMON STOCK MAY BE SOLD
OR TRANSFERRED UNLESS REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
AND QUALIFIED UNDER ALL APPLICABLE STATE SECURITIES LAWS, OR UNLESS EXEMPTIONS
FROM SUCH REGISTRATION AND QUALIFICATION ARE AVAILABLE.
QUIETPOWER SYSTEMS, INC.
COMMON STOCK PURCHASE WARRANT
No. W-___ __________, 1996
Reference is hereby made to that certain $__________ Secured Promissory
Note (the "Bridge Loan Note") dated as of the date hereof of QuietPower Systems,
Inc., a Delaware corporation (the "Company"), in favor of __________________
("Purchaser"), the terms of which are incorporated by this reference. The Bridge
Loan Note is one of a series of substantially identical Notes being sold to
DayStar Partners, L.P. ("DayStar") and others. Purchaser, DayStar and the other
purchasers of the Bridge Loan Notes are collectively referred to as the
"Purchasers." As used herein, an "IPO" means an offering of the Company's
securities registered under the Securities Act of 1933, as amended, from which
the Company receives gross proceeds of at least $3,000,000.
The Company hereby certifies that, for value received, Purchaser or any
transferee who has received this Warrant (the "Holder"), is entitled on the
terms set forth below to purchase from the Company, on or before the Expiration
Date (as defined below), for $0.01 per share (the "Exercise Price"), the number
of shares of common stock of the Company (the "Common Stock") determined by
dividing $__________ by the following per share price:
(1) if an IPO occurs on or before November 24, 1996, the offering
price of such shares;
(2) if an IPO does not occur by such date, Five Dollars ($5.00) per
share.
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If the IPO is of units rather than common shares, this Warrant shall be
for such units rather than common shares and the number of units shall be
calculated based on the offering price of the units in the IPO.
1. Expiration Date. This Warrant shall be exercisable in whole or in part
until 5:00 p.m. (San Francisco time) on May 31, 2001, provided, however, that
notwithstanding such expiration date, this Warrant shall not expire unless and
until not less than 30 nor more than 90 days shall have passed since the Company
gave the Holder notice of the anticipated expiration hereof, and further
provided, that absent such notice to Holder, this Warrant shall expire on
November 30, 2002.
2. Exercise of Warrant. This Warrant shall be exercisable in whole or in
part immediately following such time (and from time to time thereafter) as the
number of shares for which it is exercisable as set forth above may be
determined with certainty. This Warrant shall be exercised by surrendering it to
the Company at its principal office, with a duly executed Subscription Form (in
substantially the form appearing at the end of this document), together with
payment of the Exercise Price. Promptly after exercise, the Company shall issue
and deliver to or upon the order of the Holder a certificate or certificates for
the number of shares of Common Stock issuable upon such exercise, and the
Company will pay all issue taxes in connection therewith. All shares of Common
Stock which may be issued upon exercise of this Warrant will, upon issuance by
the Company in accordance with the terms of this Warrant, be validly issued,
fully paid and non-assessable, and free from all taxes and liens with respect to
the issuance thereof. To the extent permitted by law, this Warrant shall be
deemed to have been exercised immediately prior to the close of business on the
date of its surrender for exercise as provided herein, even if the Company's
stock transfer books are at that time closed, and the Holder shall be treated
for all purposes as the holder of record of the Common Stock to be issued upon
such exercise as of the close of business on such date. Upon any partial
exercise, the Company will issue to or upon the order of the Holder a new
Warrant for the number of shares of Common Stock as to which this Warrant has
not been exercised.
3. Adjustment of Exercise Price. The Exercise Price and the number of
shares subject to this Warrant shall be subject to adjustment from time to time
as described below.
3.1 Adjustment for Stock Splits, Stock Combinations and Common Stock
Dividends. If at any time or from time to time after the date of this Warrant
(the "Issue Date") the number of shares of Common Stock outstanding is increased
by a stock dividend payable in shares of Common Stock (or in options to purchase
or rights to subscribe for Common Stock, or securities by their terms
convertible into or exchangeable for Common Stock, or options to purchase or
rights to subscribe for such convertible or exchangeable securities
(collectively, "Common Stock Rights")) or by a subdivision or split-up of shares
of Common Stock, then, on the date such payment is made or such change is
effective, the Exercise Price shall be decreased, and the number of shares of
Common Stock which the Holder shall be entitled to purchase hereunder shall be
increased, in direct proportion to such increase in outstanding shares; and if
the number of shares of Common Stock outstanding at any time after the date
hereof is decreased by a combination of the outstanding shares of Common Stock,
then, on the effective date of such combination, the Exercise Price shall be
increased, and the number of shares of
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Common Stock which the Holder shall be entitled to purchase hereunder shall be
decreased, in direct proportion to such decrease in outstanding shares (it being
assumed, in each case, for purposes of calculating such proportional
adjustments, that all Common Stock Rights outstanding on the date the
adjustments are to be made are exercised into the maximum number of shares of
Common Stock into which they may be converted).
3.2 Adjustment for Dividends in Other Stock or Property;
Reclassifications. In case at any time or from time to time after the holders of
the Common Stock receive or, on or after the record date fixed for the
determination of eligible stockholders, become entitled to receive, without
payment therefor, (i) other or additional stock or other securities or cash or
other property by way of dividend, or (ii) other or additional stock or other
securities or cash or other property by way of stock split, spin-off, split-up,
reclassification, combination of shares or similar corporate rearrangement (in
each case other than additional shares of Common Stock of the Company, or any
other stock or securities into which such Common Stock had been changed, or any
Common Stock Rights, issued as a stock dividend or stock-split), then, and in
each such case, the Holder, upon the exercise of this Warrant, will be entitled
to receive the amount of stock, securities and/or property (including cash)
which the Holder would have received on or before the date of such exercise if
on the Issue Date he had been the holder of record of the number of shares of
Common Stock of the Company which he would have been able to acquire upon
exercise in full of this Warrant and had thereafter, during the period from the
Issue Date to and including the date of such exercise, retained such shares
and/or all other or additional stock and other securities and cash or other
property receivable by him as aforesaid during such period.
3.3 Adjustment for Reorganization, Consolidation, Merger. In case of
any reorganization of the Company (or any other corporation, the stock or other
securities of which are at the time receivable on the exercise of this Warrant),
or in case the Company (or such other corporation) consolidates with, merges
into or conveys all or substantially all its assets to another corporation after
the Issue Date, then the Holder, upon the exercise of this Warrant at any time
after the consummation of such reorganization, consolidation, merger or
conveyance, will be entitled to receive, in lieu of the stock or other
securities and property receivable upon the exercise of this Warrant prior to
such consummation, the stock, securities or property to which the Holder would
have been entitled upon such consummation if the Holder had converted this
Warrant immediately prior thereto. The provisions of this Paragraph 3.3 shall
similarly apply to successive reorganizations, consolidations, mergers or
conveyances.
3.4 Other Restrictions Relating to Acquisitions. The Company shall
not permit a third party to acquire substantially all of its stock or assets, or
to merge with it, prior to the Company's IPO without the written consent of the
Holder of this Warrant, which consent may be refused unless in connection
therewith the Company pays all amounts then owing under the Bridge Loan Notes
plus a premium equal to 12 1/2% of such amount. If the acquisition price for
QPS's shares is at least 250% of the exercise price of this Warrant, then the
Company may terminate this Warrant if it has not been exercised by the Holder
within 30 days following the Closing of such acquisition.
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3.5 Minimal Adjustments. No adjustment in the Exercise Price need be
made if such adjustment would result in a change in the Exercise Price of less
than one percent (1%); no adjustment in the number of shares of Common Stock
subject to this Warrant need be made if such adjustment would result in a change
of less than one percent (1%) in the number of shares subject hereto. Any
adjustment less than these amounts which is not made shall be carried forward
and shall be made at the time of and together with any subsequent adjustment
which, on a cumulative basis, amounts to an adjustment of at least this amount.
3.6 Reorganization of Company. If the Company consolidates or merges
with or into, or transfers or leases all or substantially all its assets to, any
person, upon consummation of such transaction this Warrant shall automatically
become exercisable for the kind and amount of securities, cash or other assets
which the Holder of a Warrant would have owned immediately after the
consolidation, merger, transfer or lease if the Holder had exercised the Warrant
immediately before the effective date of the transaction. Concurrently with the
consummation of such transaction, the corporation formed by or surviving any
such consolidation or merger if other than the Company, or the person to which
such sale or conveyance shall have been made, shall enter into a supplemental
Warrant Agreement so providing and further providing for adjustments which shall
be as nearly equivalent as may be practical to the adjustments provided for in
this Section. The successor Company shall mail to Warrant Holders a notice
describing the supplemental Warrant Agreement. If the issuer of securities
deliverable upon exercise of Warrants under the supplemental Warrant Agreement
is an affiliate of the formed, surviving, transferee or lessee corporation, that
issuer shall join in the supplemental Warrant Agreement. If this subsection
applies, other subsections of this Section 3 shall not apply.
3.7 Certificate as to Adjustments. Upon the occurrence of each
adjustment pursuant to this Paragraph 3 or pursuant to the initial paragraph of
this Warrant, the Company, at its expense, shall promptly compute such
adjustment or readjustment in accordance with the terms hereof and prepare and
furnish to the Holder a certificate setting forth such adjustment or
readjustment and showing in detail the facts upon which such adjustment or
readjustment is based. The Company shall, upon written request at any time of
the Holder, furnish or cause to be furnished to the Holder a like certificate
setting forth (i) such adjustments and readjustments, (ii) the then effective
number of shares of Common Stock subject to the Warrant, and (iii) the then
effective amount of securities (other than Common Stock) and other property, if
any, which would be received upon exercise of the Warrant.
4. No Dilution or Impairment. The Company will not, by amendment of its
Certificate of Incorporation or through reorganization, consolidation, merger,
dissolution, issue or sale of securities, sale of assets or any other voluntary
action, avoid or seek to avoid the observance or performance of any of the terms
of this Warrant, but will at all times in good faith assist in the carrying out
of all such terms and in the taking of all such action as may be necessary or
appropriate in order to protect the rights of the Holder against dilution or
other impairment. Without limiting the generality of the foregoing, the Company
will take all such action as may be necessary or appropriate in order that the
Company may validly and legally issue fully paid and non-assessable shares of
Common Stock upon the exercise of this Warrant and will take no action to amend
its Certificate of Incorporation which would change to the
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detriment of the holders of Common Stock (whether or not any Common Stock is
outstanding at the time) the dividend or voting rights of the Company's Common
Stock as constituted on the date hereof.
5. Reservation of Stock Issuable on Exercise of Warrant. The Company will
at all times reserve and keep available, solely for issuance and delivery upon
the exercise of this Warrant, all such shares of Common Stock and other stock,
securities and property as from time to time are receivable upon the exercise of
this Warrant. If at any time the number of authorized but unissued shares of
Common Stock (or other stock, securities or property) shall not be sufficient to
effect the exercise of this Warrant, the Company will use its best efforts to
take such corporate action as may be necessary, in the opinion of its counsel,
to increase its authorized but unissued shares of Common Stock (or other stock,
securities or property) to such number of shares as shall be sufficient for such
purpose.
6. Fractional Shares. No fractional shares of the Common Stock will be
issued in connection with any exercise of this Warrant, but in lieu of such
fractional shares the Company shall make a cash payment therefor upon the basis
of the Exercise Price then in effect.
7. Notice of Record Date. In case (i) the Company takes a record of the
holders of its Common Stock (or other stock or securities at the time receivable
upon the exercise of the Warrant) for the purpose of entitling them to receive
any dividend (other than a cash dividend at the same rate as the rate of the
last cash dividend theretofore paid) or other distribution, or any right to
subscribe for or purchase any shares of stock of any class or any other
securities, or to receive any other right, or (ii) of any capital reorganization
of the Company, any reclassification of the capital stock of the Company, any
consolidation or merger of the Company with or into another corporation, or any
conveyance of all or substantially all of the assets of the Company to another
corporation, or (iii) of any voluntary dissolution, liquidation or winding-up of
the Company, then, and in each such case, the Company will mail or cause to be
mailed to the Holder a notice specifying, as the case may be, (a) the date on
which a record is to be taken for the purpose of such dividend, distribution or
right, and stating the amount and character of such dividend, distribution or
right, or (b) the date on which such reorganization, reclassification,
consolidation, merger, conveyance, dissolution, liquidation or winding-up is to
take place, and the time, if any is to be fixed, as of which the holders of
record of Common Stock (or such other stock or securities at the time receivable
upon the exercise of the Warrant) will be entitled to exchange their shares of
Common Stock (or such other stock or securities) for securities or other
property deliverable upon such reorganization, reclassification, consolidation,
merger, conveyance, dissolution, liquidation or winding-up. Such notice shall be
mailed at least fifteen (15) days prior to the date specified therein.
8. Warrant Register. The Company, or its duly appointed agent, shall
maintain a register for this Warrant and other warrants of similar tenor on
which it shall register the issuance and transfer of such warrants. The duly
registered holder ("Registered Owner") of each warrant shall be deemed the
actual owner of the warrant so registered until the Company, or its agent, is
required to record a transfer thereof.
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9. Transfer.
9.1 Transfer. This Warrant may be transferred, in whole or in part,
without the consent of the Company. The Company acknowledges that one or more of
the Purchasers may wish to transfer their Warrants to a stock brokerage firm
which would then exercise the Warrant and sell the underlying stock. If the
Company is notified that one or more of the Purchasers wish to proceed in this
manner, the Company will cooperate with the parties and use reasonable efforts
to assist the brokerage firm in disposing of the underlying securities in
accordance with applicable law.
9.2 Registration or Exemption. This Warrant and the Warrant Shares
shall not be sold or transferred unless either (i) they first shall have been
registered under the Securities Act of 1933, as amended (the "Act"), or (ii) the
Company first shall have been furnished with an opinion of legal counsel,
reasonably satisfactory to the Company, to the effect that such sale or transfer
is exempt from the registration requirements of the Act.
9.3 Legend. Each certificate representing Warrant Shares shall bear
a legend substantially in the following form:
"The securities represented by this certificate have not been-
registered under the Securities Act of 1933, as amended, and may not
be offered, sold or otherwise transferred, pledged or hypothecated
unless and until such securities are registered under such Act or an
opinion of counsel satisfactory to the Company is obtained to the
effect that such registration is not required."
The foregoing legend shall be removed from the certificates representing any
Warrant Shares, at the request of the holder thereof, at such time as they
become eligible for resale pursuant to Rule 144(k) under the Act or otherwise.
10. Payment of Taxes. The Company will pay all documentary stamp taxes
attributable to the initial issuance of Warrant Shares upon the exercise of
Warrants; provided, however, that the Company shall not be required to pay any
tax or taxes which may be payable in respect of any transfer involved in the
issue of any Warrant Certificates or any certificates for Warrant Shares in a
name other than that of the registered holder of a Warrant Certificate
surrendered upon the exercise of a Warrant, and the Company shall not be
required to issue or deliver such Warrant Certificates unless or until the
person or persons requesting the issuance thereof shall have paid to the Company
the amount of such tax or shall have established to the satisfaction of the
Company that such tax has been paid.
11. Replacement of Warrant. Upon receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant, and (in the case of loss, theft or destruction) upon delivery of
an indemnity agreement or bond in such reasonable amount as the Company may
determine or (in the case of mutilations) upon surrender and cancellation
hereof, the Company, at its expense, will issue a replacement.
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12. Notices. All notices, requests, consents and other communications
required or permitted hereunder shall be in writing and shall be deemed to have
been delivered one business day after deposit with a reputable overnight
delivery service, or two business days after deposit in the mail with the United
States Postal Service addressed as follows:
(a) If to any Holder, addressed to such Holder at its address
as shown on the books of the Company, or at such other address as such
Holder may specify from time to time by written notice to the Company,
with a copy to Barry Reder, Coblentz, Cahen, McCabe & Breyer, LLP, 222
Kearny Street, Seventh Floor, San Francisco, CA 94108; or
(b) If to the Company, at the address set forth below, or at
such other address as the Company may specify from time to time by written
notice to the Holder, with a copy to Gary Moomjian, Breslow & Walker, 875
Third Avenue, New York, NY 10022;
and such notices and other communications shall for all purposes of this Warrant
be treated as being effective or having been given upon delivery, if delivered
personally, or, if sent by mail, seventy-two (72) hours after the same has been
deposited in a regularly maintained receptacle for the deposit of United States
mail, addressed and postage prepaid as aforesaid.
13. Survival of Covenants, Representations and Warranties, etc. All
covenants, representations and warranties made in, pursuant to, or in connection
with this Warrant shall survive the execution and delivery hereof.
14. Severability. Should any one or more of the provisions of this Warrant
be determined to be illegal or unenforceable, all other provisions of this
Warrant shall be given effect separately from the provision or provisions
determined to be illegal or unenforceable and shall not be affected thereby.
15. Parties in Interest. All the terms and provisions of this Warrant
shall be binding upon and inure to the benefit of and be enforceable by the
respective transferees, successors, assigns, administrators, executors, heirs,
and legal representatives of the Holder and the Company, whether so expressed or
not.
16. Changes; Waiver. Neither this Warrant nor any term hereof may be
changed, waived, discharged or terminated orally, but only by an instrument in
writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought.
17. Headings. The headings in this Warrant are for purposes of convenience
of reference only, and shall not be deemed to constitute a part hereof.
18. Governing Law. Because the issuer of this Warrant is a Delaware
corporation, this Warrant shall be construed in accordance with and governed by
the laws of that State. Any litigation or arbitration between the parties which
arises out of this Warrant shall be instituted and prosecuted only in the
appropriate California or Federal court or other tribunal, situated in
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San Francisco, California. The Company hereby specifically submits itself and
its properties to the exclusive jurisdiction of such courts for purposes of any
such action and the enforcement of any judgment or order arising therefrom. The
parties hereto each waive any right to a change of venue and any and all
objections to the jurisdiction of the California courts. Notwithstanding the
foregoing, the Purchasers may take such actions in a foreign jurisdiction with
they deem necessary and appropriate to enforce or collect any court judgment in
any dispute arising out of the Warrant or to seek and obtain other relief as is
necessary to enforce the terms of this Warrant. Each party agrees that service
upon such party in any such action or proceeding maybe made as provided above
for the giving of notices.
19. Expiration. If the last day on which this Warrant may be exercised, or
on which it may be exercised at a particular Exercise Price, is a Sunday or a
legal holiday or a day on which banking institutions doing business in the City
of San Francisco are authorized by law to close, this Warrant may be exercised
prior to 5:00 p.m. (San Francisco time) on the next succeeding full business day
with the same force and effect and at the same Exercise Price as if exercised on
such last day specified herein.
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WARRANT
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20. Securities Act Registration. All shares issuable upon exercise of this
Warrant shall be registered by the Company in its IPO and, to the extent not
sold, in any subsequent registered offering. The Company and the Holder shall
enter into a Registration Rights Agreement substantially in the form attached
hereto as of the Issue Date.
IN WITNESS WHEREOF, the Company has caused this Common Stock Purchase
Warrant to be duly executed and delivered on the date first set forth above.
QUIETPOWER SYSTEMS, INC.,
a Delaware corporation
By:
--------------------------------------
Its:
-------------------------------------
Address: 1675 Broadway, Suite 2600
New York, NY 10019
Attn: President
ACCEPTANCE BY PURCHASER:
By:
-----------------------------
Its:
----------------------------
Address: _______________________
_______________________
_______________________
Dated: _____________, 1996
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WARRANT
<PAGE>
SUBSCRIPTION FORM
The undersigned hereby irrevocably elects to exercise the within Warrant
to the extent of purchasing _______ shares of the Common Stock of QUIETPOWER
SYSTEMS, INC. and hereby delivers $______________ in payment of the Exercise
Price thereof, in accordance with the Common Stock Purchase Warrant dated
____________________, ________.
DATED: _______________, _____
-------------------------------------
Name of Warrant Holder
By
-----------------------------------
Authorized Signature
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WARRANT
<PAGE>
SECURITY AGREEMENT
This SECURITY AGREEMENT is dated as of ___________, 1996 by and between
QUIET POWER SYSTEMS, INC., a Delaware corporation (the "Debtor"), and DAYSTAR
PARTNERS, L.P., a California limited partnership and
______________________________, a _______________________________ (collectively,
the "Creditor").
FACTUAL BACKGROUND
Pursuant to a Note Purchase Agreement dated the date hereof, Debtor has
delivered to Creditor Promissory Notes dated the date hereof in the aggregate
principal amount of [$500,000] (the "Notes"). Debtor has agreed to grant to
Creditor a security interest in the Collateral (as that term is hereinafter
defined) to secure the performance of Debtor's obligations under the Notes.
NOW, THEREFORE, the parties hereto agree as follows:
1. GRANT OF SECURITY INTEREST. Debtor hereby grants to Creditor a
security interest in the property described in Paragraph 2 (the "Collateral") to
secure payment of the Notes and performance by Debtor of all of Debtor's present
and future debts, covenants, liabilities, undertakings and obligations to
Creditor, whether absolute or contingent (the "Indebtedness").
2. COLLATERAL. The Collateral shall consist of all tangible and
intangible property of Debtor (and all of Debtor's right, title and interest
therein and thereto), whether now owned by Debtor or acquired by Debtor after
the date hereof at any time, including, but not limited to, goods, inventories,
machinery, equipment, fixtures, documents, patents, patent applications,
customer lists, contract rights, instruments, books, records, files, licenses of
patents and technology, general intangibles, goodwill, chattel paper, accounts
receivable and accounts, including all cash and non-cash proceeds of all such
property, the products and increase of all such property, and all additions to
and replacements of all such property. For purposes of this Security Agreement,
the term "proceeds" includes whatever is receivable or received by Debtor when
Collateral is sold, leased, collected, exchanged or otherwise disposed of,
whether such disposition is voluntary or involuntary, and includes, without
limitation, all rights to payment, including return premiums, with respect to
any insurance relating thereto.
3. REPRESENTATIONS AND WARRANTIES. Debtor hereby represents and warrants
to Creditor that:
(a) Debtor is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware; the execution, delivery
and performance of this Security Agreement have been duly authorized and are not
in conflict with the terms of any indenture, agreement or undertaking to which
Debtor is a party or by which it is bound; and this Security
<PAGE>
Agreement is a valid and binding obligation of Debtor enforceable against Debtor
in accordance with its terms;
(b) Debtor is the owner of the Collateral (or, in the case of
after-acquired Collateral, at the time Debtor acquires rights in such
Collateral, will be the owner thereof); Creditor has a valid and attached lien
on all of the Collateral; and to the best of Debtor's knowledge and except as
known to Creditor, no other persons, other than (i) persons making substantially
similar bridge loans to Debtor ("Other Bridge Loan Lenders"), or (ii) persons
having purchase money security interests, have (or, in the case of
after-acquired Collateral, at the time Debtor acquires rights therein, will
have) any right, title, claim or interest (by way of security interest or other
lien or charge or otherwise) in, against or to the Collateral;
(c) Each account receivable, promissory note or any other right to
the payment of money which is included in the Collateral is, or at the time it
comes into existence will be, genuine and enforceable in accordance with its
terms against the party obligated to pay the same (an "Account Debtor");
(d) The amount represented from time to time by Debtor to Creditor as
owing by all Account Debtors will be true, complete and correct in all material
respects; and
(e) All information, certificates and statements, including
information relating to the Collateral, submitted by Debtor to Creditor from
time to time, whether pursuant to this Security Agreement, the Agreement, or
otherwise, will be true, complete and correct in all material respects.
4. COVENANTS OF DEBTOR. Debtor hereby agrees that it will, until the
Indebtedness is paid in full:
(a) Do all acts that may be necessary to maintain, preserve and
protect the Collateral;
(b) Not use or permit any Collateral to be used unlawfully or in
violation of any provision of this Security Agreement, or any applicable law,
statute, regulation or ordinance or any policy of insurance covering the
Collateral;
(c) Pay timely when due all taxes, assessments, charges, encumbrances
and liens now or hereafter imposed upon or affecting any Collateral unless
contested in good faith;
(d) Notify Creditor within fifteen (15) days of any change in
Debtor's name or place of business;
(e) Procure, execute and deliver to Creditor from time to time any
endorsements, assignments, financing statements, vehicle registration documents
and other documents, agreements, and writings (including, without limitation,
subordination agreements and
2
<PAGE>
intercreditor agreements) reasonably deemed necessary or appropriate by Creditor
to perfect, establish, maintain and protect Creditor's security interest
hereunder;
(f) Appear in and defend any action or proceeding which affects its
title to or Creditor's interest in the Collateral;
(g) Keep separate, accurate and complete records of the Collateral
and provide Creditor, and Creditor's attorney or agent, with copies of and upon
ten days' notice access to such records as Creditor may reasonably request at
any time and from time to time during Debtor's normal business hours (upon
receipt of an appropriate, standard confidentiality agreement from Creditor);
(h) Not surrender, sell, encumber, lease, rent or otherwise dispose
of any Collateral or any right or interest therein except in the ordinary course
of business, and keep the Collateral free of all levies and security interests
or other liens or charges, except those arising in the ordinary course of
business, those granted Other Bridge Loan Lenders, or approved in writing by
Creditor, which approval shall not be unreasonably withheld;
(i) Keep the Collateral in good condition and repair and not cause or
permit any waste or unusual or unreasonable depreciation of the Collateral;
(j) At any time and from time to time during Debtor's normal business
hours, upon demand and ten days' notice by Creditor, exhibit to and allow
reasonable inspection by Creditor (or persons designated by Creditor) of the
Collateral;
(k) Comply with all laws, statutes, regulations and ordinances
relating to the possession, operation, maintenance and control of the
Collateral;
(l) Insure the Collateral in form and amounts, with companies, and
against risks and liabilities customary to Debtor's business;
(m) Pay and perform to and for Creditor any and all debts, covenants,
liabilities, understandings and obligations comprising the Indebtedness when
due;
(n) At the reasonable request of Creditor at any time and from time
to time, mark Debtor's records and all evidence of the collateral to indicate
clearly the Creditor's security interest therein;
(o) At any time and from time to time upon reasonable request by
Creditor, promptly give to Creditor any information relating to the Collateral
which Creditor may reasonably request.
5. WAIVER BY DEBTOR. To the maximum extent permitted by law, Debtor
hereby waives (i) any right to require Creditor to pursue any particular remedy
against Debtor or any other
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<PAGE>
person; (ii) any right to the benefit of, or to direct the application of, any
Collateral until the Indebtedness shall have been paid and performed in full;
and (iii) any right of subrogation to Creditor until the Indebtedness shall have
been paid and performed in full.
6. AUTHORIZED ACTION BY CREDITOR. Debtor hereby irrevocably appoints
Creditor as its attorney-in-fact, upon the occurrence of a Default (as defined
in Section 8) hereunder, (i) to do any act which Debtor is obligated by this
Security Agreement to do, and (ii) to exercise such rights and powers as Debtor
might exercise with respect to the Collateral, including, without limitation,
the right to: (a) collect by legal proceedings or otherwise and endorse and
receive all payments, proceeds and other sums and property now or hereafter
payable on or on account of the Collateral; and (b) insure, process, protect and
preserve the Collateral. Debtor agrees to reimburse Creditor upon demand for
any costs and expenses, including, without limitation, reasonable attorneys'
fees, which Creditor may incur while acting as Debtor's attorney-in-fact
hereunder.
7. NOTIFICATION OF ACCOUNT DEBTORS; COLLECTION. Upon Default, Debtor
shall, at Creditor's request, notify any Account Debtors of Creditor's security
interest in any accounts receivable and direct payment thereof to Creditor.
Creditor may (but shall not be obligated to), upon Default, so notify any
Account Debtor and may receive any proceeds to which Creditor may be entitled
under this Security Agreement. For such purposes, Debtor hereby (i) constitutes
and appoints Creditor as Debtor's attorney-in-fact to demand, receive, sue for,
and to give discharges and releases for any monies due or to become due on any
account receivable; and (ii) with respect to any Collateral, assents to all
extensions, postponement of the time of payment thereof, and any other
indulgence in connection therewith, to each substitution, exchange or release of
Collateral, to the addition or release of any party primarily or secondarily
liable on any obligations, all in such manner and at such time or times as
Creditor shall deem advisable. Until otherwise notified by Creditor, Debtor
shall collect, enforce and receive delivery and payment of the Collateral.
8. DEFAULT AND REMEDIES.
(a) Debtor shall be deemed in default ("Default") under this Security
Agreement if:
(i) Debtor shall fail to make payment due under any Note when
due, or within any cure period therein specified, or
(ii) Debtor shall fail to observe or perform any term or
condition of this Security Agreement in any material respect or be in
breach of any representation or warranty set forth herein in any
material respect, and such failure or breach shall continue for a
period of thirty (30) days following written notice thereof from
Creditor to Debtor.
(b) Upon the occurrence of any such Default, Creditor may, at its
option, and in addition to all rights and remedies available to Creditor
hereunder, under the Agreement or under the Delaware Commercial Code, do any one
or more of the following:
4
<PAGE>
(i) foreclose or otherwise enforce Creditor's security interest
in any manner permitted by law or provided for in this Security
Agreement;
(ii) recover from Debtor all costs and expenses, including,
without limitation, reasonable attorneys' fees and costs, incurred or
paid by Creditor in exercising any right, power or remedy provided by
this Security Agreement or by law;
(iii) require Debtor to assemble the Collateral and make it
available to Creditor at a place to be designated by Creditor;
(iv) enter onto property where any Collateral is located and take
and maintain possession thereof and remove the Collateral therefrom
with or without judicial process;
(v) prior to the disposition of the Collateral, store, process,
repair or recondition it or otherwise prepare it for disposition in
any manner and to the extent Creditor deems appropriate; and
(vi) declare all or any of the Indebtedness to be immediately due
and payable (and upon which declaration the Indebtedness shall be so
due and payable).
If a sufficient sum is not realized from the disposition of Collateral to
pay the Indebtedness then outstanding, Debtor shall be liable for and agrees to
pay any deficiency.
9. CUMULATIVE RIGHTS. The rights, powers and remedies of Creditor under
this Security Agreement shall be in addition to all rights, powers and remedies
given to the Creditors by virtue of any statute or rule of law or the Agreement,
all of which rights, powers and remedies shall be cumulative and may be
exercised successively or concurrently without impairing Creditor's security
interest in the Collateral. Nothing in this Security Agreement shall be deemed
to preclude exercise by Debtor of the Sale Option in accordance with the Notes.
10. BINDING UPON SUCCESSORS. All rights of Creditor under this Security
Agreement shall inure to the benefit of the heirs, executors, administrators,
successors and assigns of Creditor, and all obligations of Debtor shall bind its
heirs, executors, administrators, successors and assigns.
11. ENTIRE AGREEMENT; SEVERABILITY. This Security Agreement contains the
entire agreement between Creditor and Debtor relating to the subject hereof, and
supersedes any and all prior understandings or agreements relating to the
subject matter hereof, except for the Purchase Agreement (as defined on the
first page hereof). If any of the provisions of this Security Agreement shall
be held invalid or unenforceable, this Security Agreement shall be construed as
if not containing those provisions and the rights and obligations of the parties
hereto shall be construed and enforced accordingly.
5
<PAGE>
12. NOTICE. Any notice, consent or other communication provided for in
this Security Agreement or by law shall be given in writing as provided in the
Purchase Agreement, addressed as follows:
If to Creditor: DayStar Partners L.P.
10600 N. DeAnza Blvd., Suite 215
Cupertino, CA 95014
Attention: Larry Wells
With a copy to: Barry Reder, Esq.
Coblentz, Cahen, McCabe & Breyer, LLP
222 Kearny Street, 7th Floor
San Francisco, CA 94108
and: ______________________________
______________________________
______________________________
______________________________
With a copy to:______________________________
______________________________
______________________________
______________________________
If to Debtor: Quiet Power Systems, Inc.
1675 Broadway, Suite 2600
New York, NY 10019
Attention: President
With a copy to:Gary Moomjian, Esq.
Breslow & Walker
875 Third Avenue
New York, NY 10022
Any party may change its address for notice by notice similarly given.
13. NO WAIVER. No delay on the part of Creditor in exercising any power
of sale, option or other right or remedy hereunder, and no notice or demand
which may be given to or made upon Debtor by Creditor, shall constitute a waiver
thereof, limit or impair Creditor's right to take any action or to exercise any
other power of sale, option or any other right or remedy hereunder, or prejudice
Creditor's rights or remedies against Debtor in any respect. Creditor's
acceptance of partial or delinquent payment or performance or the failure of
Creditor to exercise any right shall
6
<PAGE>
not waive any obligation of Debtor or right of Creditor and shall not modify
this Security Agreement or waive any other similar default.
14. GOVERNING LAW; JURISDICTION; AMENDMENTS. Because Debtor is a Delaware
corporation, this Security Agreement shall be governed by the laws of the State
of Delaware in all respects, including matters of construction, validity and
performance. Any litigation or arbitration between the parties which arises out
of this Security Agreement shall be instituted and prosecuted only in the
appropriate California or Federal court or other tribunal, situated in San
Francisco, California. Each party hereto each specifically submits itself and
its properties to the exclusive jurisdiction of such courts for purposes of any
such action and the enforcement of any judgment or order arising therefrom. The
parties hereto each waive any right to a change of venue and any and all
objections to the jurisdiction of the California courts. Notwithstanding the
foregoing, the Creditor may take such actions in a foreign jurisdiction which
Creditor deems necessary and appropriate to enforce or collect any court
judgment in any dispute arising out of this Security Agreement or to seek and
obtain other relief as is necessary to enforce the terms hereof. Each party
agrees that service upon such party in any such action or proceeding may be made
as provided for the giving of notices hereunder. No term or provision of this
Agreement may be altered, modified, limited or amended except by an agreement
expressly referring hereto and to which the parties hereto consent in writing.
15. COUNTERPARTS. This Security Agreement may be executed in any number
of counterparts, each of which shall be deemed an original but all of which
taken together shall constitute one and the same document.
IN WITNESS WHEREOF, the parties hereto have caused this Security Agreement
to be executed on the date first set forth above.
DEBTOR: QUIET POWER SYSTEMS, INC.,
a Delaware corporation
By:__________________________________
Title: _______________________________
CREDITOR: DAYSTAR PARTNERS, L.P.,
a California limited partnership
By: LARRY WELLS CO., INC., its
General Partner
7
<PAGE>
By: ______________________________
Larry Wells, President
_____________________________________
By:__________________________________
Its:__________________________________
8
<PAGE>
EXHIBIT 10.10
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement") is made and entered
into as of May 24, 1996, by and between QUIETPOWER SYSTEMS, INC., a Delaware
corporation (the "Company"), DAYSTAR PARTNERS, L.P., a California limited
partnership ("DayStar"), and the other parties listed on Schedule 1 attached
hereto (the "Other Lenders"), each of whom is purchasing a Bridge Loan Note from
the Company under a Note Purchase Agreement (the "Purchase Agreement"). DayStar
and the Other Lenders are collectively referred to herein as the "Purchasers."
FACTUAL BACKGROUND
A. The Company and the Purchasers have entered into Purchase Agreements
pursuant to which the Purchasers will receive warrants to acquire common stock
of the Company (the "Warrant Shares"); and
B. The Company and the Purchasers desire to provide for certain
arrangements with respect to the registration of the Warrant Shares under the
Securities Act of 1933, as amended.
In consideration of the mutual promises and covenants contained in this
Agreement, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
1. Definitions. For purposes of this Agreement, the following terms shall
have the following meanings:
1.1 Act: The Securities Act of 1933, as amended, or any other statute in
effect from time to time corresponding to such act.
1.2 Holder: Any Purchaser who holds Registrable Securities or any holder
of Registrable Securities to whom registration rights have been transferred in
compliance with paragraph 9.2 hereof.
1.3 Initiating Holders: A Holder or Holders who in the aggregate holds not
less than 30% of the outstanding Registrable Securities.
1.4 Person: An individual, partnership, corporation, trust or
unincorporated organization, or a government or agency or political subdivision
thereof.
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REGISTRATION RIGHTS AGREEMENT
<PAGE>
1.5 Participating Holders: Those Holders participating in any registration
pursuant to Article II or Article III hereof.
1.6 Prospectus: The prospectus included in any Registration Statement, as
amended or supplemented by any prospectus supplement with respect to the terms
of the offering of any portion of the Registrable Securities covered by the
Registration Statement and by all other amendments and supplements to the
prospectus, including post-effective amendments and all material incorporated by
reference in such prospectus.
1.7 Register, registered, and registration: A registration effected by
preparing and filing a Registration Statement in compliance with the Act and the
declaration or ordering of effectiveness of such Registration Statement by the
SEC.
1.8 Registrable Securities: All Warrant Shares owned by the Purchasers
(and their permitted transferees) or issuable to the Purchasers (or to their
permitted transferees) upon exercise of warrants or options or conversion of
other securities of the Company; provided that a security ceases to be a
Registrable Security when it is transferred other than pursuant hereto or if it
is no longer a Restricted Security. A security is a Restricted Security unless
and until:
1.8.1 it has been effectively registered under the Act and may be
disposed of in accordance with the Registration Statement covering it,
except for such registrations withdrawn pursuant hereto; or
1.8.2 as to any Holder, when all of the Common Stock owned by such
Holder may be distributed to the public pursuant to Rule 144 (or any
similar provision then in force) under the Act within the succeeding six
(6) months without regard to the volume of trading in the Company's
securities.
1.9 Registration Statement: Any registration statement of the Company
which covers Registrable Securities pursuant to the provisions of this
Agreement, including the Prospectus, amendments and supplements to such
Registration Statement, post-effective amendments, and all exhibits and all
material incorporated by reference in such Registration Statement.
1.10 SEC: The Securities and Exchange Commission or any other agency
assuming or succeeding to the responsibilities thereof in connection with the
registration of securities.
Capitalized terms not herein defined have the meanings given them in the
Purchase Agreement or the Bridge Loan Notes.
ARTICLE II
COMPANY REGISTRATION
2. Company Registration. Subject to Article V hereof, if at any time after
the date of this Agreement the Company determines to register, either for its
own account or the account
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REGISTRATION RIGHTS AGREEMENT
<PAGE>
of any security holder or holders, any of its common stock on a form that would
also permit the registration of Registrable Securities (expressly excluding any
public offering relating solely to Form S-8 for employee benefit plans or Form
S-4 for certain business combinations, or their successor forms, or any form
that does not permit secondary offerings), the Company shall, each such time,
promptly give each Holder written notice of such determination which notice
shall list those jurisdictions in which the Company intends to attempt to
qualify such securities under applicable blue sky laws. Upon the written request
of every Holder electing to participate, with each such request given within
twenty (20) days after mailing of any such notice by the Company, the Company
shall use its best efforts to include in such registration (and any related
qualification under blue sky laws, and in any underwriting) all of the
Registrable Securities that the Participating Holders have requested be
registered. The Company may withdraw any registration pursuant to this Article
II at any time prior to the effectiveness of the Registration Statement whether
or not any Holder has elected to participate. Subject to the provisions of
Article VIII hereof, each Holder may participate in an unlimited number of
registrations pursuant to this Article II.
ARTICLE III
DEMAND REGISTRATION
3.1 Demand Registration. Subject to the provisions of Article V hereof, if
at any time or from time to time after the IPO of the Company and after six (6)
months following the date hereof an Initiating Holder provides the Company with
a written demand (the "Demand") that the Company effect a registration under the
Act of all or any part of Registrable Securities having an aggregate offering
price in excess of $500,000, then the Company shall (i) give written notice of
the Demand to all other Holders within 10 days following its receipt of the
Demand; and (ii) use its best efforts to effect such registration (a "Demand
Registration") as to all Registrable Securities included in the Demand together
with all or such portion of the Registrable Securities of any other Holder
joining in such Demand as specified in a written notice received by the Company
within 20 days following such other Holder's receipt of the Demand from the
Company. Subject to (i) the provisions of Article V hereof and (ii) the absolute
priority of the Holders, the Company may include in any Demand Registration,
other securities of the Company whether being sold for the accounts of others or
for the account of the Company.
3.2 Limitations on Demand Registrations. The rights of the Holders to
effect a Demand Registration shall be limited as follows:
3.2.1 Except as set forth in subparagraph 3.2.2, the Company shall
not be required to effect more than two Demand Registrations.
3.2.2 Notwithstanding subparagraph 3.2.1 and subject to the
provisions of paragraph 3.3 hereof, the Holders shall be entitled to three
(3) Demand Registrations at the Company's expense on Form S-3 or any
similar short-form registration, provided that the Company qualifies for
such short-form registration, and provided further that any
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REGISTRATION RIGHTS AGREEMENT
<PAGE>
Demand Registration pursuant to this subparagraph 3.2.2 shall not be
counted as one of the Demand Registrations allowed under subparagraph
3.2.1 above.
3.2.3 Notwithstanding subparagraph 3.2.2, the Holders shall be
entitled to an unlimited number of Demand Registrations at their own
expense on any applicable form of registration.
3.2.4 The Company shall not be obligated to effect a registration,
qualification, or compliance under this Article III during the period
starting sixty (60) days prior to the Company's good faith estimate of the
date of filing of, and ending on a date one hundred eighty (180) days
following the effective date of, a Company-initiated registration (other
than a registration of securities in a Rule 145 transaction or with
respect to an employee benefit plan), provided that the Company is
actively and in good faith employing all reasonable efforts to cause such
registration to become effective.
3.2.5 The Company will not be deemed to have provided a Demand
Registration hereunder unless, in addition to the satisfaction of any
other conditions required by this Agreement, such registration has become
effective.
3.2.6 Any Demand Registration must be firmly underwritten by
underwriters selected by the Initiating Holders, subject to the approval
of the Company, which approval shall not be unreasonably withheld, and the
Company and the Initiating Holders shall obtain the commitment of such
underwriter to firmly underwrite the offering.
3.2.7 If the Company shall furnish to the Holders making such Demand
a certificate signed by the President of the Company stating that, in the
unanimous good faith judgment of the Board of Directors of the Company, it
would be seriously detrimental to the Company and its shareholders for
such Registration Statement to be filed at the date filing would be
required hereunder, then the Company shall have an additional period of
not more than ninety (90) days within which to file such Registration
Statement.
3.3 Registration on Form S-3. If any Holder or Holders request that the
Company file a registration statement on Form S-3 (or any successor form) for a
public offering of Registrable Securities the reasonably anticipated aggregate
offering proceeds of which would exceed $500,000 and the Company is entitled to
use Form S-3 for such offering, then the Company shall use its best efforts to
cause such Registrable Securities to be registered on such form and to be
qualified in such jurisdictions as the Holder or Holders may reasonably request;
provided, however, that the Company shall not be required to effect more than
one (1) registration pursuant to this paragraph in any nine (9) month period or
more than three (3) registrations in total pursuant to this paragraph. The
obligations of this paragraph shall be subject to the limitations set forth in
subparagraphs 3.2.6 and 3.2.7 above.
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REGISTRATION RIGHTS AGREEMENT
<PAGE>
ARTICLE IV
OBLIGATIONS OF THE COMPANY
4.1 Obligations of the Company. Whenever required under Article II or
Article III to use its best effort to effect the registration of any Registrable
Securities, the Company shall, as expeditiously as reasonably possible:
4.1.1 Prepare and file with the SEC a Registration Statement with
respect to such Registrable Securities as promptly as possible (but in no
event, in the case of a Demand Registration, if audited financial
statements for the immediately preceding year are available, later than
seventy-five (75) days following the Company's receipt of the Demand) and
use its best efforts to cause such Registration Statement to become and
remain effective for a period of not less than one hundred and twenty
(120) days or until the Participating Holders have completed the
distribution described in the Registration Statement, whichever first
occurs; provided, however, that in connection with any proposed
registration intended to permit an offering of any securities from time to
time (i.e., a so-called "shelf registration"), the Company shall in no
event be obligated to cause any such registration to remain effective for
more than one hundred eighty (180) days;
4.1.2 Prepare and file with the SEC such amendments (including
post-effective amendments) and supplements to such Registration Statement
and the Prospectus used in connection with such Registration Statement as
may be necessary to comply with the provisions of the Act with respect to
the disposition of all securities covered by such Registration Statement;
4.1.3 Keep the Participating Holders advised as to the progress of
the registration and offering, and furnish to the Holders, at any time and
from time to time, such numbers of copies of a Prospectus, including a
preliminary prospectus, amendments or supplements, in conformity with the
requirements of the Act, and such other documents as any of them from time
to time may reasonably request in order to facilitate the disposition of
Registrable Securities owned by the Participating Holders;
4.1.4 Notify each Participating Holder of the happening of any event
which might cause the Prospectus included in such Registration Statement,
as then in effect, to include an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary
to make the statements therein not misleading or incomplete in the light
of the circumstances then existing, and at the request of any Holder,
prepare and furnish to such Holder a reasonable number of copies of a
supplement to or an amendment of such Prospectus as may be necessary so
that, as thereafter delivered to the purchasers of such shares, such
Prospectus shall not include an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary
to make the statements therein not misleading or incomplete in the light
of the circumstances than existing.
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REGISTRATION RIGHTS AGREEMENT
<PAGE>
4.1.5 Cause all such Registrable Securities registered pursuant
hereunder to be listed on each securities exchange on which similar
securities issued by the Company are then listed.
4.1.6 Provide a transfer agent and registrar for all Registrable
Securities registered pursuant to such registration statement and a CUSIP
number of all such Registrable Securities, in each case not later than the
effective date of such registration.
4.1.7 Use its best efforts to register and qualify the securities
covered by such Registration Statement under such other securities or Blue
Sky laws of such jurisdictions as shall be reasonably appropriate for the
distribution of the securities covered by the Registration Statement,
provided that the Company shall not be required to register or qualify the
securities in any jurisdiction where the Company, in connection with such
registration or qualification or as a condition thereto, is required to
qualify to do business or to file a general consent to service of process
(unless the Company is already subject to service in such jurisdiction and
except as required by the Act), and further provided that (anything in
this Agreement to the contrary notwithstanding with respect to the bearing
of expenses) if any jurisdiction in which the securities shall be
qualified shall require that expenses incurred in connection with the
qualification of the securities in that jurisdiction be borne by selling
shareholders, then such expenses shall be payable by the Participating
Holders, pro rata, to the extent required by such jurisdiction.
4.2 Furnish Information. It shall be a condition precedent to the
obligations of the Company to take any action pursuant to this Agreement with
respect to any Participating Holder that such person furnish to the Company such
information regarding such person, the Registrable Securities held by such
person, and the intended method of disposition of such securities as the Company
shall reasonably request and as shall be required in connection with the action
to be taken by the Company.
4.3 Expenses of Registration. Except as set forth in subparagraph 3.2.3
hereof, all expenses incurred in connection with any registration effected
hereunder (excluding underwriters' discounts and commissions and stock transfer
taxes), including without limitation all registration and qualification fees and
printing, legal and accounting fees and costs, shall be borne by the Company. In
addition, the Company shall bear the reasonable attorneys' fees and costs
incurred by the Participating Holders up to an aggregate amount of $10,000.
Further, the Company shall not be required to pay for any expenses of any
registration commenced pursuant to Article III hereof and subsequently withdrawn
at the request of the Participating Holders unless such withdrawal is based upon
either (i) adverse market conditions or (ii) material adverse information
relating to the Company that was unknown or unavailable to the Initiating
Holders at the time of making the Demand. If such withdrawn registration was a
Demand Registration as provided in Section 3.1 hereof, then the Company may
count such withdrawn registration as a Demand Registration, notwithstanding the
provisions of Subsection 3.2.6 hereof, unless such withdrawal is based upon
either (i) adverse market conditions or (ii) material adverse information
relating to the Company that was unknown or unavailable to the Initiating
Holders at the time of making the Demand.
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4.4 Certain Limitations in Connection With Future Grants of Registration
Rights. From and after the date of this Agreement, the Company shall not enter
into any agreement with any holder or prospective holder of any securities of
the Company providing for the granting of registration rights to such holder
unless (i) such agreement includes provisions substantially equivalent to
paragraph 9.1 hereof and (ii) such agreement requires that, in the case of any
public offering involving an underwritten registered offering under Article II
or Article III hereof, the Holders have priority as to registration over any
subsequent purchaser of the Company's Common Stock.
ARTICLE V
UNDERWRITING REQUIREMENTS
5.1 Underwriting. If any registration hereunder shall involve an
underwriting, then the Company and all Holders shall be so advised in writing.
In such event, the right of any Holder to participate in any registration
hereunder shall be conditioned upon such Holder's participation in such
underwriting and the inclusion of such Holder's Registrable Securities in the
underwriting to the extent provided herein. The Company, together with all
Holders proposing to distribute their Registrable Securities through such
underwriting, shall enter into an underwriting agreement in customary form with
the underwriter or underwriters selected for such underwriting by the Company,
or in the case of a Demand Registration pursuant to Article III hereof, selected
pursuant to the terms hereof. Notwithstanding any other provisions of this
Agreement, if the underwriter or underwriters determine that marketing factors
require a limitation on the number of shares of Common Stock to be underwritten,
then the Company shall so advise all Participating Holders and the securities to
be included in such registration shall be allocated as follows:
5.1.1 In the event of a registration pursuant to Article II hereof,
the Company shall be entitled to include all securities it proposed to
register for its own account in its notice to Holders, and the number of
shares of Registrable Securities which may thereafter be included in the
registration and underwriting shall be allocated first, as nearly as
practical, among the Participating Holders in proportion to the number of
Registrable Securities held by each such person at the time of the initial
filing of the Registration Statement, and then to other participants, as
may be agreed by such other participants.
5.1.2 In the event of a Demand Registration effected pursuant to
paragraph 3.1 hereof, the number of shares of Registrable Securities that
may be included in the registration and underwriting shall be allocated,
as nearly as practical, to the Participating Holders pro rata in
proportion to the number of shares of Registrable Securities held by each
such person at the time of the initial filing of the Registration
Statement, and then to the other participants, including the Company, as
may be agreed by such participants.
5.1.3 No Registrable Securities excluded from the underwriting by
reason of this Article V shall be included in such registration. If any
person disapproves of the terms of the underwriting, such person may elect
to withdraw therefrom by written notice to the
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Company and the underwriter or underwriters. All Registrable Securities so
withdrawn shall also be withdrawn from the registration and shall not be
transferred in a public distribution prior to one hundred and twenty (120)
days after the effective date of the Registration Statement relating
thereto or such other shorter period of time as the underwriter or
underwriters may require.
ARTICLE VI
INDEMNIFICATION
6.1 Indemnification by Company. To the extent permitted by law, the
Company will indemnify and hold harmless each of the Holders, each of the
Holder's respective partners, officers, directors, employees, heirs, successors,
assigns and agents, and each Person, if any, who controls any Holder within the
meaning of either Section 15 of the Act or Section 20 of the Securities Exchange
Act of 1934, as amended (the "Exchange Act") (each such person being sometimes
hereinafter referred to as an "Indemnified Holder"), from and against any and
all losses, claims, damages, liabilities and expenses (or actions, proceedings
or settlements with respect thereto) including reasonable costs of investigation
and legal fees and expenses, (i) arising out of or based upon any untrue
statement or alleged untrue statement of a material fact contained in any
Registration Statement or Prospectus (or in any amendment or supplement thereto
or in any preliminary prospectus) or any document relating thereto, or (ii)
arising out of or based upon any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, or (iii) arising out of or based upon any violation by
the Company of the Act or any rule or regulation thereunder applicable to the
Company and the relating action or inaction required of the Company in
connection therewith, and the Company will reimburse each Holder, each of its
partners, officers, directors, employees, heirs, successors, assigns and agents,
and each person controlling such Holder, for any and all legal and other
expenses reasonably incurred in connection with investigating, defending or
settling such loss, claim, damage or liability. Notwithstanding the above, this
indemnity and duty to defend shall not apply to any Holder to the extent that
such losses, claims, damages, liabilities or expenses arise out of or are based
upon any untrue statement or omission or allegation thereof based upon
information furnished in writing to the Company by such Holder expressly for use
in any Registration Statement or Prospectus, or any amendment or supplement
thereto, or any preliminary prospectus, or given supplementally to the SEC, the
National Association of Securities Dealers, any exchange or state securities
regulators. Further, the Company shall not be liable nor have any duty to defend
in any such case to the extent that any such loss, claim, damage, liability or
expense arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission made in any preliminary prospectus if
(i) such Indemnified Holder failed to send or deliver a copy of the Prospectus
with or prior to the delivery of written confirmation of the sale of Registrable
Securities, and (ii) the Prospectus would have completely corrected such untrue
statement or omission. Further, the Company shall not be liable nor have any
duty to defend in any case to the extent that any such loss, claim, damage,
liability or expense arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission in the Prospectus if
such untrue statement or alleged untrue statement, omission or alleged omission
is completely corrected in an amendment or supplement
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REGISTRATION RIGHTS AGREEMENT
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to the Prospectus and if, having previously been furnished by or on behalf of
the Company with copies of the Prospectus as so amended or supplemented, such
Indemnified Holder thereafter fails to deliver such Prospectus as so amended or
supplemented, prior to or concurrently with the sale of a Registrable Security
to the person asserting such loss, claim, damage, liability or expense who
purchased such Registrable Security which is the subject thereof from such
Indemnified Holder. This indemnity will be in addition to any liability which
the Company may otherwise have. This indemnity shall not apply to any amount
paid or incurred in settlement without the express written consent of the
Company, which consent shall not be unreasonably withheld.
Each Indemnified Holder shall give prompt notice to the Company after it
has actual knowledge of any claim in respect of which indemnity may be sought
from the Company hereunder. In such notice, an Indemnified Holder may in its
discretion demand indemnification, in which case the Company shall assume the
defense thereof at the Company's expense, provided that counsel for the Company
shall be satisfactory to such Indemnified Holder (whose approval shall not be
unreasonably withheld). The failure of any Indemnified Holder to give notice as
provided herein shall not relieve the Company of any of its obligations
hereunder to the extent such failure is not prejudicial. If the Company assumes
the defense in such action, such Indemnified Holder shall retain the right to
employ separate counsel in any such action and to participate in the defense
thereof, but the fees and expenses of such counsel shall be the expense of such
Indemnified Holder unless (i) the Company has expressly agreed in writing to pay
such fees and expenses, or (ii) the Company shall have a duty to assume the
defense of such action or proceeding and has failed to do so and failed to
employ counsel satisfactory to such Indemnified Holder in any such action or
proceeding as required hereunder, or (iii) the named parties to any such action
or proceeding (including any impleaded parties) include both the Indemnified
Holder and the Company, and such Indemnified Holder shall have been advised by
counsel that there may be one or more legal defenses available to such
Indemnified Holder which are different from or additional to those available to
the Company and which conflict with those of the Company. In all circumstances,
if the Indemnified Holder notifies the Company in writing that it elects to
employ separate counsel at the expense of the Company, the Company shall not
have the obligation to assume the defense of such action or proceeding on behalf
of such Indemnified Holder; it being understood, however, that the Company shall
not, in connection with any one such action or proceeding or separate but
substantially similar or related actions or proceedings in the same jurisdiction
arising out of the same general allegations or circumstances, be liable for the
reasonable fees and expenses of more than one separate firm of attorneys at any
time for such Indemnified Holder, which firm shall be designated in writing by
such Indemnified Holder and shall be subject to the approval of the Company,
which approval shall not be unreasonably withheld. The Company shall not be
liable for any settlement of any such action or proceeding effected without its
written consent, but if settled with its written consent, or if there be a final
judgment for the plaintiff in any such action or proceeding, the Company agrees
to indemnify and hold harmless such Indemnified Holder from and against any loss
or liability by reason of such settlement or judgment.
6.2 Indemnification by Holders. To the extent permitted by law, each of
the Holders agrees to indemnify and hold harmless the Company, its directors,
employees, officers and agents, and each person, if any, who controls the
Company within the meaning of either Section 15 of the Act or Section 20 of the
Exchange Act, and each other Holder, and each other Holder's part-
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ners, officers, directors, employees, heirs, successors, assigns and agents and
each person controlling such Holder, to the same extent as the foregoing
indemnity from the Company to the Indemnified Holders, but only with respect to
information relating to each Holder furnished in writing by such Holder
expressly for use in any Registration Statement or Prospectus, or any amendment
or supplement thereto, or any preliminary prospectus, or given supplementally to
the SEC, the National Association of Securities Dealers, any exchange or state
securities regulators. In case any action or proceeding shall be brought in
respect of which indemnity may be sought against any Holder hereunder, (a) such
Holder shall have the rights and duties given the Company, and (b) the Company
and its directors, officers, employees or agents and controlling persons shall
have the rights and duties given to each Indemnified Holder by paragraph 6.1. In
no event shall the liability of any Holder hereunder be greater in amount than
the dollar amount of the proceeds received by such Holder upon the sale of the
Registrable Securities giving rise to such indemnification obligation.
6.3 Contribution. If the indemnification provided for in this Article VI
is unavailable to an indemnified party under paragraphs 6.1 or 6.2 hereof (other
than by reason of exceptions provided in those paragraphs) in respect of any
losses, claims, damages or liabilities referred to therein, then each applicable
indemnifying party, in lieu of indemnifying such indemnified party, shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages or liabilities in such proportion as is
appropriate to reflect the relative fault of the Company, on the one hand, and
of the Indemnified Holder or Holders, on the other hand, in connection with the
statements or omissions which resulted in such losses, claims, damages or
liabilities, as well as any other relevant equitable considerations. The
relative fault of the Company on the one hand and of the Indemnified Holder or
Holders on the other shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company or by the Indemnified Holder or Holders and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. The amount paid or payable by a party as a
result of the losses, claims, damages, liabilities and expenses referred to
above shall be deemed to include, subject to the limitations set forth in
paragraph 6.1, any legal or other fees or expenses reasonably incurred by such
party in connection with investigating or defending any action or claim. The
Company, and the Holders agree that it would not be just and equitable if
contribution pursuant to this paragraph 6.3 were determined by pro rata
allocation or by any other method of allocation which does not take account of
the equitable considerations referred to herein. Notwithstanding the provisions
of this paragraph 6.3, no Holder shall be required to contribute any amount in
excess of the amount by which the total price at which the Registrable
Securities sold by such Holder and distributed to the public were offered to the
public exceeds the amount of any damages which such Holder has otherwise been
required to pay by reason of such untrue or alleged untrue statement or omission
or alleged omission. No person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation.
6.4 Survival. All provisions of this Article VI shall survive the
expiration or termination of this Agreement for any reason.
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ARTICLE VII
TERM AND TERMINATION
7.1 Termination of the Company's Obligations. The Company's obligations
pursuant to Articles II and III shall expire December 31, 2004.
ARTICLE VIII
RULE 144 REPORTING
8.1 Reports Under Exchange Act. With a view to making available to Holders
the benefits of Rule 144 promulgated under the Act ("Rule 144") and any other
rule or regulation of the SEC that may at any time permit the Holders to sell
securities of the Company to the public without registration, the Company agrees
to use its best efforts to:
8.1.1 make and keep public information available, as those terms are
understood and defined in Rule 144, at all times subsequent to ninety (90)
days after the effective date of the first registration statement covering
a public offering of the Company's securities filed with the SEC by the
Company;
8.1.2 file with the SEC, in a timely manner, all reports and other
documents required of the Company under the Act and the Exchange Act; and
8.1.3 so long as such person owns any Registrable Securities,
furnish to the Holders forthwith upon request, a written statement by the
Company that it has complied with the reporting requirements of Rule 144
(at any time after ninety (90) days after the effective date of said first
registration statement filed by the Company), and of the Act and the
Exchange Act (at any time after it has become subject to such reporting
requirements), (ii) a copy of the most recent annual or quarterly report
of the Company, and (iii) such other reports and documents so filed by the
Company as may be reasonably requested in availing the Holders of any rule
or regulation of the SEC permitting the selling of any such securities
without registration.
ARTICLE IX
OBLIGATIONS OF THE HOLDERS
9.1 Lockup Agreement. In consideration for the Company agreeing to its
obligations hereunder, if each of the Company's officers and directors and each
person with registration rights with respect to the Company's Common Stock has
previously agreed thereto on the same terms, each of the Holders agrees in
connection with the initial registration of the Company's Common Stock for sale
to the general public and, upon the request of the Company or the
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underwriters managing any underwritten offering of the Company's securities, not
to sell, make short sale of, loan, grant any option for the purchase of, or
otherwise dispose of any Registrable Securities (other than those included in
the registration) without the prior written consent of the Company or such
underwriters, as the case may be, for such period of time (not to exceed the
lesser of thirteen (13) months or the shortest period agreed by any officer,
employee or shareholder of the Company to be bound in such registration) from
the effective date of such registration as the Company or the underwriters may
specify. If the Holder is to be so obligated, each Holder agrees to execute and
deliver such documentation as may be reasonably required by the underwriters in
connection with this Article IX. This restriction shall not apply to a
registration relating solely to employee benefit plans on Form S-1 or similar
successor forms, or a registration relating solely to a Rule 145 transaction on
Form S-4 or similar or successor forms. If the Company is otherwise inclined to
seek the underwriters' consent to any waiver of the lock up for any other
shareholder, the Company shall first offer the Holders the opportunity to
participate in such waiver on a pro rata basis. In any registered offering after
the initial offering, the Holders shall agree to a similar "lockup" of their
shares (other than those included in the registration) provided the lockup
period does not exceed 180 days.
9.2 Notice of Proposed Transfers. The rights to cause the Company to
register securities under Articles I and II hereunder shall be transferrable or
assignable only to a transferee or assignee of Registrable Securities (as
presently constituted and subject to adjustments for stock splits, stock
dividends, and the like) equal to not less than 0.5% of the Company's
outstanding common stock. Prior to any proposed sale, assignment, transfer or
pledge of any Registrable Securities (other than a transfer not involving a
change in beneficial ownership) unless there is in effect a registration
statement under the Act covering the proposed transfer, the Holder thereof shall
give written notice to the Company of such Holder's intention to effect such
transfer, sale, assignment or pledge in sufficient detail, and, if requested by
the Company, such notice shall be accompanied, at such Holder's expense, by
either (i) an unqualified written opinion of legal counsel who shall be, and
whose legal opinion shall be, reasonably satisfactory to the Company, addressed
to the Company, to the effect that the proposed transfer of the Registrable
Securities may be effected without registration under the Act, or (ii) a "no
action" letter from the SEC to the effect that the transfer of such securities
without registration will not result in a recommendation by the staff of the SEC
that action be taken with respect thereto, whereupon the Holder of such
Registrable Securities shall be entitled to transfer such Registrable Securities
in accordance with the terms of the notice delivered by the Holder to the
Company. It is agreed that the Company will not request an opinion of counsel
for the Holder for transactions made in reliance on Rule 144 under the Act, as
to which no notice shall be necessary. Each certificate evidencing the
Registrable Securities transferred as above provided shall bear the appropriate
restrictive legend except that such certificate shall not bear any restrictive
legend if in the opinion of counsel for such Holder and the Company such legend
is not required in order to establish compliance with any provision of the Act.
Notwithstanding the foregoing, each Holder agrees that it will not request that
a transfer of the Registrable Securities be made (or that any legend be removed
from the certificate evidencing the Registrable Securities) solely in reliance
on Rule 144(k) under the Act if as a result of such proposed transfer, the
Company would be rendered subject to the reporting requirements of the Exchange
Act.
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9.3 No Right to Delay. No Holder shall have any right to take any action
to restrain, enjoin, or otherwise delay any registration as a result of any
controversy under this Agreement.
ARTICLE X
MISCELLANEOUS
10.1 Assignment. The terms and conditions of this Agreement shall be
binding upon and inure to the benefit of the respective successors and assigns
of the parties hereto and shall be binding upon the parties with respect to
shares of capital stock subsequently acquired by any Holder.
10.2 Entire Agreement; Amendment; Waiver. This Agreement (including the
Exhibits hereto, if any) constitutes the full and entire understanding and
agreement between the parties with regard to the subjects hereof and thereof.
Neither this Agreement nor any term hereof may be amended, waived, discharged or
terminated, except by a written instrument signed by the Company and the Holders
of at least 80% of the then outstanding Registrable Securities and any such
amendment, waiver, discharge or termination shall be binding on all the Holders,
but in no event shall the obligation of any Holder hereunder the materially
increased, except upon the written consent of such Holder.
10.3 Information Confidential. Each Holder acknowledges that the
information received by it pursuant hereto may be confidential and for its use
only, and it will not use such confidential information in violation of the
Exchange Act or reproduce, disclose or disseminate such information to any other
person (other than its employees or agents having a need to know the contents of
such information, and its attorneys) or use such information to the detriment of
the Company, except in connection with the exercise of rights under this
Agreement, unless the Company has made such information available to the public
generally or such Holder is required to disclose such information by a
governmental body.
10.4 Further Assurances. The parties hereto shall use their best efforts
to do and perform or cause to be done and performed all such further acts and
shall execute and deliver all such other agreements, certificates, instruments
or documents as any other party may reasonably request in order to carry out the
intent and purpose of this Agreement and the consummation of the transactions
contemplated hereby and thereby. Neither the Company nor any Holder shall
voluntarily undertake any course of action inconsistent with the satisfaction of
the requirements applicable to them set forth in this Agreement and each shall
promptly do all such acts and take all such measures as may be appropriate to
enable them to perform as early as practicable the obligations herein and
therein required to be performed by them.
10.5 Third Parties. Nothing in this Agreement, express or implied, is
intended to confer upon any Person, other than the parties hereto, the
Indemnified Holders, the Company's directors, controlling persons, employees,
officers, agents and their respective heirs, successors and assigns, any rights,
remedies, obligations or liabilities under or by reason of this Agreement,
except as expressly provided herein.
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10.6 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of California applicable to contracts
executed by residents of California and wholly to be performed in California.
Each party hereby submits to the exclusive jurisdiction and venue of the
Superior Court of the State of California for the City and County of San
Francisco or the Federal District Court for the Northern District of California
for purposes of any legal or equitable action or proceeding arising out of this
Agreement. Each party agrees that service upon such party in any such action or
proceeding may be made by first class mail, certified or registered, return
receipt requested as provided by the giving of notices in Section 10.8.
10.7 Titles and Subtitles; Form of Pronouns. The titles of the articles
and sections of this Agreement are for convenience only and are not to be
considered in construing this Agreement. All pronouns used in this Agreement
shall be deemed to include masculine, feminine and neuter forms.
10.8 Notices. Except as otherwise expressly provided herein, all notices
and other communications required or permitted hereunder shall be given in
writing and shall be deemed effectively given upon receipted personal delivery
(professional courier permissible), United States certified mail delivery or
confirmed facsimile transmission to the address set forth with respect to such
party on the signature pages of this Agreement (and with copies as indicated
thereon), or to such other address as such party shall have given notice of
pursuant hereto to the other party or parties.
10.9 Rights; Severability. Unless otherwise expressly set forth herein, a
Holder's rights and obligations hereunder are several rights, not rights jointly
held with the other Holders. If one or more provisions of this Agreement are
held to be invalid, illegal or unenforceable under applicable law, portions of
such provisions, or such provisions in their entirety, to the extent necessary,
shall be severed from this Agreement, and the balance of this Agreement shall be
enforceable in accordance with its terms.
10.10 Delays or Omissions. No delays or omissions to exercise any right,
power or remedy accruing to any party to this Agreement, upon any breach or
default of the other party, shall impair any such right, power or remedy of such
nonbreaching party nor shall it be construed to be a waiver of any such breach
or default, or an acquiescence therein, or of or in any similar breach or
default thereafter occurring; nor shall any waiver of any single breach or
default be deemed a waiver of any other breach or default theretofore or
thereafter occurring. Any waiver, permit, consent or approval of any kind or
character on the part of any party of any breach or default under this
Agreement, must be made in writing and shall be effective only to the extent
specifically set forth in such writing. All remedies, either under this
Agreement, or by law or otherwise afforded to any holder, shall be cumulative
and not alternative.
10.11 Attorneys' Fees. In the event of litigation hereunder, the
prevailing party or parties shall be entitled to recover its or their costs of
litigation, including reasonable attorneys' fees, in addition to all other
relief as may be granted.
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10.12 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
IN WITNESS WHEREOF, the parties have executed this Registration Rights
Agreement as of the date first written above.
COMPANY: QUIETPOWER SYSTEMS, INC., a Delaware
corporation
By:
--------------------------------------
Jonathan Charry, President
Address for Notice:
1675 Broadway, Suite 2600
New York, NY 10019
Attn.: President
DAYSTAR: DAYSTAR PARTNERS L.P., a California
limited partnership
By: LARRY WELLS CO., INC., its
General Partner
By:
--------------------------------------
Larry Wells, President
Address for Notice:
10600 N. DeAnza Blvd., Suite 215
Cupertino, CA 95014
Attn.: Larry Wells
OTHER LENDERS
-----------------------------------------
Print Name and Address
-----------------------------------------
-----------------------------------------
-----------------------------------------
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-----------------------------------------
Print Name and Address
-----------------------------------------
-----------------------------------------
-----------------------------------------
-----------------------------------------
Print Name and Address
-----------------------------------------
-----------------------------------------
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EXHIBIT 10.11
INTERCREDITOR AGREEMENT
This Intercreditor Agreement (the "Agreement") dated as of May 24, 1996 is
entered into by and among DayStar Partners, L.P., a California limited
partnership ("DayStar") and the persons identified as "Other Creditors" on the
signature page hereof (the "Other Creditors").
FACTUAL BACKGROUND
A. DayStar and the Other Creditors have entered into Note Purchase
Agreements (the "Purchase Agreements") relating to Bridge Loan Notes of
QuietPower Systems, Inc. a Delaware corporation (the "Borrower"). All undefined
capitalized terms herein shall have the meanings set forth in the Purchase
Agreements.
B. To secure payment of the Bridge Loan Notes and the Borrower's other
obligations under the Purchase Agreements, Borrower has granted DayStar and the
Other Creditors a security interest in Borrower's currently owned and hereafter
acquired assets and all proceeds thereof (the "Collateral") and the parties
hereto desire to set forth their respective rights and obligations with respect
thereto and other matters. As used herein, the term "Loan Documents" means the
Purchase Agreements, the Bridge Loan Notes, the Security Agreement, and any
UCC-1 Financing Statement filed pursuant thereto, and "Creditors" means DayStar
and the Other Creditors.
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
herein contained, and for other good and valuable consideration, the parties
agree as follows:
I. AGENCY; MANAGEMENT DUTIES
1.1 Appointment of DayStar as Agent. The Creditors hereby authorize
DayStar to act as agent for the Creditors in connection with all matters (other
than receiving payments and providing notices of change of address) relating to
the Loan Documents including, without limitation, (i) granting waivers, (ii)
enforcing (or determining not to enforce) the acceleration of amounts owed under
any of the Bridge Loan Notes, (iii) notifying the Other Creditors and/or the
Borrower of any event of default, breach and all other matters relating to the
Creditors' respective rights under the Loan Documents, and (iv) negotiating any
dispute between or among DayStar and the Other Creditors and the Borrower. Each
Other Creditor agrees not to amend, modify or assert any of its rights under any
of the Loan Documents without the prior written consent of DayStar.
1.2 Management of the Collateral. DayStar will be solely responsible for
(i) exercising the rights of all Creditors with respect to any Collateral,
including without limitation, all rights of the Creditors to exercise any power
of sale or foreclosure thereupon, (ii) the distribution of all Collateral
proceeds among the Creditors in accordance with this Agreement, and (iii) the
management and control of the Collateral for the Creditors.
1.3 No Interference. As between the Other Creditors and DayStar, DayStar
may in its sole discretion cause the sale or foreclosure of any of the
Collateral without interference or
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disturbance of any type from any of the Other Creditors, notwithstanding any
present or future claim, title, lien, security interest, foreclosure, right of
entry, re-entry or possession of Creditor with reference to (a) the Borrower's
property, or (b) the Collateral, by reason of any contractual relationship
between any Creditor and the Borrower, or any legal or equitable right of any
Creditor. The Creditors agree to not pursue any enforcement action against the
Borrower until after the termination of this Agreement pursuant to Section 4
below. Each Other Creditor agrees to execute forthwith such other documents as
DayStar shall deem appropriate to give effect to the intent of this Agreement.
II. DISPOSITION OF PROCEEDS
2.1 Allocation of Proceeds. Notwithstanding the date, manner or order of
perfection of the security interests and liens granted to any Creditor and
notwithstanding any provision of the Uniform Commercial Code, or any applicable
law or decision or the Loan Documents, the parties hereto agree that all
proceeds received by the Creditors after each sale of any portion of the
Collateral by DayStar shall be distributed as follows (unless a court orders
otherwise):
(i) first, to the payment to DayStar of its out-of-pocket costs,
including (without limitation, attorneys' fees) arising from
its actions under this Agreement;
(ii) second, after the amounts described in subsection (i) above
have been paid in full, pro rata to principal and interest
owed to each of DayStar and the Other Creditors under the Loan
Documents, until said amounts have been repaid in full;
(iii) third, after the amounts described in subsection (ii) above
are paid in full, to Borrower or whomsoever else shall be
entitled thereto.
2.2 Cooperation. The Other Creditors will cooperate and assist DayStar in
defending any claim by any other creditor of the Borrower to the Collateral or
proceeds thereof until all amounts under the Loan Documents are fully paid to
DayStar and the Other Creditors.
2.3 No Guarantee of Success. Nothing in this Agreement or otherwise shall
be construed as any kind of warranty, promise or guarantee by DayStar that the
proceeds of the Collateral will be sufficient, when applied as set forth in
Section 2.1, to cover all of the obligations of the Borrower to any Creditor
(whether under the Loan Documents or otherwise).
2.4 Expenses. If at any time DayStar requests each Other Creditor to
deposit a pro rata amount of anticipated out-of-pocket expenses, each Other
Creditor shall forthwith transmit to DayStar such Other Creditor's pro rata
amount.
2.5 No Assumption of Debt, Etc. In performing its obligations under this
Agreement, DayStar is not assuming any debt of any Other Creditor or any
obligations of any Other Creditor under the Loan Documents.
2
<PAGE>
III. REPORTS TO CREDITORS
3.1 Remittances; Statements of Account. DayStar will remit to each Other
Creditor any and all funds received by DayStar as payment relating to such Other
Creditor's Bridge Loan Note within five (5) business days after DayStar's
receipt thereof. DayStar may commingle the funds of all Creditors in a single
account prior to making such remittances. DayStar agrees to send with each such
payment to each Other Creditor a statement indicating the allocation of such
payment to principal and interest.
3.2 Notices of Default. DayStar will use its best efforts to give to each
Other Creditor a copy of any notice of the occurrence or existence of an event
of default or demand for payment of any claim under the Loan Documents
simultaneously with the sending of such notice to the Borrower, but the failure
to do so shall not affect the validity of such notice or create a cause of
action against the party failing to give such notice or create any claim or
right on behalf of any third party.
IV. TERMINATION
This Agreement will terminate automatically as to each Other Creditor at
the time that such Other Creditor has been paid in full all sums owed by
Borrower to it under the Loan Documents.
V. LIMITATION OF LIABILITY; INDEMNIFICATION
5.1 Actions Covered. Notwithstanding any other provision hereof, DayStar
shall not be liable to any party hereunder in connection with any act by DayStar
or its failure to act relating to this Agreement, unless the same is a breach of
this Agreement and also constitutes gross negligence or willful misconduct by
DayStar.
5.2 Damages. DayStar shall not be liable to any other party hereunder for
any incidental or consequential damages (including, without limitation, lost
profits or expectation damages) relating to the performance, breach or
termination of this Agreement, or the condition, utility or value of the
Collateral.
5.3 Indemnification. To the extent of its respective pro rata interest in
the Bridge Loan Notes, each Other Creditor agrees to indemnify, defend and hold
DayStar, its general and limited partners and the directors, officers and agents
of such general and limited partners, harmless from and against all liabilities,
demands, damages, penalties, losses, costs and expenses (including attorneys'
fees and costs) arising out of (i) any claims made by the Borrower or by any
party resulting from any breach of this Agreement by any Other Creditor
(including any action contesting any Other Creditor's rights to the Collateral),
or (ii) any error, act, omission to act (other than gross negligence or willful
misconduct) by DayStar in its performance of this Agreement.
3
<PAGE>
VI. MISCELLANEOUS
6.1 Independent Credit Investigations. Neither the Other Creditors nor
DayStar shall be responsible to the other for the Borrower's solvency, financial
condition or ability to repay any claim created under any of the Loan Documents,
or for statements of the Borrower, oral or written, or for the validity,
sufficiency or enforceability of any claim created under any of the Loan
Documents or the ownership or value of the Collateral. The Other Creditors and
DayStar have entered into their respective financing agreements with Borrower
based upon their own independent investigations and no party makes any warranty
or representation to any other party hereto, nor does any party rely upon any
representation of another party hereto, with respect to matters identified or
referred to in this Section 6.1.
6.2 UCC Filings, Etc. The Other Creditors will cooperate with and assist
DayStar in the making of any filings (including UCC filings) and the taking of
any other steps reasonably deemed necessary by DayStar to memorialize or protect
the Other Creditors' security interest in the Collateral.
6.3 Governing Law; Jurisdiction. This Agreement shall be governed by and
construed in accordance with the laws of the State of California. Any litigation
between the parties which arises out of this Agreement shall be instituted and
prosecuted only in the appropriate California or Federal court or other
tribunal, situated in San Francisco, California. The parties hereto each
specifically submit to the exclusive jurisdiction of such courts or such other
tribunal for purposes of any such action and the enforcement of any judgment or
order arising therefrom. The parties hereto each waive any right to a change of
venue and any and all objections to the jurisdiction of California courts.
Notwithstanding the foregoing, DayStar may take such actions in a foreign
jurisdiction which DayStar deems necessary and appropriate to enforce or collect
any court judgment in any dispute arising out of this Agreement or to seek and
obtain other relief as is necessary to enforce the terms of this Agreement. No
term or provision of this Agreement may be altered, modified, limited or amended
except by an agreement expressly referring hereto and to which the parties
hereto consent in writing.
6.4 No Joint Venture. This Agreement does not (and is not intended to)
create a partnership, joint venture, association or other entity nor create any
fiduciary relationship between the parties hereto. Any and all actions to be
taken by either party under this Agreement shall be taken as an independent
contracting party.
6.5 Successors and Assigns. This Agreement is not assignable by any party
hereto without the prior consent of the other parties hereto, except that
DayStar may assign its rights and obligations hereunder to any entity under
common control with it. The provisions hereof shall inure to the benefit of, and
be binding upon, the affiliates, successors, assigns, heirs, executors and
administrators of the parties hereto.
6.6 Notices. All notices, consents and other communications required or
permitted hereunder shall be given to all parties hereto and shall be in writing
and to the address set forth under each party's signature hereto, or such other
address as the parties may designate from time to time by written notice to each
other. Any notice, consent or other communication so addressed
4
<PAGE>
shall be effectively given upon receipted personal delivery (reputable overnight
courier permissible), confirmed facsimile transmission or United States
certified mail delivery. Any notice given by.other means shall be deemed given
upon its arrival at the address for notices.
6.7 Severability. Any invalidity, illegality or limitation on the
enforceability of any of the provisions of this Agreement shall in no way affect
or impair the validity, legality or enforceability of the remaining provisions
of this Agreement.
6.8 Delays or Omissions. No delay or omission by any party hereto to
exercise any right, power or remedy accruing upon any breach or default under
this Agreement or the Loan Documents, respectively, shall impair any such right,
power or remedy, nor shall it be construed to be a waiver of any such breach or
default, or any acquiescence therein, or of or in any similar breach or default
thereafter occurring; nor shall any waiver of any single breach or default be
deemed a waiver of any other breach or default theretofore or thereafter
occurring.
6.9 Attorneys' Fees. In the event of any litigation or other proceeding
between or among the parties hereto relating to this Agreement, the prevailing
party or parties shall be entitled to be reimbursed by the non-prevailing party
or parties for its or their reasonable attorneys' fees, court costs and
expenses.
6.10 Injunctive Relief. The Creditors agree that if any Creditor breaches
the Creditors' covenants contained in this Agreement, DayStar and the Other
Creditors may suffer irreparable harm and significant injury which may be
difficult to ascertain. Accordingly, without limiting DayStar's right to pursue
legal remedies on behalf of itself or the Other Creditors, DayStar shall have
the right to seek an immediate injunction and such other appropriate equitable
relief to enjoin any breach of this Agreement.
6.11 Integration. This Agreement supersedes all prior and contemporaneous
discussions, understandings and agreements among any of the parties as to the
subject matter hereof and represents the entire agreement of the parties as to
such subject matter.
6.12 Acknowledgment and Cooperation of Other Creditors. Each Other
Creditor agrees to use its best efforts in complying with this Agreement and
will fully cooperate with every Other Creditor and DayStar in fulfilling all of
the obligations created hereunder.
6.13 Counterparts. This Agreement may be executed in any number of
counterpart signature pages, each of which shall be an original for all
purposes, but all of which together shall constitute one instrument. Any
signature hereto transmitted by facsimile shall have the full force and effect
as the original signature.
6.14 Interpretation. This Agreement shall be construed evenly between the
parties without regard to which of the parties caused any uncertainty to exist.
5
<PAGE>
IN WITNESS WHEREOF, each of the undersigned has executed this
Intercreditor Agreement as of the date first written above.
DAYSTAR PARTNERS, L.P.
By: Larry Wells Co., Inc.
Its General Partner
By:____________________________
Larry Wells, President
Address: 10600 N. DeAnza Blvd., Ste. 215
Cupertino, CA 95014
Fax No.: 408-257-8111
OTHER CREDITORS:
The Smith 1987 Family Trust
By:
---------------------------------
Richard D. Smith, Trustee
By:
---------------------------------
Patricia Ann Smith, Trustee
Address: 2415 Smith Court
Palo Alto, CA 94301
-------------------------------------
Douglas Lee
Address: 2100 Garden Road, No. 306
Monterey, CA 93940
-------------------------------------
Ted Kalborg
Address: Tufton Oceanic Limited
Little Tufton House
3 Dean Trench Street
London SWIP 3HB, London
6
<PAGE>
-------------------------------------
Tom Bentley
Address: 171 Estates Drive
Piedmont, CA 94611-3344
* * * * * *
The undersigned acknowledges receipt of a copy of the foregoing Agreement.
Acknowledged:
QuietPower Systems, Inc.
By: Dated: _______________, 1996
------------------------------
Its:
------------------------------
7
<PAGE>
EXHIBIT 10.12
QuietPower Systems, Inc.
1675 Broadway
New York, NY 10019
April 9, 1997
Mr. Larry Wells
DayStar Partners, L.P.
10600 N. DeAnza Blvd., Suite 215
Cupertino, CA 95014
Re: AMENDMENT TO BRIDGE LOAN FINANCING
Dear Larry:
The following is my proposal with respect to the amendment to the Bridge
Loan Financing (including the Note Purchase Agreements dated May 24, 1996, the
Secured Promissory Notes dated July 16, 1996 totaling $535,000 in principal and
the other related documents are herein collectively referred to as
the"Agreement").
We are proposing that the $147,025 installment that was due under the
Agreement on February 24, 1997 be paid on April 18, 1997 in the amount of
$150,502, and that the remaining interest and principal be paid upon the closing
of our initial public offering ("IPO") or any private offering greater than $3
million, whichever first occurs. In no event shall the remaining principal and
interest be paid later than January 15, 1998. If the Company should not comply
with the above revised terms, then the default provisions pursuant to the
original Agreement shall be applicable.
In recognition of you amending the agreement, we would be prepared to
continue accruing the debt at a 15% interest rate, and we would also propose
that the Common Stock Purchase Warrant be amended to decrease the calculation
for the share coverage from $5.00 to $4.00, but in no case greater than the
offering price of the IPO.
In addition, upon payment of the April 18, 1997 installment referred to
above, it is agreed that QuietPower shall be deemed not in default under the
Agreement as of such date.
If you are in agreement with the above terms, please sign in the space
provided below.
Sincerely,
/s/ Jonathan Charry
Jonathan Charry
President and Chief Executive Officer
Agreed and Accepted:
DayStar Partners, L.P.
By: /s/ Larry Wells
-------------------------------------------------
Larry Wells Date
<PAGE>
April 18, 1997
Mr. Larry Wells
DayStar Partners, L.P.
10600 N. DeAnza Blvd., Suite 215
Cupertino, CA 95014
Ref: Letter agreement dated April 9, 1997
Dear Larry:
As per our conversation, by signing in the space provided below, you
are hereby agreeing to extend the due date of the $150,502 payment described in
the above referenced agreement between QuietPower and DayStar Venture Partners,
L.P., until April 21,1997.
If you should have any questions regarding this, please contact me
immediately.
Sincerely,
/s/ Jonathan Charry
- -----------------------------------------
Jonathan Charry
President and Chief Executive Officer
Agreed and Accepted:
DayStar Partners, L.P.
By: /s/ Larry Wells
------------------------------------------
Larry Wells Date
<PAGE>
April 21, 1997
Mr. Larry Wells
DayStar Partners, L.P.
10600 N. DeAnza Blvd., Suite 215
Cupertino, CA 95014
Ref: Letter agreement dated April 18, 1997
Dear Larry:
As per our conversation, by signing in the space provided below, you
are hereby agreeing to extend the due date of the $150,502 payment described in
the above referenced agreement between QuietPower and DayStar Venture Partners,
L.P., until April 23, 1997.
If you should have any questions regarding this, please contact me
immediately.
Sincerely,
/s/ Jonathan Charry
- -----------------------------------------
Jonathan Charry
President and Chief Executive Officer
Agreed and Accepted:
DayStar Partners, L.P.
By: /s/ Larry Wells
------------------------------------------
Larry Wells Date
<PAGE>
April 25, 1997
Mr. Larry Wells
DayStar Partners, L.P.
10600 N. DeAnza Blvd., Suite 215
Cupertino, CA 95014
Re: Amendment to Bridge Loan Financing
Dear Larry:
The following is my proposal with respect to the amendment to the
Bridge Loan Financing (including the Note Purchase Agreement dated May 24, 1996,
the Secured Promissory Notes dated July 16, 1996 totaling $35,000 in principal
and the other related documents are herein collectively referred to as the
"Agreement").
We are proposing that the $147,025 installment that was due under
the Agreement on February 24, 1997 be paid on April 18, 1997 in the amount of
$150,502, and that the remaining interest and principal be paid upon the closing
of our initial public offering ("IPO") or any private offering greater than $3
million, whichever first occurs. In no event shall the remaining principal and
interest to be paid later than January 15, 1998. If the Company should not
comply with the above revised terms, then the default provisions pursuant to the
original Agreement shall be applicable.
In recognition of you amending the agreement, we would be prepared
to continue accruing the debt at a 15% interest rate, and we would also propose
that the Common Stock Purchase Warrant be amended to decrease the calculation
for the share coverage from $5.00 to $4.00, but in no case greater than the
offering price of the IPO.
In addition, upon payment of the April 18, 1997 installment referred
to above, it is agreed that QuietPower shall be deemed not in default under the
Agreement as of such date.
If you are in agreement with the above terms, please sign in the
space provided below.
Sincerely,
/s/ Jonathan Charry
- -----------------------------------------
Jonathan Charry
President and Chief Executive Officer
Agreed and Accepted:
DayStar Partners, L.P.
By: /s/ Larry Wells
------------------------------------------
Larry Wells Date
<PAGE>
EXHIBIT 10.13
---------------------------------
SECURITIES PURCHASE AGREEMENT
---------------------------------
dated as of April 17, 1997
by and between
QUIETPOWER SYSTEMS, INC.
and
EACH OF THE PURCHASERS LISTED IN
SCHEDULE A ANNEXED HERETO
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I
DEFINITIONS..........................................................-1-
Section 1.01 Certain Defined Terms...................................-1-
Section 1.02 References; Incorporation by Reference..................-3-
ARTICLE II.................................................................-3-
PURCHASE AND SALE..........................................................-3-
Section 2.01 Purchase and Sale of Securities; Closing................-3-
ARTICLE III................................................................-4-
REPRESENTATIONS AND WARRANTIES
OF THE COMPANY.......................................................-4-
Section 3.01 Incorporation and Authority of the Company..............-4-
Section 3.02 Qualification of the Company............................-5-
Section 3.03 Capitalization..........................................-5-
Section 3.04 Offering of Securities..................................-6-
Section 3.05 Subsidiaries............................................-6-
Section 3.06 Consents and Approvals; No Conflict.....................-6-
Section 3.07 Financial Information...................................-7-
Section 3.08 Absence of Changes......................................-7-
Section 3.09 Key Personnel...........................................-8-
Section 3.10 Absence of Undisclosed Liabilities......................-8-
Section 3.11 Transactions with Affiliates............................-8-
Section 3.12 Registration Rights.....................................-8-
Section 3.13 Absence of Litigation...................................-8-
Section 3.14 Intellectual Property...................................-9-
Section 3.15 Taxes..................................................-10-
Section 3.16 Brokers................................................-10-
Section 3.17 Extent of Offering.....................................-10-
Section 3.18 Disclosure.............................................-10-
Section 3.19 Past Activities........................................-11-
Section 3.20 Title to and Condition of Properties...................-11-
Section 3.21 Other Agreements.......................................-11-
Section 3.22 Employees..............................................-11-
Section 3.23 Compliance with Laws; Environmental....................-12-
Section 3.25 Insurance..............................................-13-
-i-
<PAGE>
Section 3.26 IPO....................................................-14-
Section 3.27 Small Business Matters.................................-14-
ARTICLE IV................................................................-14-
REPRESENTATIONS AND WARRANTIES
OF THE PURCHASERS...................................................-14-
Section 4.01 Authority..............................................-15-
Section 4.02 Investment Representations.............................-15-
Section 4.03 Accredited Investor....................................-15-
Section 4.04 No Other Representations; Disclosure; Acknowledgment...-15-
ARTICLE V.................................................................-16-
COVENANTS OF THE COMPANY..................................................-16-
Section 5.01 Investigation by the Purchasers.......................-16-
Section 5.02 Consents and Best Efforts.............................-16-
Section 5.03 Notification of Certain Matters.......................-16-
Section 5.04 Financial and other Information.......................-16-
Section 5.05 Board Visitation Rights...............................-17-
Section 5.06 Nondisclosure Agreements..............................-18-
Section 5.07 Preemptive Rights.....................................-18-
Section 5.08 Compliance............................................-18-
Section 5.09 Nonavoidance Covenant.................................-18-
Section 5.10 Other Information Provided to Stockholders............-18-
Section 5.11 Governmental Filings..................................-19-
Section 5.12 Lawsuits..............................................-19-
Section 5.14 Insurance.............................................-19-
Section 5.15 Maintain Existence....................................-20-
Section 5.16 Negative Covenants....................................-20-
Section 5.17 Regulatory and Other Authorizations; Consents.........-21-
Section 5.18 Use of Proceeds.......................................-22-
Section 5.20 Notification of Issuances.............................-22-
ARTICLE VI................................................................-22-
CONDITIONS TO CLOSING.....................................................-22-
Section 6.01 Conditions to Obligations of the Company...............-22-
Section 6.02 Conditions to Obligations of the Purchasers............-23-
ARTICLE VII...............................................................-24-
INDEMNIFICATION...........................................................-24-
-ii-
<PAGE>
Section 7.01 General...............................................-24-
Section 7.02 Indemnification Procedures............................-25-
Section 7.03 Payments to Be Net of Certain Items...................-25-
Section 7.04 Third Party Claims....................................-25-
Section 7.05 Contribution..........................................-25-
Section 7.06 Distribution of Indemnification Payments..............-26-
ARTICLE VIII..............................................................-26-
TERMINATION, WAIVER.......................................................-26-
Section 8.01 Termination...........................................-26-
Section 8.02 Waiver................................................-26-
Section 8.03 Event of Default......................................-26-
ARTICLE IX................................................................-26-
GENERAL PROVISIONS........................................................-26-
Section 9.01 Notices...............................................-26-
Section 9.02 Expenses..............................................-27-
Section 9.03 Appointment as Agent..................................-28-
Section 9.04 Public Announcements..................................-28-
Section 9.07 Headings..............................................-28-
Section 9.08 Severability..........................................-28-
Section 9.09 Entire Agreement......................................-29-
Section 9.10 No Third Party Beneficiaries; Assignment..............-29-
Section 9.11 Amendment.............................................-29-
Section 9.12 Counterparts..........................................-29-
Section 9.13 Gender and Number.....................................-30-
Section 9.14 Governing Law.........................................-30-
Section 9.15 Consent to Jurisdiction...............................-30-
-iii-
<PAGE>
SCHEDULES
Schedule A - Schedule of Purchasers
Schedule 1.01 - DayStar Note Purchase Agreements
Schedule 3.03 - Capitalization
Schedule 3.08 - Changes
Schedule 3.10 - Undisclosed Liabilities and List of Indebtedness
Schedule 3.11 - Transactions with Affiliates
Schedule 3.12 - Registration Rights
Schedule 3.13 - Litigation
Schedule 3.14 - Intellectual Property
Schedule 3.16 - Brokers Fees and Commissions
Schedule 3.20 - Liens and Encumbrances
Schedule 3.22 - Employee Agreements and Plans
Schedule 3.23 - Compliance with Law
Schedule 3.24 - Contracts and Commitments
Schedule 5.18 - Use of Proceeds
Schedule 6.02(d) - Required Consents and Waivers
EXHIBITS
Exhibit A - Form of Note
Exhibit B - Form of Warrant
Exhibit C - Form of Registration Rights Agreement
Exhibit D - Security Agreement
Exhibit E - Letter of Intent with National Securities Corporation
Exhibit F - Form of Opinion of Breslow & Walker, LLP
-iv-
<PAGE>
SECURITIES PURCHASE AGREEMENT
SECURITIES PURCHASE AGREEMENT dated as of April 17, 1997 (this
"Agreement"), by and between QUIETPOWER SYSTEMS, INC., a Delaware corporation
(the "Company"), and each of the purchasers listed on Schedule A annexed hereto
(each a "Purchaser" and collectively the "Purchasers").
R E C I T A L
This Agreement sets forth the terms and conditions upon which the
Purchasers are purchasing from the Company, and the Company is issuing to the
Purchasers for an aggregate purchase price of $2,000,000 (the "Purchase Price")
(a) $2,000,000 aggregate principal amount of the Company's senior secured
promissory notes, in the form annexed hereto as Exhibit A (the "Notes"), and (b)
warrants (the "Warrants") exercisable for 240,000 shares (the "Warrant Shares")
of common stock, par value $.01 per share, of the Company (the "Common Stock")
in the form annexed hereto an Exhibit B.
NOW, THEREFORE, in consideration of the foregoing premises and of
the mutual agreements and covenants hereinafter set forth, and for good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Company and the Purchasers hereby agree as follows:
ARTICLE I
DEFINITIONS
Section 1.01 Certain Defined Terms. As used in this Agreement, the
following terms shall have the following meanings:
"Business Day" means a day of the year on which banks are not
required or authorized to be closed in the City of New York.
"Business Plan" means the Business Plan of the Company dated
February, 1997.
"Collateral" shall have the meaning set forth for such term in the
Security Agreement.
"Collateral Assignment" means the Collateral Assignment of
Intellectual Property dated as of April 17, 1997 by and between the Company and
QPS Bridge, LLC.
"Commission" means the Securities and Exchange Commission.
-1-
<PAGE>
"Control" (including the terms "controlled by" and "under common
control with") means the possession, directly or indirectly in any capacity,
including, without limitation, as a trustee or executor (in each case, acting in
a fiduciary capacity), of the power to direct or cause the direction of the
management or policies of a Person, whether through the ownership of voting
securities, by contract or otherwise.
"DayStar Note Purchase Agreements" means the Note Purchase
Agreements listed on Schedule 1.01 hereto.
"DayStar Notes" means those notes in the principal amount of
$535,000 issued pursuant to the DayStar Note Purchase Agreements.
"Encumbrance" means a pledge, lien, security interest, mortgage,
charge, adverse claim of ownership or use, or other encumbrance of any kind
whether or not filed or recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement and any lease
deemed to constitute a security interest, and any option or other agreement to
give any security interest).
"Event of Default" shall have the meaning set forth in the Notes.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Indebtedness" means any (i) indebtedness for borrowed money
(including, without limitation, reimbursement and all other obligations with
respect to surety bonds, letters of credit and bankers' acceptances, whether or
not matured) or for the deferred purchase price of property or services, (ii)
obligations evidenced by notes, bonds, debentures or similar instruments, (iii)
indebtedness created or arising under any conditional sale or other title
retention agreement with respect to property acquired (even though the rights
and remedies of the seller or lender under such agreement in the event of
default are limited to repossession or sale of such property), (iv) capital
leases, (v) obligations to purchase, redeem, retire, defease or otherwise
acquire for value any capital stock or other security.
"Intercreditor Agreement" means the Intercreditor Agreement dated as
of April 17, 1997 by and among the Company, QPS Bridge, LLC, as Agent for the
Purchasers and DayStar Partners, L.P., as Agent for the holders of DayStar
Notes.
"Issue Date" means the date of issuance of the Notes.
"Material Adverse Effect" means any change in, or effect on, the
business of the Company, as it is currently conducted, that is or is reasonably
likely to be materially adverse to the business, prospects, property, condition
(financial or otherwise) or operations of the Company.
-2-
<PAGE>
"Person" means an individual, corporation, partnership, joint
venture, person, trust, estate, association or other entity.
"Registration Rights Agreement" means the Registration Rights
Agreement dated as of April 17, 1997 between the Company and the Purchasers.
"Securities" means the Notes, the Warrants and the Warrant Shares,
taken together.
"Securities Act" means the Securities Act of 1933, as amended.
"Security Agreement" means the Security Agreement dated as of April
17, 1997 between the Company and QPS Bridge, LLC, as Agent for the Purchasers.
"Subsidiary" of any Person means any corporation, partnership, joint
venture, trust, association or other legal entity of which such Person (either
alone or through or together with any other subsidiary) owns or has the right to
acquire, directly or indirectly, 30% or more of the economic interest or the
voting power of such entity.
"Transaction Documents" means this Agreement, the Warrants, the
Notes, the Security Agreement, the Registration Rights Agreement, the
Intercreditor Agreement, the Collateral Assignment and all other documents or
instruments required to consummate the transactions contemplated hereby.
Section 1.02 References; Incorporation by Reference. References to a
"Schedule" or an "Exhibit" are, unless otherwise specified, to a Schedule or an
Exhibit annexed to this Agreement, each of which is incorporated herein by
reference and deemed to be an integral part of this Agreement as if expressly
set forth herein.
ARTICLE II
PURCHASE AND SALE
Section 2.01 Purchase and Sale of Securities; Closing.
(a) At the Closing provided for in paragraph (b) below, the Company
agrees to sell to each of the Purchasers, and subject to the terms and
conditions hereof and in reliance upon the representations, warranties and
covenants of the Company set forth in the Transaction Documents each of the
Purchasers, severally and not jointly, agrees to purchase from the Company,
Notes in such principal amount and Warrants to purchase such number of Warrant
Shares, respectively, as specified opposite such Purchaser's name in Schedule A
annexed hereto for the portion of the Purchase Price which is specified opposite
the name of such Purchaser on
-3-
<PAGE>
Schedule A hereto. The Warrants and Warrant Shares shall have the benefit of the
registration rights set forth in the Warrant and in the Registration Rights
Agreement attached hereto as Exhibit C. The Notes shall be secured by the
Collateral pursuant to the Security Agreement in the form of Exhibit D hereto.
(b) The Closing of the sale and purchase of the Notes and the
Warrants (the "Closing") will be held on April 17, 1997 (the "Closing Date"), at
the offices of Shereff, Friedman, Hoffman & Goodman, LLP, 919 Third Avenue, New
York, New York 10022 or such other time and place as the Company and the
Purchasers shall agree. On the Closing Date, the Company shall deliver to each
of the Purchasers (i) Notes in such principal amount and (ii) Warrants to
purchase such number of Warrant Shares, respectively, as specified opposite such
Purchaser's name on Schedule A annexed hereto, in consideration of receipt of
the portion of the Purchase Price which is specified opposite the name of such
Purchaser on Schedule A hereto, registered in such Purchaser's name, or in the
name of a nominee which may be set forth under such Purchaser's name in Schedule
A or that such Purchaser shall have designated in writing by notice to the
Company prior to the Closing. On the Closing Date, the portion of the Purchase
Price which is specified opposite the name of each Purchaser on Schedule A
hereto shall be paid by the Purchasers to the Company at the Closing in
immediately available funds by wire transfer or by delivery of bank cashier's
checks or certified checks or by such other form as approved by the Company.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
OF THE COMPANY
The Company hereby represents and warrants to the Purchasers as
follows:
Section 3.01 Incorporation and Authority of the Company. The Company
is a corporation duly incorporated, validly existing and in good standing under
the laws of the State of Delaware and has all necessary corporate power and
authority to execute, deliver and perform this Agreement and the other
Transaction Documents, to carry out its obligations hereunder and thereunder and
to consummate the transactions contemplated hereby and thereby, and no further
corporate action or approval is or will be required for their respective
execution, delivery and performance. The Company has taken all necessary
corporate action to authorize the execution, delivery and performance by it of
this Agreement and the other Transaction Documents. This Agreement and the other
Transaction Documents have been duly executed and delivered by the Company and,
assuming due authorization, execution and delivery of this Agreement (and each
of the other Transaction Documents required to be executed by the Purchasers) by
each of the Purchasers, each of this Agreement and the Transaction Documents
constitute legal, valid and binding obligations of the Company enforceable
against the Company in accordance with their respective terms.
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Section 3.02 Qualification of the Company. The Company has all
necessary corporate power and authority to own, operate or lease the properties
and assets now owned, operated or leased by the Company and to carry on the
business of the Company, as it is now being conducted. The Company is duly
licensed or qualified and in good standing as a foreign corporation authorized
to do business in each jurisdiction wherein the character of the properties
owned or leased by the Company and/or the nature of the activities conducted by
the Company makes such licensing or qualification necessary. The Company has
furnished the Purchasers with copies of its Certificate of Incorporation and its
By-Laws; said copies are true and correct, and contain all amendments through
the date of the Closing.
Section 3.03 Capitalization. (a) As of the date hereof and
immediately prior to the Closing the authorized capital stock of the Company
consists of (i) 10,000,000 shares of Common Stock, of which 727,811 shares are
issued and outstanding and (ii) 10,000 shares of Preferred Stock, par value
$0.01 per share, of which 1,325 shares have designated as Series A Convertible
Preferred Stock (the "Series A Stock"). All of the shares of Series A Stock are
issued and outstanding. All of such issued and outstanding shares of Common
Stock and Series A Stock have been duly authorized and validly issued and are
fully paid, nonassessable and the holders thereof are not subject to personal
liability by reason of being such holders. None of such issued and outstanding
shares of Common Stock and Series A Stock have been issued in violation of
statutory preemptive rights or similar contractual rights granted by the
Company, or are entitled to preemptive rights. No shares of Common Stock are
held in the treasury of the Company. The Company has not authorized any other
class of capital stock. The Company has duly reserved for issuance up to 240,000
shares of Common Stock for issuance upon the exercise of the Warrants. When paid
for by, and issued to, the Purchasers, the Notes and Warrants will be duly and
validly issued, fully paid and non-assessable, and will be free and clear of any
Encumbrances and except as set forth in this Agreement or in the Notes or
Warrants will not be subject to any restriction on use or transfer. The Warrant
Shares issuable to the Purchasers upon exercise of the Warrants, will be duly
and validly issued, fully paid and non-assessable and will be free and clear of
any Encumbrances and except as set forth in this Agreement, will not be subject
to any restrictions on use, voting or transfer. The number of shares of Common
Stock to be received upon conversion of the Series A Stock, the conversion price
and the timing of conversion is as set forth on Schedule 3.03. Assuming an IPO
price of $7.50 per share as set forth on Schedule 3.03 and the full vesting and
the exercise of all outstanding options, warrants (other than the Warrants),
subscription rights, rights of exchange or conversion and all other rights to
acquire Common Stock, the number of shares of Common Stock outstanding would be
2,484,550 (not including the 240,000 Warrant Shares).
(b) Except as disclosed on Schedule 3.03 hereto, there are no
options, calls, warrants, subscription rights or rights of exchange or
conversion or other rights, agreements, arrangements or commitments of any
character relating to the capital or common stock of the Company or obligating
the Company to issue or sell any additional shares of the Company's capital or
common stock, or securities convertible into or exchangeable for such capital
stock, or obligating the Company to issue or grant any such option, call,
warrant, subscription right, right
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of conversion or other right, agreement, arrangement or commitment. The Company
has authorized options for 10,510 shares of its Common Stock which have not yet
been granted pursuant to the 1993 Stock Option Plan of the Company.
Section 3.04 Offering of Securities. Neither the Company nor, to the
knowledge of the Company, any Person or entity authorized or employed by the
Company as agent, broker, dealer or otherwise in connection with the offering or
sale of the Securities has offered the Securities for sale to, or solicited any
offers to buy the Securities from, or otherwise approached or negotiated with
respect to the Securities with, any Person or Persons other than the Purchasers
under circumstances that have involved the use of any form of general
advertising or solicitation as such terms are used in Regulation D promulgated
under the Securities Act, and neither the Company nor, to the knowledge of the
Company, any Person acting on its behalf has taken any action (including,
without limitation, any offer, issuance or sale of any security of the Company,
whether to an existing investor or otherwise, under circumstances which might
require the integration of such security with the offering of any of the
Securities under the Securities Act or the rules and regulations of the
Commission thereunder) in a manner which would make the exemptions from
registration afforded by the Securities Act unavailable for the offering,
issuance or sale of the Securities.
Section 3.05 Subsidiaries. The Company has no Subsidiaries. There
are no Persons in which the Company owns, or has the right to acquire, any
direct or indirect equity or voting interest.
Section 3.06 Consents and Approvals; No Conflict.
(a) The execution, delivery and performance of this Agreement and
each of the Transaction Documents by the Company, including, without limitation,
the offer and sale of the Notes, the Warrants and the Warrant Shares, do not and
will not require any consent, approval, authorization or other action by, or
filing with or notification to, any governmental or regulatory authority or any
third party, except for federal and state securities law filings, all of which
shall have been made prior to Closing where required.
(b) The Company is not in violation of any (i) term of its
Certificate of Incorporation or Bylaws, or (ii) in any material respect of any
mortgage, indenture, contract, agreement, instrument, or, (iii) any judgment,
decree, order, statute, rule or regulation applicable to it. The execution,
delivery and performance of this Agreement and the Transaction Documents by the
Company do not (x) conflict with or violate the charter or by-laws of the
Company, or (y) conflict with or violate any law, rule, regulation, order, writ,
judgment, injunction, decree, determination or award applicable to the Company,
or (z) result in any breach of, or constitute a default (or event which with the
giving of notice or lapse of time, or both, would become a default) under, or
give to others any rights of termination, amendment, acceleration or
cancellation of, or result in the creation of any Encumbrance on any of the
assets or properties of the Company pursuant to, any note, bond, mortgage,
indenture, contract,
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agreement, lease, license, permit, franchise or other instrument relating to
such assets or properties to which the Company is a party or by which any of
such assets or properties is bound.
Section 3.07 Financial Information.
(a) The Company has furnished to the Purchasers a complete and
correct copy of the unaudited balance sheets of the Company (the "Balance
Sheets") as of December 31, 1995 and December 31, 1996, and the related
statements of income for the 12 months ending on such dates, all as compiled by
the Company (collectively, the "Financial Statements"). The Financial Statements
are complete and correct, are in accordance with the books and records of the
Company and present fairly the financial condition and results of operations of
the Company, as at the dates and for the periods indicated, and have been
prepared in accordance with generally accepted accounting principles
consistently applied, except that the Financial Statements are not audited and
are subject to normal year-end audit adjustments which in the aggregate will not
be material.
Section 3.08 Absence of ChangesExcept as set forth on Schedule 3.08,
since December 31, 1996,
(i) the Company has not entered into any transaction
which was not in the ordinary course of its business;
(ii) there has been no material adverse change in the
business, prospects, financial condition or results of operations of the
Company, except for losses incurred in the ordinary course of business, which
would not be expected to have a Material Adverse Effect;
(iii) there has been no damage to, or destruction or
loss of, physical property (whether or not covered by insurance) which may have
a material adverse effect on the business and condition of the Company;
(iv) the Company has not declared or paid any cash
dividend or made any distribution on its securities, or redeemed, purchased, or
otherwise acquired any of its securities;
(viii) there has been no borrowing or agreement to
borrow by the Company or change in the contingent obligations of the Company by
way of guaranty, endorsement, indemnity, warranty, or otherwise or grant of a
mortgage or security interest in any properties of the Company;
(ix) there has not been any payment of any obligation or
liability other than current liabilities paid in the ordinary course of
business; and
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(x) there has been no sale, assignment, transfer, or
encumbrance of any tangible asset of the Company except in the ordinary course
of business and no sale, assignment, transfer, or encumbrance of any
Intellectual Property, trade secret, or other intangible asset of the Company
or, to the knowledge of the Company, any unauthorized disclosure of any
proprietary or confidential information on the Company.
Section 3.09 Key Personnel. To the knowledge of the Company,
Jonathan M. Charry, Eric W. Jacobson, and Mark J. Dietrich do not intend to
leave the Company.
Section 3.10 Absence of Undisclosed Liabilities. Except as set forth
in the Financial Statements and on Schedule 3.10, the Company has no
Indebtedness, liability or obligation of any nature, whether absolute, accrued,
contingent or otherwise, related to or arising from the operation of its
business or other ownership, possession or use of its assets, except for such
indebtedness, liability or obligation incurred in the ordinary course of its
business. Set forth on Schedule 3.10 is a list of all Indebtedness of the
Company as of the date hereof, broken down into principal and interest accrued
through a recent date (such date shall be no earlier than March 31, 1997), and
the maturity date of such Indebtedness.
Section 3.11 Transactions with Affiliates. Except as set forth on
Schedule 3.11, the Company has not approved or entered into any transaction with
any officer or director of the Company which would be subject to disclosure,
pursuant to the requirements of Items 404 of Regulation S-K promulgated under
the Securities Act, if the Company were subject to the provisions of the
Securities Act. To the knowledge of the Company, no event has occurred
concerning any officer or director of the Company which would be subject to
disclosure, pursuant to the requirements of Items 401(f) of Regulation S-K
promulgated under the Securities Act, if the Company were subject to the
provisions of the Securities Act. Except as set forth on Schedule 3.11, there
are no outstanding notes payable to or accounts receivable from, or advances by
the Company to, and the Company is not otherwise a creditor of, any officer,
employee, five per cent stockholder, director or partner of the Company. No
officer, employee, five per cent stockholder, director or partner of the Company
owns any of the property used to conduct the business of the Company.
Section 3.12 Registration Rights. Except as set forth on Schedule
3.12 or as required by the Transaction Documents, the Company is not under any
obligation to register any of its presently outstanding securities or any of its
securities which may hereafter be issued.
Section 3.13 Absence of Litigation. Except as set forth in Schedule
3.13, there is no litigation, arbitration, claim, action, suit, governmental, or
other proceeding (formal or informal) or investigation pending or, to the
knowledge of the Company, threatened (or any basis therefor known to the
Company) with respect to the Company, any of its businesses, properties, or
assets, or any of its directors, officers, or employees to the extent such
proceeding relates to the business of the Company. Except as set forth in
Schedule 3.13, the Company is not subject to any judgment, order or decree.
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Section 3.14 Intellectual Property.
(a) Schedule 3.14 sets forth all patents, patent applications,
tradenames, trademarks, service marks, copyrights, or other intellectual
property or technology and applications for any of the foregoing used or owned,
directly or indirectly, by the Company. The Company owns or has otherwise
obtained adequate and enforceable licenses or other rights to use and/or develop
and license all of the property required by the preceding sentence to be
disclosed in Schedule 3.14 and to all inventions, trade secrets, processes,
formulae, hardware and software necessary for, or used in, the operation of its
business (including, without limitation manufacturing) as now conducted or
proposed to be conducted as described in the Business Plan (the "Intellectual
Property"). The Company will not assign or transfer any of its Intellectual
Property (other than the grant of licenses or sublicenses not related to
financings, and otherwise in the ordinary course of business) to any Person
other than as may be required by the DayStar Note Purchase Agreements or under
the Security Agreement.
(b) Except as set forth on Schedule 3.14 (i) no other Person has
been granted, by the Company or otherwise, any rights, or has any interest, in
such Intellectual Property and (ii) to the knowledge of the Company, with
respect to any Intellectual Property which have been assigned or licensed to the
Company, the assigning or licensing party is fully authorized to assign such
rights to the Company without thereby creating an obligation of the Company to
any Person. Except as set forth in Schedule 3.14, the rights of the Company to
the Intellectual Property are free and clear of any liens or other Encumbrances.
No claims have been asserted, and, to the knowledge of the Company, no claim has
been threatened, by any Person regarding the use or licensing of any of the
Intellectual Property by the Company or challenging or questioning the validity,
enforceability or effectiveness of any licenses or agreements (including,
without limitation, assignments) relating to Intellectual Property or asserting
any rights in such Intellectual Property. To the best knowledge of the Company,
the use of its Intellectual Property by the Company does not violate or
infringe, and has not in the past violated or infringed, the rights of any
Person. No claims have been asserted by the Company against any other Person
claiming infringement of the Intellectual Property. Except as set forth on
Schedule 3.14, the Company has not granted any licenses to the Intellectual
Property (other than those granted as a result of the sales of any proprietary
product of the Company in the ordinary course of business), and is not aware of
any third parties who are infringing or violating any of such Intellectual
Property. Neither the Company nor, to the knowledge of the Company, any other
Person is in default under any license or other agreement relating to the
Intellectual Property (including without limitation, assignments), and all such
licenses and agreements are valid, enforceable and in full force and effect.
(c) Except as set forth on Schedule 3.14, all inventors of the
patents and patent applications owned by the Company set forth on Schedule 3.14
are employees of the Company and have executed or agreed to execute an
assignment of patent with respect to any such patents or patent applications.
Except as set forth on Schedule 3.14, the Company has no
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obligation to pay any royalties with respect to the use of the patents and
patent applications on Schedule 3.14.
Section 3.15 Taxes. The Company has filed or will file all federal,
state and local tax returns required to be filed or sent or has obtained
extensions thereof. The Company has timely paid or made provision for all taxes
shown as due and payable on its returns required to be filed prior to the date
hereof and all assessments received by the Company and will timely pay all taxes
that will be shown as due and payable on its returns required to be filed after
the date hereof, except to the extent that the Company shall be contesting such
taxes and assessments in good faith by appropriate proceedings (and in respect
of which the Company has set aside adequate reserves). The Company has not been
the subject of an audit by any governmental entity with respect to any tax
return filed by the Company.
Section 3.16 Brokers. Except as set forth on Schedule 3.16 and
except as set forth in Section 9.02 below, no broker, finder or investment
banker is entitled to any brokerage, finders or other fee or commission in
connection with the transactions contemplated by this Agreement based upon
arrangements made by or on behalf of the Company and the Company has not paid or
issued any monies, securities or other compensation to any member of the
National Association of Securities Dealers, Inc. ("NASD") or to any associate or
affiliate of such a member or to any other Person in consideration for such
Person raising funds for the Company or providing consulting services to the
Company during the previous 12 months. The Company does not owe any monies or
other obligations to any NASD member, associate or affiliate.
Section 3.17 Extent of Offering. Subject in part to the truth and
accuracy of the Purchasers' representations set forth in Article IV of this
Agreement, the offer, sale and issuance of the Securities as contemplated by
this Agreement are exempt from the registration requirements of the Securities
Act and of each state where the Securities are offered or sold, and neither the
Company nor, to the best of the Company's knowledge, any agent acting on its
behalf, will take any action hereafter that would cause the loss of such
exemption.
Section 3.18 Disclosure. No representations or warranties by the
Company set forth in this Agreement or the Transaction Documents, and no
statement contained in this Agreement or the Transaction Documents or the
Business Plan, contains any untrue statement of a material fact or omits to
state any material fact necessary, in light of the circumstances under which it
was made, in order to make the statements herein or therein not misleading. All
information contained the Business Plan and in any financial statement,
application, schedule, report, certificate, agreement, or any other document
provided by the Company or by any other officer, director or shareholder in
connection with the issuance of the Notes and the Warrants is in all material
respects true and accurate, and the Company or such other Person has not omitted
to state any material fact or any fact necessary to make such information not
misleading. There is no fact known to any Person executing this Agreement or the
Transaction Documents that has not been disclosed in writing to the Purchasers
that materially and adversely affects the business, earnings, prospects,
properties, performance or condition (financial or otherwise) of the
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Company or materially adversely affects or in the future could reasonably be
expected to materially adversely affect the ability of the Company to perform
its obligations under this Agreement or the Transaction Documents. The
projections contained in the Business Plan were prepared by the Company with
reasonable care, are based on good faith estimates and assumptions by the
Company, and represent the Company's good faith projection of results of
operations to be achieved for the periods covered by the projections. The
Company does not warrant that the projections will be achieved.
Section 3.19 Past Activities. During the past ten (10) years, except
as previously disclosed to the Purchaser in writing, none of the Company's
current directors or officers have been arrested or convicted of any material
crime, nor have any of them been the subject of a voluntary or involuntary
bankruptcy proceeding or been an officer or director of a company which has been
the subject of a voluntary or involuntary bankruptcy proceeding.
Section 3.20 Title to and Condition of Properties. The Company has
good and marketable title to all its tangible and intangible property and
assets, including those reflected in the Financial Statements (except such
property or assets as have since December 31, 1996 been sold or otherwise
disposed of in the ordinary course of business), and except as set forth on
Schedule 3.20 such property and assets are subject to no mortgage or security
interest, conditional sales contract, charge, lien or Encumbrance (except for
the lien of current taxes not yet due and payable and such imperfections of
title, easements and encumbrances, if any, as are not substantial in character,
amount or extent and do not materially detract from the value of, or interfere
with the present use of the properties subject thereto or affected thereby, or
otherwise materially impair the Company's business operations), and subsequent
to December 31, 1996, the Company has not sold or disposed of any of its
property and assets or obligated itself to do so except in the ordinary course
of business. Except for such minor defects as are not substantial in character
and which do not have a materially adverse effect upon the validity thereof, all
material real and personal property leases to which the Company is a party are
valid and effective, and there is not under any such lease any existing material
default or event which with notice or lapse of time or both would constitute a
material default. Attached as Schedule 3.20 hereto is a complete and accurate
list of every material lease of real or personal property to which the Company
is a party and which is in effect as of the date hereof.
Section 3.21 Other Agreements. The Company has not entered into any
written or oral "side agreements" which amend or modify any other agreement
entered into by the Company, and none of the officers and directors of the
Company have agreed to take any action beyond what is required in any other
agreement entered into by the Company which have a value or require the Company
to pay an amount in excess of $25,000, other than as set forth on Schedule 3.24.
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Section 3.22 Employees.
(a) None of the employees of the Company is represented
by any labor union, and there is no labor strike or other labor trouble pending
with respect to the Company (including, without limitation, any organizational
drive) or, to the best of the Company's knowledge, threatened. Other than as set
forth on Schedule 3.22, no employee has any agreement or contract regarding his
or her employment.
(b) No accumulated funding deficiency (as defined in Section
302 of Employee Retirement Income Security Act of 1974, as amended ("ERISA") or
Section 412 of the Internal Revenue Code (the "Code")), whether or not waived,
exists with respect to any pension plan of the Company. No liability to the
Pension Benefit Guarantee Corporation has been, or is reasonably likely to be
incurred with respect to any such pension plan by the Company, or any ERISA
affiliate. The Company is not a "party in interest" (as defined in Section 3(14)
of ERISA) or a "disqualified person" (as defined in Section 4975(e)(2) of the
Code) with respect to the Purchasers. To the best knowledge of the Company, no
fiduciary of or "party in interest" or "disqualified person" with respect to any
employee benefit plan (as defined in Section 3(3) of ERISA) maintained or
contributed to the Company or any of its Subsidiaries, for the benefit of their
respective employees (each an "Employee Plan") has engaged in or caused any
Employee Plan to engage in any "prohibited transaction" (within the meaning of
Section 4975 of the Code and Sections 406 or 407 of ERISA) that has resulted in
the imposition of any tax or penalty imposed under Section 4975 of the Code or
Section 502 of ERISA that has not been satisfied. Each Employee Plan has been
maintained and administered in compliance with all applicable law including
ERISA and the Code. Each Employee Plan which is intended to qualify under
Section 401(a) of the Code has been so qualified during the period from its
adoption to dated. There are no pending IRS audits or controversies with respect
to any pension plan. The Company has no trade or business, whether or not
incorporated, which, together the Company, is under common control, as described
in Section 414(b) or (c) of the Code. Attached as Schedule 3.22 hereto is a
complete and accurate list of every Employee Plan to which the Company is a
party and which is in effect as of the date hereof.
Section 3.23 Compliance with Laws; Environmental.
(a) Compliance With Law. Except as set forth on Schedule 3.23
hereto, the operations of the Company have been conducted in all material
respects in accordance with all applicable laws, regulations and other
requirements of all governmental bodies having jurisdiction over the Company.
The Company has not received any notification of any asserted present or past
failure to comply with any such laws, rules or regulations. The Company has all
material licenses, permits, orders or approvals ("Permits") from governmental
bodies required for the conduct of its business (a list of which is provided on
Schedule 3.23 and copies of which have been provided to the Purchasers). All
such Permits are in full force and effect, and there exists no violations or
breaches of any such Permits.
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(b) Compliance With Legislation Regulating Environmental
Quality. Except where non-compliance is not reasonably likely to have a Material
Adverse Effect on the Company, the facilities which currently are owned,
operated or leased by the Company, are, and, to the knowledge of the Company, at
all times have been, maintained and operated in compliance with all applicable
federal, state and local environmental protection, occupational, health and
safety or similar laws, ordinances, restrictions, orders, regulations and
licenses (collectively "Environmental Laws") including but not limited to the
Federal Water Pollution Control Act (33 U.S.C. ss. 1251 et seq.), Resource
Conservation & Recovery Act (42 U.S.C. ss. 6901 et seq.), Safe Drinking Water
Act (21 U.S.C. ss. 349, 42 U.S.C. ss.ss. 201, 300f), Toxic Substances Control
Act (15 U.S.C. ss. 2601 et seq.), Clean Air Act (42 U.S.C. ss. 7401 et seq.),
Comprehensive Environmental Response, Compensation and Liability Act (42 U.S.C.
ss. 9601 et seq.), California Health & Safety Code (ss. 25100 et seq., ss. 39000
et seq.), and California Water Code (ss. 13000 et seq.). To the knowledge of the
Company, no materials, substances, or products have been at any time placed,
held, located disposed of or released on, under, at, within, or about the
facilities which may reasonably be expected to result in a regulatory agency or
other governmental entity requiring clean up, removal or other remedial action
by the Company under Environmental Laws with such exceptions as would not in the
aggregate have a material adverse effect on the Company. To the knowledge of the
Company, no hazardous or toxic substance, waste or material (collectively
"Hazardous Materials") has at any time been used, stored, treated, transported
or handled by the Company or any of its consultants, contractors or agents on,
under, at, within, or about the facilities except Hazardous Materials that are
used, stored, treated, transported or handled on, under, at, within or about the
Facilities in material compliance with Environmental Laws. No litigation,
administrative enforcement actions, proceedings or notices of potential
liability have been (x) received, served or, to the best knowledge of the
Company, filed or threatened against the Company or (y) to the actual knowledge
of the Company, received, served, filed or threatened against any predecessor
business or landowner or with respect to any facility owned or leased by the
Company, in each case, relating to damage, contribution, cost recovery,
compensation, loss or injury resulting from any Hazardous Materials or arising
out of the use, generation, storage, treatment, release, discharge,
transportation, handling or disposal of Hazardous Materials or resulting from a
violation or alleged violation of Environmental Laws.
Section 3.24 Material Contracts and Obligations. Schedule 3.24
contains a true and complete and accurate list and a brief description of all
contracts, agreements, understandings or other obligations (whether written or
oral) to which the Company is a party or by which any of its assets, properties,
and, with respect to the business of the Company, its employees or key
consultants are bound (true, complete and correct copies of which have
previously been delivered by the Company to the Purchasers), under which or
pursuant to which the Company is obligated to make cash payments of, or to
deliver products or render services with a value greater than $25,000 or receive
cash payments of or receive products or services with a value greater than
$25,000 or which are otherwise material to the Company. All of such material
agreements are valid, binding, enforceable and in full force and effect. The
Company is
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not, and to its knowledge believes that no other party is, in default in any
material respect under any of such agreements.
Section 3.25 Insurance. The Company maintains with well-rated and
responsible insurance companies such insurance as is required by applicable laws
and such other insurance in such amounts, of such types, and against such risk,
hazards, liabilities, casualties, and contingencies as is customarily maintained
by companies similarly situated (including Federal flood insurance if the
businesses of the Company are located in a Federal Flood Area).
Section 3.26 IPO.
(a) The Company and National Securities Corporation (the
"Underwriter") have executed a letter of intent, dated as of January 4, 1997
(the "Letter of Intent") pursuant to which the Company intends to file with the
Commission a registration statement (the "Registration Statement") in connection
with the Company's proposed initial public offering of Common Stock to raise
gross proceeds of $15,000,000 (the "IPO"). A full, true and correct copy of the
Letter of Intent is attached hereto as Exhibit E, and such letter has not been
amended or modified orally or in writing, in any material respect.
(b) The completion by the Company of the IPO will not require
any consent, approval, authorization or other action by, or filing with or
notification to, any governmental or regulatory authority or agency except for:
(i) the declaration of effectiveness by the Commission of the Company's IPO
registration statement, (ii) approval of the Common Stock for listing on the
American Stock Exchange, the Nasdaq Stock Market or such other stock exchange
selected by the Company and the Underwriter, (iii) required Blue Sky approvals,
and (iv) approval by the NASD of the compensation to be paid by the Company to
the underwriter in connection with such IPO. It is the present intention of the
Company to list on the American Stock Exchange.
Section 3.27 Small Business Matters. The Company, together with its
"affiliates" (as that term is defined in Title 13, Code of Federal Regulations,
ss. 121.401), is a "small business concern" within the meaning of the Small
Business Investment Act and the regulations thereunder, including Title 13, Code
of Federal Regulations, Part 121 (the "SBIA"). The information set forth in the
Small Business Administration Forms 480, 652, and 1031 delivered to the
Purchasers requesting such information regarding the Company is accurate and
complete. Copies of such forms have been completed by the Company and delivered
to the Purchasers requesting such forms prior to the date hereof along with a
list of (i) the name and title of each of the Company's directors as of the date
hereof, and (ii) the name of each of the Company's stockholders setting forth
the number and class of shares held. The Company does not presently engage in
any activities, nor will the Company use directly or indirectly the proceeds
from the sale and issuance of the Securities hereunder for any purpose for which
a Small Business Investment Company is prohibited from providing funds by the
SBIA.
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES
OF THE PURCHASERS
Each of the Purchasers, severally but not jointly, represents and
warrants to the Company as follows:
Section 4.01 Authority. The Purchaser has all necessary power and
authority to enter into this Agreement and, where applicable, the Transaction
Documents, to carry out its obligations hereunder and to consummate the
transactions contemplated hereby.
Section 4.02 Investment Representations.
(a) The Purchaser is acquiring the Securities solely for the purpose
of investment and not with a view to, or for offer or sale in connection with,
any distribution thereof. The Purchaser acknowledges that the Securities are not
registered under the Securities Act and that no Securities may be transferred or
sold except pursuant to the registration provisions of the Securities Act or
pursuant to an applicable exemption therefrom and subject to state securities
laws and regulations, as applicable.
(b) Each Purchaser acknowledges and agrees that the purchase of the
Securities involves a high degree of risk and may result in a loss of the entire
amount invested.
Section 4.03 Accredited Investor. The Purchaser is an "accredited
investor" within the meaning of Rule 501 of Regulation D promulgated under the
Securities Act because either (i) the Purchaser is an individual whose net
worth, either individually or with his or her spouse, exceeds $1,000,000 on the
date hereof; (ii) the Purchaser is an individual whose individual income
exceeded $200,000 in each of the two previous years or whose joint income with
his or her spouse exceeded $300,000 in each of the two previous years, and has a
reasonable expectation of reaching the same income level in the current year;
(iii) the Purchaser is an entity described in Section 501(c)(3) of the Internal
Revenue Code, corporation, Massachusetts or similar business trust, or
partnership, not formed for the purpose of acquiring the securities offered,
with total assets in excess of $5,000,000; (iv) the Purchaser is a trust, with
total assets in excess of $5,000,000, not formed for the specific purpose of
acquiring the securities offered, whose purchase is directed by a sophisticated
Person, or (v) the Purchaser is a non-individual Person, and each of equity
members of such Person meet the requirements of (i), (ii), (iii) or (iv) above;
Section 4.04 No Other Representations; Disclosure; Acknowledgment.
Except as set forth in this Agreement, the Purchaser is not making any
representation, warranty, covenant or agreement with respect to the matters
contained herein. No representations or warranties by the Purchaser set forth in
this Agreement contains any untrue statement of a
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material fact or omits to state any material fact necessary, in light of the
circumstances under which it was made, in order to make the statements herein or
therein not misleading.
ARTICLE V
COVENANTS OF THE COMPANY
Of the following covenants, Sections 5.01, 5.03, 5.04, 5.05, 5.06,
5.07, 5.08, 5.11, 5.12, 5.13, 5.14, 5.15, 5.16, 5.18 and 5.19 shall survive and
be in full force until both the closing of the IPO (with gross proceeds of $7.5
million) and the repayment of the Notes; and Sections 5.02, 5.09, 5.10, 5.17 and
5.20 shall survive and be in full force until the earlier of the expiration or
the exercise of all of the Warrants.
Section 5.01 Investigation by the Purchasers. The Company shall
allow the Purchasers (who have signed appropriate confidentiality agreements)
during regular business hours and upon reasonable notice through the Purchasers'
employees, agents and representatives to make such investigation of the
business, properties, books and records of the Company, and to conduct such
examination of the condition of the Company, as the Purchasers deem reasonably
necessary or advisable to familiarize themselves with such business, properties,
books, records, condition and other matters, and to verify the representations
and warranties of the Company hereunder and to discuss the Company's affairs,
finances and accounts with the Company's officers, all at such reasonable times
and as often as may be reasonably requested.
Section 5.02 Consents and Best Efforts. Subject to the terms and
conditions provided herein, the Company covenants and agrees to use its
commercially reasonable best efforts to take, or cause to be taken, all action
or do, or cause to be done, all things necessary, proper or advisable under
applicable laws and regulations to consummate and make effective the
transactions contemplated hereby and to cause the fulfillment of its obligations
hereunder.
Section 5.03 Notification of Certain Matters. The Company shall give
prompt notice to the Purchasers, of (i) the occurrence, or failure to occur, of
any event which occurrence or failure would be likely to cause any
representation or warranty contained in this Agreement to be untrue or
inaccurate in any material respect as of the Closing Date and (ii) any material
failure of the Company to comply with or satisfy any covenant, condition or
agreement to be complied with or satisfied by it hereunder, and shall use all
reasonable efforts to remedy same.
Section 5.04 Financial and other Information. (a) The Company will
deliver to the Purchasers as soon as practicable after the end of each fiscal
year of the Company, and in any event within 90 days thereafter, consolidated
and consolidating balance sheets of the Company and its Subsidiaries, if any, as
at the end of such fiscal year, and consolidated and consolidating statements of
income and surplus and consolidated and consolidating statements of changes in
financial position of the Company and its Subsidiaries, if any, for such year,
prepared in
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accordance with generally accepted accounting principles consistently applied
and setting forth in each case in comparative form the figures for the previous
fiscal year, all in reasonable detail, and, if the Company's shares are then
publicly traded, certified by independent public accountants of recognized
national standing selected by or reasonably acceptable to the Company.
Concurrently therewith, the Company shall also deliver copies of any management
letters provided by the Company's auditors in connection with is annual audit.
(b) Monthly Reports. As soon as practicable after the end of each
calendar month and in any event within thirty (30) days thereafter, unaudited
consolidated and consolidating balance sheets of the Company and its
Subsidiaries, if any, as at the end of such month, and unaudited consolidated
and consolidating statements of income, of costs and expenses and of
shareholders equity, and cash flow statements for each month and for the current
fiscal year to date, all containing actual financial information prepared in
accordance with generally accepted accounting principles consistently applied,
except that such statements shall have been prepared for the internal use of
management and may not be in accordance with generally accepted accounting
principles because of the absence of footnotes normally contained therein and
are subject to normal year-end audit adjustments which in the aggregate will not
be material. Such monthly statements shall include comparisons to the projected
results previously given to the Purchasers for the relevant fiscal period, in
reasonable detail, and shall be signed by the principal financial officer of the
Company.
(c) Budgets. Not later than one month prior to the beginning of each
fiscal year, the budget approved by the Company's Board of Directors, including
projected financial statements of the Company and each material Subsidiary.
Within ten days after a material change is made in the projected financial
results, as compared to the projection previously delivered, such change shall
be disclosed to each Purchaser.
(d) Minutes. Copies of the minutes of proceedings of the Company's
Board of Directors and Shareholders to any holder who has signed an appropriate
confidentiality agreement.
(e) Board Packages; Commission Filings. The Company will, promptly
after such material becomes available, furnish to the Purchasers a copy of any
other documents provided to the Company's directors and of all of the Company's
fillings with the Commission, provided that the Purchasers shall have signed an
appropriate confidentiality agreement.
(f) Compliance Certificate. The Company will promptly furnish to the
Purchasers copies of any compliance certificates furnished to lenders in respect
of indebtedness of the Company and such other financial and other data of the
Company as the Purchasers may reasonably request.
Section 5.05 Board Visitation Rights. The Company shall allow the
Purchasers to have one observer present at all meetings of the Board of
Directors and committees of the
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Board of Directors and such observer shall be entitled to participate in
discussions and consult with the Board of Directors and committees of the Board
of Directors, without voting, provided that any such observer shall have signed
an appropriate confidentiality agreement.
Section 5.06 Nondisclosure Agreements. The Company shall require all
key management Persons now or hereafter employed by the Company who have access
to confidential and proprietary information of the Company to enter into
nondisclosure agreements in a form that is commercially reasonable.
Section 5.07 Preemptive Rights. In the event of a financing of the
Company effected by the sale by the Company of its Common Stock (or any other
voting or other security of the Company or security convertible into or
exercisable for such Common Stock) in a private offering prior to an IPO, the
Purchasers shall be entitled to purchase shares in such sale on a pro rata basis
in respect of the Common Stock then beneficially owned by them, on a fully
diluted basis (assuming exercise of the Warrant and all other outstanding
warrants and options), so that following such sale, each Purchaser will, if it
has elected to purchase the securities to be sold, beneficially own the same
percentage of the equity ownership of the Company on a fully diluted basis as it
had before such sale (assuming in each case exercise of the Warrant and all
other outstanding warrants and options). The Company shall provide the
Purchasers with a minimum of ten (10) business days notice of the anticipated
pricing of such offering, which notice shall indicate the anticipated size and
range of pricing of the offering, and based on such notice, each Purchaser shall
advise the Company within five (5) business days as to whether it elects to
exercise its rights under this Section 5.07, and if it so elects, such Purchaser
shall tender payment for the same securities, at the same time, and in the same
manner as the other purchaser(s) in such offering.
Section 5.08 Compliance. The Company shall maintain all licenses,
permits, governmental approvals, rights, privileges and franchises necessary for
the conduct of its business; conduct its business in an orderly and regular
manner; and comply with the provisions of all documents pursuant to which the
Company is organized and/or which govern the Company's continued existence and
with the requirements of all laws, regulations and orders of a governmental
agency applicable to the Company or its business, to the extent that the failure
to maintain or comply with any of the above would have a Material Adverse
Effect.
Section 5.09 Nonavoidance Covenant. The Company will not, by
amendment of its Certificate of Incorporation or through reorganization,
consolidation, merger, dissolution or sale of assets, or by any other voluntary
act, deed or omission, avoid or seek to avoid the performance or observance of
any of the covenants, stipulations or conditions to be performed or observed by
the Company as set forth herein, or in the Note, the Warrant, or the other
Transaction Documents, but will at all times in good faith assist, insofar as it
is able, in the carrying out of all provisions of this Agreement, the Note, the
Warrant, and the other Transaction Documents and in the taking of all other
action which may be reasonably necessary in order to protect the rights of the
Purchasers.
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Section 5.10 Other Information Provided to Stockholders. The Company
shall provide to the Purchasers all information or correspondence (including,
without limitation, all proxy statements and annual or quarterly reports) which
it provides to its stockholders, at the same time and in the same manner as the
Company provides such information to its stockholders.
Section 5.11 Governmental Filings. The Company shall (i) pay and
discharge when due any and all Indebtedness, obligations, assessments and taxes,
both real or personal and including federal and state income taxes, except such
as the Company may in good faith contest or as to which a bona fide dispute may
arise, provided provision is made to the reasonable satisfaction of the Company
for eventual payment thereof in the event that it is found that the same is an
obligation of the Company, and (ii) promptly give notice in writing to the
Purchasers of any pending assessment or adjustment by any taxing authority
against the Company. Within thirty (30) days after filing, at the request of any
Purchaser, the Company shall provide such Purchaser with a copy of all material
reports or other documents filed by the Company with any governmental agencies,
including without limitation, the Internal Revenue Service and the Commission.
Section 5.12 Lawsuits. Within thirty (30) days after filing or
receipt, the Company shall provide each Purchaser with copies of all pleadings
filed in connection with any material suits or proceedings filed by or against
the Company in which the amount in controversy exceeds $50,000.
Section 5.13 Default Notices.
(a) Within ten (10) days after receipt of any notification, the
Company shall provide each Purchaser with a copy of any notification received by
the Company relating to any defaults by the Company on any loans, leases,
material contracts or other material agreements to which the Company is a party.
(b) The Company shall provide the Purchaser with a quarterly
certificate of the President of the Company stating that no Event of Default (or
default which, with the passage of time and notice, would become an Event of
Default) has occurred during the immediately concluded calendar quarter under
this Agreement or under any of the other Transaction Documents, or describing
the nature of any default hereunder or thereunder.
Section 5.14 Insurance. The Company will (a) at all times maintain
with wellrated and responsible insurance companies such insurance as is required
by applicable laws and such other insurance in such amounts, of such types, and
against such risks, hazards, liabilities, casualties, and contingencies as is
customarily maintained by companies similarly situated (including Federal flood
insurance if the businesses of the Company are located in a Federal Flood Area),
(b) within 5 days of the Closing, list the Purchasers on such policies as a loss
payee, to the extent of the Purchasers' interest in the Company, and (c) file
with the Purchasers annually
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a detailed list of the insurance then in effect and stating the names of the
insurance companies, the types, the amounts, and rates of the insurance, dates
of the expiration thereof and the properties and risks covered thereby, and,
within thirty (30) days after notice in writing from the Purchasers, obtain such
additional insurance as the Purchasers may reasonably request, provided that the
terms of such additional insurance (including the premiums) are dictated by
sound business judgment.
Section 5.15 Maintain Existence. The Company will at all times
maintain in full force and effect its corporate existence, rights, privileges,
and franchises and qualify and remain qualified in all jurisdictions where
qualification is required.
Section 5.16 Negative Covenants. The Company will comply with the
following negative covenants.
(a) Liens, Etc. The Company shall not create or suffer to exist, any
lien or Encumbrance (other than those set forth on Schedule 3.20) upon or with
respect to any of its properties or any of the Collateral, whether now owned or
hereafter acquired, or assign any right to receive income.
(b) Indebtedness. Except for the Indebtedness outstanding on the
date hereof as set forth on Schedule 3.10 (and only to the extent that it is not
subsequently repaid), the Company shall not incur, create, issue, assume, suffer
to exist or guarantee, or otherwise become liable in any way for, any
Indebtedness ranking superior to or pari passu with the Notes, or which contains
a cross default to the Notes including, without limitation, reborrowing any
amount of Indebtedness outstanding on the date hereof which is subsequently
repaid.
(c) Restricted Payments. The Company shall not, nor shall it permit
any of its Subsidiaries to: (i) declare or make any dividend payment or other
distribution of assets, properties, cash, rights, obligations or securities on
account or in respect of any of its capital stock (other than the conversion of
the Series A Stock in accordance with its terms as set forth on the Certificate
of Designation relating thereto), or (ii) purchase, redeem, prepay, defease or
otherwise acquire for value or make any payment (other than required payments
which have been disclosed on Schedule 3.10 to this Agreement) on account or in
respect of its capital stock or any principal amount of Indebtedness for
borrowed money, hereafter outstanding. The Company shall not pay any amount with
respect to any of the Company's Indebtedness owing to affiliates or which is
subordinated to the Notes, other than the Company's trade indebtedness incurred
in the ordinary course of business. The Company will pay amounts due pursuant to
the DayStar Notes out of the proceeds of the sale of the Securities in
accordance with Schedule 5.18 and thereafter in accordance with the terms of
such notes.
(d) Mergers, Stock Issuances, Sale of Assets, Etc. The Company shall
not (i) merge with any Person, (ii) consolidate with any Person, (iii) acquire
all or substantially all of the capital stock (iv) acquire all or substantially
all of the assets of any Person or all or
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substantially all of the assets constituting the business of a division, branch
or other unit operation of any Person, (v) enter into any joint venture or
partnership with any Person other than in the ordinary course of business, (vi)
sell, lease, transfer or otherwise dispose of, whether in one transaction or in
a series of transactions any substantial part of its assets, including, without
limitation, substantially all assets constitution the business of a division,
branch or other unit operation, or (vii) effect or cause to be effected a change
of control of the Company (other than in the IPO). The Company shall not issue
or transfer any capital stock, other than pursuant to the IPO and upon the
exercise of the options and warrants listed on Schedule 3.03 hereto. The Company
shall not sell, convey, transfer, lease or otherwise dispose of any of its
assets or any interest therein to any Person, or permit or suffer any other
Person to acquire any interest in any of the assets of the Company except the
sale or disposition of assets in the ordinary course of business or assets which
have become obsolete or are replaced in the ordinary course of business.
(e) Change in Nature of Business. The Company shall not make any
material change in the nature or conduct of its business as carried on at the
date hereof.
(f) Cancellation of Indebtedness Owed to It. The Company shall not
cancel any claim or Indebtedness owed to it except for adequate consideration or
in the ordinary cause of business.
(g) Certificate of Incorporation Amendments. The Company shall not
make any change in its capital structure (including, without limitation, in the
terms of its outstanding capital stock) or amend its certificate of
incorporation by-laws other than (i) the IPO, or (ii) for changes or amendments
which in the aggregate have no Material Adverse Effect.
(h) Change in Governing Documents. The Company shall not amend its
charter or Bylaws in a manner which would be reasonably expected to or would
adversely affect the rights and obligations of the Purchasers to purchase the
shares of Common Stock under the terms set forth in this Agreement and in the
Warrants, or to receive principal or interest in the amounts and on the dates
specified in the Notes (as this Agreement, the Warrants and the Notes may be
amended or supplemented).
(i) Affiliated Transactions. The Company shall not make any
distributions of cash, securities or other property (other than normal salary or
compensation payments) to, or enter in any transactions with, any officer,
director or 5% shareholder of the Company, other than transactions on a basis no
less favorable to the Company as would be obtained in a comparable arm's length
transaction with a Person who is not so affiliated and which have been approved
by the majority of disinterested directors.
(j) Other. The Company shall not agree or commit orally or in
writing to do any of the foregoing.
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Section 5.17 Regulatory and Other Authorizations; Consents. The
Company shall use its best efforts to obtain all authorizations, consents,
orders and approvals of all federal, state, local and foreign regulatory bodies
and officials that may be or become necessary for its execution and delivery of,
and the performance of its obligations pursuant to, this Agreement and
shall cooperate fully with the other parties in promptly seeking to obtain all
such authorizations, consents, orders and approvals. The Company shall not take
any action that will have the effect of delaying, impairing or impeding the
receipt of any required approvals.
Section 5.18 Use of Proceeds. The proceeds of the sale of the
Securities will be used in all material respects in accordance with the Use of
Proceeds set forth on Schedule 5.18 hereto. The Company shall not directly or
indirectly use the proceeds of the sale of Securities for any other purpose.
Section 5.19 Public Offering. The Company shall use its reasonable
efforts to take, or cause to be taken, all actions and to do, or cause to be
done, all other things necessary, proper or advisable to consummate as promptly
as practical the proposed IPO, including, without limitation, the entering into
by the Company of an underwriting agreement and such other agreements as are
necessary to consummate the IPO.
Section 5.20 Notification of Issuances. Following the repayment of
the Notes, the Company shall notify the Purchasers in writing and in advance of
any proposed investment of equity or debt in the Company.
ARTICLE VI
CONDITIONS TO CLOSING
Section 6.01 Conditions to Obligations of the Company. The
obligations of the Company to consummate the transactions contemplated by this
Agreement shall be subject to the fulfillment, at or prior to the Closing, of
each of the following conditions:
(a) Representations and Warranties. The representations and
warranties of each of the Purchasers contained in this Agreement shall be true
and correct as of the Closing (except where the failure to be so true and
correct would not have a material adverse effect on such Purchaser's ability to
consummate the transactions contemplated hereby), with the same force and effect
as if made as of the Closing Date.
(b) Receipt of Purchase Price. Prior to the Closing, the Company
shall have received payment of the applicable Purchase Price as set forth in
Article II hereof, less any fees and expenses to be paid by the Company in
accordance with Section 9.02 hereof which the Company shall have directed the
Purchasers to deduct from the Purchase Price.
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(c) No Suits. No suit, action, investigation, inquiry or other
proceeding by any Person shall have been instituted or threatened which
questions the validity or legality of, or seeks to enjoin or invalidate, the
transactions contemplated hereby and which is reasonably likely to succeed and
which, if successful, is reasonably likely to materially and adversely effect
the Company.
Section 6.02 Conditions to Obligations of the Purchasers. The
obligations of the Purchasers to consummate the transactions contemplated by
this Agreement shall be subject to the fulfillment, at or prior to the Closing,
of each of the following conditions:
(a) Representations, Warranties and Agreements. (i) The
representations and warranties of the Company set forth in this Agreement shall
be true and correct in all material respects as of the date of this Agreement
and as of the Closing Date with the same force and effect as though made at such
time (such representations and warranties not being affected by any updating
information furnished pursuant to any provision of this Agreement), (ii) the
Company shall have performed and complied in all material respects with all
agreements, covenants and conditions contained in this Agreement required to be
performed and complied with by it at or prior to the Closing and (iii) the
Purchasers shall have received a certificate to that effect signed by the Chief
Executive Officer of the Company.
(b) Executed Documents. The Purchasers shall have received properly
executed copies of the Notes, the Warrants, the Security Agreement, the
Registration Rights Agreement, the Intercreditor Agreement and the Collateral
Assignment and evidence of the filing of UCC-1 Financing Statements and other
required filings to perfect the Purchaser's security interest in the Collateral
as described in the Security Agreement.
(c) Legal Opinion. The Purchasers shall have received an opinion
from Breslow & Walker, LLP, counsel to the Company, dated the Closing Date and
in substantially the form of Exhibit F.
(d) Consents and Approvals. The Company shall have received all
consents, approvals and authorizations from, and shall have made all filings
with and notifications to, all governmental or regulatory authorities necessary
for the consummation of the transactions contemplated by this Agreement and no
such governmental or regulatory agency shall have taken any action which
restrains or prohibits consummation of such transactions. The Company shall have
received all consents and waivers from third parties which are required with
respect to the sale and purchase of the Securities and the consummation of all
the transactions described in the Transaction Documents including, without
limitation, those which are identified on Schedule 6.02(d) hereto.
(e) No Order. No United States or state governmental authority or
other agency or commission or United States or state court of competent
jurisdiction shall have enacted, issued, promulgated, enforced or entered any
statute, rule, regulation, injunction or other
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order (whether temporary, preliminary or permanent) which is in effect and has
the effect of making the transactions contemplated by this Agreement illegal or
otherwise restraining or prohibiting consummation of such transactions;
provided, however, that the parties hereto shall use their best efforts to have
any such order or injunction vacated.
(f) Secretary of State Certificates. Purchasers shall have received
(i) a copy of the Certificate of Incorporation certified as a recent date by the
Secretary of State of Delaware, and (ii) Certificates of the Secretary of State
of the State of Delaware with respect to the Company, and of each state in which
the Company is qualified to do business as a foreign corporation as of a recent
date showing Company to be validly existing or qualified as a foreign
corporation in its states of existence and qualification, as the case may be,
and in good standing.
(g) Secretary's Certificate of the Company. Purchasers shall have
received a Certificate of the Secretary of the Company, certifying that (i) no
document has been filed relating to or affecting the Certificate of
Incorporation of the Company after the date of the Certificate of the Secretary
of State of the state of its incorporation furnished pursuant to paragraph (f)
of this Section, (ii) attached to the Certificate is a true and complete copy of
By-Laws of the Company, as in full force and effect at the date of the Closing,
and (ii) the names and true signatures of each officer of the Company who has
been authorized to execute and deliver this Agreement, and Transaction
Documents.
(h) Resolutions. Purchasers shall have received certified copies of
resolutions duly adopted by the Company's Board of Directors (and stockholders,
if necessary) authorizing the execution and delivery of this Agreement, the
Transaction Documents the issuance and sale of the Securities, the reservation
of the shares of Common Stock issuable upon conversion of the Warrants and the
performance of the transaction contemplated hereby and certifying that such
resolutions were duly adopted, are in full force and effect and have not been
rescinded or amended as of the date of the Closing.
(i) Compliance Evidence. The Purchasers shall have received such
certificates, opinions, documents and information as they may reasonably request
in order to establish satisfaction of the conditions set forth in this Section.
(j) Proceedings Satisfactory. All certificates, opinions and other
documents to be delivered by the Company and all other matters to be
accomplished prior to or at the Closing shall be satisfactory in the reasonable
judgment of the Purchasers and their counsel.
ARTICLE VII
INDEMNIFICATION
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Section 7.01 General. The Company agrees, subject to the other terms
and conditions of this Agreement, to indemnify the Purchasers against and hold
harmless from all costs, expenses, claims, actions, diminution in value or other
liabilities or damages (including cost of investigation and defense, including
reasonable attorneys' fees) (collectively, "Damages") to the Purchasers arising
out of the breach of any representation, warranty, covenant or agreement of the
Company herein or in the Transaction Documents. Each Purchaser severally agrees,
subject to the terms and conditions of this Agreement, to indemnify the Company
against and hold it harmless from all Damages to the Company arising out of the
breach of any representation, warranty, covenant or agreement by such Purchaser
herein, except to the extent such liability results primarily and directly from
the gross negligence or willful misconduct of the Company.
Section 7.02 Indemnification Procedures. No claim may be asserted
nor may any action be commenced against an indemnifying party for breach of any
representation, warranty, covenant or agreement contained herein, unless written
notice of such claim or action is given to the indemnifying party describing in
detail the facts and circumstances with respect to the subject matter of such
claim or action.
Section 7.03 Payments to Be Net of Certain Items. Payments by the
indemnifying party pursuant to Section 7.01(a) shall be limited to the amount of
any liability or damage that remains after deduction therefrom of any insurance
proceeds and any indemnity, contribution or other similar payment actually
received by the indemnified party by any third party with respect thereto.
Section 7.04 Third Party Claims. The indemnified party agrees to
give the indemnifying party prompt written notice of any claim, assertion, event
or proceeding by or in respect of a third party of which the indemnified party
has knowledge concerning any liability or damage as to which it may request
indemnification hereunder. The indemnifying party shall have the right to
assume, through counsel of its own choosing, the defense or settlement of any
such claim or proceeding at its own expense. If the indemnifying party elects to
assume the defense of any such claim or proceeding, the indemnified party may
participate in such defense, but in such case the expenses of the indemnified
party shall be paid by the indemnified party. The indemnified party shall
provide the indemnifying party with access to its records and, if applicable,
personnel relating to any such claim, assertion, event or proceeding during
normal business hours and shall otherwise cooperate with the indemnifying party
in the defense or settlement thereof, and the indemnifying party shall reimburse
the indemnified party for all of its reasonable out-of-pocket expenses in
connection therewith. If the indemnifying party elects to assume the defense of
any such claim or proceeding, the indemnified party shall not pay, or permit to
be paid, any part of any claim or demand arising from such asserted liability,
unless the indemnifying party consents in writing to such payment or unless the
indemnifying party withdraws from the defense of such asserted liability, or
unless a final judgment from which no appeal may be taken by or on behalf of the
indemnifying party is entered against the indemnified party for such liability.
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Section 7.05 Contribution. If the indemnification provided for in
this Article 7 is unavailable to any indemnified party (other than as a result
of the failure to notify the indemnifying party as provided herein) in respect
to any Damages then the indemnifying party, in lieu of indemnifying such
indemnified party, will contribute to the amount paid or payable by such
indemnified party, as a result of such Damages in such proportion as is
appropriate to reflect the relative fault of the indemnifying party, on the one
hand, and of the indemnified party, on the other hand, which resulted in such
Damages, as well as any other relevant equitable considerations.
Section 7.06 Distribution of Indemnification Payments. The amount of
any payment by the indemnifying party required to be made pursuant to this
Section 7.01 shall be made in cash in immediately available funds to the
indemnified party, promptly after the determination of the amount of the
required payment hereunder.
ARTICLE VIII
TERMINATION, WAIVER AND DEFAULT
Section 8.01 Termination. This Agreement may be terminated at any
time prior to the Closing only by the written consent of the Company and each of
the Purchasers.
Section 8.02 Waiver. At any time prior to the Closing, each of the
parties hereto may (a) extend the time for the performance of any of the
obligations or other acts of any other party hereto, (b) waive any inaccuracies
in the representations and warranties contained herein or in any document
delivered pursuant hereto or (c) waive compliance with any of the agreements or
conditions contained herein. Any such extension or waiver shall be valid if set
forth in an instrument in writing signed by the party to be bound thereby. Any
waiver of any provision of this Agreement shall not operate or be construed as a
waiver of any subsequent breach of the same or any other provision of this
Agreement. Except as otherwise contemplated herein, no waiver by one or more
Purchasers shall be binding on any other Purchasers.
Section 8.03 Event of Default. In the case of an Event of Default
(as such term is defined in the Notes) the Purchasers may use all remedies which
are available to him, her or it under the Notes and the Security Agreement.
ARTICLE IX
GENERAL PROVISIONS
Section 9.01 Notices. All notices, consents and other communications
under this Agreement shall be in writing and shall be deemed to have been duly
given when (a) delivered
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<PAGE>
by hand, (b) sent by telex or telecopier (with receipt confirmed), provided that
a copy is mailed by registered mail, return receipt requested, or (c) when
received by the addressee, if sent by Express Mail, Federal Express or other
express delivery service (receipt requested), in each case to the appropriate
addresses, telex numbers and telecopier numbers set forth below (or to such
other addresses, telex numbers and telecopier numbers as a party may designate
as to itself by notice to the other parties complying as to delivery with this
Section):
(a) if to the Company:
QuietPower Systems, Inc.
1675 Broadway
New York, NY 10019
Attention: Eric W. Jacobson
Telecopier No.: (212) 830-7298
with a copy to:
Breslow & Walker, LLP
767 Third Avenue
New York, NY 10017
Attention: Gary T. Moomjian
Telecopier No.: (212) 888-4955
(b) if to the Purchasers, at the address for each Purchaser set
forth on the signature page next to his or her or its name.
with a copy to:
Shereff, Friedman, Hoffman & Goodman, LLP
919 Third Avenue
New York, New York 10022
Attention: Robert M. Friedman Esq.
Telecopier No.: (212) 758-9526
Section 9.02 Expenses.
(a) The Company hereby agrees (i) to pay all fees and expenses
incurred by the Company with respect to Form D and blue sky filings, stamp and
other transfer taxes which may be payable in respect of the execution and
delivery of the Transaction Documents or the issuance of the Securities; and
(ii) to pay to Andersen, Weinroth & Co., L.P., as placement agent (the
"Placement Agent") for all Purchasers, a sum equal to 5% of the aggregate
principal amount of the Notes being purchased hereunder.
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<PAGE>
(b) The Company agrees to pay and save the Purchasers harmless
against liability for the payment of (i) their reasonable out-of-pocket costs,
accounting fees, and legal fees, including those of Shereff, Friedman, Hoffman &
Goodman, LLP, counsel for the Purchasers, arising in connection with the
negotiation, execution and Closing of the transactions described in the
Transaction Documents; (ii) fees and expenses (including, without limitation,
reasonable attorneys' fees) incurred in respect of the enforcement by the
Purchasers or the holders of the Securities of the rights granted to the
Purchasers or the holders of the Securities under the Transaction Documents and
(iii) fees and expenses (including, without limitation, reasonable attorneys'
fees) incurred in connection with any consent requested to be given by the
Purchasers or the holders of the Securities pursuant to the Transaction
Documents.
Section 9.03 Appointment as Agent. The Purchasers hereby consents to
the appointment of QPS Bridge, LLC, as Agent under the Security Agreement.
Section 9.04 Public Announcements. Neither the Company, nor the
Purchasers shall make any public announcements in respect of this Agreement or
the transactions contemplated herein or otherwise communicate with any news
media without prior notification to the Company and the Placement Agent, and the
Company and the Placement Agent, as agent on behalf of the Purchasers, shall
cooperate as to the timing and contents of any such announcement.
Section 9.05 Survival. The representations and warranties made
herein shall survive for a period of three years after the Closing. The
covenants and agreements made herein shall survive the Closing.
Section 9.06 Further Assurances. Upon the terms and subject to the
conditions contained herein, each of the parties hereto agrees, both before and
after the Closing (i) to use all reasonable efforts to take, or cause to be
taken, all actions and to do, or cause to be done, all things necessary, proper
or advisable to consummate and make effective the transactions contemplated by
this Agreement and the other Transaction Documents, (ii) to execute any
documents, instruments or conveyances of any kinds which may be reasonably
necessary or advisable to carry out any of the transactions contemplated
hereunder or thereunder, and (iii) to cooperate with each other in connection
with the foregoing, including, without limitation, using their respective best
efforts (A) to obtain all consents, approvals and waivers from any Person
necessary to permit the consummation of the transactions contemplated by this
Agreement and the other Transactions Documents, and (B) to fulfill all
conditions to this Agreement.
Section 9.07 Headings. The headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
Section 9.08 Severability. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any rule of law
or public policy, all other
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<PAGE>
conditions and provisions of, this Agreement shall nevertheless remain in full
force and effect so long as the economic or legal substance of the transactions
contemplated hereby is not affected in any manner adverse to any party. Upon
such determination that any term or other provision is invalid, illegal or
incapable of being enforced, the parties hereto shall negotiate in good faith to
modify this Agreement so as to effect the original intent of the parties as
closely as possible in a mutually acceptable manner in order that the
transactions contemplated hereby be consummated as originally contemplated to
the greatest extent possible.
Section 9.09 Entire Agreement. This Agreement and the other
Transaction Documents constitute the entire agreement between the parties hereto
with respect to the subject matter hereof and supersede any prior oral or
written agreement between the parties.
Section 9.10 No Third Party Beneficiaries; Assignment.
(a) This Agreement is for the sole benefit of and binding upon
the parties hereto and their permitted successors and assigns and nothing
herein, express or implied, is intended to or shall confer upon any other Person
or entity any legal or equitable right, benefit or remedy of any nature
whatsoever under or by reason of this Agreement.
(b) No Securities may be pledged, transferred, sold or
assigned (each a "Transfer") until (i) a registration statement with respect
thereto is effective under the Securities Act and any applicable state
securities law or (ii) the Company receives an opinion of counsel to the Company
or other counsel to the holder of such Securities, which opinion and other
counsel is reasonably satisfactory to the Company, that such Securities may be
pledged, sold, assigned or transferred without an effective registration
statement under the Securities Act or applicable state securities laws. In
addition, no Transfer may be made unless prior to such Transfer, the transferor
shall promptly notify the Company of the Transfer and such transferee shall take
and hold the transferred Securities subject to the terms and conditions set
forth in this Agreement and to the rights, obligations and restrictions of the
transferor as of the date of this Agreement, and such transferee shall observe
and comply with all obligations and restrictions imposed hereby and, upon demand
made at any time by any party to this Agreement, shall execute an appropriate
instrument to that effect.
Section 9.11 Amendment. This Agreement may be amended or modified
only by an instrument in writing signed by the Company and, by Purchasers of
record holding sixty-six and two-thirds percent (66 2/3%) of the principal
amount of the outstanding Notes; provided, however, that no amendment may remove
or adversely affect a Purchaser's right to receive the Common Stock issuable
upon exercise of the Warrants or the payment of principal or interest under the
Notes or change the due date provisions of the Notes, in each case without the
prior written consent of such Purchaser.
Section 9.12 Counterparts. This Agreement may be executed in one or
more counterparts, and by the different parties hereto in separate counterparts,
each of which when
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<PAGE>
executed shall be deemed to be an original but all of which taken together shall
constitute one and the same agreement.
Section 9.13 Gender and Number. Whenever used in this Agreement, the
singular number shall include the plural, the plural the singular, and the use
of any gender shall be applicable to all genders.
Section 9.14 Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of New York without giving
effect to the principles of conflicts of laws thereof.
Section 9.15 Consent to Jurisdiction. The Company and the Purchasers
hereby consent to the jurisdiction of the state and federal courts of New York
for all disputes arising under this Agreement.
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<PAGE>
IN WITNESS WHEREOF, the Purchasers and the Company have caused this
Securities Purchase Agreement to be executed as of the date first written above
in their individual capacities or by their respective representatives thereunto
duly authorized, as applicable.
QUIETPOWER SYSTEMS, INC.
By:/s/ Jonathan M. Charry
--------------------------------
Name: Jonathan M. Charry
Title: President
QPS BRIDGE, LLC Notices to:
QPS Bridge, LLC
1330 Avenue of the Americas
By: Andserson Weinroth & Co., L.P., 36th Floor
New York, New York 10019
Manager Attention: Stephen D. Weinroth
Fax: (212) 399-1954
Tax Identification Number: 13-3942589
By:/s/ Stephen Weinroth -------------
- ------------------------
Name: Stephen Weinroth
Title: General Partner
REGENT CAPITAL PARTNERS, L.P. Notices to:
Regent Capital Partners, L.P.
505 Park Avenue
By: Regent Capital Holdings, L.P., 17th Floor
its General Partner New York, New York 10022
Attention: Richard Hochman
Fax: (212) 735-9908
By: Regent Capital Holdings, Inc., Tax Identification Number: 13-3832906
its General Partner -------------
By:/s/ J. Oliver Maggard
- --------------------------
Name: J. Oliver Maggard
Title: Managing Director
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<PAGE>
SCHEDULE A
Principal Amount Number of
of Notes to Be Warrants to be
Purchaser Purchased Delivered Purchase Price
- --------- --------- --------- --------------
QPS Bridge, LLC $1,000,000 120,000 $1,000,000
Regent Capital Partners, L.P. $1,000,000 120,000 $1,000,000
========== ======= ==========
TOTAL $2,000,000 240,000 $2,000,000
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<PAGE>
EXHIBIT 10.14
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "SECURITIES ACT"), NOR UNDER ANY STATE SECURITIES LAW AND MAY
NOT BE PLEDGED, SOLD, ASSIGNED OR TRANSFERRED UNTIL (i) A REGISTRATION STATEMENT
WITH RESPECT THERETO IS EFFECTIVE UNDER THE SECURITIES ACT AND ANY APPLICABLE
STATE SECURITIES LAW OR (ii) THE COMPANY RECEIVES AN OPINION OF COUNSEL TO THE
COMPANY OR OTHER COUNSEL TO THE HOLDER OF SUCH NOTE, WHICH OPINION AND OTHER
COUNSEL IS REASONABLY SATISFACTORY TO THE COMPANY, THAT SUCH NOTE MAY BE
PLEDGED, SOLD, ASSIGNED OR TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OR APPLICABLE STATE SECURITIES LAWS.
THIS NOTE IS ISSUED, ACCEPTED AND HELD SUBJECT TO THE TERMS AND
CONDITIONS OF A SECURITIES PURCHASE AGREEMENT DATED AS OF APRIL 17, 1997, BY AND
BETWEEN THE COMPANY AND EACH OF THE PURCHASERS SET FORTH ON SCHEDULE A ANNEXED
THERETO, COPIES OF WHICH MAY BE EXAMINED, UPON REQUEST AND DURING NORMAL
BUSINESS HOURS, AT THE PRINCIPAL EXECUTIVE OFFICES OF THE COMPANY. THIS NOTE MAY
NOT BE SOLD, PLEDGED, ASSIGNED OR OTHERWISE TRANSFERRED EXCEPT IN COMPLIANCE
WITH THE TERMS OF SUCH AGREEMENT.
QUIETPOWER SYSTEMS, INC.
SENIOR SECURED PROMISSORY NOTE
$1,000,000 April 17, 1997
FOR VALUE RECEIVED, QuietPower Systems, Inc., a Delaware corporation
(the "Company"), with its principal office at 1675 Broadway, New York, NY 10019,
promises to pay to the order of _______________________________ residing at
__________________________________________ (the "Payee" or "the holder of this
Note"), or registered assigns, on the earlier to occur of (i) the first
anniversary (the "First Anniversary") of the date of issuance of this Note (the
"Issue Date"), or (ii) the closing of one or a series of public and/or private
offerings of debt and/or equity securities of the Company or any sale of assets,
merger, recapitalization or other capital transaction with aggregate gross
proceeds to the Company of not less than $4,000,000 (the earlier of the First
Anniversary and any one or more of the transactions described in (ii) above to
occur being referred to herein
<PAGE>
as the "Maturity Date") the principal amount of One Million Dollars
($1,000,000), in such coin or currency of the United State of America as at the
time of payment shall be legal tender for the payment of public or private
debts, together with interest as set forth in the next succeeding sentence. This
Note shall bear interest at a rate equal to eleven percent (11%) per annum,
computed on the basis of a 360-day year consisting of twelve (12) 30-day months,
from the Issue Date, and shall be paid semi-annually, with the first interest
payment to be made on October 15, 1997. On the Maturity Date, all accrued and
unpaid interest shall be paid, together with the full outstanding principal
amount hereof. Except as set forth in the Purchase Agreement (as defined below)
this Note shall be senior to all Indebtedness of the Company. This Note shall be
paid (and prepaid, if applicable) pro rata with certain additional notes of like
tenor being issued herewith.
1. Prepayment. The Company, at its option, may prepay all or any part of the
principal amount of this Note and any accrued interest hereon at any time in
whole or in part from time to time, without payment of any premium or penalty.
All prepayments of this Note shall be applied first to accrued interest on this
Note and then to the payment of any outstanding principal hereof.
2. Security. Repayment of all amounts due under this Note shall be secured by a
security interest granted in all of the Company's right, title and interest in
and to certain collateral pledged by the Company as security for its obligations
hereunder as described in more detail in the Security Agreement dated as of
April 17, 1997 (the "Security Agreement"), between the Company and QPS Bridge,
LLC, as Agent for the Purchasers.
3. Purchase Agreement. This Note is issued pursuant to the terms of a Securities
Purchase Agreement, dated as of April 17, 1997, by and among the Company and the
Purchasers listed therein (the "Purchase Agreement"), a copy of which agreement
is available for inspection at the Company's principal office. Notwithstanding
any provision to the contrary contained herein, this Note is subject and
entitled to certain terms, conditions, covenants and agreements contained in the
Purchase Agreement. Any transferee or transferees of this Note, by their
acceptance hereof, assume the obligations of the Payee in the Purchase Agreement
with respect to the conditions and procedures for transfer of this Note.
Reference to the Purchase Agreement and the Security Agreement shall in no way
impair the absolute and unconditional obligation of the Company to pay both
principal and interest hereon as provided herein. The terms used herein and not
defined herein shall have the meaning ascribed to such term in the Purchase
Agreement. This Note is one of several notes of the Company of like tenor issued
in connection with a bridge financing for the Company of not more than
$2,000,000, which notes, together with this Note, are hereinafter referred to as
the "Notes."
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<PAGE>
4. Events of Default.
(a) Upon the occurrence of any of the following events (herein called
"Events of Default") which shall have occurred and be continuing:
(i) The Company shall default in the payment of the principal of or
interest on this Note when due, and, in the case of interest, such
amount is not paid within 3 days of the due date; or
(ii) (1) The Company shall commence any proceeding or other action
relating to it in bankruptcy or seek reorganization, arrangement,
readjustment of its debts, receivership, dissolution, liquidation,
winding-up, composition or any other relief under the federal
bankruptcy act, as amended, or under any other insolvency,
reorganization, liquidation, dissolution, arrangement, composition,
readjustment of debt or any other similar act or law, of any
jurisdiction, domestic or foreign, now or hereafter existing; or (2)
the Company shall admit the material allegations of any petition or
pleading in connection with any such proceeding; or (3) the Company
applies for, or consents or acquiesces to, the appointment of a
receiver, conservator, trustee or similar officer for it or for all
or a substantial part of its property; or (4) the Company makes a
general assignment for the benefit of creditors or (5) the Company
generally admits its inability to pay its debts as they become due
and payable; or
(iii) (1) Commencement of any proceeding or in the taking of any
other action against the Company in bankruptcy or seeking
reorganization, arrangement, readjustment of its debts, liquidation,
dissolution, arrangement, composition, or any other similar act or
law of any jurisdiction, domestic or foreign, now or hereafter
existing and the continuance of any of such events for sixty (60)
days undismissed, unbonded or undischarged; or (2) the appointment
of a receiver, conservator, trustee or similar officer of the
Company or for all or substantially all of its property and the
continuance of any such events for sixty (60) days undismissed,
unbonded or undischarged, or (3) the issuance of a warrant or
attachment, execution or similar process against substantially all
of the property of the Company and the continuance of such event for
thirty (30) days undismissed, unbonded and undischarged;
(iv) the Company fails in any material respect to perform or observe
any of the covenants contained in the Purchase Agreement or the
Security Agreement or fails in any material respect to comply with
any of the provisions of the Purchase Agreement or the Security
Agreement and any such default shall not be cured or
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<PAGE>
waived within thirty (30) days after the Company's receipt of
written notice of same;
(v) the Company shall fail to maintain a perfected security interest
in the Collateral (as defined in the Security Agreement) or any
portion thereof for the benefit of the Purchasers, subject only to
the security interests which secure the DayStar Notes granted
pursuant to the DayStar Note Purchase Agreements except that the
failure to maintain a perfected security interest in Collateral
(other than Intellectual Property) which in the aggregate is worth
less than $5,000 shall not be deemed an Event of Default; or the
Collateral or any portion thereof shall be subject to levy of
execution or other individual process except that a levy of
execution or other process against Collateral (other than
Intellectual Property) which in the aggregate is worth less than
$5,000 shall not be deemed an Event of Default;
(vi) the Company's representations and warranties contained in the
Purchase Agreement or the Security Agreement shall be untrue or
misleading in any material respect as of the time when made or as of
the closings of such agreements;
(vii) a default or an event of default that extends beyond any
applicable grace period shall occur or exist with respect to any
Indebtedness of the Company, which, in the aggregate, is in excess
of $25,000;
(viii) any judgment or order for the payment of money in excess of
$50,000 shall be rendered against the Company which is not stayed,
bonded or discharged within 30 days; or
(ix) a default or an event of default shall occur or exist with
respect to any material contract of the Company, which default could
give rise to a material claim by a third party against the Company
or the Company's assets which, if curable, is not cured within 30
days.
then, and in any such event, the Payee, at its option, and upon written notice
to the Company, may declare the entire unpaid principal amount of this Note
outstanding together with accrued interest thereon due and payable without
presentment, demand, protest, or other notice of any kind, all of which are
expressly waived, and pursue any additional remedies available to Payee under
the Purchase Agreement and/or the Security Agreement, subject to the
Intercreditor Agreement.
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<PAGE>
5. Non-Waiver and Other Remedies. No course of dealing or delay on the part of
the holder of this Note in exercising any right hereunder shall operate as a
waiver thereof or otherwise prejudice the right of the holder of this Note. No
remedy conferred hereby shall be exclusive of any other remedy referred to
herein or now or hereinafter available at law, in equity, by statute or
otherwise.
6. Collection Costs. In case of an Event of Default hereunder, the Company will
be liable to the Payee or its successors and assigns for such additional amounts
as shall be sufficient to cover the reasonable cost and expense of collection,
including, without limitation, attorney's fees, expenses and disbursements.
7. Obligation to pay Principal and Interest. No provision of this Note nor the
Purchase Agreement shall alter or impair the obligation of the Company, which is
absolute and unconditional, to pay the principal of and interest on this Note at
the place, at the respective times, at the rates, and in the currency herein
prescribed.
8. Amendment. Subject to applicable law, this Note may not be amended modified
or supplemented with respect to any of the terms contained herein without the
prior written agreement of the Company and the Payee, its successors or assigns.
9. Lost Documents. Upon receipt by the Company of evidence satisfactory to it of
the loss, theft, destruction or mutilation of this Note or any Note exchanged
for it, and (in the case of loss, theft or destruction) of indemnity
satisfactory to it, and upon reimbursement to the Company of all reasonable
expenses incidental thereto, and upon surrender and cancellation of such Note,
if mutilated, the Company will make and deliver in lieu of such Note a new Note
of like tenor and unpaid principal amount and dated as of the original date of
the Note.
10. Miscellaneous.
(a) Parties in Interest. All covenants, agreements, and undertakings in
this Note by and on behalf of any of the parties hereto shall bind and inure to
the benefit of the respective permitted successors and assigns of the parties
hereto whether so expressed or not.
(b) Notice. All notices, consents and other communications under this Note
shall be in writing and shall be deemed to have been duly given when (a)
delivered by hand, (b) sent by telex or telecopier (with receipt confirmed),
provided that a copy is mailed by registered mail, return receipt requested, or
(c) when received by the addressee, if sent by Express Mail, Federal Express or
other express delivery service (receipt requested), in each case to the
appropriate addresses, telex numbers and telecopier numbers set forth below (or
to such other addresses,
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<PAGE>
telex numbers and telecopier numbers as a party may
designate as to itself by notice to the other parties complying as to delivery
with this Section):
a. if to the Company:
QuietPower Systems, Inc.
1675 Broadway
New York, NY 10019
Attention: Eric W. Jacobson
Telecopier No.: (212) 830-7298
with a copy to:
Breslow & Walker, LLP
767 Third Avenue
New York, NY 10017
Attention: Gary T. Moomjian, Esq.
Telecopier No.: (212) 888-4955
b. if to the Payee, at the address set forth above.
with a copy to:
Shereff, Friedman, Hoffman & Goodman, LLP
919 Third Avenue
New York, New York 10022
Attention: Robert M. Friedman, Esq.
Telecopier No.: (212) 758-9526
(a) Waiver. Any failure of any of the parties hereto to comply with any
obligation, covenant or agreement contained herein may be waived by the party
entitled to the benefit of such obligation, covenant or agreement only by
written instrument signed by such party.
(b) Consent to Jurisdiction. The Company and the Payee hereby consent to
the jurisdiction of the state and federal courts of New York for all disputes
arising under this Agreement.
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<PAGE>
(i) Construction. This Note shall be construed and enforced in accordance
with, and the rights of the parties shall be governed by, the laws of the State
of New York without giving effect to the principles of conflicts of laws
thereof.
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<PAGE>
IN WITNESS WHEREOF, this Note has been executed and delivered on the date
first written above by the duly authorized representative of the Company.
QUIETPOWER SYSTEMS, INC.
By:
-------------------------------------
Name:
Title:
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<PAGE>
EXHIBIT 10.15
EXHIBIT A TO WARRANT
EXHIBIT C TO SECURITIES PURCHASE AGREEMENT
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT, dated as of April 17, 1997 (this
"Agreement"), by and among QuietPower Systems, Inc., a Delaware corporation (the
"Company"), and the Purchasers appearing on the signature pages hereto under the
heading "Purchasers" (collectively, the "Purchasers") and the assignee of one of
the Purchasers named on the signature pages hereto.
WHEREAS, the Purchasers are simultaneously herewith entering into a
Securities Purchase Agreement (the "Purchase Agreement") with the Company
pursuant to which the Purchasers will acquire warrants (the "Warrants") to
purchase shares of the Company's common stock, par value $.01 per share (the
"Common Stock"), pursuant to a private offering; and
WHEREAS, the Company desires to grant certain registration rights to the
Purchasers with respect to the shares of Common Stock issuable upon exercise of
the Warrants.
NOW, THEREFORE, in consideration of the premises and mutual covenants
contained herein, and for other good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties agree as follows:
1. Securities Subject to this Agreement; Certain Definitions. For purposes
of this Agreement, "Registrable Securities" shall mean (i) the shares of Common
Stock issuable upon exercise of the Warrants, (ii) any other shares of Common
Stock issued or issuable as a result of stock splits, stock dividends,
reclassifications, recapitalizations, or similar events relating to the shares
described in clause (i) above, and (iii) the Warrants, in each case until such
time as (x) a registration statement covering such Registrable Securities has
been declared effective and such Registrable Securities have been transferred
pursuant to such effective registration statement, (y) such Registrable
Securities are transferred pursuant to Rule 144 under the Securities Act of
1933, as amended (the "Securities Act"), or such other similar law in effect in
any jurisdiction which governs a transfer of Registrable Securities without
registration (such laws governing the transfer of securities without
registration and the registration of securities for public sale being herein
referred to as "Applicable Securities Laws"), or (z) at such time as the
Registrable Securities may be sold pursuant to Rule 144(k) under the Securities
Act. In the event of any merger, reorganization, consolidation, recapitalization
or other change in corporate structure affecting the Common Stock, such
adjustment shall be made in the definition of "Registrable Securities" as is
appropriate in order to prevent any dilution or enlargement of the rights
granted pursuant to this Agreement. Any capitalized term used but not defined
herein shall have the meaning ascribed to such term in the Purchase Agreement.
<PAGE>
2. Demand Registration.
(a) Notice. At any time after the earlier of (i) the effective date
of the IPO registration statement, or (ii) one year from the date hereof, any
record holder or holders of an aggregate of more than 33% of the Registrable
Securities (with Warrants being calculated on an as exercised basis) (the
"Requesting Holders") may request the registration of their shares of
Registrable Securities. In the event such a request is made, the Company shall
prepare and file with the Securities and Exchange Commission (the "SEC") a
registration statement under the Securities Act covering the shares of Common
Stock which are the subject of such request and shall use its best efforts to
cause such registration statement to become effective as promptly as practicable
after the date of such initial filing. In addition, upon the receipt of such
request, the Company shall promptly give written notice to all other record
holders of Registrable Securities that such registration is to be effected. The
Company shall include in such registration statement such Registrable Securities
for which it has received written requests by such other record holders within
thirty (30) days after the delivery of the Company's written notice to such
other record holders. The Company shall not be obligated to cause to become
effective more than two registration statements pursuant to which Registrable
Securities are sold under this Section 2(a).
(b) Limitations. At such time as the Registrable Securities may be
registered on Form S-2 or Form S-3, as the case may be (or any similar form or
forms promulgated by the SEC), the holders of Registrable Securities shall have
unlimited rights to request registration of their shares on Form S-2 or Form
S-3, as the case may be, or such similar form, provided that any such
registration of Registrable Securities have an anticipated aggregate offering
price (net of discounts and commissions) of at least $500,000. Registrations
effected on Form S-2 and Form S-3 shall not be counted as demand registrations
pursuant to Section 2(a).
(c) Registration Statement Form. Registrations under this Section 2
shall be on such appropriate registration form of the SEC as shall (i) be
selected by the Company and (ii) permit the disposition of such Registrable
Securities in accordance with the intended method or methods of disposition
specified by the Requesting Holders in their request for such registration.
(d) Effective Registration Statement. A registration requested
pursuant to this Section 2 shall not be deemed to have been effected:
(i) unless a registration statement with respect thereto has
become effective; or
(ii) as set forth in Section 2(g); or
(iii) if, after it has become effective, such registration is
interfered with by any stop order, injunction or other
order or requirement of the SEC or other governmental
agency or court for any reason.
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(e) Selection of Underwriters. If a requested registration pursuant
to this Section 2 involves an underwritten offering, the managing underwriter(s)
thereof shall be selected by the Requesting Holders and shall be reasonably
acceptable to the Company unless the Company has theretofore sold shares of
Common Stock in an underwritten offering, in which case the managing
underwriter(s) of a requested registration pursuant to this Section 2 shall be
selected by the Company and shall be reasonably acceptable to the Requesting
Holders.
(f) Priority in Requested Registrations. If a requested registration
pursuant to this Section 2 involves an underwritten offering, and the managing
underwriter(s) advises the Company in writing (with a copy provided to each
holder of Registrable Securities requesting registration) that, in its opinion,
the number of Registrable Securities and other securities requested to be
included in such registration including shares of Common Stock of holders who
have piggyback registration rights pursuant to other agreements with the Company
("Other Shares") exceeds the number which can be sold in such offering (within a
price range acceptable to the holders of a majority of the Registrable
Securities requested to be included in such registration), then the Company will
include in such registration prior to the inclusion of any Other Shares, the
number of Registrable Securities requested to be included in such registration
which can be sold in such offering within such price range, and such number
shall be allocated pro rata among all holders of Registrable Securities
requesting registration on the basis of the total number of shares beneficially
owned.
(g) Additional Demand Registration. Notwithstanding any other
provision of this Section 2, if, solely as a result of the operation of Section
2(f), the Company effects the registration of less than all of the Registrable
Securities requested to be registered pursuant to Section 2(a), the Requesting
Holders shall be entitled to request a registration pursuant to Section 2(a) at
any time during the period commencing six (6) months after the most recent
registration effected under Section 2 or Section 3. Any such registration shall
be requested, effected and, in all other respects, in accordance with the terms
of Section 2(a). In addition, the holders of the Registrable Securities will be
entitled to the benefits of Section 2. This provision shall apply successively
if any holder of Registrable Securities continues to hold Registrable Securities
solely as a result of Section 2(f).
3. "Piggyback" Registration.
(a) Notice. If at any time the Company shall determine to proceed
with the actual preparation and filing of a registration statement under the
Securities Act in connection with the proposed offer and sale of any of its
securities by it or any of its securityholders (other than a registration
statement on Form S-4, S-8 or other comparable form), the Company will give
prompt written notice (at least 15 business days before the proposed
registration) of its determination to all record holders of Registrable
Securities. Upon the written request of any holder of Registrable Securities
made within 10 business days after the receipt of any such notice (which request
shall specify the Registrable Securities intended to be disposed of by such
holder and the intended method of disposition thereof), the Company will use its
best efforts to effect
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the registration under the Securities Act of all such Registrable Securities, to
the extent required to permit the disposition (in accordance with the intended
methods thereof) of the Registrable Securities so to be registered; provided,
however, that if at any time after giving written notice of its intention to
register securities and before the effective date of the related registration
statement the Company determines for any reason not to register or to delay
registration of such securities, the Company may, at its election, give written
notice of such determination to each holder of Registrable Securities and, (i)
in the case of a determination not to register, shall be relieved of its
obligation to register any Registrable Securities in connection with such
registration (but not from its obligation to pay the Registration Expenses (as
defined hereafter) in connection therewith), without prejudicing the rights of
any holder(s) of Registrable Securities entitled to request that such
registration be effected as a registration under Section 2, and (ii) in the case
of a determination to delay registering, shall be permitted to delay registering
any Registrable Securities, for the same period as the delay in registering such
other securities.
(b) Underwritten Registration. If any such registration shall be
underwritten in whole or in part, the Company may require that the Registrable
Securities requested for inclusion be included in the underwriting on the same
terms and conditions as the securities otherwise being sold through the
underwriters. In the event that in the good faith judgment of the managing
underwriter of such public offering (on a firm commitment basis) the inclusion
of all of the Registrable Securities originally covered by a request for
registration would exceed the number of securities which can be sold by the
Company in such offering, then the Company will include in such registration, to
the extent of the number which the Company is so advised can be sold in such
offering, first, all securities proposed by the Company to be sold for its own
account, second, the Registrable Securities plus those shares of Common Stock
issued pursuant to the DayStar Note Purchase Agreements and those issued to the
Underwriter in the IPO, pro rata among all holders requesting registration on
the basis of the total number of shares beneficially owned by such holders and
third, Other Shares requested to be included in such registration pro rata among
all such holders of Other Shares requesting registration on the basis of the
total number of shares owned by such holders of Other Shares.
4. Holdback Agreements. A Purchaser whose Registrable Securities are
included in a registration statement as part of a firm commitment underwriting
of Common Stock shall agree not to effect any public sale or distribution of
Common Stock, including a sale pursuant to Rule 144 under the Securities Act or
Applicable Securities Laws or in reliance on any other exemption from
registration under the Securities Act or Applicable Securities Laws, during the
ninety (90) day period beginning on the effective date of such registration
statement (except as part of such registration), but only if and to the extent
requested in writing (with reasonable prior written notice) by the
underwriter(s) and only if and to the extent that all executive officers and
directors of the Company enter into similar agreements. Any such agreement shall
be in writing in a form satisfactory to a majority in interest of the Purchasers
participating in such registration. In addition, no Purchaser shall be required
to make any representation or warranty to or agreement with the Company or the
underwriters other than representations, warranties or agreements
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<PAGE>
regarding such Purchaser, such Purchaser's Registrable Securities and such
Purchaser's intended method of distribution and any other representation
required by law.
5. Registration Procedure.
(a) If and whenever the Company is required pursuant to Sections 2
or 3 hereof to effect the registration of Registrable Securities under the
Securities Act, the Company will, as soon as practicable:
(i) prepare and file with the SEC a registration statement
with respect to such securities, and use its best
efforts to cause such registration statement to become
and remain effective as promptly as practicable for such
period as may be reasonably necessary to effect the sale
of such securities;
(ii) prepare and file with the SEC such amendments to such
registration statement and supplements to the prospectus
contained therein as may be necessary to keep such
registration statement effective for such period as may
be reasonably necessary to effect the sale of such
securities, not to exceed twelve months;
(iii) furnish to the securityholders participating in such
registration and to the underwriters of the securities
being registered such number of copies of the
registration statement and each such amendment and
supplement thereto, all exhibits, the preliminary
prospectus and final prospectus and such other documents
as such securityholders may reasonably request in order
to facilitate the public offering of such securities;
(iv) use its best efforts to register or qualify the
securities covered by such registration statement under
such state securities or blue sky laws of such
jurisdictions as such participating holders may
reasonably request, use its best efforts to keep such
registration or qualification in effect for so long as
such registration statement remains in effect, and do
any and all other acts and things necessary or desirable
to enable such holders to consummate the sale of the
respective Registrable Securities owned by such holders,
except that the Company shall not for any purpose be
required to execute a general consent to service of
process or to qualify to do business as a foreign
corporation in any jurisdiction wherein it would not but
for the requirements of this subsection (iv) be
obligated to be so qualified or to consent to general
service
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<PAGE>
of process in any such jurisdiction except where
required under blue sky or state securities laws;
(v) notify the securityholders participating in such
registration, promptly after it shall receive notice
thereof, of the time when such registration statement
has become effective or a supplement to any prospectus
forming a part of such registration statement has been
filed;
(vi) notify such holders promptly of any request by the SEC
for the amending or supplementing of such registration
statement or prospectus or for additional information;
(vii) prepare and file with the SEC, any amendments or
supplements to such registration statement or prospectus
which is required under the Securities Act or the rules
and regulations thereunder in connection with the
distribution of Common Stock by such holder;
(viii) use its best efforts to cause all Registrable Securities
covered by such registration statement to be registered
with or approved by such other governmental agencies or
authorities as may be necessary to enable the holder(s)
thereof to consummate the disposition of such
Registrable Securities in the United States;
(ix) notify each holder of Registrable Securities covered by
such registration statement, when a prospectus relating
thereto is required to be delivered under the Securities
Act, upon discovery that, or upon the happening of any
event as a result of which, the prospectus includes an
untrue statement of a material fact or omits to state
any material fact required to be stated therein or
necessary to make the statements therein not misleading
in light of the circumstances under which they were
made, and, at the request of any such holder, promptly
prepare and file with the SEC and furnish to such holder
a reasonable number of copies of any supplement or
amendment as may be necessary so that, as thereafter
delivered to the purchasers of such securities, such
prospectus shall not include an untrue statement of a
material fact or omit to state a material fact required
to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances
under which they are made;
(x) in the event the offering is an underwritten offering,
use its best efforts to obtain a "cold comfort" letter
from the independent
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<PAGE>
public accountants for the Company in customary form and
covering such matters of the type customarily covered by
such letters;
(xi) make generally available to the holders of Registrable
Securities an earnings statement (which need not be
audited) for the twelve months beginning after the
effective date of a registration statement as soon as
reasonably practicable after the end of such period,
which earnings statement shall satisfy Section 11(a) of
the Securities Act;
(xii) advise such holders, promptly after it shall receive
notice or obtain knowledge thereof, of the issuance of
any stop order by the SEC suspending the effectiveness
of such registration statement or the initiation or
threatening of any proceeding for that purpose and
promptly use its best efforts to prevent the issuance of
any stop order or to obtain its withdrawal if such stop
order should be issued;
(xiii) make available to such holders drafts of the
registration statement, each prospectus or other
information document included therein or filed with the
SEC and each amendment or supplement thereto and make
available for inspection by such holders, any
underwriter participating in any disposition pursuant to
such registration statement, and any attorneys,
accountants or other agents retained by such holders or
such underwriter, all financial and other records,
pertinent corporate documents and properties of the
Company and cause the Company's officers, directors,
employees and independent accountants to supply all
information reasonably requested by such holders,
underwriters, attorneys, accountants or agents in
connection with such registration statement;
(xiv) use its best efforts to cause all such Registrable
Securities to be listed on or quoted on any securities
exchange or national automated quotation system on which
the Common Stock is then traded or quoted; and
(xv) provide and cause to be maintained a transfer agent and
registrar for all such Registrable Securities not later
than the effective date of such registration statement.
(b) The Company may require each Purchaser participating in a
registration hereunder to furnish the Company such information regarding such
Purchaser and the
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<PAGE>
distribution of such Registrable Securities as the Company may from time to time
reasonably request in writing and as shall be required by law to effect such
registration.
(c) Notwithstanding anything contained in the Warrants or in this
Agreement, once during any twelve (12) month period after completion of the
Company's IPO and after the expiration of sixty (60) days after the lock-up
period applicable to the Registrable Securities, and for a period not to exceed
forty-five (45) days, the Company shall not be prevented from delaying a
registration statement covering the Registrable Securities pursuant to this
Agreement, at any time when the Company, in its good faith judgment, reasonably
believes that the filing thereof at the time requested, or the offering of
Registrable Securities pursuant thereto, would materially and adversely affect
(i) a bona fide pending or scheduled public offering of the Company's securities
pursuant to a letter of intent entered into prior to delivery of a notice by
Requesting Holders of registration rights under this Agreement or (ii) an
acquisition, merger, recapitalization, consolidation, reorganization or similar
transaction by or of the Company.
6. Expenses.
(a) All fees, costs and expenses of, and incidental to, the
registration of Registrable Securities in a public offering (as specified in
paragraph (b) below) in connection with a registration hereunder, regardless of
whether a registration becomes effective ("Registration Expenses") shall be
borne by the Company.
(b) Registration Expenses shall include, without limitation, all
registration and filing fees, including fees with respect to filings required to
be made with the SEC, the National Association of Securities Dealers, Inc. or
any other regulatory body having jurisdiction over the relevant registration,
and all legal fees and disbursements and other expenses of complying with state
securities or blue sky laws of any jurisdictions in which the securities to be
offered are to be registered and qualified, all word processing, duplicating,
printing, messenger, telephone and delivery expenses, and reasonable fees and
disbursements of counsel and accountants for the Company and one law firm acting
as counsel to the holders of the Registrable Securities.
7. Sales Without Registration.
The Company shall take all actions reasonably necessary to enable
the Purchasers to sell Registrable Securities without registration under the
Securities Act within the limitation of the exemptions provided by (a) Rule 144
under the Securities Act, as such Rule may be amended from time to time, or (b)
any similar rule or regulation hereafter adopted by the SEC including, without
limiting the generality of the foregoing, filing on a timely basis all reports
required to be filed by the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). In the event the Company has gone public under the Applicable
Securities Laws of a jurisdiction other than the United States, then the Company
shall take all actions reasonably necessary to enable the Purchasers to sell
Registrable Securities without registration pursuant to exemptions provided
under such Applicable Securities Laws including, without limiting the generality
of the
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<PAGE>
foregoing, the timely filing of reports. Upon the request of any Purchaser, the
Company will deliver to such Purchaser a written statement as to whether it has
complied with such requirements and shall provide such Purchaser with such
publicly filed documents of the Company as are reasonably requested by such
Purchaser in connection with such sale.
8. Indemnification; Contribution.
(a) Indemnification by the Company. In the event of any registration
of any of the Registrable Securities under the Securities Act or any other
Applicable Securities Laws pursuant to this Agreement, the Company will
indemnify and hold harmless each Purchaser participating in the registration
(each, a "Selling Stockholder"), its directors, stockholders, officers and
partners and each underwriter involved in such registration and each other
person, if any, who controls each Selling Stockholder or underwriter within the
meaning of the Securities Act or the Exchange Act or any other Applicable
Securities Laws against any losses, claims, damages or liabilities, joint or
several, to which each Selling Stockholder or its officers, directors,
stockholders or partners or underwriter or controlling person may become subject
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in any registration statement under
which such Registrable Securities were registered, any preliminary prospectus,
final prospectus or other information document contained in such registration
statement, or any amendment or supplement to such registration statement, or
arise out of or are based upon the omission or alleged omission to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading. The Company will reimburse such Selling Stockholder, its
officers, directors, stockholders and partners and such underwriter and each
such controlling person for any legal or any other expenses reasonably incurred
by any of them as they are incurred in connection with investigating or
defending any such loss, claim, damage, liability or action; provided, however,
that the Company will not be liable to any Selling Stockholder or its officers,
directors, stockholders or partners, or controlling persons in any such case to
the extent that any such loss, claim, damage or liability arises out of or is
based upon any untrue statement or omission made in such registration statement,
preliminary prospectus, final prospectus or other information document, or any
such amendment or supplement thereto, in reliance upon and in conformity with
information furnished to the Company, in writing, by or on behalf of such
Selling Stockholder or its officers, directors, stockholders or partners, or
controlling persons, specifically for use in the preparation of such
registration statement, preliminary prospectus, final prospectus or other
information document or amendment or supplement thereto.
(b) Indemnification by the Selling Stockholders. In the event of any
registration of any of the Registrable Securities under the Securities Act or
any other Applicable Securities Laws pursuant to this Agreement, each Selling
Stockholder will indemnify and hold harmless the Company, each of its directors,
each of its officers who has signed such registration statement, each
underwriter involved in such registration, each other Selling Stockholder and
their respective officers, directors, stockholders and partners and each person,
if any, who
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<PAGE>
controls the Company or any such underwriter or Selling Stockholder within the
meaning of the Securities Act or the Exchange Act or any other Applicable
Securities Laws, against any losses, claims, damages or liabilities, to which
the Company, such directors and officers, such underwriter or Selling
Stockholder or its respective officers, directors, stockholders or partners or
controlling persons may become subject, insofar as such losses, claims, damages
or liabilities (or actions in respect thereof) arise out of or are based upon
any untrue statement or alleged untrue statement of a material fact contained in
any registration statement under which such Registrable Securities were
registered, any preliminary prospectus, final prospectus or other information
document contained in such registration statement, or any amendment or
supplement to such registration statement, and will reimburse the Company, the
underwriters, Selling Stockholders and their respective officers, directors,
stockholders, partners and controlling persons for any legal or any other
expenses reasonably incurred by any of them in connection with investigating or
defending any such loss, claim, damage, liability or action, if the statement or
omission was made in reliance upon and in conformity with information furnished
in writing to the Company by or on behalf of such Selling Stockholder or its
officers, directors, stockholders or partners or controlling persons,
specifically for use in connection with the preparation of such registration
statement, preliminary prospectus, final prospectus or other information
document or any such amendment or supplement thereto; provided, however, that
the obligation to indemnify will be several, not joint and several, among the
Selling Stockholders and the liability of each such Selling Stockholder will be
in proportion to and limited to the proceeds received by it from the sale of
Registrable Securities pursuant to such registration statement.
(c) Conduct of Indemnification Proceeding. Each party entitled to
indemnification under this Section 8 (the "Indemnified Party") shall give notice
to the party or parties required to provide indemnification (the "Indemnifying
Party") promptly after such Indemnified Party has actual knowledge of any claim
as to which indemnity may be sought, and shall permit the Indemnifying Party to
assume the defense of any such claim or any litigation resulting therefrom;
provided, however, that counsel for the Indemnifying Party, who shall conduct
the defense of such claim or litigation, shall be subject to approval by the
Indemnified Party, or a majority in interest of the Indemnified Parties if there
is more than one Indemnified Party (which approval shall not be unreasonably
withheld); and, provided, further, that the failure of any Indemnified Party to
give notice as provided herein shall not relieve the Indemnifying Party of its
obligations under this Agreement unless such failure materially adversely
affects the ability of such Indemnifying Party to defend or settle such claim or
litigation. The Indemnified Party may participate in such defense at its own
expense; provided, however, that the Indemnifying Party shall pay such expense
if (i) representation of such Indemnified Party by counsel retained by the
Indemnifying Party would be inappropriate due to a conflict of interest between
the Indemnified Party and the Indemnifying Party or (ii) the Indemnified Party
is participating in such defense because the Indemnifying Party has failed
promptly to assume such defense and employ counsel. No Indemnifying Party, in
the defense of any such claim or litigation, shall except with the consent of
the Indemnified Party, consent to entry of any judgment or enter into any
settlement which does not include as an unconditional term thereof the giving by
the claimant or plaintiff to such Indemnified Party of a release from all
liability in
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<PAGE>
respect of such claim or litigation, and no Indemnified Party shall consent to
entry of any judgment or settle such claim or litigation without the prior
written consent of the Indemnifying Party, which consent shall not be
unreasonably withheld.
(d) Contribution. If the indemnification provided for in this
Section 8 from the Indemnifying Party is unavailable to an Indemnified Party
hereunder in respect of any losses, claims, damages, liabilities or expenses
referred to herein, then the Indemnifying Party, in lieu of indemnifying such
Indemnified Party, shall contribute to the amount paid or payable by such
Indemnified Party as a result of such losses, claims, damages, liabilities or
expenses (i) in such proportion as is appropriate to reflect the relative fault
of the Indemnifying Party and Indemnified Party in connection with the actions
which resulted in such losses, claims, damages, liabilities or expenses, as well
as any other relevant equitable considerations; provided, however, that the
maximum obligation of each Selling Stockholder for contribution relating to a
registration hereunder shall be limited to the proceeds received by it from the
sale of Registrable Securities pursuant to such registration; or (ii) if the
allocation provided by clause (i) above is not permitted by applicable law, in
such proportion as shall be appropriate to reflect the relative benefits
received by the Indemnifying Party, on the one hand, and the Indemnified Party,
on the other hand, from the sale of the securities covered by such registration.
The relative fault of the Indemnifying Party, on the one hand, and the
Indemnified Party, on the other hand, shall be determined by reference to, among
other things, whether any action in question, including any untrue or alleged
untrue statement of a material fact has been made by, or relates to information
supplied by, such party, and such party's relative intent, knowledge, access to
information and opportunity to correct or prevent such action. The relative
benefits received by the Indemnifying Party, on the one hand, and the
Indemnified Party, on the other hand, shall be deemed to be in the same
proportion as the total proceeds from the offering (net of underwriting
discounts and commissions, but before deducting expenses) received by the
Indemnifying Party bears to the total proceeds (net of underwriting discounts
and commissions, but before deducting expenses) received by the Indemnified
Party. The amount paid or payable by a party as a result of the losses, claims,
damages, liabilities and expenses referred to above shall be deemed to include,
subject to the terms of Section 8(c) hereof, any reasonable legal or other fees
or expenses reasonably incurred by such party in connection with any
investigation or proceeding.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 8(d) were determined by pro rata
allocation or by any other method of allocation which does not take account of
the equitable considerations referred to in the immediately preceding paragraph.
No person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act or under the provisions of any Applicable Securities
Laws) shall be entitled to contribution from any person who was not guilty of
such fraudulent misrepresentation.
If indemnification is available under this Section 8, the
Indemnifying Party shall indemnify each Indemnified Party to the full extent
provided in Sections 8(a) and (b) hereof
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without regard to the relative fault of said Indemnifying Party or Indemnified
Party or any other equitable consideration provided for in this Section 8(d).
(e) Certain Exceptions to Indemnification and Contribution.
Notwithstanding any contrary provision in this Section 8, neither the Company
nor any Selling Stockholder will be liable for indemnification or contribution
in any case to the extent that any untrue statement or omission attributable to
the Company or such Selling Stockholder was contained or made in a preliminary
prospectus and corrected in the final prospectus and any such loss, claim,
damage or liability suffered or incurred by an Indemnified Party resulted from
an action, claim or suit by any person who purchased shares from such
Indemnified Party and such Indemnified Party received a copy of the final
prospectus or final similar information document but failed to deliver or
provide a copy of the final prospectus or final similar information document to
such person at or prior to the confirmation of the sale of such shares.
9. Miscellaneous.
(a) No Inconsistent Agreements. The Company represents and warrants
to the holders of Registrable Securities that it has not previously entered into
any agreement granting any registration rights with respect to its securities to
any person, other than as set forth on Schedule 9(a) hereto. The Company
covenants that it will not grant any right of registration under the Securities
Act relating to any of its shares of capital stock or other securities to any
person other than pursuant to this Agreement, except to the underwriter of the
IPO and to the extent that the rights of the holders of such stock or securities
shall not conflict with the rights of the holder of Registrable Securities
hereunder, and, provided, further, that (i) such holder of such securities may
not participate in any demand registration under this Agreement except as
provided in Section 2; (ii) the holder of such securities may not participate in
any piggyback registration except as contemplated in Section 3(b); and (iii)
such securities may not be publicly offered or sold for the period specified in
Section 4 under the circumstances described in such Section. If subsequent to
the date hereof the Company grants to holders or prospective holders of its
securities registration rights which are more favorable than the terms or
provisions of this Agreement are to the holders of Registrable Securities, this
Agreement shall be deemed to be automatically amended (without the necessity of
any action on the part of the Company or the holders of Registrable Securities)
to grant to the holders of Registrable Securities such more favorable or
additional rights, in addition to those set forth herein. The provisions of the
immediately preceding sentence shall terminate upon repayment of the Notes and
the effective date of the IPO registration statement which includes all the
Registrable Securities.
(b) Parties in Interest. All covenants, agreements, representations,
warranties and undertakings contained in this Agreement by and on behalf of any
of the parties hereto shall bind and inure to the benefit of the respective
successors and permitted assigns of the parties hereto.
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(c) Assignment. Each holder of Registrable Securities shall have the
unrestricted right to assign this Agreement and to delegate all or any of its
rights hereunder to any transferee of its Registrable Securities. Except as
provided in this Section 9(c), no party hereto shall assign this Agreement or
delegate all or any of its obligations hereunder without the prior written
consent of the other parties hereto. The provisions of this Agreement which are
for the benefit of the parties hereto other than the Company shall also be for
the benefit of and enforceable by any subsequent holder of Registrable
Securities subject to the provisions respecting the minimum numbers or
percentages of shares of Registrable Securities required in order to be entitled
to certain rights, or take certain actions, contained herein.
(d) Entire Agreement; Amendments and Waivers. This Agreement
together with the Warrants and the other Transaction Documents constitute the
entire agreement among the parties with respect to the subject matter hereof,
and supersedes all prior agreements, written or oral, with respect hereto.
Changes in or additions to this Agreement may be made only upon written
agreement of the Company and holders of at least 66 2/3% of Registrable
Securities. The waiver by any party hereto of a breach of any provision of this
Agreement shall not operate or be construed as a waiver of any subsequent
breach, whether or not similar.
(e) Governing Law. This Agreement and the rights and obligations of
the parties hereunder are to be governed and construed in accordance with the
laws of the State of New York, without regard to the principles of conflicts of
laws thereof.
(f) Specific Performance. The parties hereto agree that money
damages would not be a sufficient remedy for a breach by the Company of the
provisions of this Agreement because of the difficulty of ascertaining the
amount of damage that would be suffered in connection therewith, that the
Purchasers would be irreparably damaged in the event any obligation of the
Company is not performed in accordance with its specific terms and that the
Purchasers shall be entitled to equitable relief (including injunction and
specific performance) in any action instituted in any court of the United States
or any state thereof having subject matter jurisdiction, as a remedy for any
breach or to prevent any breach of such provisions. Such remedies shall not be
deemed to be exclusive for a breach or anticipatory breach of this Agreement,
but shall be in addition to all other remedies available at law or equity.
(g) Counterparts. This Agreement may be executed in one or more
counterparts, each of which will be deemed an original, but all of which
together will constitute one and the same instrument.
(h) Headings. The headings of the sections of this Agreement are for
convenience only and will not by themselves determine the interpretation of this
Agreement.
(i) Notices. All notices, consents and other communications under
this Note shall be in writing and shall be deemed to have been duly given when
(a) delivered by hand, (b) sent by telex or telecopier (with receipt confirmed),
provided that a copy is mailed by registered
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mail, return receipt requested, or (c) when received by the addressee, if sent
by Express Mail, Federal Express or other express delivery service (receipt
requested), in each case to the appropriate addresses, telex numbers and
telecopier numbers set forth below (or to such other addresses, telex numbers
and telecopier numbers as a party may designate as to itself by notice to the
other parties complying as to delivery with this Section):
if to the Company:
QuietPower Systems, Inc.
1675 Broadway
New York, NY 10019
Attention: Eric W. Jacobson
Telecopier No.: (212) 830-7298
with a copy to:
Breslow & Walker, LLP
767 Third Avenue
New York, NY 10017
Attention: Gary T. Moomjian
Telecopier No.: (212) 888-4955
if to the Purchaser, at the address set forth for such
Purchaser on Schedule A to the Purchase Agreement.
with a copy to:
Shereff, Friedman, Hoffman & Goodman, LLP
919 Third Avenue
New York, New York 10022
Attention: Robert M. Friedman Esq.
Telecopier No.: (212) 758-9526
(j) Invalid or Void Provisions. If any provision of this Agreement
is deemed invalid, illegal, or unenforceable in any jurisdiction, such provision
will be deemed amended to conform to applicable law so as to be valid, legal and
enforceable in such jurisdiction, and the validity, legality and enforceability
of such provision will not be affected or impaired thereby in any other
jurisdiction; if such provision cannot be amended without altering materially
the intention of the parties, it will be stricken and the remainder of this
Agreement will remain in full force and effect.
-14-
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(k) Expiration. The obligation of the Company to register the
Registrable Securities pursuant to the terms of this Agreement shall expire on
the earlier of (i) the date on which there are no longer any Registrable
Securities outstanding, or (ii) ten years from the effective date of the IPO
registration statement.
IN WITNESS WHEREOF, the undersigned have caused this Registration Rights
Agreement to be duly executed as of the date first above written.
QUIETPOWER SYSTEMS, INC.
1675 Broadway
New York, New York 10019
By: /s/ Jonathan M. Charry
-------------------------------------
Name: Jonathan M. Charry
Title: President
PURCHASERS:
QPS BRIDGE, LLC
By: Anderson, Weinroth & Co., L.P., Manager
By: /s/ Stephen Weinroth
---------------------------------------
Name: Stephen Weinroth
Title: General Partner
REGENT CAPITAL PARTNERS, L.P.
By: Regent Capital Holdings, L.P.,
its general partner
By: Regent Capital Holdings, Inc.,
its general partner
By: /s/ J. Oliver Maggard
---------------------------------------
Name: J. Oliver Maggard
Title: Managing Director
ASSIGNEE:
ANDERSEN, WEINROTH & CO., L.P., as
assignee of warrants from QPS Bridge, LLC
By: /s/ Stephen Weinroth
---------------------------------------
Name: Stephen Weinroth
Title: General Partner
-15-
<PAGE>
EXHIBIT 10.16
SECURITY AGREEMENT
SECURITY AGREEMENT dated as of April 17, 1997 (this "Agreement"),
made by QUIETPOWER SYSTEMS, INC., with its principal office at 1675 Broadway,
New York, New York 10019 (the "Company") to QPS Bridge, LLC, with an office at
1330 Avenue of the Americas, 36th Floor, New York, New York 10019, as agent (the
"Agent") for the Purchasers (as defined below) of the Company's Senior Secured
Promissory Notes.
R E C I T A L S
WHEREAS, the Company is a party to a Securities Purchase Agreement
dated as of April 17, 1997 (the "Purchase Agreement"), relating to the sale by
the Company of $2 million aggregate principal amount of Senior Secured
Promissory Notes of the Company (the "Notes") to the purchasers (the
"Purchasers") listed therein;
WHEREAS, the Purchasers in the Purchase Agreement have appointed QPS
Bridge, LLC, as their Agent for purposes of this Agreement;
WHEREAS, DayStar Partners, L.P., as Agent for certain other secured
lenders, the Company, and the Agent have executed an Intercreditor Agreement of
even date herewith (the "Intercreditor Agreement") regarding the matters
contained herein;
WHEREAS, the Purchasers hold the Notes which shall be secured by the
Collateral (as defined below) and it is a condition of the consummation of the
Purchase Agreement that the Company make the assignments and grant the liens and
security interests contemplated by this Agreement.
NOW, THEREFORE, in consideration of the foregoing premises and in
order to induce the Purchasers to enter into the Purchase Agreement, the Company
hereby agrees with the Agent for its benefit and the benefit of the Purchasers,
as follows:
SECTION 1. Grant of Security. The Company hereby grants, assigns and
pledges to the Agent for the benefit of the Purchasers, a lien on and security
interest in all of the right, title and interest of the Company, whether now or
hereafter acquired, in and to the Collateral. For the purposes of this
Agreement, "Collateral" shall mean:
(a) All tangible and intangible property of the Company (and all of
the Company's right, title and interest therein and thereto), whether now owned
by the Company or acquired by the Company after the date hereof at any time,
including, but not limited to, goods, inventories, machinery, equipment,
fixtures, documents, customer lists, contract rights, instruments, books,
records, files, general intangibles, goodwill, chattel paper, accounts
receivable and accounts, including all cash and non-cash proceeds of all such
property, the products and increase of all such property, and all additions to
and replacements of all such property;
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(b) Each of the patents, patent applications, patent licenses,
trademarks, trade names, trade secrets, service marks, brand marks, brand names,
copyrights, copyright applications, inventions, technologies, know-how,
formulae, processes, names and likeness owned or licensed by the Company, which
are presently, or in the future may be, owned, created, acquired, or used
(whether pursuant to a license or otherwise) by the Company, in whole or in
part, and all rights with respect thereto throughout the world, including all
proceeds thereof (including license royalties and proceeds of infringement
suits), and rights to renew and extend such rights, and the good will of the
business to which each of such rights relates, including, without limitation:
(i) All of the trademarks, service marks, trade names, brand
marks, and brand names, (whether or not registered) listed on Schedule A hereto;
(ii) All of the patents, patent applications, patent licenses,
listed on Schedule B hereto;
(iii) All of the copyrights (whether or not registered) and
copyright applications listed on Schedule C hereto; and
(iv) All of the licenses and license agreements in which the
Company grants or receives any interest in any trademarks, service marks, trade
names, brand marks, brand names, patents, patent applications, patent licenses,
copyrights and copyright applications, which are listed on Schedule D hereto.
(c) If an Event of Default shall have occurred and be continuing,
all of the Company's right, title and interest to register any trademark,
copyright or patent claims under any state or federal patent, trademark or
copyright law or regulation of any foreign country and to apply for, renew, and
extend any of the rights listed in clauses (a) and (b) above, the right (without
obligation) to sue or bring opposition or cancellation proceedings in the name
of the Company or in the name of the Agent for past, present, and future
infringements of the above listed rights and all rights (but not obligations)
corresponding thereto in the United States and any foreign country, and the
associated goodwill;
(d) All general intangibles relating to the foregoing (including
without limitation all standards, formulae, recipes and procedures necessary to
run the Company's business as set forth in its Business Plan, dated February,
1997, and thereafter); and
(e) All proceeds of any and all of the foregoing (including, without
limitation, license royalties and proceeds of infringement suits) and, to the
extent not otherwise included, all payments under insurance, or any indemnity,
warranty, or guaranty payable by reason of loss or damage to or otherwise with
respect to the Collateral. The term "proceeds" includes whatever is receivable
or received by the Company when Collateral is sold, leased, collected, exchanged
or otherwise disposed of, whether such disposition is voluntary or involuntary,
and includes,
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without limitation, all rights to payment, including return premiums, with
respect to any insurance relating thereto.
SECTION 2. Security Obligations. This Agreement secures the payment
of all obligations of every kind or character now or hereafter existing between
the Company and the Purchasers, whether matured or unmatured, contingent or
liquidated, under the Notes and the Purchase Agreement, including any
extensions, replacements, modifications, substitutions, amendments and renewals
thereof, whether for principal, interest, fees, expenses or otherwise and all
such obligations of the Company now or hereafter existing under this Agreement
(all such obligations being the "Obligations").
SECTION 3. Representation, Warranties and Covenants. The Company
represents and warrants as follows:
(a) Except as set forth on Schedule 3(a) hereto, the Company is the
sole, legal and beneficial owner of the entire right, title and interest in and
to the Collateral free and clear of any lien, security interest, option, charge,
pledge, license, assignment (whether conditional or not) or covenant, or any
other encumbrance except for the liens, licenses and security interests created
or permitted by this Agreement or listed on the Schedules hereto.
(b) Set forth on Schedule A is a complete and accurate list of all
trademarks, service marks, trade names, brand marks, and brand names, (whether
or not registered) owned by the Company.
(c) Set forth on Schedule B is a complete and accurate list of all
patents, patent applications, and patent licenses owned by the Company.
(d) Set forth on Schedule C is a complete and accurate list of all
copyrights (whether or not registered) and copyright applications owned by the
Company.
(e) Set forth on Schedule D is a complete and accurate list of all
licenses and license agreements in which the Company grants or receives any
interest in any trademarks, service marks, trade names, brand marks, brand
names, patents, patent applications, patent licenses, copyrights and copyright
applications, owned by the Company.
(f) The Collateral listed on the Schedules hereto are subsisting and
no portion of the Collateral has been judged by a court to be invalid,
unpatentable, or unenforceable, in whole or in part, and all of the Collateral
is, to the best of the Company's knowledge, valid and enforceable, except as set
forth on the Schedules hereto.
(g) The Company has not granted any license, release, covenant not
to sue, or non-assertion assurance to any third person with respect to any part
of the Collateral other than such licenses, releases, covenants and assurances
listed on the Schedules hereto. The Company
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<PAGE>
covenants that it will (i) not surrender, sell, encumber, or otherwise dispose
of any Collateral in excess of $25,000 per year, or any right or interest
therein except in the ordinary course of business, and (ii) keep the Collateral
free of all levies and security interests or other liens or charges, except
those arising in the ordinary course of business, or approved in writing by the
Agent, which approval shall not be unreasonably withheld.
(h) The Company's principal place of business and all of the records
concerning the Collateral are located, is at 1675 Broadway, New York, New York
10019. All of the Collateral is located at 1675 Broadway, New York, New York
10019 (which is in New York County) and 1025 West Nursery Road, Lithicum,
Maryland 21090 (which is in Anne Arundel County). The Company will not change
its principal place of business or remove its records or change the location of
the Collateral unless it gives the Agent at least 30 days prior written notice
thereof (or 5 days prior written notice if the new location of the Collateral is
within New York County) and has taken such action as is necessary to cause the
security interest of the Agent in the Collateral to continue to be perfected.
(i) No authorization, consent, approval or other action by, and no
notice to or filing or recording with, any governmental, administrative or
judicial authority or regulatory body is currently or is reasonably expected to
be required either for the making by the Company of the assignments and the
granting by the Company of the liens and security interests made and granted
hereby or for the execution, delivery or performance of this Agreement by the
Company.
(j) The Company has no knowledge of the existence of any right or
claim under any patent that would preclude the Company from making, having made
for it, importing or exporting, or having imported or exported for it, selling,
or using any product currently made by it, being made for it or sold or used by
it or materially interfere with the ability of the Company to carry on its
business as currently carried on.
(k) No claim has been made, and the Company has no knowledge of any
claim that is likely to be made, that the use by the Company of any Collateral
does or may violate the rights of any person.
(l) The Company will (i) do all acts that may be necessary to
maintain, preserve and protect the Collateral, (ii) not use or permit any
Collateral to be used unlawfully or in violation of any provision of this
Security Agreement or the other Transaction Documents, or any applicable law,
statute, regulation or ordinance or any policy of insurance covering the
Collateral, (iii) appear in and defend any action or proceeding which affects
its title to or the Agent's interest in the Collateral, (iv) keep the Collateral
in good condition and repair and not cause or permit any waste or unusual or
unreasonable depreciation of the Collateral, (v) at the reasonable request of
the Agent at any time and from time to time, mark the Company's records and all
evidence of the collateral to indicate clearly the Agent's security interest
therein, and (vi) at any time and from time to time upon reasonable request by
the Agent, promptly give to the Agent any information relating to the Collateral
which the Agent may reasonably request.
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<PAGE>
SECTION 4. Further Assurances.
(a) The Company agrees that from time to time, at the expense of the
Company, the Company will promptly execute and deliver all further instruments
and documents, and take all reasonable further action, that may be necessary or
desirable, or that the Agent may reasonably request, in order to (i) continue,
perfect and protect any security interest granted or purported to be granted
hereby or (ii) enable the Agent to exercise and enforce its rights and remedies
hereunder with respect to any part of the Collateral. The Company will, upon the
request of the Agent, execute a Collateral Assignment of Intellectual Property
in the form attached hereto (and with any revisions necessary so as to make it
acceptable with the appropriate authorities and binding) with respect to any
patents, patent applications, copyrights and copyright applications which form
part of the Collateral for filing with the United States Patent and Trademark
Office. Without limiting the generality of the foregoing, the Company will
execute and file such financing or continuation statements, endorsements,
assignments, vehicle registration documents and other documents, agreements, and
writings (including, without limitation, subordination agreements and
intercreditor agreements) and such other instruments or notices, or any
amendments thereto, as may be necessary or desirable, or as the Agent may
reasonably request, in order to perfect and preserve the security interests
granted or purported to be granted hereby.
(b) The Company hereby authorizes the Agent at the expense of the
Company to file one or more financing or continuation statements, and amendments
thereto, relative to all or any part of the Collateral without the signature of
the Company where permitted by law. A carbon, photographic or other reproduction
of this Agreement or any financing statement covering the Collateral or any part
thereof shall be sufficient as a financing statement where permitted by law.
(c) The Company will furnish to the Agent from time to time
statements and schedules further identifying and describing the Collateral,
including, without limitation, any sublicensing of Collateral by the Company,
and such other reports in connection with the Collateral as the Agent may
reasonably request, all in reasonable detail.
(d) The Company agrees that, should it obtain an ownership interest
in any patent, patent application, trademark, or trademark application which is
not now identified in the Schedules hereto or in any other asset which is not
included in the Schedules hereto, (i) the Company shall give prompt written
notice thereof to the Agent, (ii) the provisions of Section 1 shall
automatically apply to such Collateral, (iii) the Company shall execute a
collateral Assignment of Intellectual Property with respect to such Collateral,
and (iv) such additional ownership interest shall automatically become part of
the Collateral. The Company authorizes the Agent to modify this Agreement by
amending the Schedules hereto to include any additional ownership interest that
become part of the Collateral under this Section.
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<PAGE>
(e) With respect to any patent or patent application necessary to
the conduct of the business of the Company, the Company agrees to take all
necessary steps in any proceeding before the United States Patent and Trademark
Office or any similar office or agency in any other country or any political
subdivision thereof or in any court to maintain and pursue where appropriate,
rights in the Collateral (including each patent application now or hereafter
included in the Collateral), including the filing of divisional, continuation,
continuation-in-part and substitute applications, the filing of applications for
reissue, renewal or extensions, the payment of maintenance fees, and the
participation in interference, reexamination, opposition and infringement
proceedings. Any expenses incurred in connection with such activities shall be
borne by the Company. The Company shall not abandon any such right to file a
patent application, or abandon any such pending patent application or patent,
unless the invention which is the subject of such patent application or patent
is not necessary or desirable in the conduct of the business of the Company in
such country or political subdivision.
(f) The Company agrees to notify the Agent immediately and in
writing if the Company learns of any adverse determination or any development
(including, without limitation, the institution of any proceeding in the United
States Patent and Trademark Office or any court) regarding any material item of
the Collateral, unless, in each such case, the material that is the subject of
such Collateral is not necessary or desirable in the conduct of the business of
the Company.
(g) In the event that the Company becomes aware that any item of the
Collateral is materially infringed or misappropriated by a third party, the
Company shall promptly notify the Agent and if necessary or desirable in the
conduct of the business of the Company, shall promptly sue for infringement or
misappropriation and for recovery of all damages caused by such infringement or
misappropriation, and shall take such other actions as the Company shall deem
appropriate under the circumstances to protect such Collateral. Any expense
incurred in connection with such activities shall be borne by the Company. The
Company shall have sole control over the prosecution and settlement of such
actions and Agent and Purchasers shall cooperate fully with the Company and
shall be named parties, if necessary, in any such actions.
(h) The Company shall continue to mark its products with the number
of appropriate patents in accordance with the existing practices of the Company.
SECTION 5. Transfers and Other Liens. The Company shall not, without
the prior written consent of the Agent:
(a) sell, assign (by operation of law or otherwise) or otherwise
dispose of any of the Collateral, except as permitted by Section 3(g) of this
Agreement;
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(b) create or suffer to exist any lien, security interest or other
charge or encumbrance upon or with respect to any of the Collateral except for
the liens and security interests described in the Schedules hereto, or
(c) take any other action in connection with any of the Collateral
that would impair the value of the interests or rights thereunder of the Company
such that the interests or rights of the Agent in the Collateral taken as a
whole would be materially impaired.
SECTION 6. Agent Appointed Attorney-in-Fact. The Company hereby
irrevocably appoints the Agent as the Company's attorney-in-fact, with full
authority in the place and stead of the Company and in the name of the Company
or otherwise, from time to time in the Agent's reasonable discretion and in good
faith, to take any action and to execute any instrument that the Agent may deem
necessary or advisable to accomplish the purposes of this Agreement, only in the
event the Company refuses to take such action after being requested to do so by
the Agent and such action is necessary and desirable in the conduct of the
business of the Company, including, without limitation:
(a) to ask, demand, collect, sue for, recover, compromise, receive
and give acquittance and receipts for monies due and to become due under or in
respect of any of the Collateral;
(b) to receive, endorse, and collect any drafts or other
instruments, documents and chattel paper, in connection with clause (a) above;
and
(c) to file any claims or take any action or institute any
proceedings that the Agent may deem necessary or desirable for the collection of
any of the Collateral or otherwise to enforce the rights of the Agent with
respect to any of the Collateral.
SECTION 7. Agent May Perform.
(a) If the Company fails to perform any agreement contained herein,
the Agent may perform, or cause performance of, such agreement, and the expenses
of the Agent incurred in connection therewith shall be paid by the Company under
Section 10(b).
(b) The Agent or its designated representatives, shall have the
right, during normal business hours at any reasonable time and from time to
time, with 48 hours notice, to inspect the premises of the Company and to
examine the books, records and operations of the Company relating to the
Collateral.
(c) The Agent shall have the right but in no way shall be obligated
to bring suit in its own name or in the name of the Company to enforce any part
of the Collateral only in the event the Company refuses to take such action
after being reasonably requested in good faith to do so by the Agent and such
action is necessary and desirable (as reasonably determined by
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the Agent) in the conduct of the business of the Company. The Company shall at
the reasonable request of the Agent do any and all lawful acts and execute any
and all proper documents required by the Agent in aid of such enforcement. Upon
demand, the Company shall promptly reimburse and indemnify the Agent for all
reasonable costs and expenses incurred by the Agent in the exercise of its
rights under this Section.
SECTION 8. The Agent's Duties. The powers conferred on the Agent
hereunder are solely to protect the Purchasers' interest in the Collateral and
shall not impose any personal liability or any duty upon the Agent to exercise
any such powers. Except for the safe custody of any Collateral in its possession
and the accounting for moneys actually received by it hereunder, the Agent shall
have no duty or any personal liability as to any Collateral or as to the taking
of any necessary steps to preserve rights against the other parties or any other
rights pertaining to any Collateral. The Agent shall be deemed to have exercised
reasonable care in the custody and preservation of the Collateral in its
possession if the Collateral are accorded treatment substantially equal to that
which the Agent accords its own property and it has not committed wilful
misconduct in the care and preservation of the Collateral.
SECTION 9. Remedies. If an Event of Default shall have occurred and
be continuing:
(a) The Agent may exercise in respect of the Collateral, in addition
to other rights and remedies provided for herein or otherwise available to the
Agent, all the rights and remedies of a secured party on default under the
Uniform Commercial Code in effect in the state of New York at the time (the
"Code") (whether or not the Code applies to the affected Collateral) and also
may (i) exercise any and all rights and remedies of the Company in respect of
the Collateral, (ii) require the Company to, and the Company hereby agrees that
it will at its expense and upon request of the Agent forthwith, assemble all or
any part of the documents embodying the Collateral as directed by the Agent and
make it available to the Agent at a place to be designated by the Agent that is
reasonably convenient to both the Agent and the Company, (iii) file any
Assignments of Intellectual Property with the United States Patent and Trademark
Office, and (iv) without notice except as specified below, sell the Collateral
or any part thereof in one or more parcels at public or private sale, at any of
the Agent's offices or elsewhere, for cash, on credit or for future delivery,
and upon such other terms as the Agent may deem commercially reasonable. Upon
the occurrence of an Event of Default, the Company's rights to the Intellectual
Property subject to this Agreement shall be unconditional. The Company agrees
that at least ten (10) days' notice to the Company of the time and place of any
public or private sale is to be made shall constitute reasonable notification.
The Agent shall not be obligated to make any sale of Collateral regardless of
notice of sale having been given. The Agent may adjourn any public or private
sale from time to time by announcement at the time and place fixed therefor, and
such sale may, without further notice, be made at the time and place to which it
was so adjourned.
(b) All payments received by the Company under or in connection with
any of the Collateral shall be received in trust for the benefit of the Agent,
shall be segregated from
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other funds of the Company and shall be forthwith paid over to the Agent in the
same form as so received (with any necessary endorsement).
(c) All payments made under or in connection with or otherwise in
respect of the Collateral, and all cash proceeds received by the Agent in
respect of any sale of, collection from, or other realization upon all or any
part of the Collateral may, in the discretion of the Agent, be held by the Agent
as collateral for, and/or then or at any time thereafter applied (after payment
of any amounts payable to the Agent pursuant to Section 10) in whole or in part
by the Agent for the benefit of the Purchasers, ratably among the Purchasers,
against all or any part of the remaining Obligations, in such order as the Agent
shall elect. Any surplus of such cash or cash proceeds held by the Agent and
remaining after payment in full of all Obligations shall be paid over to the
Company or to whomsoever may be lawfully entitled to receive such surplus.
SECTION 10. Indemnity and Expenses.
(a) The Company agrees to indemnify the Agent from and against any
and all claims, losses and liabilities arising out of or resulting from this
Agreement or the transactions contemplated hereby (including, without
limitation, enforcement of this Agreement), except claims, losses or liabilities
resulting from the Agent's gross negligence or wilful misconduct as determined
by a final judgment of a court of competent jurisdiction.
(b) The Company will upon demand pay to the Agent the amount of any
and all reasonable expenses, including, without limitation the reasonable fees
and disbursements of its counsel and of any experts and agents, which the Agent
may incur in connection with (i) the custody, preservation, use or operation of,
or the sale of, collection from, or other realization upon, any of the
Collateral, (ii) the exercise or enforcement of any of the rights of the Agent
or the Purchasers hereunder, or (iii) the failure by the Company to perform or
observe any of the provisions hereof.
SECTION 11. Acceptance of Agency. The Agent hereby accepts its
duties as Agent hereunder for the Purchasers. The Agent shall not be entitled to
compensation for any services rendered by it in the exercise and performance of
any of its duties hereunder.
SECTION 12. Certain Matters Regarding the Agent.
(a) The Agent in its individual or any other capacity may be or
become the owner of Notes with the same rights it would have if it were not the
Agent.
(b) There shall at all times be an Agent hereunder.
(c) The Agent at any time may be removed from the agency and trusts
hereby created, by the Purchasers of a majority in principal amount of the Notes
then outstanding (the
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"Majority Purchasers") upon written notice thereof to the Agent and the Company
and a successor Agent shall be appointed by the Majority Purchasers.
If at any time the Agent shall become incapable of acting (including
without limitation by reason of death or disability), or shall be adjudged
bankrupt or insolvent, or a receiver of the Agent or of its property shall be
appointed, or any public officer shall take charge or control of the Agent or of
its property or affairs for the purpose of rehabilitation, conservation or
liquidation, then the Agent shall be deemed to have been removed from the agency
and trusts hereby created and the Company shall promptly notify the Majority
Purchasers in writing who shall have the right to appoint a successor Agent as
if such Agent had been removed pursuant to the preceding paragraph.
Any removal of the Agent and appointment of a successor pursuant to
any of the provisions of this Section shall become effective upon acceptance of
appointment by the successor as provided in paragraph (d) below.
(d) Any successor Agent appointed as provided in paragraph (c) shall
execute, acknowledge and deliver to the Company and to its predecessor Agent an
instrument accepting such appointment hereunder, and thereupon the removal of
the predecessor Agent shall become effective and such successor Agent, without
any further action, deed or conveyance, shall become fully vested with all the
rights, powers, duties and obligations of its predecessor Agent hereunder, with
the like effect as if originally named as Agent herein. The predecessor Agent
shall transfer all Collateral to the successor Agent and execute and deliver
such instruments, and do such other things, as reasonably may be required for
more fully and certainly vesting and confirming in the successor Agent all such
rights, powers, duties and obligations.
Upon acceptance of appointment by a successor Agent as provided in
this Section, the Company shall mail notice of the succession of such Agent
hereunder to all Purchasers at the address for each Purchaser set forth next to
his or her or its name on the signature page of the Purchase Agreement. If the
Company fails to mail such notice within 10 days after acceptance of appointment
by the successor Agent, the successor Agent shall cause such notice to be mailed
at the expense of the Company.
SECTION 13. Limitation on Rights of Purchasers. No Purchaser (except
as expressly provided herein) shall have any right to control in any manner the
operation, management, foreclosure or liquidation of the Collateral, or the
obligations of the parties hereto.
No Purchaser shall have any right by virtue of any provision of this
Agreement to institute any suit, action or proceeding in equity or at law upon
or under or with respect to this Agreement, unless such Purchaser previously
shall have given to the Agent a written notice of default and of the continuance
thereof, and unless also the Majority Purchasers shall have made written request
upon the Agent to institute such action, suit or proceeding in its own name as
Agent hereunder and shall have offered to the Agent such reasonable indemnity as
it may require
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against the costs, expenses and liabilities to be incurred therein or thereby,
and the Agent, for 30 days after its receipt of such notice, request and offer
of indemnity, shall have neglected or refused to institute any such action, suit
or proceeding; it being understood and intended, and being covenanted expressly
by each Purchaser with each other Purchaser and the Agent, that no one or more
Purchasers shall have any right in any manner whatever by virtue of any
provision of this Agreement to affect, disturb or prejudice the rights of any
other Purchaser, or to obtain or seek to obtain priority over or preference to
any other such Purchasers. For the protection and enforcement of the provisions
of this Section, each and every Purchaser and the Agent shall be entitled to
such relief as can be given either at law or in equity.
SECTION 14. Acts of Purchasers. (a) Except as otherwise specifically
provided herein, whenever Purchaser approval, authorization, direction, notice,
consent, waiver or other action is required hereunder, such approval,
authorization, direction, notice, consent, waiver or other action shall be
deemed to have been given or taken on behalf of, and shall be binding upon, all
Purchasers if agreed to by the Majority Purchasers.
(b) Any request, demand, authorization, direction, notice, consent,
waiver or other action provided by this Agreement to be given or taken by
Purchasers may be embodied in and evidenced by one or more instruments of
substantially similar tenor signed by such Purchasers in person or by agent duly
appointed in writing; and except as herein otherwise expressly provided, such
action shall become effective when such instrument or instruments are delivered
to the Agent and, where required, to the Company. Proof of execution of any such
instrument or of a writing appointing any such agent shall be sufficient for any
purpose of this Agreement and conclusive in favor of the Agent and the Company
if made in the manner provided in this Section.
(c) The fact and date of the execution by any Purchaser of any such
instrument or writing may be proved in any reasonable manner which the Agent
deems sufficient.
(d) Any request, demand, authorization, direction, notice, consent,
waiver or other action by Purchasers pursuant to Section 14(a) above shall bind
every holder of every Purchaser in respect of anything done, or omitted to be
done, by the Agent in reliance thereon, whether or not notation of such action
is made upon such security.
(e) The Agent may require such additional proof of any matter
referred to in this Section as it shall deem reasonably necessary.
SECTION 15. Amendment. This Agreement may be amended from time to
time by the Company and the Agent, but without the consent of any Purchaser, (a)
to cure any ambiguity or to correct or supplement any provisions herein which
may be inconsistent with any other provisions herein, (b) to add to the duties
or obligations of the Agent hereunder, or (c) to make any other provisions with
respect to matters or questions arising under this Agreement
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which shall not be materially inconsistent with the provisions of this
Agreement; provided, however, that in each case such action shall not, as
evidenced by an opinion of counsel to the Company, adversely affect in any
material respect the interests of any Purchaser.
This Agreement also may be amended from time to time by the Company
and the Agent, with the consent of the Majority Purchasers, for the purpose of
adding any provisions to or changing in any manner or eliminating or waiving any
of the provisions or requirements of this Agreement; provided, however, that no
such amendment or waiver shall (i) effectively reduce in any manner the amount
of, or delay the timing of, the amounts to be distributed on the Notes, or (ii)
alter the percentage of Purchasers required to consent to any such amendment,
unless such amendment or waiver is consented to by all Purchasers.
Promptly after the execution of any such amendment the Agent shall
furnish written notification of the substance of such amendment to each
Purchaser.
SECTION 16. Notices. All notices, consents and other communications
under this Note shall be in writing and shall be deemed to have been duly given
when (a) delivered by hand, (b) sent by telex or telecopier (with receipt
confirmed), provided that a copy is mailed by registered mail, return receipt
requested, or (c) when received by the addressee, if sent by Express Mail,
Federal Express or other express delivery service (receipt requested), in each
case to the appropriate addresses, telex numbers and telecopier numbers set
forth below (or to such other addresses, telex numbers and telecopier numbers as
a party may designate as to itself by notice to the other parties complying as
to delivery with this Section):
(a) if to the Company:
QuietPower Systems, Inc.
1675 Broadway
New York, NY 10019
Attention: Eric W. Jacobson
Telecopier No.: (212) 830-7298
with a copy to:
Breslow & Walker LLP
767 Third Avenue
New York, NY 10017
Attention: Gary T. Moomjian, Esq.
Telecopier No.: (212) 888-4955
(a) if to the Purchasers, at the address for each Purchaser set
forth next to his or her or its name on the signature page of
the Purchase Agreement.
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(b) if to the Agent:
QPS Bridge, LLC
1330 Avenue of the Americas, 36th Floor
New York, NY 10019
Attention: Stephen D. Weinroth
Telecopier No.: (212) 399-1954
with a copy to:
Shereff, Friedman, Hoffman & Goodman, LLP
919 Third Avenue
New York, New York 10022
Attention: Robert M. Friedman Esq.
Telecopier No.: (212) 758-9526
SECTION 17. Continuing Ownership Rights; Continuing Security
Interest; Release of Collateral and Termination of this Agreement.
(a) This Agreement shall create continuing ownership rights in the
Collateral and shall (i) remain in full force and effect until the payment in
full of the Obligations, (ii) be binding upon the Company, its successors and
assigns, and (iii) inure, together with the rights and remedies of the Agent
hereunder, to the benefit of the Agent, the Purchasers and their respective
successors, transferees and assigns. The term "Purchasers" as used herein shall
include all successors, transferees and assigns of the original Purchasers.
(b) This Agreement shall terminate, the assignments made, and the
liens and security interests and other rights granted hereby shall terminate and
all rights to the Collateral shall revert to the Company upon the payment in
full of the Obligations. Upon any such termination, the Agent and the Purchasers
will, at the Company's expense, execute and deliver to the Company such
documents as the Company shall reasonably request to evidence such termination
and reversion.
SECTION 18. Definitions; Entire Agreement. Any capitalized term used
but not defined herein shall have the meaning ascribed to such term in the
Purchase Agreement. This Agreement, the Purchase Agreement, the Intercreditor
Agreement, the Notes, the Warrants and the Registration Rights Agreements
contain the entire agreement between the parties with respect to the
transactions contemplated hereby.
SECTION 19. Severability. If any term or provision of this Agreement
is or shall become illegal, invalid or unenforceable in any jurisdiction, all
other terms and provisions of
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this Agreement shall remain legal, valid and enforceable in such jurisdiction
and such illegal, invalid or unenforceable provision shall be legal, valid and
enforceable in any other jurisdiction.
SECTION 20. Governing Law; Terms. This Agreement shall be governed
by, and construed in accordance with, the laws of the State of New York, except
to the extent that the validity or perfection of the security interest
hereunder, or remedies hereunder, in respect of any particular Collateral are
governed by the laws of the United States or any other jurisdiction other than
the State of New York.
SECTION 21. Consent to Jurisdiction. The Company and the Purchasers
hereby consent to the jurisdiction of the state and federal courts of New York
for all disputes arising under this Agreement.
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IN WITNESS WHEREOF, the Company has caused this Agreement to be duly
executed and delivered by its officer thereunto duly authorized as of the date
first above written.
QUIETPOWER SYSTEMS, INC.
By:/s/ Jonathan M. Charry
---------------------------
Name:Jonathan M. Charry
Title:President
Agreed and consented to as of the date first above written:
QPS BRIDGE, LLC, AS AGENT
By: Andersen, Weinroth & Co., L.P., Manager
By: /s/ Stephen Weinroth
---------------------------
Name:Stephen Weinroth
Title:General Partner
<PAGE>
EXHIBIT 10.17
INTERCREDITOR AGREEMENT
INTERCREDITOR AGREEMENT dated as of April 17, 1997 (this "Agreement"), by
and among each of DayStar Partners, L.P., a California limited partnership,
("DayStar"), acting as Agent for the DayStar Lenders (as such term is defined
herein), QPS Bridge, LLC, a New York limited liability company ("QPS Bridge")
acting as Agent (the "Agent") for the purchasers (the "Bridge Lenders") of
Senior Secured Notes (the "Bridge Notes") of the Borrower (as herein defined)
pursuant to a Securities Purchase Agreement dated as of April 17, 1997 (the
"Bridge Lender Purchase Agreement") (DayStar and each of the Bridge Lenders is
herein referred to individually as a "Lender" and collectively, "Lenders") and
QuietPower Systems, Inc., a Delaware corporation ("Borrower").
BACKGROUND
The DayStar Lenders have entered into financing arrangements with Borrower
pursuant to certain agreements and related documents which provide for security
interests in all tangible and intangible property and assets of Borrower. The
Bridge Lenders have purchased $2,000,000 of Bridge Notes from Borrower, to be
secured by a security interest in all of the tangible and intangible property
and assets of Borrower. As an inducement to the Bridge Lenders to purchase the
Bridge Notes from the Borrower, and to set forth certain agreements with respect
to the respective security interests of each Lender in the Collateral, DayStar,
on behalf of the DayStar Lenders, and the Agent, on behalf of the Bridge
Lenders, have agreed to enter into this intercreditor agreement to set forth
their respective rights with respect to their "Liens" in the assets of Borrower.
NOW, THEREFORE, in consideration of the foregoing premises and for good
and valuable consideration, the receipt and adequacy of which is hereby
acknowledged, the parties hereto agree as follows:
I. DEFINITIONS
1.1 General Terms. For purposes of this Agreement, the following terms
shall have the following meanings:
"Books and Records" shall mean all books and records, whether now
owned or hereafter acquired or arising, including, but not limited to, customer
lists, credit files, computer programs, printouts and other computer materials
and records of the Borrower pertaining to any Collateral.
"Bridge Lender Agreements" shall mean the Transaction Documents, as
defined in the Bridge Lender Purchase Agreement, as such Transaction Documents
may be amended, modified or supplemented.
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"Bridge Lender Obligations" shall mean the unpaid principal amount
of, and interest (including, without limitation, interest accruing after the
maturity of the Bridge Notes, and interest accruing after the filing of any
petition in bankruptcy, or the commencement of any insolvency, reorganization of
like proceeding, relating to the Borrower, whether or not a claim for
post-filing or post-petition interest is allowed in such proceeding) on the
Bridge Notes, and all other obligations and liabilities of the Borrower to the
Bridge Lenders, whether direct or indirect, absolute or contingent, due or to
become due, or now existing or hereafter incurred, which may arise under, out
of, or in connection with, the Transaction Documents, whether on account of
principal, interest, reimbursement obligations, fees, indemnities, costs,
expenses (including, without limitation, all reasonable fees and disbursements
of counsel to the Bridge Lenders) or otherwise.
"Code" shall mean the United States Bankruptcy Code.
"Collateral" shall mean all tangible and intangible property or
assets of the Borrower, now owned or hereafter acquired by Borrower in or upon
which any of the Lenders now or hereafter has a Lien, and all proceeds of such
property (including, without limitation, insurance and condemnation proceeds and
escrow accounts covering any such property).
"DayStar Agreements" shall mean the Note Purchase Agreements dated
May 24, 1996 between the Borrower and each of (i) DayStar Partners, L.P., (ii)
Douglas Lee, (iii) The Smith 1987 Family Trust, Richard Dunham Smith and
Patricia Ann Smith, (iv) J. Thomas Bentley, and (v) Westminster Associates,
Ltd., and all of the collateral documents thereto, including, without
limitation, the DayStar Notes, the Security Agreement dated as of May 24, 1996,
by and between the Borrower and DayStar and the other DayStar Lenders, as
amended, modified and supplemented, and each of the other documents creating the
DayStar Obligations as defined below.
"DayStar Lenders" shall mean those persons holding the DayStar Notes
(as such term is defined in the in the Bridge Lender Purchase Agreement).
"DayStar Obligations" shall mean, after the payment of $133,750 in
principal and $16,752 in interest (which represents a complete repayment of the
interest accrued through the date hereof on the principal being repaid) being
made to the DayStar Lenders upon the closing of the transactions contemplated by
the Bridge Lender Agreements, up to $401,250 in original principal amount of
DayStar Notes issued to DayStar and the other DayStar Lenders, plus interest
(including, without limitation, interest accruing after the maturity of the
DayStar Notes, and interest accruing after the filing of any petition in
bankruptcy, or the commencement of any insolvency, reorganization of like
proceeding, relating to the Borrower, whether or not a claim for post-filing or
post-petition interest is allowed in such proceeding) accrued thereon from and
after the date hereof; provided, however, that DayStar Obligations shall exclude
(i) any indebtedness or other obligation for borrowed money to the DayStar
Lenders other than the outstanding $401,250 in principal amount of DayStar Notes
(plus interest hereafter accruing), (ii)
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any amount of indebtedness owing under the DayStar Notes which is the result of
the re-lending of amounts outstanding under the DayStar Notes on the date hereof
which are subsequently repaid, and (iii) all other obligations and liabilities
of the Borrower to the DayStar Lenders, whether direct or indirect, absolute or
contingent, due or to become due, or now existing or hereafter incurred, which
may arise under, out of, or in connection with, the DayStar Agreements, whether
on account of reimbursement obligations, fees, indemnities, costs, expenses
(including, without limitation, all fees and disbursements of counsel to the
DayStar Lenders) or otherwise, except for such reasonable costs and expenses of
counsel to the DayStar Lenders in connection with enforcing the rights of the
DayStar Lenders upon any Event of Default under the DayStar Agreements but
consistent with and not in derogation of or duplicative of the Agent's exclusive
rights with respect to the Collateral and any process thereon as described in
this Agreement.
"Enforcement Action" shall mean, collectively or singly, for one or
more of the Lenders, to (i) declare an Event of Default and make demand for
payment, and/or accelerate the indebtedness of the Borrower to such Lender, (ii)
take possession of any material amount of Collateral, or (iii) exercise any
Secured Lender Remedies.
"Enforcement Notice" shall mean a written notice delivered at a time
when an Event of Default has occurred and is continuing, by any Lender to the
other Lenders, (i) specifying the relevant Event of Default, and (ii) stating
that an Enforcement Action shall commence or has commenced.
"Event of Default" when used throughout this Agreement shall mean
any default, event of default, or any event which, with notice or the passage of
time (or both) would constitute a default or an event of default under any of
the Lending Agreements.
"Lending Agreements" shall mean, collectively, the DayStar
Agreements and the Bridge Lender Agreements, each as from time to time in
effect.
"Liens" shall mean any mortgage, deed of trust, pledge,
hypothecation, assignment, deposit arrangement, security interest, encumbrance
(including, but not limited to, easements, rights of way and the like), lien
(statutory or other), security agreement or transfer intended as security,
including without limitation, any conditional sale or other title retention
agreement, the interest of a lessor under a capital lease, or any financing
lease having substantially the same economic effect as any of the foregoing.
"Person" shall mean an individual, a partnership, a corporation
(including a business trust), a joint stock company, a trust, an unincorporated
association, a joint venture, or other entity or a government or any agency,
instrumentality or political subdivision thereof.
"Secured Lender Remedies" means any action which results in the
sale, foreclosure, realization upon, or a liquidation of any Collateral,
including without limitation, the
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exercise of any remedies or rights of a "Secured Party" under Article 9 of
the UCC, such as, without limitation, the notification of account debtors and
voting and receiving distributions with respect to pledged stock.
"UCC" shall mean Article 9 of the Uniform Commercial Code, as in
effect on the date hereof in the State of New York.
1.2 Certain Matters of Construction. The terms "wherein", "hereof" and
"hereunder" and other words of similar import refer to this Agreement as a whole
and not to any particular section, paragraph or subdivision. Any pronoun used
shall be deemed to cover all genders wherever appropriate in the context, terms
used herein in the singular also include the plural and vice versa. All
references to statutes and related regulations shall include any amendments of
same and any successor statues and regulations. All references to any
instruments or agreements, including, without limitation, references to any of
the Lending Agreements shall include any and all modifications or amendments
thereto and any and all extensions or renewals thereof.
II. PRIORITIES, SUBORDINATIONS AND RELATED MATTERS.
2.1 Priority of Rights in Collateral
(a) The Agent agrees and acknowledges on behalf of the Bridge
Lenders, subject to the terms of this Agreement, that regardless of the time or
order of attachment, or the time, order, or manner of perfection, or the time or
order of filing of financing statements, or any provisions of the UCC or
applicable law, as between the parties the DayStar Lenders shall have a first
and prior Lien in the Collateral.
(b) DayStar agrees and acknowledges on behalf of the DayStar
Lenders, subject to the terms of this Agreement, that regardless of the time or
order of attachment, or the time, order, or manner of perfection, or the time or
the order of filing of financing statements, or any provision of the UCC or
applicable law, as between the parties the Bridge Lenders shall have a second
priority Lien in the Collateral.
(c) With respect to proceeds from the sale of the Collateral, the
Agent shall turn or pay over to DayStar with respect thereto, proceeds of any
disposition of such Collateral until the satisfaction of all obligations of the
Borrower with respect to the DayStar Obligations then outstanding, and until
such time, the Agent shall hold such proceeds of Collateral in trust for the
benefit of the DayStar Lenders. DayStar agrees to release the Lien of the
DayStar Lenders in the Collateral and any and all other claims with respect to
the Borrower, under the DayStar Agreements or otherwise, promptly upon
satisfaction of the DayStar Obligations and agrees to execute any additional
instruments or take any action reasonably necessary to effectuate the same.
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(d) The subordination and priorities specified in this Section 2.1
are expressly conditioned upon the nonavoidability and perfection of the Lien to
which another Lien is subordinated and, if the Lien to which another Lien is
subordinated is not perfected or is avoidable, for any reason, then the
subordinations and relative priority agreements provided for herein shall not be
effective as to the particular Collateral (and only as to such particular
Collateral) which is the subject of the unperfected or avoidable Lien. The
subordination and priorities provided in this Section 2.1 shall not be altered
or otherwise affected by any amendment, modification, supplement, extension,
renewal, restatement or refinancing of the indebtedness payable under any
Lending Agreement, nor by any action or inaction which any Lender may take or
fail to take in respect of any Collateral.
2.2 Perfection. Each Lender shall be solely responsible for perfecting and
maintaining the perfection of its Lien in and to each item constituting the
Collateral in which such Lender has been granted a Lien. The foregoing
provisions of this Agreement are intended solely to govern the respective Lien
priorities as between the Lenders and shall not impose on the Lenders any
obligation in respect of the disposition of proceeds of foreclosure on any
Collateral which would conflict with prior perfected claims therein in favor of
any other Person. Each Lender agrees that it will not contest the validity,
perfection, priority or enforceability of the Liens of the other Lender upon its
respective Collateral and that, as between the Lenders, the terms of this
Agreement shall govern even if part or all of the indebtedness owed to such
Lender under the respective Lending Agreements are avoided, disallowed, set
aside or otherwise invalidated in any judicial proceeding or otherwise. Borrower
agrees that it will not contest the validity, perfection, priority or
enforceability of the Liens.
2.3 Management of Collateral. Subject to the terms hereof, the Agent, on
behalf of the Bridge Lenders, shall have the exclusive right to manage, perform
and enforce the terms of the Lending Agreements with respect to its collateral
and to exercise and enforce all privileges and rights thereunder according to
its discretion and the exercise of its business judgment, including, without
limitation, the exclusive right to enforce or settle insurance claims, take or
retake control or possession of such Collateral and to hold, prepare for sale,
process, sell, lease, dispose of, or liquidate such Collateral.
2.4 Use of Collateral. Notwithstanding anything to the contrary contained
herein or in any of the Lending Agreements, only the Agent, on behalf of the
Bridge Lenders, shall have the right to permit or approve the sale, transfer or
other disposition of the Collateral, whether by Borrower or otherwise. DayStar,
as agent on behalf of the DayStar Lenders, will, immediately upon the request of
the Agent, release or otherwise terminate the Liens of the DayStar Lenders upon
such Collateral, to the extent such Collateral is sold or otherwise disposed of
by the Agent or by Borrower with the consent of the Agent, and DayStar will
immediately deliver such release documents as the Agent may require in
connection therewith.
2.5 Distribution of Proceeds of Collateral. The proceeds of Collateral
shall be used first to pay the costs and expenses of realizing such proceeds and
then shall be paid to DayStar
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up to the amount of the DayStar Obligations with any residual or additional
proceeds after satisfaction of the DayStar Obligations being paid to the Bridge
Lenders. DayStar agrees that neither the Agent nor the Bridge Lenders have any
other obligations to the DayStar Lenders other than the obligation to pay to
DayStar the proceeds, if any, of Collateral, as set forth in this Article II, up
to the amount of the DayStar Obligations.
2.6 Enforcement Action.
(a) So long as the Bridge Lender Obligations are outstanding, none
of the DayStar Lenders shall take any action to commence any Enforcement Actions
or to enforce their Secured Lender Remedies with respect to Collateral;
provided, if (i) DayStar shall have notified the Agent in writing of an Event of
Default under the DayStar Agreements and (ii) within one hundred twenty days
(120) days thereafter the Agent shall not have commenced action to foreclose on
the Collateral or realize upon or enforce any of its rights with respect to the
Collateral, then DayStar may commence its own action to foreclose on the
Collateral or to realize upon or enforce any of its rights with respect to the
Collateral as agent on behalf of the Bridge Lenders and all proceeds in excess
of the DayStar Obligations shall be paid to the Bridge Star Lenders. DayStar, as
agent on behalf of the DayStar Lenders, waives any rights to a commercially
reasonable disposition of Collateral under the UCC.
(b) Subject to paragraphs 2.5 and 2.6(a) hereof, the Agent, at its
option, may take any action to accelerate or demand payment of the Bridge Lender
Obligations and to foreclose or realize upon or enforce any of its rights with
respect to Collateral, regardless of its effect on the DayStar Lenders. The
Agent acknowledges that it shall advise DayStar of the liquidation of the
Collateral.
2.7 Information Sharing. Upon the occurrence and continuance of an
Enforcement Action, in the event that any Lender, in the exercise of its
respective rights under the Lending Agreements, shall receive possession or
control of any Books and Records which contain information identifying or
pertaining to any of the property of any Borrower in which any other Lender has
been granted a Lien, it shall notify the other party that is has received such
Books and Records and shall, as promptly as practicable thereafter, make
available to the other party duplicate copies of such Books and Records in the
same form as the original. All expenses incurred by such Lender in performing
its obligations under this paragraph shall be borne by the Borrower and shall
constitute indebtedness under the such Lender's agreements with Borrower. The
failure of either Lender to share information shall not create a cause of action
against the party failing to share information or create any claim on behalf of
Borrower or any third party.
2.8 Notices of Default and Certain Events. Each of the Agent on behalf of
the Bridge Lenders, on the one hand, and DayStar, as agent on behalf of the
DayStar Lenders, on the other, hereby undertakes in good faith to notify the
other and the Borrower of the occurrence of any of the following as applicable:
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(a) occurrence or existence of an Event of Default (simultaneously
with the sending of such notice to the Borrower) under the respective Lending
Agreements;
(b) payment in full by Borrower (whether as a result of refinancing
or otherwise) of all obligations under the respective Lending Agreements; or
(c) the exercise of any Secured Lender Remedies.
Each of the Agent on behalf of the Bridge Lenders, on the one hand, and DayStar,
as agent on behalf of the DayStar Lenders, on the other, agrees to use its best
efforts to give to the other such notice, but the failure to do so shall not
affect the validity of such notice or create a cause of action against the party
failing to give such notice or create a claim or right on behalf of any third
party. The sending of such notice shall not oblige the other Lender to cure such
Event of Default.
2.9 Agreement Absolute. This Agreement shall be and remain absolute and
unconditional under any and all circumstances, and no act or omission on the
part of any Lender shall affect or impair the agreement of any other Lender
hereunder.
2.10 Bankruptcy Issues. This Agreement shall continue in full force and
effect after the filing of any petition by or against Borrower under the Code
and all converted or succeeding cases in respect thereof. All references herein
to Borrower shall be deemed to apply to a trustee for Borrower and Borrower as
debtor-in-possession.
III. PRIORITY OF PAYMENTS
The Bridge Lenders hereby subordinate, solely with respect to assets of
the Borrower comprising Collateral, payment of the Bridge Lender Obligations to
payment of the DayStar Obligations. Notwithstanding the foregoing, provided no
default or event of default shall have occurred under the DayStar Agreements,
and provided such payment does not cause the occurrence of such a default or
event of default, Borrower may make scheduled payments of principal and interest
under the Bridge Notes. This paragraph is intended to reflect the agreements of
the Lenders with regard to the priority of payments, and nothing herein shall
affect in any way any obligations of Borrower to any of the Lenders under the
Lending Agreements.
IV. MISCELLANEOUS
4.1 Notices. All notices, consents and other communications under this
Agreement shall be in writing and shall be deemed to have been duly given when
(a) delivered by hand, (b) sent by telex or telecopier (with receipt confirmed),
provided that a copy is mailed by registered mail, return receipt requested, or
(c) when received by the addressee, if sent by Express Mail, Federal Express or
other express delivery service (receipt requested), in each case to the
appropriate addresses, telex numbers and telecopier numbers set forth below (or
to such other
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addresses, telex numbers and telecopier numbers as a party may
designate as to itself by notice to the other parties complying as to delivery
with this Section):
(a) If to DayStar:
DayStar Partners, L.P.
10600 N. DeAnza Blvd., Ste 215
Cupertino, CA 95014
Attn: Larry Wells, President
Telecopier: (408) 257-8111
with a copy to:
Coblentz, Cahen, McCabe & Breyer, LLP
222 Kearny Street, 7th Floor
San Francisco, CA 94108
Attn: Barry Reder
Telecopier: (415) 989-1663
(b) If to Company:
QuietPower Systems, Inc.
1675 Broadway
New York, NY 10019
Attention: Eric W. Jacobson
Telecopier No.: (212) 830-7298
with a copy to:
Breslow & Walker, LLP
767 Third Avenue
New York, NY 10017
Attention: Gary T. Moomjian, Esq.
Telecopier No.: (212) 888-4955
(c) If to Agent
QPS Bridge, LLC
1330 Avenue of the Americas, 36th Floor
New York, NY 10019
Attention: Stephen D. Weinroth
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Telecopier No.: (212) 399-1954
with a copy to:
Shereff, Friedman, Hoffman & Goodman, LLP
919 Third Avenue
New York, New York 10022
Attention: Robert M. Friedman Esq.
Telecopier No.: (212) 758-9526
4.2 Insurance. Proceeds of the Collateral include insurance proceeds, and
therefore the priorities set forth in Section 2.1 govern the ultimate
disposition of casualty insurance proceeds. The Agent, subject to the Bridge
Lender rights under the Transaction Documents, shall have the sole and exclusive
right, as against the other Lender, to adjust settlement of insurance claims in
the event of any covered loss, theft or destruction of such Collateral. All
proceeds of such insurance shall be applied as provided in Article II hereof,
and the other Lender shall cooperate (if necessary) in a reasonable manner in
effecting the payment of insurance proceeds as provided herein.
4.3 Dealings with Borrower: Agreement Continues. The subordination and
agreements as to relative priority as set forth above shall remain in full force
and effect, regardless of whether either Lender in the future seeks to rescind,
amend, terminate or reform by litigation or otherwise such Lender's agreement
with Borrower.
4.4 No Additional Rights For Borrower Hereunder. If any Lender shall
enforce its rights or remedies in violation of the terms of this Agreement,
Borrower agrees that it shall not use such violation as a defense to any action
by any Lender, nor assert such violation as a counterclaim or basis for set off
or recoupment against any Lender.
4.5 Section 9-504 Notice and Waiver of Marshaling. Lenders acknowledge
that this Agreement shall constitute notice of their respective interests in the
Collateral as provided by Section 9-504 of the UCC. Each Lender hereby waives
any and all rights to compel the marshaling of any of the Collateral.
4.6 Independent Credit Investigations. None of the Lenders nor any of
their respective directors, officers, agents or employees shall be responsible
to any other Lender or to any other person, firm or corporation for Borrower's
solvency, financial condition or ability to repay the DayStar Obligations or the
Bridge Lender Obligations, or for statements of Borrower, oral or written, or
for the validity, sufficiency or enforceability of the DayStar Obligations or
the Bridge Lender Obligations, or any Liens granted by Borrower to the Lenders
in connection therewith. Each Lender has entered into its respective financing
agreements with the Borrower
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based upon its own independent investigation, and makes no warranty or
representation to the other Lenders nor does it rely upon any representation of
the other Lenders with respect to matters identified or referred to in this
paragraph.
4.7 Amendments to Financing Arrangements or to this Agreement. Nothing
contained in this Agreement shall in any manner limit or restrict the ability of
any Lender from increasing (subject to the limitations set forth in the
definition of DayStar Obligations) or changing the terms of the loans under
their respective Lending Agreements, or otherwise to waive, amend or modify the
terms and conditions of their respective Lending Agreements, in such manner as
such Lender and Borrower shall mutually determine, and each Lender agrees that
none of such actions shall in any manner affect or impair the relative Lien
priorities and subordination established by this Agreement in respect of the
indebtedness payable under the Lending Agreements. Upon reasonable request of a
Lender, the other Lenders shall provide copies of all such modifications or
amendments to their respective Lending Agreements and copies of all other
documentation relevant to the Collateral. All waivers to, and modifications or
amendments of, this Agreement must be in writing and duly executed by an
authorized officer of each Lender to be binding and enforceable, but shall not
require any agreement or consent by the Borrower thereto.
4.8 Binding Effect; Successors and Assigns. Replacement Financing. This
Agreement shall be a continuing agreement, shall be binding upon and shall inure
to the benefit of the parties hereto from time to time and their respective
successors and assigns, shall be irrevocable and shall remain in full force and
effect until all indebtedness and other obligations under the Lending Agreements
shall have been satisfied or paid in full in cash and the Lending Agreements
shall have been irrevocably terminated, but shall continue to be effective, or
be reinstated, as the case may be, if at any time payment, or any part thereof,
of any amount paid by or on behalf of Borrower with regard to the indebtedness
and other obligations under the respective Lending Agreements is rescinded or
must otherwise be restored or returned upon the insolvency, bankruptcy,
dissolution, liquidation or reorganization of Borrower, or upon or as a result
of the appointment of a receiver, intervenor or conservator of, or trustee,
custodian, or similar officer, for Borrower or any substantial part of its
property, or otherwise, all as though such payments had not been made. This
Agreement does not create, and shall not be construed as creating, any rights
enforceable by Borrower or any other person not a party to this Agreement. In
the event Borrower's obligations to the Lenders are to be refinanced in full by
an institutional lender it will, at the request of such other Lender or
refinancer, enter into an intercreditor agreement with such refinancer
substantially in the form hereof.
4.9 Survival. Wherever possible, each provision of this Agreement shall be
interpreted in such manner to be effective and valid under applicable law, but
if any provision of this Agreement shall be prohibited by or invalid under
applicable law, such provision shall be ineffective only to the extent of such
prohibition or invalidity, without invalidating the remainder of such provision
or the remaining provisions of this Agreement. The right of any Lender to
enforce the provisions of this Agreement shall not be prejudiced or impaired by
any act or
10
<PAGE>
omitted act of Borrower or such Lender including forbearance, waiver, consent,
compromise, amendment, extension, renewal, or taking or release of security in
respect of any obligations or noncompliance by Borrower with such provisions,
regardless of the actual or imputed knowledge of such holder of the obligations.
4.10 Governing Law; Proceedings. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT, GIVING
EFFECT TO ITS CONFLICTS OF LAWS PROVISIONS. BY EXECUTION AND DELIVERY OF THIS
AGREEMENT, EACH LENDER, AND THE BORROWER, IRREVOCABLY SUBMITS, GENERALLY AND
UNCONDITIONALLY TO THE EXCLUSIVE JURISDICTION OF THE STATE COURTS OF THE STATE
OF NEW YORK AND THE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE
SOUTHERN DISTRICT OF THE STATE OF NEW YORK, IN RESPECT OF ANY PROCEEDING BY ANY
PARTY HERETO INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER OR CLAIM IN ANY WAY
ARISING OUT OF, RELATED TO OR IN CONNECTION WITH THIS AGREEMENT OR ANY RELATED
AGREEMENT, AND IRREVOCABLY AGREE TO BE BOUND BY THE JUDGMENT OF ANY SUCH COURT.
NOTHING HEREIN SHALL AFFECT THE RIGHT TO SERVE PROCESS IN ANY MANNER PERMITTED
BY LAW. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, EACH LENDER AND THE
BORROWER HEREBY CONSENTS TO SERVICE OF PROCESS BY CERTIFIED MAIL AT THE ADDRESS
TO WHICH NOTICES ARE TO BE GIVEN. EACH PARTY HERETO WAIVES ANY OBJECTION TO
JURISDICTION AND VENUE OF ANY ACTION INSTITUTED HEREUNDER IN ANY SUCH COURT AND
SHALL NOT ASSERT ANY DEFENSE BASED ON LACK OF JURISDICTION OR VENUE OR BASED
UPON FORUM NON CONVENIENS.
4.11 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
4.12 Headings. The headings in this Agreement are for convenience of
reference only, and shall not alter or otherwise affect the meaning hereof.
4.13 Representations and Warranties. Each Lender represents and warrants
to the other that it is the holder of the Liens which secure or will secure the
indebtedness payable under its respective loan agreements with Borrower. Each
Lender agrees that it shall not assign or transfer any of its Liens without (i)
notice being given to the other Lender and (ii) such assignment or transfer
being made expressly subject to the terms of this Agreement. Each Lender
warrants to the other Lender that it has full right, power and authority to
enter into this Intercreditor Agreement.
4.14 Consent to Liens of Bridge Lender. DayStar, as agent on behalf of the
DayStar Lenders, hereby consents to the granting by Borrower to the Bridge
Lender of Liens in and to the
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<PAGE>
Collateral specified in the Bridge Lender Agreements as of the date hereof and
waives any event of default under the DayStar Agreements which otherwise might
have been caused solely by the granting of such Liens.
IN WITNESS WHEREOF, the parties have caused this Intercreditor Agreement
to be executed on the day and date first above written.
QUIETPOWER SYSTEMS, INC.
By: /s/ Jonanthan M. Charry
---------------------------
Name: Jonanthan M. Charry
Title: President
DAYSTAR PARTNERS, L.P., as Agent on
behalf of the DayStar Lenders
By: /s/ Larry Wells
---------------------------
Name: Larry Wells
Title: President of General Partner
QPS BRIDGE, LLC,
as Agent on behalf of the Bridge Lenders
By: Anderson, Weinroth & Co,. L.P., Manager
By: /s/ Stephen Weinroth
---------------------------
Name: Stephen Weinroth
Title: General Partner
12
<PAGE>
EXHIBIT 10.18
COLLATERAL ASSIGNMENT OF INTELLECTUAL PROPERTY
AGREEMENT made this 17th day of April, 1997, by and between
QuietPower Systems, Inc. (the "Assignor") and QPS Bridge, LLC, as Agent of the
Purchasers (the "Agent") for the benefit of the Purchasers (as defined in the
Security Agreement referred to below).
W I T N E S S E T H:
WHEREAS, Assignor and the Purchasers are parties to the Securities
Purchase Agreement dated as of April 17, 1997 (said Agreement, as it hereafter
may be amended or otherwise modified from time to time, being referred to as the
"Purchase Agreement"), pursuant to which the Company has issued Senior Secured
Promissory Notes (the "Notes") and executed a related Security Agreement dated
as of April 17, 1997 (the "Security Agreement"), which provides that Assignor
and the Agent shall execute this Assignment;
WHEREAS, the Agent and the Company have executed an Intercreditor
Agreement with DayStar Partners, L.P., as Agent for certain secured lenders,
with respect to property which is subject to this Agreement;
NOW, THEREFORE, in consideration of the mutual covenants and
agreements hereinafter set forth and for good and valuable consideration the
receipt and adequacy of which is hereby acknowledged, the parties agree as
follows:
1. Incorporation. This Assignment is made pursuant to and subject to the
terms of the Purchase Agreement, the Notes and the Security Agreement, each of
which is deemed incorporated herein by this reference and shall constitute part
of this Assignment as if fully set forth herein. Capitalized terms used herein
and not defined shall have the meanings set forth for such term in the Security
Agreement.
2. Collateral Assignment. Assignor hereby grants to the Agent a security
interest in all of Assignor's entire right, title and interest in and to the
patents and patent applications, which are part of the Collateral as set forth
on Schedule A hereto. Upon an Event of Default (as defined in the Notes),
Assignor conveys, sells, assigns, transfers and sets over to the Agent all of
Assignor's entire right, title and interest in said Collateral. Upon an Event of
Default, the Agent shall be entitled to exercise all remedies under the Notes
and the Security Agreement with no further action required by any party.
3. Termination of Agreement. Upon payment of all of the Obligations prior
to an Event of Default, this Agreement shall be terminated by the terms hereof
and the Agent shall execute such documents as the Company reasonably shall
require to release all rights of the Agent and the Purchasers in the Collateral
transferred hereby.
4. Notices. All notices hereunder to the parties hereto shall be made in
the manner and to the addresses specified in the Security Agreement.
<PAGE>
5. Further Instruments. The parties agree to promptly execute and deliver
all further instruments necessary or desirable to carry out the purposes of this
Agreement.
6. Schedules. The terms and conditions of the Schedules referred to herein
are incorporated herein by this reference and shall constitute part of this
Assignment as if fully set forth herein.
7. Governing Law. This Agreement shall be governed by and construed in
accordance with the law of the State of New York without giving effect to the
principles of conflicts of law thereof.
8. Headings. The headings in this Assignment are for purposes of reference
only and shall not in any way limit or otherwise affect the meaning or
interpretation of any of the terms hereof.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Assignment as of
the date first written above.
ASSIGNOR:
QUIETPOWER SYSTEMS, INC.
By: /s/ Jonathan M. Charry
---------------------------------
Title: President
AGENT:
QPS BRIDGE, LLC
By: Andersen, Weinroth & Co., L.P., Manager
By: /s/ Stephen Weinroth
---------------------------------
Title: General Partner
State of New York, County of New York ss.:
On this 17th day of April 1997, before me personally appeared Jonathan
Charry to me known and known to me to be the individual who executed the
foregoing assignment on behalf of the Assignor and he thereupon duly
acknowledged to me that he executed the same.
/s/ Deborah A. Benish
-----------------------------------
Notary Public
<PAGE>
Schedule A
Patent application filed with the U.S. Patent and Trademark Office on December
27, 1996, entitled "Method and Apparatus for Locating Partial Discharge in
Electrical Transformers" (application number: 08/773,591).
<PAGE>
EXHIBIT 10.19
NEITHER THIS WARRANT NOR THE COMMON STOCK ISSUABLE UPON EXERCISE OF THIS WARRANT
HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"),
OR UNDER ANY STATE SECURITIES LAW AND NEITHER THIS WARRANT NOR SUCH COMMON STOCK
MAY BE SOLD, ENCUMBERED OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE ACT AND ANY APPLICABLE STATE SECURITIES LAW OR
AN EXEMPTION FROM SUCH REGISTRATION REQUIREMENT, AND, IF AN EXEMPTION SHALL BE
APPLICABLE, THE HOLDER SHALL HAVE DELIVERED AN OPINION OF COUNSEL ACCEPTABLE TO
QUIETPOWER SYSTEMS, INC. THAT SUCH REGISTRATION IS NOT REQUIRED.
For the Purchase of
Warrant No. ____ ____ shares of Common Stock
WARRANT TO PURCHASE SHARES OF COMMON STOCK
OF
QUIETPOWER SYSTEMS, INC.
(A Delaware Corporation)
FOR VALUE RECEIVED, QUIETPOWER SYSTEMS, INC., a Delaware corporation (the
"Company"), hereby certifies that ______________, or his or its registered
assigns (the "Registered Holder" or "Holder"), is entitled to purchase from the
Company, at any time or from time to time during the period commencing April 17,
1997 and ending on April 16, 2002, ______ shares of Common Stock, par value
$0.01 per share, of the Company ("Common Stock"), at an initial exercise price
per share (subject to adjustment as provided below) equal to the lesser of (i)
$3.75 per share and (ii) 50% of the price per share of Common Stock to the
public in the Company's initial public offering. The number of shares of Common
Stock purchasable upon exercise of this Warrant, and the exercise price per
share, each as adjusted from time to time pursuant to the provisions of this
Warrant, are hereinafter referred to as the "Warrant Shares" and the "Exercise
Price," respectively. References to this "Warrant", shall include this warrant
together with all warrants hereafter issued in exchange or substitution for this
warrant.
This Warrant is issued pursuant to the terms of the Securities Purchase
Agreement (the "Purchase Agreement") dated as of the date hereof by and between
the Company and each of the Purchasers listed on Schedule A annexed to the
Purchase Agreement. Any capitalized term used but not defined herein shall have
the meaning ascribed to such term in the Purchase Agreement.
<PAGE>
1. Exercise of Warrant.
(a) This Warrant may be exercised by the Registered Holder, in whole or in
part, by surrendering this Warrant, with the purchase form appended hereto as
Exhibit I duly executed by such Registered Holder, at the principal office of
the Company, or at such other office or agency as the Company may designate,
either (i) accompanied by payment in full, in lawful money of the United States,
of the Exercise Price payable in respect of the number of Warrant Shares
purchased upon such exercise or (ii) electing payment on a "cashless" basis as
provided in Section 2 below.
(b) Each exercise of this Warrant shall be deemed to have been effected
immediately prior to the close of business on the day on which the Warrant shall
have been surrendered to the Company as provided in subsection 1(a) above. At
such time, the person or persons in whose name or names any certificates for
Warrant Shares shall be issuable upon such exercise as provided in subsection
1(c) below shall be deemed to have become the holder or holders of record of the
Warrant Shares represented by such certificates.
(c) As soon as practicable after the exercise of this Warrant in full or
in part, and in any event within 10 days thereafter, the Company at its expense
will cause to be issued in the name of, and delivered to, the Registered Holder,
or, subject to the terms and conditions hereof, as such Holder (upon payment by
such Holder of any applicable transfer taxes) may direct:
(i) a certificate or certificates for the number of full shares of
Warrant Shares to which such Registered Holder shall be entitled upon such
exercise plus, in lieu of any fractional share to which such Registered Holder
would otherwise be entitled, cash in an amount determined pursuant to subsection
(d) below, and
(ii) in case such exercise is in part only, a new warrant or
warrants (dated the date hereof) of like tenor, calling in the aggregate on the
face or faces thereof for the number of Warrant Shares equal (without giving
effect to any adjustment therein) to the number of such shares called for on the
face of this Warrant, minus the number of such shares purchased by the
Registered Holder upon such exercise as provided in subsection 1(a) above.
(d) In lieu of any fractional Warrant Shares to which the Holder shall be
entitled, to cash equal to the fair value (determined in such reasonable manner
as the Board of Directors of the Company shall determine) of such fractional
share.
2. Cashless Exercise.
(a) All or any part of this Warrant may be exercised on a "cashless"
basis, by stating in the Purchase Form such intention and the maximum number
(the "Maximum Number") of Warrant Shares the Registered Holder desires to
purchase in consideration of cancellation of Warrants in payment for such
exercise. The number of Warrant Shares the Registered Holder
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<PAGE>
shall receive (the "Cashless Exercise Number") upon such exercise shall equal
the difference between the Maximum Number and the quotient that is obtained when
the product of the Maximum Number and the then current Exercise Price is divided
by the then Current Market Price per share (as hereinafter defined).
(b) The "Current Market Price" per share of Common Stock on any date shall
be deemed to be the daily closing price for such date or if such date is not a
trading day then for the last trading day preceding the date in question. The
closing price for any day shall be the last reported sales price regular way or,
in case no such reported sale takes place on such day, the closing bid price
regular way, in either case on the principal national securities exchange
(including, for purposes hereof, the NASDAQ National Market) on which the Common
Stock is listed or admitted to trading on any national securities exchange, the
highest reported bid price for the Common Stock as furnished by the National
Association of Securities Dealers, Inc. through NASDAQ or a similar organization
if NASDAQ is no longer reporting such information. If on any such date the
Common Stock is not listed or admitted to trading on any national securities
exchange and is not quoted by NASDAQ or any similar organization, the Current
Market Price of a share of Common Stock on such date, shall be determined in
accordance with the following procedure: The Company and the Holders of the
Warrants, as applicable, shall use their best efforts to mutually agree to a
determination of Current Market Price within ten days of the date of the event
requiring that such a determination be made. If the Company and such Holders are
unable to reach agreement within said ten day period, the Company and such
Holders shall, within five days of the expiration of the ten day period above
referred to, retain an independent investment banking firm, acceptable to each
of the Company and such Holders, to determine (within thirty days of being
retained) the Current Market Price of the security, property, assets, business
or entity, as the case may be, in question and deliver its opinion in writing to
the Company and to such Holders. The determination so made will be conclusive
and binding on the Company and such Holders. The fees and expenses of such
determination made by such independent investment banking firm shall be divided
equally between the Company, on the one hand, and such Holders, on the other
hand. If there is more than one Holder of Warrants entitled to determination of
Current Market Price in any particular instance, each action to be taken by the
Holders of such Warrants hereunder shall be taken by the majority (including as
to any mutual agreement with the Company with respect to Current Market Price
and as to any selection of investment banking firms) shall be binding upon all
such Holders. In case of a determination of the Current Market Price per share
of Common Stock, the Company and such Holders shall not take into consideration,
and shall instruct any investment banking firm, not to take into consideration,
any premium for shares representing control of the Company, any discount for any
minority interest therein or any restrictions on transfer under Federal and
applicable state securities laws or otherwise.
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<PAGE>
3. Reservation of Warrant Shares.
(a) The Company agrees that, prior to the expiration of this Warrant on
April 16, 2002, the Company will at all times have authorized and in reserve,
and will keep available, free from preemptive rights, solely for issuance or
delivery upon the exercise of this Warrant, the number of Warrant Shares and
other stock, securities and property, as, from time to time, shall be issuable
by the Company upon the exercise of this Warrant. The Company covenants and
agrees that all Warrant Shares and other stock, securities and property which
shall be so issuable will, upon issuance, be duly authorized and issued, fully
paid and nonassessable. The Company will not take any action which results in
any adjustment of the Exercise Price if the total number of Warrant Shares
issuable after such action upon exercise of the Warrants would exceed the total
number of shares of Common Stock then authorized by the Company's Certificate of
Incorporation in effect at such time but will agree to seek shareholder approval
to authorize any increases in shares of Common Stock of the Company.
(b) The Company shall not, by amendment of its certificate of
incorporation or through any reorganization, transfer of assets, consolidation,
merger, issuance or sale of securities or otherwise, avoid or take any action
that would have the effect of avoiding the observance or performance of any of
the terms to be observed or performed hereunder by the Company, but shall at all
times in good faith assist in carrying out all of the provisions of this Warrant
and in taking all such action as may be necessary or appropriate in order to
protect the rights of the Warrantholders of this Warrant against dilution or
other impairment.
(c) If any shares of Common Stock required to be reserved for the purpose
of exercise of this Warrant require registration with or approval of any
governmental authority under any Federal law (other than the Securities Act) or
under any state law, before such Common Stock may be issued upon exercise of
this Warrant, the Company shall, at its expense, as expeditiously as possible,
use its best efforts to cause such shares to be duly registered or approved, as
the case may be.
(d) This Warrant shall be binding upon any corporation succeeding to the
Company by merger, consolidation or acquisition of all or substantially all of
the Company's assets.
4. Adjustments.
(a) If the outstanding shares of the Company's Common Stock shall be
subdivided or split into a greater number of shares, or a dividend in Common
Stock shall be paid in respect of Common Stock, then the Exercise Price in
effect immediately prior to such subdivision or at the record date of such
dividend shall, simultaneously with the effectiveness of such subdivision or
split or immediately after the record date of such dividend, be proportionately
reduced. If the outstanding shares of Common Stock shall be combined or
reverse-split into a smaller number of shares, then the Exercise Price in effect
immediately prior to such combination or reverse-split shall, simultaneously
with the effectiveness of such combination or reverse-split be
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<PAGE>
proportionately increased. When any adjustment is required to be made in the
Exercise Price, the number of shares of Warrant Shares purchasable upon the
exercise of this Warrant shall be changed to the number determined by dividing
(i) an amount equal to the number of shares issuable upon the exercise of this
Warrant immediately prior to such adjustment, multiplied by the Exercise Price
in effect immediately prior to such adjustment, by (ii) the Exercise Price in
effect immediately after such adjustment.
(b) If there shall occur any capital reorganization or reclassification of
the Company's Common Stock (other than a change in par value or a subdivision or
combination as provided for in Section 4(a) above), or any consolidation or
merger of the Company with or into another corporation, or a transfer of all or
substantially all of the assets of the Company, or the payment of a liquidating
distribution, then, as part of any such reorganization, reclassification,
consolidation, merger, transfer or liquidating distribution, lawful provision
shall be made so that the Registered Holder of this Warrant shall have the right
thereafter to receive upon the exercise hereof (to the extent, if any, still
exercisable) the kind and amount of shares of stock or other securities or
property which such Registered Holder would have been entitled to receive if,
immediately prior to any such reorganization, reclassification, consolidation,
merger, transfer or liquidating distribution, as the case may be, such
Registered Holder had held the number of shares of Common Stock which were then
purchasable upon the exercise of this Warrant. In any such case, appropriate
adjustment (as reasonably determined by the Board of Directors of the Company)
shall be made in the application of the provisions set forth herein with respect
to the rights and interests thereafter of the Registered Holder of this Warrant
such that the provisions set forth in this Section 4 (including provisions with
respect to adjustment of the Exercise Price) shall thereafter be applicable, as
nearly as practicable, in relation to any shares of stock or other securities or
property thereafter deliverable upon the exercise of this Warrant. The above
provisions of this subsection (b) shall similarly apply to successive
consolidations, mergers, statutory exchanges, sales or conveyances.
(c) If at any time prior to both (i) the completion of the Company's IPO
and (ii) the expiration of 60 days after the lock-up period applicable to the
Warrants and Warrant Shares of the Holder, the Company shall issue any shares of
Common Stock, or convertible preferred stock, warrants, options, rights, or
other securities only to the extent the aforementioned securities are
convertible into or exchangeable or exercisable for shares of Common Stock, or
rights to subscribe for or to purchase Common Stock or any stock or securities
convertible into or exchangeable or exercisable for Common Stock without
consideration or for a consideration per share of Common Stock less than two
times the prevailing Exercise Price, then the Exercise Price in effect
immediately prior to each such issuance shall forthwith be adjusted to a price
per share equal to that amount which is 50% of the consideration per share of
Common Stock received or deemed received by the Company for such shares or
securities convertible or exercisable for shares. In such event, the number of
Warrant Shares issuable upon the exercise of this Warrant shall be increased to
the number obtained by dividing (x) the product of (A) the number of Warrant
Shares issuable upon the exercise of this Warrant before such adjustment, and
-5-
<PAGE>
(B) the Exercise Price in effect immediately prior to the issuance giving rise
to this adjustment by (y) the new Exercise Price.
(d) If the Company issues additional shares of Common Stock and warrants
to the holders of Series A Convertible Preferred Stock to fulfill its guarantee
of a 35% annual return, then each Holder shall be issued additional shares of
Common Stock sufficient to enable such Holder to maintain its percentage
ownership in the Company at the time of such issuance, calculated on a fully
diluted basis (treating all options, warrants and other rights to acquire Common
Stock as exercised and all securities convertible into Common Stock as having
been converted, but excluding the securities issued in or in connection with the
IPO).
(e) For the purposes of any adjustment of the Exercise Price and the
number of Warrant Shares issuable upon exercise of the Warrants pursuant to
subsection (c) above, the following provisions shall be applicable:
(i) In the case of the issuance of Common Stock for cash, the
consideration shall be deemed to be the amount of cash received by the Company
therefor.
(ii) In the case of the issuance of Common Stock for a consideration
in whole or in part other than cash, the consideration other than cash shall be
deemed to be the "fair value" of such consideration as determined in the good
faith judgment of the board of directors of the Company.
(iii) In the case of the issuance of any (x) option to purchase or
right to subscribe for Common Stock, (y) security by its terms convertible into
or exchangeable for Common Stock or (z) option to purchase or right to subscribe
for such convertible or exchangeable security:
(1) the aggregate maximum number of shares of Common Stock
deliverable upon exercise of any such option to purchase or right to subscribe
for Common Stock shall be deemed to have been issued at the time such option or
right was issued and for a consideration equal to the consideration (determined
in the manner provided in subdivisions (i) and (ii) above), if any, received by
the Company upon the issuance of such option or right plus the minimum purchase
price provided in such option or right for the Common Stock covered thereby;
(2) the aggregate maximum number of shares of Common Stock
deliverable upon conversion of or in exchange for any such convertible or
exchangeable securities or upon the exercise of such option to purchase or right
to subscribe for such convertible or exchangeable securities and subsequent
conversion or exchange thereof shall be deemed to have been issued at the time
such securities were issued or such option or right was issued and for a
consideration equal to the consideration received by the Company for any such
security and related options or rights (excluding any cash received on account
of accrued interest
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<PAGE>
or accrued dividends), plus the additional consideration, if
any, to be received by the Company upon the
conversion or exchange of such securities or the exercise of any related options
or rights (the consideration in each case to be determined in the manner
provided in subdivisions (i) and (ii) above);
(3) on any change in the number of shares or exercise price of
Common Stock deliverable upon exercise of any such option or right or upon the
conversion or exchange of any such convertible or exchangeable security (other
than a change resulting from the anti-dilution provisions thereof), the Exercise
Price and the number of Warrant Shares issuable upon exercise of the Warrants
shall forthwith be readjusted to such Exercise Price and to such number of
shares as would have been obtained had the adjustment been made at the time of
the issuance of such option, right or convertible or exchangeable securities,
which had not been converted prior to such change, been made upon the basis of
such change; and
(4) on the expiration of any such option or right, the
termination of any right to convert or exchange or the expiration of any option
or right related to such convertible or exchangeable securities, the Exercise
Price and the number of Warrant Shares issuable upon exercise of the Warrants
shall forthwith be readjusted to such Exercise Price and to such number of
shares as would have been obtained had such options, rights, securities or
options or rights related to such securities not been issued.
(iv) In the case of the issuance of (v) Common Stock, (w) options to
purchase or rights or warrants to subscribe for Common Stock, (x) securities by
their terms which are convertible into or exchangeable for Common Stock, or (y)
options to purchase or rights or warrants to subscribe for such convertible or
exchangeable securities (each of the securities referred to in the clauses (v),
(w), (x) or (y) above, an "Additional Security"), together with other shares or
securities (including another Additional Security) of the Company, the
consideration for such Additional Securities and other shares or securities
shall be the proportion of the aggregate consideration received for such
Additional Securities and other shares or securities, computed as provided in
(i), (ii) and (iii) above, as determined reasonably and in good faith by the
board of directors of the Company.
(f) No adjustment in the per share Exercise Price shall be required unless
such adjustment would require an increase or decrease in the Exercise Price of
at least $0.01; provided, however, that any adjustments which by reason of this
subsection (f) are not required to be made shall be carried forward and taken
into account in any subsequent adjustment. All calculations under this Section 4
shall be made to the nearest cent or to the nearest 1/100th of a share, as the
case may be.
(g) In any case in which the provisions of this Section 4 shall require
that an adjustment of the Exercise Price shall become effective immediately
after a record date for an event, the Company may, until the occurrence of such
event, defer issuing to the holder of any Warrant exercised after such record
date and before the occurrence of such event the additional
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<PAGE>
shares of capital stock issuable upon such exercise by reason of the adjustment
required by such event over and above the shares of capital stock issuable upon
exercise before giving effect to such adjustment, provided, however, that the
Company shall deliver to such holder a due bill or other appropriate instrument
evidencing such holder's right to receive such additional shares upon the
occurrence of the event requiring such adjustment.
(h) Whenever the Purchase Price or the number of Warrant Shares issuable
upon exercise of the Warrants shall be adjusted as provided in this Section 4,
the Company shall forthwith file, at its principal office or at such other place
as may be designated by the Company, a statement, signed by its president or
chief financial officer and by its treasurer, showing in detail the facts
requiring such adjustment to the Exercise Price and the number of Warrant Shares
issuable upon exercise of the Warrants that shall be in effect after such
adjustment. The Company shall within 15 days of any adjustment cause a copy of
such statement to be sent by first-class, certified mail, return receipt
requested, postage prepaid, to each Holder of Warrants at such holder's address
appearing in the Company's records. Where appropriate, such copy may be given in
advance and may be included as part of a notice required to be mailed under the
provisions of Section 4(i).
(i) In the event the Company shall propose to take any action of the types
described in Section 4(b), the Company shall give notice to each Holder of the
Warrants in the manner set forth in Section 4(h) above at such Holder's address
appearing in the Company's records, which notice shall specify the record date,
if any, with respect to any such action and the date on which such action is to
take place. Such notice shall also set forth such facts with respect thereto as
shall be reasonably necessary to indicate the effect of such action (to the
extent such effect may be known at the date of such notice) on the Warrants and
the number, kind or class of shares or other securities or property which shall
be deliverable or purchasable upon the occurrence of such action or deliverable
upon exercise of the Warrants. In the case of any action that would require the
fixing of a record date, such notice shall be given at least 30 days prior to
the date so fixed, and in case of all other action, such notice shall be given
at least 30 days prior to the taking of such proposed action. Failure to give
such notice, or any defect therein, shall not affect the legality or validity of
any such action.
(j) A sale of all or substantially all of the assets of the Company for a
consideration consisting primarily of securities shall be deemed a consolidation
or merger for the foregoing purposes.
(k) If any event occurs of the type contemplated by the provisions of this
Section 4 but not expressly provided for by such provisions or if expressly
provided would not fairly protect the rights of the holders of the Warrants in
accordance with the essential intent and principles of such provisions, the
board of directors shall make an adjustment in the application of such
provisions, in accordance with such essential intent and principles, so as to
protect such rights as aforesaid, but in no event shall any adjustment have the
effect of increasing the Exercise Price or reducing the number of Warrant Shares
as otherwise determined pursuant to any of the
-8-
<PAGE>
provisions of this Section 4 except in the case of a combination or
reverse-split of shares of a type contemplated in Section 4(a) and then in no
event to an amount larger than the Exercise Price as adjusted pursuant to
Section 4(a) or number of Warrant Shares smaller than the number adjusted
pursuant to Section 4(a).
(l) The Company will not, by amendment of its Certificate of Incorporation
or through reorganization, consolidation, merger, dissolution, issue or sale of
securities, sales of assets or any other voluntary action, avoid or seek to
avoid the observance or performance of any of the terms of this Warrant, but
will at all times in good faith assist in the carrying out of all such terms and
in the taking of all such action as may be necessary or appropriate in order to
protect the rights of the Holder against dilution or other impairment. Without
limiting the generality of the foregoing, the Company will take all such action
as may be necessary or appropriate in order that the Company may validly and
legally issue fully paid and non-assessable shares of Common Stock upon the
exercise of this Warrant and will take no action to amend its Certificate of
Incorporation which would change to the detriment of the holders of Common Stock
(whether or not any Common Stock is outstanding at the time) the dividend or
voting rights of the Company's Common Stock as constituted on the date hereof.
5. Certain Dividends. If the Company pays a dividend or makes a distribution on
the Common Stock payable otherwise than in cash out of earnings or earned
surplus (determined in accordance with generally accepted accounting principles)
except for a stock dividend payable in shares of Common Stock (a "Property
Dividend"), then the Company will pay or distribute to the Registered Holder of
this Warrant, upon the exercise hereof, in addition to the Warrant Shares
purchased upon such exercise, the Property Dividend which would have been paid
to such Registered Holder if the Registered Holder had been the owner of record
of such shares of Warrant Shares immediately prior to the date on which a record
is taken for such Property Dividend or, if no record is taken, the date as of
which the record holders of Common Stock entitled to such dividends or
distribution are to be determined.
6. Fully Paid Stock; Taxes. The Company agrees that the Common Stock or other
securities and every certificate or instrument issuable and delivered on the
exercise of this Warrant shall, at the time of such issuance and delivery, be
validly issued and outstanding, fully paid and non-assessable, and not subject
to preemptive rights. The Company further covenants and agrees that it will pay,
when due and payable, any and all Federal and state stamp, original issue or
similar taxes that may be payable in respect of the issue of any Common Stock or
other securities or certificates or instruments therefor.
7. Limitation on Sales.
(a) Each holder of this Warrant acknowledges that this Warrant and the
Warrant Shares have not been registered under the Securities Act of 1933, as now
in force or hereafter amended, or any successor legislation ("Act"), and agrees
not to sell, pledge, distribute, offer for sale, transfer or otherwise dispose
of this Warrant or any Warrant Shares issued upon its exercise
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<PAGE>
in the absence of (i) an effective registration statement under the Act as to
this Warrant and the Warrant Shares issued upon its exercise and registration or
qualification of this Warrant or such Warrant Shares under any applicable Blue
Sky or state securities law then in effect, or (ii) an opinion of counsel,
satisfactory to the Company, that such registration and qualification are not
required.
(b) Without limiting the generality of the foregoing, unless the offering
and sale of the Warrant Shares to be issued upon the exercise of the Warrant
shall have been effectively registered under the Act, the Company shall be under
no obligation to issue the shares covered by such exercise unless and until the
Registered Holder shall have executed an investment letter in form and substance
reasonably satisfactory to the Company, including a warranty at the time of such
exercise that it is acquiring such shares for its own account, for investment
and not with a view to, or sale in connection with, the distribution of any such
shares, in which event a legend in substantially the following form shall be
endorsed upon the certificate(s) representing the Warrant Shares issued pursuant
to such exercise:
The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended ("Act"), or
under any applicable state securities laws and may not be offered or
sold except pursuant to (i) an effective registration statement
under the Act and such state securities laws, (ii) to the extent
applicable, Rule 144 under the Act (or any similar rule under such
Act relating to the disposition of securities), or (iii) an opinion
of counsel, if such opinion shall be reasonably satisfactory to the
Company, that an exemption from registration under the Act and such
state securities laws is available.
8. Registration Rights; Lock-up.
(a) The Company, at its cost and expense, shall register this Warrant (and
the underlying Warrant Shares) in its IPO registration statement under the Act
so that the Holder will be able to sell his, her or its Warrant and Warrant
Shares immediately upon the expiration of the lock-up period referred to in
paragraph (c) below, and the Company shall use its best efforts to keep the
registration statement current and effective until the earlier of (i) such time
when all of the Warrants and the underlying Warrant Shares have been sold
pursuant to an effective registration statement, (ii) such time when all of the
Warrant Shares may be sold under Rule 144(k) promulgated under the Act or (iii)
ten years. The registration right provided for in this Section 8(a) shall not
count as a demand registration under the Registration Rights Agreement attached
hereto as Exhibit A. The registration right provided for in this Section 8(a) is
expressly subject to the terms and conditions of Sections 5, 6, 8 and 9 of the
Registration Rights Agreement attached hereto as Exhibit A, and the Holder shall
be entitled to receive the benefits of those Sections.
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<PAGE>
(b) Without limiting the foregoing, so long as the Warrant and the Warrant
Shares are not included in a current and effective registration statement, the
Holder shall have the registration rights provided in the Registration Rights
Agreement attached hereto as Exhibit A.
(c) The Holder will not sell or dispose of any of the Warrants or the
Warrant Shares in the public market for the Warrants or the Warrant Shares after
the IPO until after 90 days from the effective date of the IPO registration
statement; provided, however, that this lock-up period shall only apply if the
IPO occurs prior to April 17, 1998. Any transfers of the Warrants or the Warrant
Shares which are private in nature shall require that the transferee be bound by
the provisions of this subsection (c).
9. Loss, etc. of Warrant. Upon receipt of evidence satisfactory to the Company
of the loss, theft, destruction or mutilation of this Warrant, and of indemnity
reasonably satisfactory to the Company, if lost, stolen or destroyed, and upon
surrender and cancellation of this Warrant, if mutilated, the Company shall
execute and deliver to the Holder a new Warrant of like date, tenor and
denomination.
10. Warrant Holder Not Shareholder. Except as otherwise provided herein, this
Warrant does not confer upon the Holder any right to vote or to consent to or
receive notice as a shareholder of the Company, as such, in respect of any
matters whatsoever, or any other rights or liabilities as a shareholder, prior
to the exercise hereof.
11. Notices of Record Date, etc. In case:
(a) the Company shall take a record of the holders of its Common Stock (or
other securities at the time issuable upon the exercise of this Warrant) for the
purpose of entitling or enabling them to receive any dividend or other
distribution (other than a dividend or distribution payable solely in capital
stock of the Company or out of funds legally available therefor), or to receive
any right to subscribe for or purchase any shares of stock of any class or any
other securities, or to receive any other right; or
(b) of any capital reorganization of the Company, any reclassification of
the capital stock of the Company, any consolidation or merger of the Company
with or into another corporation (other than a consolidation or merger in which
the Company is the surviving entity), or any transfer of all or substantially
all of the assets of the Company; or
(c) of the voluntary or involuntary dissolution, liquidation or winding-up
of the Company; or
(d) the Company shall otherwise take any action covered by Section 4
hereof
then and in each such case, the Company will mail or cause to be mailed to the
Registered Holder of this Warrant a notice specifying, as the case may be, (i)
the date on which a record is to
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<PAGE>
be taken for the purpose of such dividend, distribution or right, and stating
the amount and character of such dividend, distribution or right, or (ii) the
effective date on which such reorganization, reclassification, consolidation,
merger, transfer, dissolution, liquidation or winding-up or other action is to
take place, and the time, if any is to be fixed, as of which the holders of
record of Common Stock shall be entitled to exchange their Common Stock for such
other stock or securities or other property deliverable upon such
reorganization, reclassification, consolidation, merger, transfer, dissolution,
liquidation or winding-up or other action. Such notice shall be mailed at least
thirty (30) days prior, and not more than ninety (90) days prior to the record
date or effective date, for the event specified in such notice, provided that
the failure to mail such notice shall not affect the legality or validity of any
such action.
12. Notice. All notices, consents and other communications under this Note shall
be in writing and shall be deemed to have been duly given when (a) delivered by
hand, (b) sent by telex or telecopier (with receipt confirmed), provided that a
copy is mailed by registered mail, return receipt requested, or (c) when
received by the addressee, if sent by Express Mail, Federal Express or other
express delivery service (receipt requested), in each case to the appropriate
addresses, telex numbers and telecopier numbers set forth below (or to such
other addresses, telex numbers and telecopier numbers as a party may designate
as to itself by notice to the other parties complying as to delivery with this
Section):
(1) if to the Company:
QuietPower Systems, Inc.
1675 Broadway
New York, NY 10019
Attention: Eric W. Jacobson
Telecopier No.: (212) 830-7298
with a copy to:
Breslow & Walker, LLP
767 Third Avenue
New York, NY 10017
Attention: Gary T. Moomjian, Esq.
Telecopier No.: (212) 888-4955
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<PAGE>
(2) if to the Holder, at the address set forth for such Holder on
Schedule A to the Purchase Agreement.
with a copy to:
Shereff, Friedman, Hoffman & Goodman, LLP
919 Third Avenue
New York, New York 10022
Attention: Robert M. Friedman, Esq.
Telecopier No.: (212) 758-9526
13. Transfers, etc. The Company will maintain a register containing the names
and addresses of the Registered Holders of this Warrant and the holders of other
warrants of like tenor issued simultaneously hereunder. Any Registered Holder
may change its, his or her address as shown on the warrant register by written
notice to the Company requesting such change.
Until any transfer of this Warrant is made in the warrant register, the
Company may treat the Registered Holder of this Warrant as the absolute owner
hereof for all purposes and shall not be bound to recognize any equitable or
other claim to or interest in this Warrant on the part of any other person;
provided, however, that if and when this Warrant is properly assigned in blank,
the Company may (but shall not be obligated to) treat the bearer hereof as the
absolute owner hereof for all purposes, notwithstanding any notice to the
contrary.
14. Headings. The headings of this Warrant have been inserted as a matter of
convenience and shall not affect the construction hereof.
15. Applicable Law. This Warrant shall be governed by and construed in
accordance with the law of the State of New York without giving effect to the
principles of conflicts of law thereof.
16. Venue. The Company (a) agrees that any legal suit, action or proceeding
arising out of or relating to this Warrant shall be instituted exclusively in
New York State Supreme Court, County of New York or in the United States
District Court for the Southern District of New York, (b) waives any objection
to the venue of any such suit, action or proceeding and the right to assert that
such forum is not a convenient forum, and (c) irrevocably consent to the
jurisdiction of the New York State Supreme Court, County of New York, and the
United States District Court for the Southern District of New York in any such
suit, action or proceeding. The Company further agrees to accept and acknowledge
service of any and all process which may be served in any such suit, action or
proceeding in the New York State Supreme Court, County of New York, or in the
United States District Court for the Southern District of New York and agrees
that service of process upon it mailed by certified mail to its address shall be
deemed in every respect effective service upon it in any such suit, action or
proceeding.
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<PAGE>
17. Change or Waiver. Any term of this Warrant may be changed or waived only by
an instrument in writing signed by the party against whom the enforcement of the
change or waiver is sought.
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<PAGE>
IN WITNESS WHEREOF, QUIETPOWER SYSTEMS, INC., has caused this Warrant to
be signed by its President and its corporate seal to be hereunto affixed and
attested by its Secretary/Assistant Secretary this ___ day of April, 1997.
ATTEST: QUIETPOWER SYSTEMS, INC.
- ------------------------------ By:
--------------------------------
Name:
Title:
[Corporate Seal]
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<PAGE>
ASSIGNMENT
FOR VALUE RECEIVED ___________________________ hereby sells, assigns and
transfers unto _________________________________________ the foregoing Warrant
and all rights evidenced thereby, and does irrevocably constitute and appoint
__________________, attorney, to transfer said Warrant on the books of
QUIETPOWER SYSTEMS, INC.
Dated:_________________________ Signature
-------------------------
Address
---------------------------
---------------------------
PARTIAL ASSIGNMENT
FOR VALUE RECEIVED, _________________________________________ hereby
assigns and transfers unto _______________________________________ the right to
purchase _____________ Warrant Shares/units of Equity of QUIETPOWER SYSTEMS,
INC. by the foregoing Warrant, and a proportionate part of said Warrant and the
rights evidenced hereby, and does irrevocably constitute and appoint
_____________________, to transfer that part of said Warrant on the books of
QUIETPOWER SYSTEMS, INC.
Signature
Dated:_________________________ -------------------------
Address ___________________________
___________________________
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<PAGE>
EXHIBIT I
PURCHASE FORM
To: QuietPower Systems, Inc.
Dated:
In accordance with the provisions set forth in the attached Warrant (No.
_________), the undersigned hereby irrevocably elects to purchase _______ shares
of the Common Stock covered by such Warrant and herewith makes payment of
$__________, including (i) $_________ by certified or bank cashier's check, (ii)
cancellation of Warrants to purchase ___ Warrant Shares based upon a Maximum
Number (as therein defined) of ______, in accordance with the terms thereof,
representing the full Exercise Price for such shares at the price per share
provided for in such Warrant.
The undersigned understands that the shares have not been registered under
the Securities Act of 1933, as amended, or the securities laws of any other
jurisdiction, and hereby represents to the Company that the undersigned is
acquiring the shares for its own account, for investment, and not with a view
to, or for sale in connection with, the distribution of any such shares.
Signature
---------------------------
Address ___________________________
___________________________
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<PAGE>
JOINT VENTURE AGREEMENT
This Agreement is made and effective as of this 13th day of November, 1996, by
and between PROLEC-GE, S. DE R.L. DE C.V. , a corporation organized and existing
under the laws of Mexico ("PROLEC GE") and QUIETPOWER SYSTEMS, INC., a company
organized and existing under the laws of the State of Delaware ("QUIETPOWER").
WHEREAS QUIETPOWER owns certain intellectual property related to material
condition monitoring/failure diagnostics systems ("TECHNOLOGY") and is in the
business of developing, commercializing, marketing and selling this TECHNOLOGY;
and
WHEREAS PROLEC GE is in the business of designing, manufacturing and selling
power and distribution equipment ("PROLEC GE EQUIPMENT"); and
WHEREAS QUIETPOWER and PROLEC GE desire, by certain research and development
programs to further develop the TECHNOLOGY into marketable products ("COMMERCIAL
PRODUCTS"); and
WHEREAS by forming a joint venture ("JV") in order to combine certain of their
research and development resources, QUIETPOWER and PROLEC GE desire to
accelerate the development of the COMMERCIAL PRODUCTS in as short a time as
possible; and
WHEREAS QUIETPOWER and PROLEC GE wish to jointly market and sell the COMMERCIAL
PRODUCT once successful commercialization has been achieved; and
NOW, THEREFORE, in consideration of the premises and the mutual covenants
hereinafter contained, the parties hereto agree as follows:
1.0 DEFINITIONS
1.1. "TECHNOLOGY" means intellectual property rights related to
material condition monitoring/failure diagnostic systems for use with
the PROLEC GE Equipment. Condition monitoring/failure diagnostics
systems refer to the monitoring of electrical equipment using such
methods as acoustical measurements, electrical measurements and
chemical analysis, for the purpose of detection, diagnosis and location
of operational problems. These systems employ equipment such as
sensors, data acquisition devices, filters, amplifiers and software in
combination to monitor, measure, process and record diagnostic data.
Intellectual property rights shall include, but not be limited to,
patents of importation, patents of confirmation, patents of
improvements, patents and certificates of addition and utility models,
as well as divisions, reissues, reexaminations, continuations,
continuations-in-part, renewals and extensions of
<PAGE>
any of the foregoing and applications therefor, and patents which may
be issued on such applications covering inventions with respect to
which are conceived or first actually reduced to practice in the course
of development work under this Agreement, as well as registered and
unregistered designs, secret or published designs and copyrights,
know-how, and manufacturing processes, made or developed by employees
of PROLEC GE and/or QUIETPOWER pursuant to the work under this
Agreement.
1.2 "PROLEC GE EQUIPMENT" means and includes: distribution and power
transformers, load tap changers, high voltage instrument transformers
and circuit breakers.
1.3 "COMMERCIAL PRODUCTS" means material condition monitoring/failure
diagnostics products, meeting reasonable commercial criteria, such as
cost, form and function that embody the TECHNOLOGY.
1.4 The term "Statement of Work" shall have the meaning set forth in
Section 5.2 of this Agreement.
1.5 The term "DELIVERABLE" shall mean the DELIVERABLES set forth in the
Approved Statement of Work.
1.6 The term "SUBSIDIARY" of a party as used herein shall mean any company
(including but not limited to affiliates, subsidiaries and joint
ventures) in which it owns or directly or indirectly controls at least
twenty-five percent (25%) of the voting rights during the term of this
Agreement.
1.7 "Effective Date" of this Agreement shall be November 13, 1996.
1.8 "Term" of this Agreement shall be as specified in Article 12.0 below.
2.0 ESTABLISHMENT OF JOINT VENTURE PARTNERSHIP
2.1 Upon the Effective Date of this Agreement, the parties shall
expeditiously form a partnership in order to effectuate the terms of
this Agreement.
2.2 QUIETPOWER shall grant the JV rights to the TECHNOLOGY pursuant to
Article 7.0.
2.3 The JV shall be empowered to open and maintain commercial bank accounts
and conduct such other activities that will enable it to perform the
necessary activities associated with agreed-upon product development,
commercialization and marketing efforts.
2
<PAGE>
2.4 Each party shall assign personnel to the JV to perform such tasks as
defined and agreed by the Team as defined in Section 4.1. The JV may,
upon the approval of the Team, directly hire personnel who are not
employees of either party.
3.0 JV CONTRIBUTION ACCOUNTS
3.1 As a means of accounting for each party's economic interest in the JV,
each party shall have two contribution accounts: one capital account
and one reimbursable account.
3.2 The capital accounts shall accumulate the value of internal resources
and licenses contributed to Approved Statements of Work. Specifically
this shall include, but not be limited to: i) the direct cost, without
overhead, of personnel, ii) the use of both parties' equipment, iii)
the use of PROLEC GE's Transformer development, manufacturing and test
facilities, iv) the use of QuietPower's software development, system
integration and acoustic/vibration test facilities, and v) the
Technology licenses granted under Article 9.0. For purposes of
accounting for these contributions to the parties' capital accounts,
all of the above items shall be valued, those values shall be totaled
and one-half of the total shall be credited to each party's capital
account. Crediting of these items to the capital accounts shall occur
on a straight-line basis over the expected life of an approved project.
3.3 The reimbursable accounts shall accumulate expenditures for external
costs, including but not limited to cash expenditures for: i) system
components, ii) test equipment, iii) travel costs, iv) outside
subcontractor costs, and v) contributions made directly to the JV.
These costs shall be credited to the respective party's reimburseable
account when incurred.
4.0 IMPROVEMENT TEAM
4.1 Function. An Improvement Team ("Team") is hereby established as of the
Effective Date. The Team shall function as an advisory body to provide
recommendations to PROLEC GE and QUIETPOWER and to manage the JV's
implementation of the Statement of Work as defined in Section 5.2 of
this Agreement. Each party shall have an equal vote on the Team
regardless of capital account balance.
4.2 Team Tasks. The initial tasks of the Team shall be:
A. Identify, design, develop and test potential improvements to
the TECHNOLOGY that will facilitate the development of the
COMMERCIAL PRODUCT.
B. Identify, design, develop and test potential product
components and manufacturing processes and designs for
COMMERCIAL PRODUCTS.
3
<PAGE>
4.3 For a period of three (3) years from the Effective Date, neither party
shall solicit for employment nor employ any employee of the other party
assigned to the Team or to the JV.
5.0 ADOPTION OF PROGRAMS; FUNDING
5.1 Joint programs of research, design and development shall be conducted
by the JV in the fields of TECHNOLOGY and COMMERCIAL PRODUCT upon the
recommendation of the Team and subject to the agreement in writing of
each party to participate in and provide resources for a specific
program.
5.2 Prior to commencement of work on each such program, a description
(hereinafter the "Statement of Work") of the objectives, phases and
respective scope of work of each party shall be prepared jointly by the
parties as may be designated for this purpose, together with a budget
including details of estimated costs to be incurred.
5.3 The obligations of the parties in respect of a joint program shall
arise only upon the approval, in writing by each party of the Statement
of Work. Upon such approval, the Statement of Work shall be referred to
as an "Approved Statement of Work." The Approved Statement of Work
shall obligate each party to assign the agreed upon personnel and other
resources to the program and to contribute funds in accordance with the
budget described in Section 5.2.
5.4 Each Approved Statement of Work shall be subject to the terms of this
Agreement. Each party hereto will deliver to the other party the
DELIVERABLES which it is required to deliver pursuant to the Approved
Statement of Work and to otherwise fully contribute to the generation
of DELIVERABLES as required in the Approved Statement of Work.
5.5 Neither party shall have the right to withdraw from an Approved
Statement of Work without the prior written consent of the other party,
unless (1) performance by the other party of the objectives and phases
of work established pursuant to Section 5.2 is not timely; (2)
information disclosed by the other party to a third party is not in
accordance with the requirements of Section 7.2 hereof; or (3) subject
to the provisions of Section 5.6, the total external costs are expected
to exceed original approved projections by greater than 20%. In such
event, the party desiring to withdraw shall give sixty (60) days' prior
written notice to the other party of its intent to withdraw.
5.6 In the event that the total external costs of the project are expected
to exceed those projected in the Approved Statement of Work by greater
than 20%, the other party must be expeditiously notified of such
expected occurrence by that
4
<PAGE>
party which discovers such. Upon such notification each party shall
have the option to:
A. pay the additional costs in the same ratio as agreed in the
Approved Statement of Work, or
B. pay a greater percentage of the costs than agreed in the
Approved Statement of Work, if the other party chooses to
reduce their contribution level, or
C. pay all additional costs if the other party chooses not to pay
any additional costs, or
D. not pay any additional costs and halt work on the Approved
Statement of Work. If the parties choose this option, then
continued financial commitments under the Approved Statement
of Work shall cease.
Otherwise, unless Option D is selected, each party shall continue to be
obligated for their respective commitments under the Approved Statement of Work.
5.7 Upon unanimous vote of the Improvement Team, excess cash not needed for
the ongoing approved development and marketing operations of the JV may
be distributed to the parties in the following manner:
A. All additional costs paid by the parties pursuant to Section
5.6 shall be reimbursed in the same ratio as incurred by the
parties, and such costs shall be paid in full before any other
payments to the parties, then
B. external costs paid by the parties pursuant to the Approved
Statement of Work shall be reimbursed in the same ratio as
incurred by the parties, and such costs shall be paid in full
before any other payments to the parties, then
C. after all reimbursements of external costs, any further
distributions by the JV shall be shared equally by the
parties.
6.0 INDEPENDENT ACTIVITIES
Nothing contained in this Agreement shall be construed to prevent either party
from carrying out independently its normal business activities. Specifically,
PROLEC GE shall not be prevented or hindered from pursuing other technologies
for the enhancement of its PROLEC GE EQUIPMENT, nor shall QUIETPOWER be
prevented or hindered from using or further developing the TECHNOLOGY for other
uses.
5
<PAGE>
7.0 PROTECTION OF PROPRIETARY AND CONFIDENTIAL INFORMATION
7.1 All information disclosed by one party to the other during the course
of this Agreement and any Approved Statement of Work shall be
considered confidential and proprietary information which shall be
subject to the following provisions of this Article.
7.2 During the Term of this Agreement and for a period of ten (10) years
after the termination date of this Agreement, each party agrees to use
reasonable care to prevent disclosure to third parties of the other
party's information. The foregoing obligations of a party receiving
information from another party shall not apply to information which:
a. Is necessarily disclosed solely by its use in products
manufactured and sold by a party;
b. Is made public by the furnishing party;
c. Is established to be in the public domain otherwise than as a
consequence of a breach of the obligation herein undertaken;
d. Is shown by the receiving party: (1) to have been in its
possession prior to its receipt from the furnishing party; or
(2) to have come subsequently into the receiving party's
possession through channels independent of the furnishing
party; or (3) to have been independently developed by the
receiving party or its contractors by individuals who did not
have access to the information;
e. Must reasonably be disclosed by the receiving party to its
customers or users of COMMERCIAL PRODUCT in connection with
the marketing, product service and maintenance activities,
provided that the receiving party shall require such customers
or users to maintain such information in confidence to the
extent of the foregoing requirements of this Article;
f. Must reasonably be disclosed by the receiving party to a
supplier of a part or component (as opposed to major
subassemblies) as essential to their supply of the part or
component (as opposed to major subassemblies) to the receiving
party; provided however that receiving party shall require
such supplier to use such information solely for the
manufacture of such part or component for such receiving party
and to maintain such information in confidence to the extent
of the foregoing requirements of this Article
Any combination of known information shall be within any of the
foregoing exclusions only if the combination as such is within such
exclusion.
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<PAGE>
8.0 OWNERSHIP AND USE OF RESULTS OF Approved Statement of Work
8.1 QUIETPOWER shall own all copyright, patent, trade secret and other
intellectual property rights in TECHNOLOGY. PROLEC GE shall own all
copyright, patent, trade secret and other intellectual property rights
in PROLEC GE EQUIPMENT. Nothing in this Agreement shall alter such
ownership by each party.
8.2 In the event that an invention is jointly made or conceived as a result
of carrying out an Approved Statement of Work for TECHNOLOGY or
COMMERCIAL PRODUCT, any and all patent applications, whether domestic
or foreign, based on such inventions shall be owned by QUIETPOWER, who
may patent such inventions. With respect to the filing and prosecution
of patent applications on such inventions, PROLEC GE agrees to
cooperate with QUIETPOWER and to make reasonable efforts to furnish
information in a timely fashion to enable the prompt filing and
prosecution of all patent applications on such inventions. QUIETPOWER
shall bear the expense of filing and prosecution of each such patent
application. If QUIETPOWER desires not to bear the filing expenses
associated with such invention, PROLEC GE shall be entitled to file the
application on its own behalf and at its own expense and shall own all
rights, title and interest in the invention and all patents issuing
thereon, and QUIETPOWER agrees to assign its ownership rights in such
invention to PROLEC GE and execute all documents necessary to effect
that result without the payment of any compensation. If, after the
filing of a patent application, QUIETPOWER decides not to continue
incurring the expenses associated with the prosecution, issuance or
maintenance of an invention, QUIETPOWER shall promptly give notice to
PROLEC GE and shall, if requested by PROLEC GE, convey its entire
right, title and interest to PROLEC GE and execute all documents
necessary to effect that result without the payment of any
compensation.
8.3 During the Term of this Agreement, each party agrees that with respect
to its employees and contractors assigned to an Approved Statement of
Work, it will maintain invention and patent assignment agreements from
those employees and contractors that assign all ownership of all
inventions developed pursuant to an Approved Statement of Work to
QUIETPOWER.
9.0 LICENSES TO THE JV
QUIETPOWER agrees to grant to the JV licenses to use the TECHNOLOGY and
COMMERCIAL PRODUCT for the purposes as prescribed in this Article 9.0. All
licenses granted hereunder shall be royalty free.
9.1 QUIETPOWER agrees to grant a license to the JV for the purpose of
developing the TECHNOLOGY or for further developing any COMMERCIAL
PRODUCT necessary to conduct work pursuant to an Approved Statement of
Work.
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9.2 Upon the successful completion of an Approved Statement of Work that
results in a new COMMERCIAL PRODUCT, QUIETPOWER shall grant a world
wide exclusive license to the JV for the purpose of marketing,
manufacturing and selling such COMMERCIAL PRODUCT to original equipment
manufacturers ("OEM's"), including PROLEC GE.
9.3 Upon the successful completion of an Approved Statement of Work that
results in a new COMMERCIAL PRODUCT, QUIETPOWER shall grant an
exclusive license to the JV for the purpose of marketing and
selling such COMMERCIAL PRODUCT to end users for retrofit applications.
9.4 In preparation for the production of COMMERCIAL PRODUCT, the JV shall
seek competing bids from third parties for the manufacture of such
COMMERCIAL PRODUCT. Factors to be considered when evaluating the bids
shall include, but not be limited to, the cost, quality control, and
capability to deliver the COMMERCIAL PRODUCT in a required time period
in such quantities as to maximize the commercial success of the
product. Also with respect to obtaining a manufacturing source for the
COMMERCIAL PRODUCT, the JV shall grant to PROLEC GE a right of first
refusal for the manufacturing sublicense to the COMMERCIAL PRODUCT and
such right shall be evaluated in relation to the above third party
bids. In situations where PROLEC GE chooses not to bid on the
manufacture, or where PROLEC GE's bid is not competitive with such
third party bids, PROLEC GE and QUIETPOWER, represented by the Team,
shall mutually agree, and such agreement shall not be unreasonably
withheld by either party, on the grant of a manufacturing license for
the COMMERCIAL PRODUCT.
9.5 It is understood that no license is granted under this Agreement to use
the TECHNOLOGY and COMMERCIAL PRODUCT for any purpose other than that
described in this Article 9.0.
9.6 It is understood and agreed to by the parties hereto that the rights
conferred hereunder do not extend to either of the parties' respective
technology, even though such technology may be necessary to practice
the COMMERCIAL PRODUCT, with the exception of the license granted by
QUIETPOWER to the JV pursuant to this Article 9.0.
10.0 VALUATION OF COMMERCIAL PRODUCT
10.1 Upon the completion of an Approved Statement of Work, the JV shall
establish a sale price of the COMMERCIAL PRODUCT. This price shall be
based on factors such as cost of components, a reasonable return on
development expenditures, a reasonable profit margin, and improvements
in TRANSFORMER reliability resulting from such COMMERCIAL PRODUCT.
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10.2 If a party wishes to acquire units of the COMMERCIAL PRODUCT for its
own use or for resale to third parties, the acquiring party must
purchase the units from the JV at the price established in Section 10.1
of this Agreement.
11.0 CONTINUING SUPPORT FOR COMPLETED PROGRAMS
11.1 During the Term of this Agreement, each party shall use all reasonable
efforts to inform the other of improvements and modifications to
TECHNOLOGY or COMMERCIAL PRODUCT.
11.2 Nothing in Articles 8.0 or 9.0 shall be construed to require either
party to disclose to the other or grant to the other any license to use
any information except as specifically provided in this Agreement.
12.0 DURATION AND TERMINATION
This Agreement shall take effect on the Effective Date and shall remain in
effect for a period of ten (10) years, renewable upon mutual agreement of the
parties; provided that Article 7.0 shall remain in effect for ten years after
the termination of this Agreement.
13.0 MISCELLANEOUS PROVISIONS
13.1 Anything done by either party before this Agreement becomes effective
which would be in discharge of any obligations hereunder if this
Agreement were then effective, shall, after this Agreement becomes
effective, be treated as being in discharge of such obligations under
this Agreement.
13.2 Any failure by either party to enforce any of the provisions of this
Agreement or to require at any time performance by the other party of
any of the provisions hereof, shall in no way affect the validity of
this Agreement or any part thereof, or the right of either party
thereafter to enforce each and every such provision, nor shall the
types or quantities of data or consultation actually given or supplied
by either party to the other whether or not under this Agreement, be
deemed in any way indicative of the scope of the obligation of either
party under this Agreement.
13.3. All disputes arising out of or in connection with this Agreement shall
be exclusively and finally settled only by arbitration, in accordance
with the Rules of the American Arbitration Association. The arbitration
proceeding shall take place in New York City. The parties agree to
abide by and perform in accordance with any award rendered by the
arbitration panel and agree that such an award is to be final and
non-appealable and that a judgment of any court having jurisdiction may
be entered upon the award.
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13.4 This Agreement may not be assigned by either party in whole or in part
without the prior written consent of the other party, which consent
shall not be unreasonably withheld; provided, however, that either
party shall have the right to assign this Agreement without the consent
of the other to any of its subsidiaries or affiliates or to the
successor to or purchaser of substantially all of the business thereof
to which the whole or any part of the subject matter of this Agreement
pertains. Any other attempted assignment without such prior written
consent shall be null and void.
13.5 This Agreement shall be construed and the legal relations between the
parties hereto shall be determined in accordance with the laws of the
State of New York, USA, disregarding any conflicts of laws/rules which
may dictate the application of the laws of another jurisdiction.
13.6 If either party is rendered unable, wholly or in part, to carry out any
of its duties or obligations under this Agreement by reason of (i) act
of God or the public enemy, fire, explosion, perils of the sea, flood,
drought, war, riot, sabotage, accident, embargo; or (ii) without
limiting the foregoing circumstances, any circumstances of like or
different character beyond the reasonable control of the party so
failing; or (iii) interruption of or delay in transportation,
inadequacy or shortage or failure of supply of materials or equipment,
breakdowns, labor trouble from whatever cause arising and whether or
not the demands of the employees involved are reasonable and within
said party's power to concede; or (iv) compliance by either party with
any order, action, direction or request of any Governmental officer,
department, agency, authority or committee thereof; and (v) whether in
any case the circumstance now exists or hereafter arises, such party
shall forthwith give written notice thereof to the other party (such
notice briefly to describe the circumstance causing such inability);
and thereupon, to the extent that the party giving such notice is
unable to perform such duty or obligation by reason of said
circumstance, such duty or obligation shall be suspended during, but no
longer than, the continuance of such circumstance.
14.0 NOTICES
Any notice or request with reference to this Agreement shall be by personal
delivery, cable, telex or facsimile followed by a confirming letter mailed
within seven (7) days, and shall be directed by one party to the other at its
respective address, as follows:
PROLEC GE QuietPower Systems, Inc.
Steve L. Smith Jonathan M. Charry, Ph.D.
Vice President President and Chief Executive Officer
Marketing and Business Integration 1675 Broadway
Blvd. Carlos Salinas Gortari Km. 9.25 Suite 2600
Apodaca N.L. 66600 New York, NY 10019
Mexico
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or to such other address or addresses as either party may from time to time
designate as its address by notice in writing to the other. All notices so
addressed are effective when received.
15.0 ENTIRE AGREEMENT AND AMENDMENTS
This Agreement contains the entire and only agreement between the parties
respecting the subject matter hereof and supersedes all previous negotiations,
agreements, commitments and writings in respect thereto. This Agreement may not
be amended, supplemented, released, discharged, abandoned, changed or modified
in any manner, orally or otherwise, except by an instrument in writing of
concurrent or subsequent date signed by duly authorized officers or
representatives of the parties hereto.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be
executed in duplicate, as of the date first written above, by its duly
authorized representative.
QuietPower Systems, Inc. PROLEC-GE, S. DE R.L. DE C.V.
By: /s/ Jonathan M. Charry By: /s/ S. L. Smith
- ------------------------------- ---------------------------------
Name: Jonathan M. Charry Name: S. L. Smith
- ------------------------------- ---------------------------------
Title: President and CEO Title: Vice President - PROLEC 6E
- ------------------------------- ---------------------------------
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JOINT VENTURE AGREEMENT
This Agreement is made and effective as of this 15th day of June, 1996, by and
between ABB Business Area Power Transformers, represented here by ABB Secheron
SA ("ABB"), having a place of business at Rue des Sablieres 4-6, Industrial zone
Meyrin-Satigny, P.O. Box 2095, CH-1211 Geneva 2, Switzerland and QUIETPOWER
SYSTEMS, INC., having a place of business at 1675 Broadway, Suite 3500, New
York, NY 10019 ("QUIETPOWER").
WHEREAS QUIETPOWER owns certain intellectual property related to active quieting
systems for transformers ("Technology") and is in the business of developing,
commercializing, marketing and selling this Technology; and
WHEREAS ABB is in the business of designing, manufacturing and selling power and
distribution transformers ("Transformers"); and
WHEREAS QUIETPOWER and ABB desire to further develop the Technology and active
transformer quieting products ("Commercial Products"); and
WHEREAS QUIETPOWER and ABB wish to establish a Joint Venture to market and sell
the Commercial Products; and
NOW, THEREFORE, in consideration of the premises and the mutual covenants
hereinafter contained, the parties hereto agree as follows:
1.0 DEFINITIONS
1.1. "Technology" means intellectual property rights related to active
transformer quieting systems for Transformers which sense, analyze and
transduce signals with the purpose of electronically reducing acoustic
and vibration signals emitted from the transformer. This shall include,
but not be limited to, patents of importation, patents of confirmation,
patents of improvements, patents and certificates of addition and
utility models, as well as divisions, reissues, reexaminations,
continuations, continuations-in-part, renewals and extensions of any of
the foregoing and applications therefor, and patents which may be
issued on such applications covering inventions with respect to which
are conceived or first actually reduced to practice in the course of
development work under this Agreement, as well as registered and
unregistered designs, secret or published designs and copyrights,
know-how, and manufacturing processes, made or developed by employees
of ABB and/or QUIETPOWER pursuant to the work under this Agreement.
1.2 "Transformers" means and includes: distribution and power transformers.
<PAGE>
1.3 "Commercial Products" means active transformer quieting products,
meeting reasonable commercial criteria, such as cost, form and function
that embody the Technology.
1.4 The term "Statement of Work" shall have the meaning set forth in
Section 4.2 of this Agreement.
1.5 The term "Deliverable" shall mean the Deliverables set forth in the
Approved Statement of Work.
1.6 The term "Subsidiary" of a party as used herein shall mean any company
(including but not limited to affiliates, subsidiaries and joint
ventures) in which it owns or directly or indirectly controls at least
fifty percent (50%) of the voting rights during the term of this
Agreement.
1.7 "Effective Date" of this Agreement shall be the date first written
above.
1.8 "Term" of this Agreement shall be as specified in Article 11.0 below.
1.9 "European Countries" are defined as: Austria, Belgium, Czech Republic,
Denmark, Finland, France, Germany, Greece, Hungary, Ireland, Israel
Italy, Luxembourg, Netherlands, Norway, Poland, Portugal, Romania,
Slovakia, Spain, Sweden, Switzerland, United Kingdom, and former
Yugoslavia.
1.10 The "Transformer Retrofit Market" shall mean that market segment for
the application of the Commercial Products to Transformers that are
already in operation end users or to Transformers previously
manufactured but not yet installed at an end user.
2.0 SCOPE OF AGREEMENT
The terms contained in the Agreement apply to Technology and Commercial
Products for the European Countries defined in Section 1.9,
specifically for the transformer retrofit market.
3.0 COMPANY REPRESENTATIVES
3.1 Function. As of the Effective Date each party shall select an employee
of or agent for their respective company as a representative
("Representative"). The Representatives shall function as advisors to
provide recommendations to ABB and QUIETPOWER and as managers of the
sales, marketing, design, development and testing of Commercial
Products and the implementation of the
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Approved Statement of Work as defined in Section 4.3 of this AGREEMENT.
Each Representative shall have an equal vote with respect to policy
decisions, or material operating and financial decisions concerning the
joint venture. A party may replace its representative at any time. The
representatives shall meet at least four times per year. Meetings may
be held in person or telephonically. Minutes of the meetings shall be
kept and provided to the Representatives within 30 days after such
meetings for review. Status reports will be prepared in advance of the
meetings. These reports shall describe the progress in all Approved
Statements of Work, as defined in Section 4.3, and all Approved
Marketing Plans, as defined in Section 5.4. Quarterly financial
statements shall be prepared detailing all joint venture financial
transactions, including bank reconciliations of the Joint Account and
the Joint Marketing Account.
3.2 Tasks. The initial tasks of the Representatives shall be:
A. Identify markets and develop a marketing and sales plan for
the penetration of the Commercial Products into the European
Market.
B. Identify, design, develop and test potential improvements to
the Technology that will further develop the Commercial
Products.
C. Identify, design, develop and test potential product
components and manufacturing processes and designs for the
Commercial Products.
4.0 PRODUCT IMPROVEMENT FUNDING
4.1 Joint programs of product improvement shall be conducted in the fields
of Technology and Commercial Product upon the recommendation of the
Representatives and subject to the agreement in writing of each party
to participate in the specific program.
4.2 Prior to commencement of work on each such program, a description
(hereinafter the "Statement of Work") of the objectives, phases and
respective scope of work of each party shall be prepared jointly by
such employees of each of the parties as may be designated for this
purpose, including a budget with details of estimated costs to be
incurred and the ratio in which they will be shared by the parties.
4.3 The obligations of the parties with respect to a joint program shall
arise only upon the approval, in writing by each party of the Statement
of Work. Upon such approval, the Statement of Work shall be referred to
as an "Approved Statement of Work." The Approved Statement of Work
shall obligate each party
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to assign the agreed upon personnel to the program and to contribute
funds in accordance with the budget described in Section 4.2.
4.4 Each Approved Statement of Work shall be subject to the terms of this
Agreement. Each party hereto will deliver to the other party the
Deliverables which it is required to deliver pursuant to the Approved
Statement of Work and to otherwise fully contribute to the generation
of Deliverables as required in the Approved Statement of Work.
4.5 Neither party shall have the right to withdraw from an Approved
Statement of Work without the prior written consent of the other party,
unless performance by the other party of the objectives and phases of
work established pursuant to Section 4.3 is not timely or does not
conform to the Approved Statement of Work in all material respects.
4.6 At the commencement of the first Approved Statement of Work, the
parties shall open a bank account ("Joint Account") in the name of
ABB/QUIETPOWER Joint Project. This account shall be used to receive
each party's share of the costs for all Approved Statements of Work.
4.7 Payments from the Joint Account shall be made only in accordance with a
budget that is part of an Approved Statement of Work. All other
payments shall be made only upon advance written agreement of the
parties. For payments of less than $10,000, either Representative shall
have authority for signing checks or instructions for wire transfers.
For payments greater than $10,000, authority for signing checks or
instructions for wire transfers shall be signed jointly by both
Parties.
4.8 All books and records pertaining to the Joint Account, and for
development activities in general, shall be kept by ABB, and shall be
available for inspection and copying by a representative of either
party during normal business hours. Either party shall have the right
to appoint, at its own expense, an accounting firm for the purpose of
conducting an audit of the Joint Account and other related financial
activities.
5.0 COMMERCIAL PRODUCT MARKETING AND SALES
5.1 A Joint marketing and sales program for the Commercial Products shall
be developed by the Representatives. The program shall be reviewed and
revised annually by the parties. It is the intent of the parties to
prepare the plan for the program 30 days after the execution of this
Agreement. Thereafter, the revised program will be prepared by October
1, of each succeeding year.
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5.2 Generally, the responsibilities of the parties shall be as follows.
QuietPower shall design, fabricate market and sell the Commercial
Products. ABB shall market and sell Commercial Products, including
performing site visits, measurements, installation and maintenance.
5.3 Prior to commencement of a given marketing effort, the parties shall
jointly prepare a description (hereinafter the "Marketing Plan") of the
objectives of each party and a budget including details of estimated
market size, sales targets, and projected costs to be incurred.
5.4 The responsibilities of the parties with respect to a given marketing
program shall arise only upon the approval, in writing by each party,
of the Marketing Plan. Upon such approval, the Marketing Plan shall be
referred to as an "Approved Marketing Plan." The Approved Marketing
Plan shall obligate each party to assign the agreed upon personnel to
the program and to expend funds to accomplish the prescribed tasks.
5.5 At the commencement of the joint marketing and sales program, the
parties shall open a bank account ("Joint Marketing Account") in the
name of ABB/QUIETPOWER Joint Marketing Project.
5.6 The Joint Marketing Account will be used to carry out normal commercial
activities such as purchasing product components and inventory, and
collecting receipts from sales and licensing activities. All
expenditures from the account shall be approved in advance by both
parties. For payments of less than $10,000, either Representative shall
have authority for signing checks or instructions for wire transfers.
For payments greater than $10,000, authority for signing checks or
instructions for wire transfers shall be signed jointly by both
Parties.
5.7 After the end of the calendar quarter, if the amount in the Joint
Marketing Account exceeds current payment obligations to outside
vendors and the amount necessary to perform any then existing Marketing
Plan commitments, after adjusting for any existing obligations of the
parties to make payments into the Joint Marketing Account, the excess
will then be used to pay each party's pro rata share of their approved
direct marketing expenditures, and any remaining balance shall be
shared equally by the parties.
5.8 All books and records pertaining to the Joint Marketing Account, and
for marketing activities in general, shall be kept by ABB, and shall be
available for inspection and copying by a representative of either
party during normal business hours. Either party shall have the right
to appoint, at its own expense, an accounting firm for the purpose of
conducting an audit of the Joint Marketing Account and other related
financial activities.
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6.0 PROTECTION OF PROPRIETARY AND CONFIDENTIAL INFORMATION
All information disclosed by one party to the other during the course of this
Agreement and any Approved Statement of Work or Approved Marketing Plan shall be
governed by the Confidential and/or Proprietary Information Agreement between
the parties dated April 25, 1996.
7.0 OWNERSHIP AND USE OF RESULTS OF APPROVED STATEMENT OF WORK
7.1 QUIETPOWER shall own all copyright, patent, trade secret and other
intellectual property rights in Technology now existing, or hereinafter
created, as a result in whole or in part of this Agreement. ABB shall
own all copyright, patent, trade secret and other intellectual property
rights in Transformers now existing, or hereinafter created, as a
result in whole or in part of this Agreement. Nothing in this Agreement
shall alter such prior ownership by either party.
7.2 In the event that an invention or other intellectual property right is
jointly made or conceived as a result of carrying out an Approved
Statement of Work for Technology or Commercial Product, any and all
patent applications, whether domestic or foreign, based on such
inventions, and all other intellectual property rights of any kind
shall be owned by QUIETPOWER. QUIETPOWER may patent all such
inventions. With respect to the filing and prosecution of patent
applications on such inventions, ABB agrees to cooperate with
QUIETPOWER and to furnish all information requested in a timely fashion
to enable the expeditious filing and prosecution of all patent
applications on such inventions and other applications for intellectual
property rights. QUIETPOWER shall bear the expense of filing and
prosecution of each such patent application. If QUIETPOWER desires not
to bear the filing expenses associated with such invention, ABB shall
be entitled to file the application on its own behalf and at its own
expense and shall own all rights, title and interest in the invention
and all patents issuing thereon, and QUIETPOWER agrees to assign its
ownership rights in such invention to ABB and execute all documents
necessary to effect that result without the payment of any
compensation. If, after the filing of a patent application, QUIETPOWER
decides not to continue incurring the expenses associated with the
prosecution, issuance or maintenance of an invention, QUIETPOWER shall
promptly give notice to ABB and shall, if requested by ABB, convey its
entire right, title and interest to ABB and execute all documents
necessary to effect that result without the payment of any
compensation.
7.3 In the event that an invention or other intellectual property right is
jointly made or conceived as a result of carrying out an Approved
Statement of Work for
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improved Transformers not involving Technology as defined in Section
1.1, any and all patent applications, whether domestic or foreign,
based on such inventions, and all other intellectual property rights of
any kind shall be owned by ABB. ABB may patent all such inventions.
With respect to the filing and prosecution of patent applications on
such inventions, QUIETPOWER agrees to cooperate with ABB and to furnish
all information requested in a timely fashion to enable the expeditious
filing and prosecution of all patent applications on such inventions
and other applications for intellectual property rights. ABB shall bear
the expense of filing and prosecution of each such patent application.
7.4 During the Term of this Agreement, each party agrees that with respect
to its employees and contractors assigned pursuant to an Approved
Statement of Work, it will secure and maintain invention and patent
assignment agreements from those employees and contractors that assign
all ownership of all inventions developed pursuant to an Approved
Statement of Work to QUIETPOWER.
8.0 LICENSES TO ABB
Subject to Section 8.5, QUIETPOWER agrees to grant to ABB licenses to use and
sell the Technology and Commercial Product for the purposes as prescribed in
this Article 8. Furthermore the licenses to ABB described hereunder shall be
extendible by ABB to its Subsidiaries. All licenses granted hereunder shall be
royalty free.
8.1 Subject to Section 8.5, QUIETPOWER agrees to grant, and does hereby
grant, to ABB an exclusive license for retrofit applications for all
European Countries, for the sale to the Transformer Retrofit Market.
ABB shall have the right to sublicense the rights granted pursuant to
this Section 8.1.
8.2 Cash receipts from the activities described in Section 8.1 shall be
deposited into the Joint Marketing Account and shall be distributed to
the parties pursuant to Section 5.7
8.3 In preparation for the production of Commercial Product, ABB and
QUIETPOWER shall seek competing bids for the manufacture of such
Commercial Product. Factors to be considered when evaluating the bids
shall include, but not be limited to, the cost, quality control, and
capability to deliver the Commercial Product in a required time period
in such quantities as to maximize the commercial success of the
product.
8.4 It is understood that no license is granted under this Agreement to use
the Technology and Commercial Product for any purpose other than that
described in this Article 8 and Article 9.
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8.5 Commencing with the third year after the effective date of this
Agreement, QUIETPOWER and ABB shall mutually agree on yearly sales
targets. Achievement of these targets will become the basis for
maintaining exclusivity within the Agreement. Both parties shall
negotiate sales targets in good faith. This provision shall provide for
a one year make-up period for the sales targets. If the joint venture
falls short of the target in any one year, ABB will have an additional
year for the joint venture to make up any short-fall from the prior
year, in order to maintain exclusivity.
8.6 In addition to the retrofit Commercial Product, QUIETPOWER intends to
develop a Commercial Product for integration into new Transformers by
original equipment manufacturers ("OEM's"). QUIETPOWER hereby grants to
ABB a right of first refusal to bid on the OEM license for the European
Countries. ABB shall have three months from the date that QUIETPOWER
notifies ABB of the specific details of a competing OEM bid to exercise
its right. If ABB chooses to place a bid for the OEM license,
QUIETPOWER shall evaluate this bid using such factors as cost, quality
control, and capability to deliver the OEM product in a required time
period in such quantities as to maximize the success of the OEM
product.
9.0 VALUATION OF COMMERCIAL PRODUCT
9.1 Upon the completion of an Approved Marketing Plan, the parties shall
establish a sales price of the Commercial Product for end users. This
price shall be based on factors such as cost of components, a
reasonable return on development expenditures, a reasonable profit
margin, and improvements in Transformer reliability resulting from such
Commercial Product. The sales price may be changed from time to time by
agreement of the parties. Sales of Commercial Product at terms of less
than the sales price established in this Section 9.1, must first be
approved by both parties.
9.2 The proceeds from sales of Commercial Product shall be deposited in the
Joint Marketing Account and handled in the manner as prescribed in
Section 5.7.
10.0 CONTINUING SUPPORT FOR COMPLETED PROGRAMS
10.1 During the Term of this Agreement, each party shall use all reasonable
efforts to inform the other of improvements and modifications to
Technology or Commercial Product.
10.2 Nothing in Articles 7.0, 8.0 or 9.0 shall be construed to require
either party to disclose to the other or grant to the other any license
to use any information except as specifically provided in this
Agreement.
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11.0 DURATION AND TERMINATION
11.1 This Agreement shall extend for five (5) years from the Effective Date
and shall be renewable upon mutual agreement of the parties.
11.2 This agreement may be terminated by a party if the other party (a)
violates Article 6.0, including the Confidential and/or Proprietary
Information Agreement between the parties dated April 25, 1996, or (b)
commits a material breach of this Agreement, provided that such breach
has a material adverse affect on the marketing and/or development of
the Technology and/or Commercial Product, and further provided that
such breach is not remedied within 30 days from notice of said breach
by the other party.
11.3 In the event of termination or expiration of this agreement:
(a) all payments of any kind from third parties shall be deposited in
the Joint Account, from which all approved expenses due or payable
shall be paid. After all expenses due or payable are paid, the balance
in the Joint Account shall be distributed equally to the parties within
15 days;
(b) any balance in the Joint Marketing Account shall be immediately
paid into the Joint Account and be governed by subsection (a) above;
(c) Sections 7.1, 7.2 and 7.3 shall continue to be of full force and
effect and shall survive the expiration or termination of this
agreement;
(d) licenses granted by QuietPower in connection with this agreement
shall expire and revert to QuietPower;
(e) Article 6.0, including the Confidential and/or Proprietary
Information Agreement between parties dated April 25, 1996, shall
continue to be of full force and effect and shall survive the
expiration or termination of this agreement.
12.0 MISCELLANEOUS PROVISIONS
12.1 Anything done by either party before the Effective Date which would be
in discharge of any obligations hereunder if this Agreement were then
in effect, shall, on the Effective Date, be treated as being in
discharge of such obligations under this Agreement.
12.2. If an employee or agent of one of the parties to this agreement commits
an act or omission that renders that party liable for such act or
omission, then such party shall be liable for same and attorney's fees,
both if and as required by
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applicable law, without contribution from the other party. If the
parties jointly hire employee(s) or agent(s), and such employee or
agent commits an act or omission that renders either of the parties
liable for such act or omission, the parties shall share equally the
cost of same and attorney's fees, both if and as required by applicable
law.
12.3 Any failure by either party to enforce any of the provisions of this
Agreement or to require at any time performance by the other party of
any of the provisions hereof, shall in no way affect the validity of
this Agreement or any part thereof, or the right of either party
thereafter to enforce each and every such provision, nor shall the
types or quantities of data or consultation actually given or supplied
by either party to the other whether or not under this Agreement, be
deemed in any way indicative of the scope of the obligation of either
party under this Agreement.
12.4 This Agreement may not be assigned by either party in whole or in part
without the prior written consent of the other party, which consent
shall not be unreasonably withheld; provided, however, that either
party shall have the right to assign this Agreement without the consent
of the other to any of its subsidiaries or affiliates or to the
successor to or purchaser of substantially all of the business thereof
to which the whole or any part of the subject matter of this Agreement
pertains. Any other attempted assignment without such prior written
consent shall be null and void.
12.5 This Agreement shall be construed and the legal relations between the
parties hereto shall be determined in accordance with the laws of
Switzerland.
12.6 If either party is rendered unable, wholly or in part, to carry out any
of its duties or obligations under this Agreement by reason of (i) act
of God or the public enemy, fire, explosion, perils of the sea, flood,
drought, war, riot, sabotage, accident, embargo; or (ii) without
limiting the foregoing circumstances, any circumstances of like or
different character beyond the reasonable control of the party so
failing; or (iii) interruption of or delay in transportation,
inadequacy or shortage or failure of supply of materials or equipment,
breakdowns, labor trouble from whatever cause arising and whether or
not the demands of the employees involved are reasonable and within
said party's power to concede; or (iv) compliance by either party with
any order, action, direction or request of any Governmental officer,
department, agency, authority or committee thereof; and (v) whether in
any case the circumstance now exists or hereafter arises, such party
shall forthwith give written notice thereof to the other party (such
notice briefly to describe the circumstance causing such inability);
and thereupon, to the extent that the party giving such notice is
unable to perform such duty or obligation by reason of said
circumstance, such duty or obligation shall be suspended during, but no
longer than the continuance of such circumstance.
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<PAGE>
12.7 All disputes arising out of or in connection with this Agreement shall
be finally settled under the rules of conciliation and arbitration of
the International Chamber of Commerce by three arbitrators appointed in
accordance with the said rules. The arbitration proceedings shall take
place in Paris and shall be conducted in English.
13.0 NOTICES
Any notice or request with reference to this Agreement shall be by personal
delivery, cable, telex or facsimile followed by a confirming letter mailed
within seven (7) days, and shall be directed by one party to the other at its
respective address, as follows:
ABB Secheron SA QuietPower Systems, Inc.
Jean-Luc Favre Jonathan M. Charry, Ph.D.
Vice President President and Chief Executive Officer
Rue des Sablieres 4-6 1675 Broadway
P.O. Box 2095 Suite 3500
CH-1211 Geneva 2 New York, NY 10019
Switzerland United States of America
or to such other address or addresses as either party may from time to time
designate as its address by notice in writing to the other. All notices so
addressed are effective when received.
14.0 ENTIRE AGREEMENT AND AMENDMENTS
This Agreement contains the entire and only agreement between the parties
respecting the subject matter hereof and supersedes all previous negotiations,
agreements, commitments and writings in respect thereto with the sole exception
of the Confidential and/or Proprietary Information Agreement between the parties
dated April 25, 1996. This Agreement may not be amended, supplemented, released,
discharged, abandoned, changed or modified in any manner, orally or otherwise,
except by an instrument in writing of concurrent or subsequent date signed by
duly authorized officers or representatives of the parties hereto.
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<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be
executed in duplicate, as of the date first written above, by its duly
authorized representative.
QuietPower Systems, Inc. ABB Secheron SA
By: /s/ Jonathan M. Charry By: /s/ Wettstein and Favre, JrL
- ------------------------------- ---------------------------------
Name: Jonathan M. Charry Name: Wettstein and Favre, JrL
- ------------------------------- ---------------------------------
Title: President and CEO Title: Vice President - PROLEC 6E
- ------------------------------- ---------------------------------
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EXHIBIT 10.22
Thacher, Vendig & Company, Inc.
Suite 1600
450 Lexington Avenue
New York, New York 10017-3904
(212) 878-3842 Fax (212) 878-3835
April 1, 1997 (Restated)
Mr. Jonathan M. Charry
President and CEO
QuietPower Systems, Inc.
Suite 3500
1675 Broadway
New York, NY 10019
Dear Mr. Charry:
This letter shall set forth the understanding between Thacher, Vendig & Company,
Inc. and Euro American Private Equity & Management Consulting
Syndicate("Thacher") and QuietPower Systems, Inc. with respect to the potential
purchase by, financing of or establishment of a joint venture involving
QuietPower Systems, Inc. and any of its affiliates ("QuietPower") to, by or with
an entity or entities (an "Entity") introduced to QuietPower by Thacher. This
agreement shall continue in force until terminated by either party in writing
upon at least 30 days' written notice.
In the event of the purchase of (a "Purchase Transaction" or an "Acquisition")
or a financing of (a "Financing Transaction") or the establishment of a joint
venture involving (a "Venture Transaction") (individually and/or collectively a
"Transaction") QuietPower to, by or with an Entity introduced to QuietPower by
Thacher within a period of 18 months from the date of such introduction,
QuietPower shall pay, or cause to be paid, to Thacher a fee in accordance with
the following formulas:
A) If QuietPower consummates the acquisition of a business (regardless of the
form of such Business - i.e. corporation, partnership, sole proprietorship,
etc.) or any part thereof, by means of a merger, consolidation, joint venture,
exchange offer; purchase of stock or assets or other transactions (an
"Acquisition") then QuietPower shall pay Thacher, or cause Thacher to be paid, a
fee (herein referred to as the "Transaction Fee"), based upon the purchase price
for the business, or portion thereof (the "Purchase Price"), such Transaction
Fee being determined in accordance with the following formula:
In the case of a Purchase Transaction the greater of (a.) or (b.) below:
a.) Either 3% of the Purchase Price, or
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QuietPower - 2 of 5
b.) 5% of the 1st $1 million of the Purchase Price (or portion
thereof)
4% of the 2nd $1 million of the Purchase Price (or portion
thereof)
3% of the 3rd $1 million of the Purchase Price (or portion
thereof)
2% of the 4th $1 million of the Purchase Price (or portion
thereof)
1% of the balance of the Purchase Price.
The Purchase Price on which the Transaction Fee is based shall include cash,
securities (whether or not marketable), notes, royalties, earnouts, allocations
to agreements not to compete and all other consideration, including non-cash
consideration, contingent or otherwise, deliverable or payable by QuietPower or
any of its Affiliates plus all liabilities of the Business directly or
indirectly assumed by QuietPower or any of its Affiliates as a result of the
Acquisition plus the fair market value of the net assets of the Business
retained by the Seller if such assets are consideration in the transaction.
If QuietPower requests Thacher to obtain financing for the Purchase Price to be
paid by QuietPower in an Acquisition, a separate and additional fee normal and
customary for obtaining such financing will be negotiated at that time and will
be paid by QuietPower to Thacher upon closing of the financing.
Notwithstanding anything to the contrary herein, QuietPower shall not be liable
for any Transaction Fee hereunder except in accordance with the above,
regardless of the cause of or reasons for the inability or failure to consummate
any Acquisition within the time parameters set forth above.
B) In the case of a Financing Transaction:
2% of the Financing Amount that is structured as senior debt or debt
which is directly securitized by the assets of QuietPower.
4% of the Financing Amount that is structured as subordinated debt
or junior debt with no equity component.
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QuietPower - 3 of 5
6% of the Financing Amount that is structured as common equity or
debt with an equity component, interest kicker or equity with a
preference over common equity.
However, if a Financing Transaction shall occur with the following financing
sources before the occurrence of an "Initial Public Offering" by the Company,
the fee shall be 10%:
a. Anderson, Weinroth & Co., L.P.
b. Martin Milston clients and
c. Carl Horn clients and
d. Thacher, Vendig clients.
For the purposes hereof, a Financing Transaction shall include any loan to,
financing of, providing letters of credit for guarantees of obligations of, or
other investment in QuietPower or other such transaction of a like kind,
regardless of form.
The Financing Amount on which the fee arising from a Financing Transaction is
based shall include all moneys and non-cash consideration received by, and in
the case of debt with no equity component or interest kicker, committed to,
QuietPower in exchange for interests in QuietPower, including notes, securities
or other forms of investment in QuietPower and the amounts of guarantees
provided to QuietPower to the extent the obligations guaranteed are not
otherwise included in the Financing Amount.
Notwithstanding anything in this Agreement to the contrary, no fee or
other form of compensation shall be payable to Thacher in respect of
the Initial Public Offering of Securities of the Company.
C) In the case of a Venture Transaction:
5% of the Venture Amount.
For the purposes hereof, a Venture Transaction shall include the
establishment of any business organization involving the assets or
personnel of QuietPower and an Entity, as well as the establishment of any
arrangement providing for the distribution of QuietPower's products or
services by an Entity or the distribution of an Entity's products or
services by QuietPower.
The Venture Amount on which the fee arising from a Venture Transaction is
based shall be the value ascribed to the involvement of the Entity
referred to above in the Venture Transaction as such involvement is valued
in the Transaction.
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QuietPower - 4 of 5
It is understood and agreed that QuietPower has the right, without any liability
to Thacher, to terminate discussions for the purchase of, financing of, or joint
venture involving QuietPower for any reason whatsoever at any time.
The fee payable to Thacher hereunder shall be payable at the closing of the
Transaction by a certified or official bank cashier's check payable to the order
of Thacher or by federal funds wire transfer to a bank designated by Thacher. In
the event the Purchase Price, Financing Amount or Venture Amount shall consist
of securities or other non-cash consideration, the entire fee shall still be
paid by a certified or official bank cashier's check or by federal funds wire
transfer or warrants to purchase the common stock of QuietPower in the case of
non-cash consideration, with such securities or other non-cash consideration
valued, for purposes of computing the fee, on the same basis as such securities
or other non-cash consideration is valued in the Transaction.
In the event that the total Purchase Price, Financing Amount or Venture Amount
cannot be determined as of the date of closing of a Transaction, Thacher shall
receive the portion of the fee attributable to the determined portion of the
Purchase Price, Financing Amount or Venture Amount simultaneously upon closing
and shall receive the portion of the fee attributable to the undetermined
portion of the Purchase Price, Financing Amount or Venture Amount within five
(5) days of the determination of any such previously undetermined portion.
QuietPower shall indemnify Thacher, its shareholders, affiliates, officers,
directors, employees, and agents and hold them harmless from and against any
losses, claims, damages or liabilities, including reasonable legal fees and
expenses, to which they may become subject as a result of or in connection with
the rendering of services hereunder, to the extent that such losses, claims,
damages or liabilities are not caused by Thacher s gross negligence or bad
faith.
QuietPower agrees to reimburse Thacher on a monthly basis for all approved,
reasonable out-of-pocket expenses incurred by Thacher in connection with the
performance of the services provided hereunder, including expenses for such
items as travel, entertainment, telephone, printing, etc.
QuietPower agrees to provide Thacher with the transaction documents prior to the
close of a Transaction and upon the completion of a Transaction, Thacher can
publish a suitable and customary announcement concerning the Transaction subject
to QuietPower's approval, which shall not be unreasonably withheld.
This agreement sets forth the understanding of the parties relating to the
subject matter hereof, and supersedes and cancels any prior communications,
understandings and agreements (including the Letter Agreement between us
dated April 1, 1997 and not marked "restated") between the parties with
respect to the subject matter hereof. This agreement cannot be modified or
changed, nor can any of its provisions be waived, except by a writing signed
by all parties. It is agreed by all signatories to this agreement that a
signed facsimile transmission of this document is legal and binding.
<PAGE>
QuietPower - 5 of 5
This agreement shall be governed by the laws of the State of New York without
giving effect to its conflict of laws principles.
Any disagreement between the parties arising under or in connection with this
agreement shall be resolved through arbitration in New York City by a panel of
three arbitrators selected in accordance with and acting under the rules of the
American Arbitration Association. The decision of the arbitrators shall be
binding upon the parties and enforceable in any court of competent jurisdiction.
If the foregoing meets with your understanding, kindly acknowledge your
acceptance at the place indicated on this letter and on the enclosed copy of
this letter. Please return one of the executed letters to me and keep one for
your files.
Very truly yours,
THACHER, VENDIG & COMPANY, INC.
By:/s/ Alfred B. Thacher
--------------------------------------------
Alfred B. Thacher, Jr. Managing Director
ACCEPTED AND AGREED TO:
QUIETPOWER SYSTEMS, INC.
By:/s/ Jonathan M. Charry
--------------------------------------------
Jonathan M. Charry, President and CEO
Date: April 4, 1997
<PAGE>
EXHIBIT 10.23
QUIETPOWER SYSTEMS, INC.
1993 STOCK OPTION PLAN
1. Purpose.
The purpose of the 1993 Stock Option Plan (the "Plan") of QuietPower
Systems, Inc. (the "Company") is to enable the Company to better attract and
retain persons who will provide their skills and services to the Company and any
of its subsidiaries with the incentive inherent in stock ownership and to
increase their proprietary interest in the success of the Company. It is
believed that the Plan will aid in retaining officers, directors employees and
consultants and in encouraging them to devote their time and energy to further
the interests of the Company, as well as to furnish a means of attracting
employees of exceptional ability to the Company. The options issued under the
Plan shall constitute either "incentive stock options" within the meaning of
Section 422A of the Internal Revenue Code of 1986, as amended (the "Code"), or
"nonqualified stock options" (collectively, the "Options"), as designated by the
Committee (as hereinafter defined) or Board on the date of the grant of an
Option.
2. Shares Available/Option Grant.
The aggregate number of share of common stock of the Company, par value
$.01 per share (the "Common Stock"), issuable pursuant to Options granted under
the Plan shall not exceed two hundred fifty thousand (250,000) shares, except as
provided in Paragraph 9 hereof. Such Common Stock shall consist of either
unissued or reacquired shares (treasury stock). In the event that any Option
granted under the Plan shall expire or be terminated for any reason without
being wholly exercised, new Options may be granted covering the unpurchased
shares formerly subject to the expired Option.
An Option granted under this Plan may be either an incentive stock option
within the meaning of Section 422A of the Code or a nonqualified stock option as
the Committee (as hereinafter defined) or Board shall, in its sole discretion
but subject to the limitations of Section 5 herein, determine upon the grant of
an Option. Only Options specifically designated as incentive stock options shall
be treated as such for the purposes of the Plan and the Code.
3. Administration.
The Plan shall be administered and interpreted by the Board of Directors
or a committee (the "Committee") of not less than three (3) members from time to
time appointed by the Board of Directors of the Company. Each member of the
Committee, while serving as such, may also be a director of the Company and
shall be a disinterested person within the meaning of Rule 16b-3 under the
Securities Exchange Act of 1934, as amended. The Board of Directors may, from
time to time, appoint members of the Committee in substitution for, or in
addition to, members previously
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appointed, and may fill vacancies, however caused, in the Committee. The
Committee shall hold meetings at such times and places as it shall deem
advisable. A majority of its members shall constitute a quorum. The Committee
shall act by a majority vote or by a written statement signed by all of its
members. The Committee may appoint a secretary, shall keep minutes of its
meetings, and may make such rules and regulations for the conduct of its
business as it shall deem advisable.
Subject to the express provisions of the Plan, the Committee or Board
shall determine the individuals to whom Options shall be granted, the type of
Options to be granted, the time(s) at which Options shall be granted, the number
of shares to be subject to each Options, the term of each Option and the Time(s)
at or during which an Option may be exercised in whole or in part, and all such
other terms and conditions of such Options as the Committee or Board deems
appropriate including, but not limited to, conditions as to the vesting of the
right to exercise any Option. The Committee or Board may, in its sole
discretion, at the time an Option is granted establish one or more conditions to
the exercise of an Option, provided that, if the Options is designated as an
incentive stock option, then the condition(s) shall not be inconsistent with
Section 422A of the Code.
The Committee or Board may correct any defect or omission or reconcile any
inconsistency in the Plan, or in any Option, in the manner and to the extent it
shall deem desirable. The Committee or Board shall have full and sole authority
to make all grants to be made hereunder as will as to make all administrative,
interpretative and other determinations with respect to the Plan, and all such
determinations shall be final and conclusive on all officers, directors and
employees eligible to participate in the Plan and on their legal representatives
and beneficiaries.
4. Eligibility.
All officers, directors, employees and consultants of the Company and any
of its subsidiaries shall be eligible to receive Options under the Plan. The
officers, directors, employees or consultants to whom Options may be granted
pursuant to the Plan shall be determined by the Committee or Board in its sole
discretion, subject to the terms and conditions of the Plan.
5. Option Exercise Price.
The Purchase price for each share of Common Stock underlying each Option
shall be fixed by the Committee or Board at the time an Option is granted.
However, with respect to incentive stock options in no event will the exercise
price per share be less than one hundred percent (100%) of the fair market value
of the Common Stock on the date of the grant of the Option as determined by the
Committee or Board in a manner consistent with requirements of the regulations
promulgated under the Code, as in effect at such time; and further provided
that, in the case of an officer, director or employee owning shares of the
Company's stock (either directly or constructively within the meaning of Section
425(d) of the Code) in excess of ten percent (10%) of the total combined voting
power of all classes of stock of the Company, in no event will the exercise
price per share of an incentive stock option be less than one hundred and ten
percent
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(110%) of the fair market value of the Common Stock on the date of the grant of
the Option as determined by the Committee or Board in a manner consistent with
the requirements of Section 422A of the Code. Unless otherwise required by such
regulations, the term "fair market value" as used in the Plan shall mean, as of
any date and in respect of the Common Stock, (i) if quoted on a national stock
exchange, the last reported sale price on the day prior to the date of grant, or
(ii) if not traded on a national stock exchange, the mean between the closing
dealer bid and asked prices of the Common Stock as reported by the National
Association of Securities Dealers through it Automated Quotation System on the
day prior to the date of grant, or, if no quotations shall have been make on
such date, on the next preceding day on which there were quotations; provided,
that if no such quotations shall have been made within the ten (10) business
days preceding such date, or if there is no public market for the trading of the
Common Stock the fair market value of shares of Common Stock shall be as
determined in good faith by the Committee or Board.
The aggregate fair market value of the Common Stock (*determined at the
time of the grant of the Option) with respect to which incentive stock options
are exercisable for the first time by an optionee during any calendar year under
the Plan (and any other incentive stock option plan of the Company or any of its
subsidiaries) shall not exceed $100,000. To the extent Options exercisable for
the first time by an optionee during any calendar year under the Plan exceed
$100,000, such Options shall not be deemed to be incentive stock options.
6. Term of Options.
Subject to Paragraph 10 hereof, the term of each Optional shall be fixed
by the Committee or Board but shall be no more than ten (10) years from the date
of grant.
7. Exercise of the Option.
Each Option granted under the Plan shall be exercisable, either in whole
or in part, with respect to such number of shares and, subject to the provisions
of Paragraph 6 hereof, at such time(s), including periodic installments, as may
be determined by the Committee or Board at the time of the grant, and whether or
not the Option holder is at such time holding Options granted earlier; provided,
however, that no Option may be exercised in whole or in part prior to the
approval of the Plan by a majority vote of the shareholders of the Company as
provided in Section 14 of the Plan. The right to purchase shares of Common Stock
pursuant to an Option that is exercisable in installments shall be cumulative,
so that when the right to purchase any shares of Common Stock has accrued such
shares of Common Stock or any part thereof may be purchased at any time
thereafter until the expiration or termination of the Option.
An Option shall be exercised by giving written notice of exercise to the
Company. Such notice shall specify the number of shares to be purchased and
shall be accompanied by payment of the purchase price for the shares in full in
cash or by certified check. In the Committee's or Board's
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<PAGE>
sole discretion, payment of the purchase price of the shares may be made by
shares of the Company's Common Stock duly endorsed to the Company for transfer
(which shares shall be valued at their fair market value as of the date
preceding the day of such Option's exercise), or any combination of cash and
shares.
The holder of an Option shall have none of the rights of a stockholder
with respect to the Common Stock subject thereto until such Common Stock has
been issued and registered on the Company's transfer books upon such exercise.
No Option may be granted pursuant to the Plan or exercised at any time when such
Option, or the grant or exercise thereof, may result in the violation of any
law, governmental order or regulation.
If an Option shall have been exercised with respect to less than all of
the shares of Common Stock subject to the Option, the Company shall cause to be
delivered to the person entitled thereto a new Option Certificate (as
hereinafter defined), in replacement of the Option Certificate surrendered at
the time of the exercise of the Option, indicating the number of shares of
Common Stock with respect to which the Option remains available for exercise.
8. Non-Transferability.
No Option granted under the Plan shall be transferable other than by will
or the laws of descent and distribution. An Option may be exercised during the
lifetime of the holder thereof only by such holder or by his guardian or legal
representative.
9. Adjustments.
In the event there is any change in the Common Stock of the Company by
reason of a stock dividend paid with respect to the Common Stock of the Company,
or a recapitalization, reclassification, stock split or combination of shares
with respect to such Common Stock, or if the outstanding Common Stock of the
Company should, by reason of a merger, consolidation, acquisition of stock or
property, separation, reorganization or liquidation to which the Company is a
party, be exchanged for other shares of the Company or of another corporation
which is a party to such transaction, the number of shares which are subject to
an Option and issuable under the Plan shall be adjusted as the Board of
Directors shall determine to be appropriate to reflect the change or exchange.
In the event of any such change or exchange, the holder of an Option not fully
exercised shall be entitled upon the exercise thereof, to such number and kind
of securities, subject to the terms of the Option, to which such holder would
have been entitled had he owned the shares at the time of such change or
exchange and the exercise price per share shall be adjusted as the Committee or
Board shall determine to be appropriate without such determination constituting
a modification within the meaning of Section 425 of the Code.
4
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In the event of any merger or consolidation of the Company with or into
any other corporation, the Committee or Board shall have the power to amend all
outstanding Options to permit the exercise of all such Options prior to the
effectiveness of any such merger or consolidation and to terminate such Options
as of such effectiveness.
The Committee or Board also may grant Options having terms and provisions
that vary from the terms specified in the Plan provided that any Option granted
pursuant to this Section is granted only in substitution for or in connection
with the assumption of existing options granted by another corporation and
assumed or otherwise agreed to be provided for by the Company pursuant to or by
reason of a transaction involving a corporate merger, consolidation, acquisition
of property or stock, reorganization, or liquidation to which the Company is a
party.
10. Termination of Employment.
With respect to any holder of an Option who is an employee of the Company
or any of its subsidiaries, any unexercised portion of an Option shall terminate
automatically upon the cessation of employment of such holder, unless (i) such
cessation of employment shall be because of (a) involuntary termination of
employment by the Company or any of its subsidiaries which the Committee or
Board in its sole discretion shall determine to be without cause, (b) voluntary
resignation of the holder with the consent of the Board of Directors of the
Company, (c) retirement in accordance with and as permitted by the terms and
condition of a retirement plan adopted by the Company, in which case the Option
shall be exercisable within a period of three months following the date of such
cessation of employment, or (ii) such cessation of employment shall be because
of disability or death (or death shall occur within three months of such
cessation), in which case the Option shall be exercisable within a period of one
year following the date of cessation of employment, by the holder, his guardian
or legal representative, in the case of disability, or the estate of the holder
or by the person or persons to whom the holder's rights under the Option shall
pass by the holder's will or the laws of descent and distribution, in the case
of death; provided, however, that in no event may an Option be exercised after
the expiration date thereof. The Plan does not confer upon any holder any right
with respect to continuance of employment by the Company or by a subsidiary, nor
shall it be construed to prejudice in any way the Company's or any of its
subsidiaries' right to terminate employment at any time with or without cause.
11. Other Restrictions.
The shares of Common Stock issued upon exercise of an Option may be
subject to a right of repurchase by the Company upon termination of a holder's
employment and/or a right of first refusal upon a contemplated resale by a
holder, all as may be set forth in the agreements governing the terms of an
Option.
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12. Evidence of Grant.
Options granted hereunder shall be evidenced by written grants or
agreements (which need not be identical) in such form as the Committee or Board
shall approve, which shall comply with and be subject to the terms and
conditions of the Plan.
13. Purchase for Investment.
Prior to the issuance and delivery of any Common Stock upon the exercise
of an Option, the Company may: (i) require the holder to give satisfactory
assurances that the Common Stock is being purchased for investment and not with
a view to resale or distribution, and will not be transferred in violation of
applicable securities laws; (ii) restrict the transferability of the Common
stock and require a legend to be endorsed on the certificates representing the
Common Stock; and (iii) condition the issuance and delivery of the Common Stock
upon the listing, registration or qualification of such Common Stock upon a
securities exchange or under applicable securities laws. At the time an Option
is granted, the Committee or Board shall determine whether an appropriate
registration statement covering the common Stock to be issued pursuant to the
Plan shall be filed with the Securities and Exchange Commission under the
Securities Act of 1933, as amended, and whether to cause a registration
statement covering the reoffer and resale of Common Stock by holders of Options
who may be deemed to be affiliates of the Company to be so filed, and the date
upon which and the length of time the Company will cause any such registration
statement to become and remain effective.
The Plan is intended to comply with Rule 16b-4 under the Securities
Exchange Act of 1934, as amended. Any provision inconsistent with that Rue shall
be inoperative, but shall not affect the validity of the Plan.
14. Income Tax Withholding.
If the Company or any of its subsidiaries shall be required to withhold
any amounts by reason of any federal, state or local tax rules or regulations in
respect of the issuance of the Common Stock pursuant to the exercise of an
Option, the holder shall make available to the Company or any of its
subsidiaries, promptly when requested by the Company or its subsidiary,
sufficient funds to meet the withholding requirements and the Company or its
subsidiary shall be entitled to take any steps it deems advisable so that such
withholdings are make out of any funds or property due or to become due to the
holder. If an officer or employee disposes of the Common Stock acquired pursuant
to an Option that is an incentive stock option in any transaction considered to
be a "disqualifying transaction" under Sections 421 and 422A if the Internal
Revenue Code, the
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Company shall have the right to deduct any taxes required to be withheld from
any amounts otherwise payable to the employee.
15. Effective Date.
The Plan shall become effective upon its approval by the Board of
Directors of the Company; provided, however, that if the Plan is not also
approved by the shareholders of the company in accordance with Rule 16b-3 under
the Securities Exchange Act of 1934, as amended, within twelve (12) months from
the date of its approval by the Board of Directors, the Plan shall terminate and
all outstanding Options shall be canceled. No Option granted prior to
shareholder approval of the Plan may be exercised by the holder thereof until
such shareholder approval has been obtained.
16. Expiration and Termination of the Plan.
Options may be granted under the Plan at any time and from time to time
prior to the tenth anniversary of the date on which the Plan is approved by the
shareholders of the Company, on which date the Plan will expire except as to
Options then outstanding under the Plan. Such outstanding Options shall remain
in effect until they have been exercised or have expired in accordance with
their terms. The Plan may be terminated at any time by the Board of Directors of
the Company except with respect to any Options outstanding under the Plan.
17. Amendment.
The Board of Directors may, by resolution, amend or revise the Plan,
except that no such action may be taken which would prevent Options issued under
the Plan from being incentive stock options within the meaning of the Code or
jeopardizing the Plan's eligibility under Rule 16b-3. Furthermore, without
shareholder approval, no amendment shall increase the maximum number of shares
which may be subject to the Plan (except in accordance with the provision of
Paragraph 9 hereof). The Board may not, without the consent holder of an Option,
alter or impair any Option previously granted under the Plan.
18. Option Holder Not a Stockholder.
An Option holder shall not be deemed to be the holder of, or to have any
of the rights of a stockholder with respect to, any Common Stock subject to such
Option unless and until the Option shall have been exercised pursuant to the
terms thereof, the Company shall have issued and delivered Common Stock to the
Option holder, and the holder's name shall have been entered as a
7
<PAGE>
stockholder of record on the books of the Company. Thereupon, the holder shall
have full voting, dividend and other ownership rights with respect to such
Common Stock.
8
<PAGE>
EXHIBIT 10.24
- ------------------------------------------------------------------------------
SUB-SUBLEASE
BETWEEN
KALKINES, ARKY, ZALL & BERNSTEIN
AND
QUIETPOWER SYSTEMS, INC.
- ------------------------------------------------------------------------------
<PAGE>
SUB-SUBLEASE AGREEMENT made as of the 30th day of April, 1996, between
KALKINES, ARKY, ZALL & BERNSTEIN LLP, having its principal office at 1675
Broadway, New York, New York 10019 ("KAZB"), and QUIETPOWER SYSTEMS, INC.,
having its principal office at 1675 Broadway, New York, New York 10019
("Quietpower").
W I T N E S S E T H:
WHEREAS, KAZB has subleased approximately 8,257 square feet of the 35th
floor, which space is indicated by outlining and diagonal markings on the floor
plan attached hereto as Exhibit A (the "Sublet Premises") in the building known
as 1675 Broadway, New York, New York 10019 (the "Building") from BASF
Corporation, as Sublessor ("BASF"), pursuant to a sublease, dated as of May ___,
1996 (the "Sublease") under a lease dated May 24, 1988 between Broadway 52nd
Associates, as landlord ("Landlord") and BASF, as tenant (the "Main Lease"); and
WHEREAS, Quietpower desires to hire from KAZB and KAZB desires to further
sublet to Quietpower a portion of the Sublet Premises;
NOW, THEREFORE, for and in consideration of the payments, rents, covenants
and mutual agreements hereinafter contained, KAZB and Quietpower hereby covenant
and agree as follows:
1. Leasehold
1.1 KAZB hereby leases to Quietpower, and Quietpower hereby hires from
KAZB, that portion of the Sublet Premises indicated on the floor plan attached
hereto as Exhibit B (the "Sub-Subleased Premises"), in the Building, which is
deemed to be 3,443 rentable square feet.
1.2 KAZB hereby grants to Quietpower the non-exclusive right to use those
portions of the Sublet Premises indicated on the floor plan attached as Exhibit
B as common space with other occupants of the Sublet Premises.
2. Term
<PAGE>
2.1 This Sub-Sublease shall commence as of the date the Sublease is
executed by BASF and KAZB and the consent of Broadway 52nd Associates to the
Sublease and this Sub-Sublease is obtained (the "Commencement Date") and shall
terminate on September 28, 1999 unless such term shall sooner cease and expire
by law or as hereinafter provided or unless extended by mutual agreement (the
"Term").
3. Incorporation by Reference
3.1 The terms, covenants and conditions of the Sublease and the Main Lease
are incorporated herein by reference so that, except to the extent that they are
inapplicable or modified by the provisions of this Sub-Sublease, each and every
term, covenant and condition of the Main Lease and the Sublease binding or
inuring to the benefit of Landlord and BASF respectively thereunder shall, in
respect of this Sub-Sublease, bind or inure to the benefit of KAZB, and each and
every term, covenant and condition of the Main Lease and the Sublease binding or
inuring to the benefit of BASF and KAZB respectively thereunder shall, in
respect of this Sub-Sublease, bind or inure to the benefit of Quietpower, with
the same force and effect as if such terms, covenants and conditions were
completely set forth in this SubSublease, and as if the words "Landlord" and
"Tenant," wherever the same appear in the Main Lease, and as if the words
"Sublessor" and "Sublessee," wherever the same appears in the Sublease, were
construed to mean, respectively, "KAZB" and "Quietpower" in this Sub-Sublease,
and as if the words "Sublet Premises," wherever the same appear in the Main
Lease, and as if the words "Sublet Premises," wherever the same appear in the
Sublease were construed to mean "Sub-Subleased Premises" in this Sub-Sublease,
and as if the word "Lease," wherever the same appear in the Main Lease and as if
the words "Sublease", wherever the same appear in the Sublease were construed to
mean this "SubSublease." If any of the express provisions of this Sub-Sublease
shall conflict with any of the provisions incorporated by reference, such
conflict shall be resolved in every instance in favor of the express provisions
of this Sub-Sublease. If KAZB receives any notice or demand from Landlord or
BASF, KAZB shall promptly give a copy thereof to Quietpower.
2
<PAGE>
4. Rent
4.1 Throughout the Term, Quietpower shall pay Quietpower's Proportionate
Share (as hereafter defined).
4.2 Quietpower's "Proportionate Share" shall be 41.7% of the Fixed Rent,
additional rent and other charges due under the Sublease.
5. Use
5.1 Quietpower shall use and occupy the Sub-Subleased
Premises solely for offices.
6. Subordination
6.1 This Sub-Sublease is subject and subordinate to the Main Lease and the
Sublease as the same have or may be amended from time to time. This clause shall
be self-operative and no further instrument of subordination shall be required.
However, in confirmation of such subordination, Quietpower at any time and from
time to time, shall promptly execute, acknowledge and deliver any certificate
and document that Landlord or BASF may request. A copy of the Main Lease and
Sublease has been delivered to and examined by Quietpower.
7. Performance by KAZB
7.1 Any obligation of KAZB which is contained in this SubSublease by the
incorporation by reference of the provisions of the Main Lease and Sublease may
be observed or performed by KAZB using reasonable efforts to cause Landlord and
BASF to observe and/or perform the same, and KAZB shall have a reasonable time
to enforce its rights to cause such observance or performance. KAZB shall not be
required to furnish, supply or install anything under any article of the Main
Lease or Sublease. Quietpower shall not in any event have any rights in respect
of the SubSubleased Premises greater than KAZB's rights under the Sublease, and,
notwithstanding any provision to the contrary, as to obligations contained in
this Sub-Sublease by the incorporation by reference of the provisions of the
Main Lease and Sublease, KAZB shall not be required to make any payment or
perform any
3
<PAGE>
obligation, and KAZB shall have no liability to Quietpower for any matter
whatsoever, except for KAZB's obligation to pay the rent and additional rent due
under the Sublease and for KAZB's obligation to use reasonable efforts, on
request of Quietpower, to cause Landlord or BASF to observe and/or perform its
obligations under the Main Lease or Sublease.
8. No Breach of the Main Lease
8.1 Quietpower shall not do or permit to be done any act or thing which
may constitute a breach or violation of any term, covenant or condition of the
Main Lease or the Sublease.
9. No Privity of Estate
9.1 Nothing contained in this Sub-Sublease shall be construed to create
privity of estate or of contract between Quietpower and Landlord or BASF.
10. Services
10.1 Quietpower shall pay 41.7% of the cost of electricity furnished to
the Sublet Premises as additional rent under this Sub-Sublease. KAZB shall
periodically render to Quietpower a statement with respect to Quietpower's share
of the electricity cost. Quietpower shall pay such cost with the next monthly
rent installment.
10.2 KAZB shall not be responsible for any failure or interruption, for
any reason whatsoever, of the services or facilities that may be appurtenant to
or supplied at the SubSubleased Premises by Landlord or otherwise, including,
without limitation, heat, air conditioning, water, elevator service and cleaning
service, if any; and no failure to furnish, or interruption of, any such
services or facilities shall give rise to any (a) abatement, diminution or
reduction of Quietpower's obligations under this Sub-Sublease, (b) constructive
eviction, whether in whole or in part, or (c) liability on the part of KAZB or
BASF.
11. Physical Condition
4
<PAGE>
11.1 Quietpower has inspected the Sub-Subleased Premises and is thoroughly
acquainted with it condition and agrees to accept possession in "as is"
condition, subject to KAZB's obligation to perform the work depicted in Exhibit
B attached hereto. All understandings and agreements heretofore made by the
parties hereto are merged into this Sub-Sublease, which alone fully and
completely expresses the agreement between KAZB and Quietpower and any executory
agreements hereafter made shall be ineffective to change, modify, discharge or
effect an abandonment of it in whole or in part, unless such executory agreement
is in writing and signed by the party against whom enforcement of the change,
modification, discharge or abandonment is sought.
11.2 At the end of the Term, Quietpower shall deliver the Sub-Subleased
Premises to KAZB in broom clean condition, in substantially the same condition
as exists as of the Commencement Date, reasonable wear and tear excepted.
12. Broker
12.1 Each party covenants and represents that no broker brought about this
transaction.
13. Assignment or Subletting
13.1 Quietpower will not (i) sublet all or any portion of the
Sub-Subleased Premises, or (ii) assign this Sub-Sublease or permit occupancy of
the Sub-Subleased Premises by any other party, or (iii) in any way encumber its
right, title and interest in and to this Sub-Sublease or the Sub-Subleased
Premises, without the prior written consent in each instance of KAZB, which
consent shall be in KAZB's sole discretion, and the consent of Landlord and
BASF.
14. Notice
14.1 Any notice, statement, certificate, request, approval, consent or
demand required or permitted to be given under this Sub-Sublease shall be in
writing sent by registered or certified mail, return receipt requested optional,
addressed, as the case may be, to KAZB at 1675 Broadway, 27th floor, New York,
New York 10019, to Quietpower at 1675 Broadway, 35th floor, New York, New
5
<PAGE>
York 10019, or to such other addresses as either KAZB or Quietpower shall
designate as its new address for such purpose by notice given to the other
parties in accordance with the provisions of this Article 14. Such notice,
statement, certificate, request, approval, consent or demand shall be deemed to
have been given three days after the date mailed as provided in this Article 14.
15. Captions
15.1 The captions of Articles in this Sub-Sublease are inserted only as a
matter of convenience and for reference and they in no way define, limit or
describe the scope of this SubSublease or the intent of any provision thereof.
IN WITNESS WHEREOF, KAZB and Quietpower have duly executed this
Sub-Sublease as of the day and year first above written.
KALKINES, ARKY, ZALL & BERNSTEIN
By: /s/ William S. Bernstein
----------------------------------
Name: William S. Bernstein
Title: Managing Partner
QUIETPOWER
By: /s/ Jonathan M. Charry
----------------------------------
Name: Jonathan M. Charry
Title: President and Chief
Executive Officer
6
<PAGE>
STATE OF NEW YORK )
) SS:
COUNTY OF NEW YORK )
On this _____ day of _______________, 1996, before me personally came
__________________ to me known, and known to be the individual who executed the
foregoing agreement, as KAZB, and to me acknowledged that (s)he is a partner in
the firm of KALKINES, ARKY, ZALL & BERNSTEIN and that (s)he executed the same on
behalf of said firm.
------------------------
Notary Public
7
<PAGE>
STATE OF NEW YORK )
) SS:
COUNTY OF NEW YORK )
On this _____ day of _______________, 1996, before me personally came
Jonathan M. Charry to me known, who being by me duly sworn, did depose and say,
that he resides at ________ ________________________, that he is the President
and Chief Executive Officer of QUIETPOWER SYSTEMS, INC., the corporation
described in and which executed the above agreement; that he knows the seal of
said corporation; that the seal affixed to said agreement is such corporate
seal; that it was so affixed by order of the Board of Directors of said
corporation, and that he signed his name thereto by like order.
------------------------
Notary Public
8
<PAGE>
EXHIBIT 10.25
AGREEMENT
This Agreement, dated as of this 2nd day of January, 1997, by and
between KEQ Partners I ("KEQ"), a New York general partnership having an address
at 1675 Broadway, New York, New York, and QuietPower Systems, Inc. ("QPS"), a
Delaware corporation having an office at 1675 Broadway, New York, New York;
W I T N E S S E T H:
WHEREAS, QPS is a subtenant of Kalkines, Arky, Zall & Bernstein LLP
("KAZB"); and
WHEREAS, QPS owes KAZB an amount (the "Agreed Amount") for cash
disbursements advanced equal to $73,460.18 (the obligation of QPS to KAZB in
respect to the Agreed Amount is referred to herein as the "Claim"); and
WHEREAS, KAZB has distributed its right to the Claim to its equity
partners as of January 1, 1997 (in proportion to their respective shares of such
Claim) who have in turn contributed the Claim to KEQ in exchange for general
partnership interests in KEQ; and
WHEREAS, QPS has authorized for issuance shares of its common stock
and five year warrants to acquire common stock at $2.50 per share in units (the
"Units) of one share of common stock and a warrant to acquire one share of
common stock; and
WHEREAS, KEQ and QPS wish to settle the Claim by the issuance by QPS
to KEQ of an aggregate number of 14,692 Units;
NOW THEREFORE, in consideration of the premises and the mutual
covenants and promises contained herein, and wishing to be legally bound hereby,
the parties hereto agree as follows:
1. Issuance of Units.
<PAGE>
(a) QPS hereby issues to KEQ an aggregate number of 14,692 Units in
satisfaction of the Claim. KEQ accepts the Units in satisfaction of the Claim on
and subject to the terms hereof.
(b) KAZB is executing this Agreement at the foot hereof to
acknowledge that it has distributed the Claim to its equity partners, and that
it has no further right, title or interest to the Claim, and that its claims
against QPS have been reduced by the Agreed Amount. Nothing herein constitutes a
release by KAZB or an acknowledgment of any satisfaction of any claims of KAZB
against QPS other than to the extent of the Agreed Amount.
2. Representations and Warranties.
(a) QPS represents and warrants that the Units have been duly and
validly authorized and represent validly issued, fully paid and non-assessable
shares of common stock and warrants to purchase common stock, as contemplated
hereby.
(b) QPS warrants that the shares of common stock issued hereunder,
together with the shares of common stock issuable upon exercise of the warrants
issued to KEQ as contemplated hereby, represent not less than 0.68% of the total
number of shares of Common Stock of QPS outstanding as of the date hereof on a
fully-diluted basis.
(c) KEQ represents and warrants that each of its general partners is
an "accredited investor" as such term is defined in Regulation D promulgated
under the Securities Act of 1933, as amended, and that it is acquiring the Units
for investment purposes only and not with a view to the resale or other
distribution thereof.
3. Certificates.
Simultaneously herewith, QPS is issuing, executing, authenticating
and delivering to KEQ certificates representing the common stock and the
warrants making up the Units in form and substance substantially identical to
those issued to third party purchasers of common stock and warrants.
4. Restrictions on Transferability.
-2-
<PAGE>
KEQ recognizes that the Units represent "restricted securities" as
such term is defined in Rule 144 promulgated under the Securities Exchange Act
of 1934, as amended, which may not be transferred absent compliance with the
provisions of such act and other applicable law. QPS and KEQ further acknowledge
that the Units have no ready market and represent minority interests in QPS with
no special voting or other rights not accorded to holders of common stock and
warrants of QPS generally.
5. Further Assurances.
The parties hereto undertake to execute and deliver such other and
further documentation as may be necessary in the
-3-
<PAGE>
reasonable judgment of either of them to further confirm the transactions
contemplated hereby.
IN WITNESS WHEREOF, the parties hereto have hereunto set their hands
as of the 2nd day of January, 1997.
KEQ Partners I
By:
-----------------------------------
Steven M. Polan, General Partner
QuietPower Systems, Inc.
By:
-----------------------------------
Acknowledged for the purposes
of Section 1(b):
Kalkines, Arky, Zall & Bernstein LLP
By:
---------------------------------
Steven M. Polan, Managing Partner
-4-
<PAGE>
EXHIBIT 10.26
OFFICE LEASE
BETWEEN
460 WEST 34TH STREET ASSOCIATES,
--------------------------------
LANDLORD,
AND
QUIETPOWER SYSTEMS, INC.
------------------------
TENANT.
PREMISES: PORTION 7TH FLOOR
460 WEST 34TH STREET
NEW YORK, NEW YORK
<PAGE>
STANDARD FORM OF OFFICE LEASE
AGREEMENT OF LEASE, made as of this ____ day of April, 1997 between
460 WEST 34TH STREET ASSOCIATES, a New York partnership, having an office c/o
Kaufman Management Company, 450 Seventh Avenue, New York, New York 10007, party
of the first part, hereinafter referred to as LANDLORD, and
QUIETPOWER SYSTEMS,INC., a Delaware corporation having an office at 460 West
34th Street, New York, New York, party of the second part, hereinafter referred
to as TENANT.
WITNESSETH: Landlord hereby leases to Tenant and Tenant hereby hires
from Landlord that portion of the seventh floor, as shown on the rental plan
annexed hereto and made a part hereof as Exhibit A (the "Demised Premises" or
"demised premises", whether capitalized or not) in the Building known as 460
West 34th Street in the Borough of Manhattan, City of New York (the "Building"
or "building", whether capitalized or not), for the term of approximately ten
(10) years or until such term shall sooner cease and expire as hereinafter
provided) to commence as provided in Article 38 hereof and ending on the last
day of the calendar month following the tenth (10th) anniversary of the
Commencement Date (the "Expiration Date"), both dates inclusive, at annual
rental rates, as provided in Article 43 (the "fixed rent" or "Fixed Rent,"
whether capitalized or not), which Tenant agrees to pay in lawful money of the
United States which shall be legal tender in payment of all debts and dues,
public and private, at the time of payment, in equal monthly installments in
advance on the first day of each month during said term, at the office of
Landlord or such other place as Landlord may designate, without any set off or
deduction whatsoever.
The parties hereto, for themselves, their heirs, distributees,
executors, administrators, legal representatives, successors and assigns, hereby
covenant as follows:
1. RENT. Tenant shall pay the rent as above and as hereinafter
provided.
2. OCCUPANCY. Tenant shall use and occupy the Demised Premises as
provided in Article 44 hereof and for no other purpose.
3. ALTERATIONS: Tenant shall make no changes in or to the Demised
Premises of any nature without Landlord's prior written consent provided,
however, that Tenant may make purely decorative changes such as painting, mill
work and installation of partitions and carpeting without Landlord's consent but
upon notice to Landlord. Subject to the prior written consent of Landlord, not
to be unreasonably withheld or delayed and to the provisions of this Article,
Tenant at Tenant's expense, may make non-structural alterations, installations,
additions or improvements which do not affect utility services or plumbing and
electrical lines, in or to the interior of the Demised Premises using licensed
and reputable contractors or mechanics first approved by Landlord, which
approval shall not be unreasonably withheld or delayed. The foregoing
notwithstanding, subject to the absolute prior written consent of Landlord in
each instance, Tenant shall have the right to make structural improvements and
improvements to any utility systems or services, including electrical and
plumbing lines subject to all of the provisions of this Article 3. Tenant
shall, at its expense, before making any alterations, additions, installations
or improvements obtain all permits, approval and certificates required by any
governmental or quasi-governmental bodies. Tenant agrees to carry and will
cause Tenant's contractors and sub-contractors to carry such workman's
compensation, general liability, personal and property damage insurance as
Landlord may reasonably require. If any mechanic's lien is filed against the
Demised Premises or the Building for work claimed to have been done for, or
materials furnished to, Tenant, whether or not done pursuant to this Article,
the same shall be discharged by Tenant within thirty (30) days after Tenant
receives written notice thereof at Tenant's expense, by filing the bond required
by law or otherwise. All fixtures and all paneling, partitions, railings and
like installations, installed in the Demised Premises at any time, either by
Tenant or by Landlord on Tenant's behalf, shall, upon installation, become the
property of Landlord and shall remain upon and be surrendered with the Demised
Premises unless Landlord, by notice to Tenant no later than thirty (30) days
prior to the date fixed as the termination of this lease, elects to relinquish
Landlord's right thereto and to have them removed by Tenant, in which event the
same shall be removed from the Demised Premises by Tenant prior to the
expiration of the lease, at Tenant's expense. Nothing in this Article shall be
construed to give Landlord title to or to prevent Tenant's removal of trade
fixtures, moveable office furniture and equipment, but upon removal of any such
-2-
<PAGE>
furniture, fixtures and equipment from the Demised Premises or upon removal of
other installations as may be permitted hereunder, Tenant shall immediately and
at its expense, repair any damage occasioned by such removal. All property
permitted to be removed by Tenant at the end of the term remaining in the
Demised Premises after Tenant's removal shall be deemed abandoned and may, at
the election of Landlord, either be retained as Landlord's property or removed
from the Demised Premises by Landlord, at Tenant's expense.
4. REPAIRS: Landlord shall maintain and repair the exterior of and
the public portions of the Building and all Building systems servicing the
Demised Premises. Tenant shall, throughout the term of this lease, take good
care of the Demised Premises and the fixtures and appurtenances therein and at
Tenant's sole cost and expense promptly make all repairs thereto and to the
Building, whether structural or non-structural in nature, caused by or resulting
from the carelessness, omission, neglect or improper conduct of Tenant, Tenant's
servants, employees, invitees, or licensees. Tenant shall also repair all
damage to the Building and the Demised Premises caused by the moving of Tenant's
fixtures, furniture or equipment. All the aforesaid repairs shall be of quality
or class equal to the original work or construction. If Tenant fails, after
thirty (30) days written notice, to proceed with due diligence to make repairs
required to be made by Tenant, the same may be made by the Landlord at the
expense of Tenant, and the expenses thereof incurred by Landlord shall be
collectible, as additional rent, within thirty (30) days after rendition of a
bill or statement therefor. If the Demised Premises be or become infested with
vermin, Tenant shall, at its expense, cause the same to be exterminated. Tenant
shall give Landlord prompt notice of any defective condition in any plumbing,
heating system or electrical lines located in the Demised Premises and following
such notice, Landlord shall promptly remedy the condition with due diligence,
but at the expense of Tenant, if repairs are necessitated by damage or injury
attributable to Tenant, Tenant's servants, agents, employees, invitees or
licensees as aforesaid. Except as hereinafter provided, there shall be no
allowance to the Tenant for a diminution of rental value and no liability on the
part of Landlord by reason of inconvenience, annoyance or injury to business
arising from Landlord, Tenant or others making or failing to make any repairs,
alterations, additions or improvements in or to any portion of the Building or
the Demised Premises or in and to the fixtures, appurtenances or equipment
thereof. The provisions of this Article 4 with respect to the making of repairs
shall not apply in the case of fire or other casualty with regard to which
Article 9 shall apply.
5. WINDOW CLEANING: Tenant will not clean nor require, permit,
suffer or allow any window in the Demised Premises to be cleaned from the
outside in violation of Section 202 of the New York State Labor Law or any other
applicable law or of the Rules of the Board of Standards and Appeals, or of any
other Board or body having or asserting jurisdiction. Landlord shall clean the
exterior windows periodically
6. REQUIREMENTS OF LAW, FIRE INSURANCE, FLOOR LOADS: Prior to the
commencement of the lease term, if Tenant is then in possession, and at all
times thereafter, Tenant shall, at Tenant's sole cost and expense, promptly
comply with all present and future laws, orders and regulations of all state,
federal, municipal and local governments, departments, commissions and boards
and any direction of any public officer pursuant to law, and all orders, rules
and regulations of the New York Board of Fire Underwriters, or the Insurance
Services Office, or any similar body which shall impose any violation, order or
duty upon Landlord or Tenant with respect to the Demised Premises or Building
solely arising out of Tenant's manner of use thereof. Nothing herein shall
require Tenant to make structural repairs or alterations unless Tenant has, by
its manner of use of the Demised Premises or method of operation therein,
violated any such laws, ordinances, orders, rules, regulations or requirements
with respect thereto. Tenant shall not do not permit any act or thing to be
done in or to the Demised Premises which is contrary to law, or which will
invalidate or be in conflict with public liability, fire or other policies of
insurance at any time carried by or for the benefit of Landlord. Tenant shall
not keep anything in the Demised Premises except as now or hereafter permitted
by the Fire Department, Board of Fire Underwriters, Fire Insurance Rating
Organization and other authority having jurisdiction, and then only in such
manner and such quantity so as not to increase the rate for fire insurance
applicable to the Building, nor use the Demised Premises in a manner which will
increase the insurance rate for the Building or any property located therein
over that in effect prior to the commencement of Tenant's occupancy. If by
reason of failure to comply with the foregoing the fire insurance rate shall, at
the beginning of this lease or at any time thereafter, be higher than it
otherwise would be, then Tenant shall reimburse Landlord within thirty (30) days
after notice and opportunity to cure, as additional rent hereunder, for that
portion of all fire insurance premiums thereafter paid by
-3-
<PAGE>
Landlord which shall have been charged because of such failure by Tenant. In
any action or proceeding wherein Landlord and Tenant are parties, a schedule or
"make-up" or rate for the Building or Demised Premises issued by a body making
fire insurance rates applicable to said Demised Premises, shall be conclusive
evidence of the facts therein stated and of the items and changes in the fire
insurance rates applicable to the Demised Premises. Tenant shall not place a
load upon any floor of the Demised Premises exceeding the floor load per square
foot area which it was designed to carry and which is allowed by law. Landlord
reserves the right to prescribe the weight and position of all safes, business
machines and mechanical equipment. Such installations shall be placed and
maintained by Tenant, at Tenant's expense, in settings sufficient, in the
reasonable judgment of Landlord's structural engineer, to absorb and prevent
vibration, noise and annoyance. Landlord represents that the Demised Premises
has an existing floor load of 250 pounds per square foot live load. Landlord
represents and warrants to Tenant that Tenant may at Tenant's sole cost and
expense, increase the floor load to approximately 500 pounds per square foot,
live load. In furtherance thereof, Landlord agrees to utilize its best efforts
(at no cost or expense to Landlord) in promptly cooperating with Tenant's
effectuating such increased floor load, including, without limitation, executing
any required permits, reviewing plans, etc. Any such floor load reinforcement
work shall be effectuated by bolting supports on or to the slab only.
7. SUBORDINATION: This lease is subject and subordinate to all
ground or underlying leases and to all mortgages which may now or hereafter
affect such leases or the real property of which Demised Premises are a part and
to all renewals, modifications, consolidations, replacements and extensions of
any such underlying leases and mortgages. This clause shall be self-operative
and no further instrument or subordination shall be required by any ground or
underlying lessor or by any mortgagee, affecting any lease or the real property
of which the Demised Premises are a part. In confirmation of such
subordination, Tenant shall execute promptly any certificate that Landlord may
request.
Landlord agrees that it shall use reasonable efforts (at no cost or
expense to Landlord) to obtain and deliver to Tenant, as to the existing
mortgage and mortgages hereafter made covering the real property of which the
Demised Premises form a part, and/or any renewal, modification, consolidation,
replacement and extension of the existing mortgage, or future mortgages,
non-disturbance agreements in recordable form (or such agreement shall be
contained in such mortgage or any renewal, modification, consolidation,
extension or replacement thereof) from the holder of any such mortgage,
providing in substance that provided Tenant shall have entered into possession
and occupancy of the Demised Premises and commenced payment of fixed rent and
additional rent hereunder, and so long as Tenant is not in default in its
obligations for the payment of fixed rent and additional rent and in the
performance of the other terms, covenants and conditions to be performed on its
part under this Lease, its possession of the Demised Premises will not be
disturbed during the term hereof, notwithstanding the foreclosure of any such
mortgage, and Tenant will not be named as a party defendant in any foreclosure
proceedings brought for the recovery of possession, it being hereby covenanted
and agreed to by Tenant that the holder of any such mortgage, or anyone claiming
by, through or under said holder shall not be:
(a) liable for any act or omission for any prior landlord (including
Landlord), or
(b) subject to any offsets or defenses which Tenant might have against any
prior landlord (including Landlord), or
(c) bound by any fixed rent or additional rent or other charges which
Tenant might have paid for more than the current month to a prior
landlord (including Landlord), or
(d) bound by any modification of this Lease made without the consent of
such mortgagee. The inability of Landlord to obtain such agreement
shall not be deemed a default on Landlord's part of its obligations
hereunder, or impose any claim in favor of Tenant against Landlord by
reason thereof, or affect the validity of this Lease.
Tenant agrees to (i) execute and deliver to such mortgagee a
nondisturbance and attornment agreement in form and substance customarily
adopted by such mortgagee and (ii) reimburse Landlord for all reasonable
expenses incurred by Landlord in connection therewith, including legal expenses.
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8. PROPERTY - LOSS, DAMAGE, REIMBURSEMENT, INDEMNITY: Subject to
the provisions of Article 46 hereof, Landlord or its agents shall not be liable
for any damage to property of Tenant or of others entrusted to employees of the
Building, nor for loss of or damage to any property of Tenant by theft or
otherwise, nor for any injury or damage to persons or property resulting from
any cause of whatsoever nature, unless caused by or due to the negligence or
wilful acts of Landlord, its agents, servants or employees. Landlord or its
agents shall not be liable for any damage caused by other tenants or persons in,
upon or about said Building or caused by operations in connection of any
private, public or quasi public work. If at any time any windows of the Demised
Premises are temporarily closed, darkened or bricked up (or permanently closed,
darkened or bricked up, solely if required by law), Landlord shall not be liable
for any damage Tenant may sustain thereby and Tenant shall not be entitled to
any compensation therefor nor abatement or diminution of rent nor shall the same
release Tenant from its obligations hereunder nor constitute an actual or
constructive eviction. Tenant shall indemnify and save harmless Landlord
against and from all liabilities, obligations, damages, penalties, claims, costs
and expenses for which Landlord shall not be reimbursed by insurance, including
reasonable attorney's fees, paid, suffered or incurred as a result of any breach
by Tenant, Tenant's agents, contractors, employees, invitees, or licensees, of
any covenant or condition of this lease, or the carelessness, negligence or
improper conduct of the Tenant, Tenant's agents, contractors, employees,
invitees or licensees. Tenant's liability under this lease extends to the acts
and omissions of any sub-tenant and any sub-tenant, agent, contractor, employee,
invitee or licensee of any sub-tenant. In case any action or proceeding is
brought against Landlord by reason of any such claim, Tenant, upon written
notice from Landlord, will, at Tenant's or Tenant's insurance carriers' expense,
resist or defend such action or proceeding by counsel approved by Landlord in
writing, such approval not to be unreasonably withheld. With respect to
Tenant's insurance carrier's counsel, Landlord's consent shall not be required.
9. DESTRUCTION, FIRE AND OTHER CASUALTY: (a) If the Demised
Premises or any part thereof shall be damaged by fire or other casualty, Tenant
shall give immediate notice thereof to Landlord and this lease shall continue in
full force and effect except as hereinafter set forth. (b) If the Demised
Premises are partially damaged or rendered partially unusable or inaccessible by
fire or other casualty, the damages thereto shall be repaired by and at the
expense of Landlord and the rent, until such repair shall be substantially
completed, shall be apportioned from the day following the casualty according to
the part of the Demised Premises which is usable. (c) If the Demised Premises
are totally damaged or rendered wholly unusable or inaccessible by fire or other
casualty, then the rent shall be proportionately paid up to the time of the
casualty and thenceforth shall cease until the date when the Demised Premises
shall have been repaired and restored by Landlord, subject to Landlord's right
to elect not to restore the same as hereinafter provided. (d) If the Demised
Premises are rendered wholly inaccessible or unusable or (whether or not the
Demised Premises are damaged in whole or in part) if the Building shall be so
damaged that Landlord shall decide to demolish it or to rebuild it, then, in any
such events, Landlord may elect to terminate this lease by written notice to
Tenant, given within 60 days after such fire or casualty, specifying a date for
the expiration of the lease, which date shall not be more than 30 days after the
giving of such notice, and upon the date specified in such notice the term of
this lease shall expire as fully and completely as if such date were the date
set forth above for the termination of this lease and Tenant shall forthwith
quit, surrender and vacate the Demised Premises without prejudice however, to
Landlord's rights and remedies against Tenant under the lease provisions in
effect prior to such termination, and any rent owing shall be paid to the date
of such casualty date and any payments of rent made by Tenant which were on
account of any period subsequent to such date shall be returned to Tenant.
Unless Landlord shall serve a termination notice as provided for herein,
Landlord shall make the repairs and restorations under the conditions of (b) and
(c) hereof, within 180 days. After any such casualty, Tenant shall cooperate
with Landlord's restoration by removing from the Demised Premises as promptly as
reasonably possible, all of Tenant's salvageable inventory and movable
equipment, furniture, and other property. Tenant's liability for rent shall
resume five (5) days after written notice from Landlord that the Demised
Premises are substantially ready for Tenant's occupancy. (e) Nothing contained
hereinabove shall relieve Tenant from liability that may exist as a result of
damage from fire or other casualty caused by Tenant or any party lawfully
claiming through or under Tenant. Notwithstanding the foregoing, each party
shall look first to any insurance in its favor before making any claim against
the other party for recovery for loss or damage resulting from fire or other
casualty, and to the extent that such insurance is in force and collectible and
to the extent permitted by law, Landlord and Tenant each hereby releases and
waives all right of
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recovery against the other or any one claiming through or under each of them by
way of subrogation or otherwise. The foregoing release and waiver shall be in
force only if both releasors' insurance policies contain a clause providing that
such a release or waiver shall not invalidate the insurance. If, and to the
extent, that such waiver can be obtained only by the payment of additional
premiums, then the party benefitting from the waiver shall pay such premium
within ten (10) days after written demand or shall be deemed to have agreed that
the party obtaining insurance coverage shall be free of any further obligation
under the provisions hereof with respect to waiver of subrogation. Tenant
acknowledges that Landlord will not carry insurance on Tenant's furniture and or
furnishing or any fixtures or equipment, improvements, or appurtenances
removable by Tenant and agrees that Landlord will not be obligated to repair any
damage thereto or replace the same. (f) Tenant hereby waives the provisions of
Section 227 of the Real Property Law and agrees that the provisions of this
Article shall govern and control in lieu thereof.
10. EMINENT DOMAIN: If the whole or any part of the Demised Premises
shall be acquired or condemned by Eminent Domain for any public or quasi public
use or purpose, then and in that event, the term of this lease shall cease and
terminate from the date of title vesting in such proceeding and Tenant shall
have no claim for the value of any unexpired term of said lease.
Nothing contained in Article 10 hereof shall prohibit Tenant from making a
separate claim with the condemning authority for (a) the value of property owned
by Tenant, (b) any moving expenses incurred by Tenant as a result of such
condemnation and (c) any other separate claim which Tenant may hereafter be
permitted to make provided, however, that such separate claim shall not reduce
or adversely affect the amount of Landlord's award.
11. ASSIGNMENT, MORTGAGE, ETC.: Tenant, for itself, its heirs,
distributees, executors, administrators, legal representatives, successors and
assigns, expressly covenants that it shall not assign, mortgage or encumber this
agreement, nor underlet, or suffer or permit the Demised Premises or any part
thereof to be used by others without the prior written consent of Landlord in
each instance, which consent shall not be unreasonably withheld or delayed
subject to the provisions of Article 42 hereof. Transfer of the majority of the
stock of a corporate Tenant shall be deemed an assignment. If this lease be
assigned, or if the Demised Premises or any part thereof be underlet or occupied
by anybody other than Tenant, Landlord may, after default by Tenant, collect
rent from the assignee, under-tenant or occupant, and apply the net amount
collected to the rent herein reserved, but no such assignment, underletting,
occupancy or collection shall be deemed a waiver of this covenant, or the
acceptance of the assignee, under-tenant or occupant as tenant, or a release of
Tenant from the further performance by Tenant of covenants on the part of Tenant
herein contained. The consent by Landlord to an assignment or underletting
shall not in any wise be constructed to relieve Tenant from obtaining the
express consent in writing of Landlord to any further assignment or
underletting.
12. ELECTRIC CURRENT: Tenant covenants and agrees that at all times
its use of electric current shall not exceed the capacity of existing feeders to
the Building or the risers or wiring installation and Tenant may not use any
electrical equipment which, in Landlord's opinion, reasonably exercised, will
overload such installations or interfere with the use thereof by other tenants
of the Building. The change at any time of the character of electric service
shall in no manner make Landlord liable or responsible to Tenant, for any loss,
damages or expenses which Tenant may sustain.
13. ACCESS TO PREMISES: Landlord or Landlord's agents shall have the
right (but shall not be obligated) to enter the Demised Premises in any
emergency at any time, and, at other reasonable times, upon reasonable prior
notice, to examine the same and to make such repairs, replacements and
improvements as Landlord may deem necessary and reasonably desirable to any
portion of the Building or which Landlord may elect to perform in the Demised
Premises after Tenant's failure to make repairs or perform any work which Tenant
is obligated to perform under this lease after 30 days prior written notice and
Tenant's failure to cure same, or for the purpose of complying with laws,
regulations and other directions of governmental authorities. Landlord shall
perform any work using all reasonable efforts to minimize interference and
interruption with Tenant's occupancy and the conduct of its business in the
Demised Premises. Tenant shall permit Landlord to use and maintain and replace
pipes and conduits in and through the Demised Premises and to erect new pipes
and conduits
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therein provided same are concealed. Furthermore, any such work performed by
Landlord shall not reduce the usable area of the Demised Premises. Landlord
may, during the progress of any work in the Demised Premises, take all necessary
materials and equipment into said Demised Premises without the same constituting
an eviction nor shall the Tenant be entitled to any abatement of rent while such
work is in progress nor to any damages by reason of loss or interruption of
business or otherwise. Throughout the term hereof Landlord shall have the right
to enter the Demised Premises at reasonable hours for the purpose of showing the
same to prospective purchasers or mortgagees of the Building, and during the
last three (3) months of the term for the purpose of showing the same to
prospective tenants. If Tenant is not present to open and permit an entry into
the Demised Premises, Landlord or Landlord's agents may enter the same whenever
such entry may be necessary or permissible by master key or forcibly and
provided reasonable care is exercised to safeguard Tenant's property, such entry
shall not render Landlord or its agents liable therefor, nor in any event shall
the obligations of Tenant hereunder be affected. Additionally, except in the
case of an emergency, neither Landlord nor its representatives shall be entitled
to access the areas in the Demised Premises where Tenant has notified Landlord
that cash, securities or confidential information is stored, except if Landlord
or its representatives are accompanied by or have permission from Tenant to
enter such areas. If during the last month of the term Tenant shall have
removed all or substantially all of Tenant's property therefrom, Landlord may
immediately enter, alter, renovate or redecorate the Demised Premises without
limitation or abatement of rent, or incurring liability to Tenant for any
compensation and such act shall have no effect on this lease or Tenant's
obligations hereunder.
Whenever Landlord is permitted access to the Demised Premises pursuant to
the provisions of this Lease, Landlord agrees that it will not unreasonably
interfere with the operation of Tenant's business. Damage, if any, to the
Demised Premises resulting from Landlord's access thereto shall be repaired by
Landlord with reasonable diligence.
14. VAULT, VAULT SPACE, AREA: No Vaults, vault space or area,
whether or not enclosed or covered, not within the property line of the Building
is leased hereunder, anything contained in or indicated on any sketch, blue
print or plan, or anything contained elsewhere in this lease to the contrary
notwithstanding. Landlord makes no representation as to the location of the
property line of the Building. All vaults and vault space and all such areas
not within the property line of the Building, which Tenant may be permitted to
use and/or occupy, is to be used and/or occupied under a revocable license, and
if any such license be revoked or if the amount of such space or area be
diminished or required by any federal, state or municipal authority or public
utility, Landlord shall not be subject to any liability nor shall Tenant be
entitled to any compensation or diminution or abatement of rent, nor shall such
revocation, diminution or requisition be deemed constructive or actual eviction.
Any tax, fee or charge of municipal authorities for such vault or area shall be
paid Tenant, if used by Tenant, whether or not specifically leased hereunder.
15. OCCUPANCY: Tenant will not at any time use or occupy the Demised
Premises in violation of the Certificate of Occupancy issued for the Building (a
copy of which is annexed hereto and made a part hereof as Exhibit B) of which
the Demised Premises are a part. Tenant has inspected the Demised Premises and
accepts them as is, subject to Article 38 hereof. If any event, Landlord makes
no representation as to the condition of the Demised Premises and Tenant agrees
to accept the same subject to violations, whether or not of record.
Notwithstanding the foregoing provisions of this Article 15, Tenant shall not be
responsible for the curing of any violations that are not caused by Tenant or
any party lawfully claiming through or under Tenant, and in no event will any
such violations affect Tenant's ability to conduct its business for the
permitted use pursuant to Article 44.
16. BANKRUPTCY: (a) Except as otherwise provided by law, anything
elsewhere in this lease to the contrary notwithstanding, this lease may be
cancelled by Landlord by sending of a written notice to Tenant within a
reasonable time after the happening of any one or more of the following events:
(1) the commencement of a case in bankruptcy or under the laws of any state
naming Tenant as the debtor; which, in the case of an involuntary bankruptcy, is
not dismissed within sixty (60) days after the commencement thereof or (2) the
making by Tenant of an assignment or any other arrangement for the benefit of
creditors under any state statute not dismissed within sixty (60) days. Neither
Tenant nor any person claiming through or under Tenant, or by reason of any
statute or order of court, shall thereafter be entitled to possession of the
Demised Premises demised but shall forthwith quit and surrender the Demised
Premises. If this lease shall be assigned in accordance with its terms, the
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provisions of this Article 16 shall be applicable only to the party then owning
Tenant's interest in this lease.
(b) It is stipulated and agreed that in the event of the
termination of this lease pursuant to (a) hereof, Landlord shall forthwith,
notwithstanding any other provisions of this lease to the contrary, be entitled
to recover from Tenant as and for liquidated damages an amount equal to the
difference between the rental reserved hereunder (net of any electric inclusion)
for the unexpired portion of the term demised and the fair and reasonable rental
value of the Demised Premises for the same period. In the computation of such
damages the difference between any installment of rent becoming due hereunder
after the date of termination and the fair and reasonable rental value of the
Demised Premises for the period for which such installment was payable shall be
discounted to the date of termination at the rate of four percent (4%) per
annum. If the Demised Premises or any part thereof be relet by the Landlord for
the unexpired term of said lease, or any part thereof, before presentation of
proof of such liquidated damages to any court, commission or tribunal, the
amount of rent reserved upon such reletting shall be deemed to be the fair and
reasonable rental value for the part or the whole of the Demised Premises so re-
let during the term of the re-letting. Nothing herein contained shall limit or
prejudice the right of the Landlord to prove for and obtain as liquidated
damages by reason of such termination, an amount equal to the maximum allowed by
any statute or rule of law in effect at the time when, and governing the
proceedings in which, such damages are to be proved, whether or not such amount
be greater, equal to, or less than the amount of the difference referred to
above.
17. DEFAULT: A. If Tenant defaults in fulfilling any of the
covenants of this lease other than the covenants for the payment of rent or
additional rent; or if the Demised Premises becomes vacant or deserted; or if
any execution or attachment shall be issued against Tenant or any of Tenant's
property whereupon the Demised Premises shall be taken or occupied by someone
other than Tenant; or if this lease be rejected under Section 235 of Title 11 of
the U.S. Code (bankruptcy code); or if Tenant shall fail to move into or take
possession of the Demised Premises within thirty (30) days after the
commencement of the terms of this lease, then, in any one or more of such
events, upon Landlord serving a written five (5) days notice upon Tenant
specifying the nature of said default and upon the expiration of said five (5)
days, if Tenant shall have failed to comply with or remedy such default, or if
the said default or omission complained of shall be of a nature that the same
cannot be completely cured or remedied within said thirty (30) day period, and
if Tenant shall not have diligently commenced curing such default within such
thirty (30) day period, and shall not thereafter with reasonable diligence and
in good faith, proceed to remedy or cure such default, then Landlord may serve a
written five (5) days' notice of cancellation of this lease upon Tenant, and
upon the expiration of said five (5) days this lease and the term thereunder
shall end and expire as fully and completely as if the expiration of such five
(5) day period were the day herein definitely fixed for the end and expiration
of this lease and the term thereof and Tenant shall then quit and surrender the
Demised Premises to Landlord but Tenant shall remain liable as hereinafter
provided.
B. If the notice provided for in (A) hereof shall have been given, and
the term shall expire as aforesaid; or if Tenant shall make default in the
payment of the rent reserved herein or any item of additional rent herein
mentioned or any part of either or in making any other payment herein required
after five (5) business days prior written notice, then and in any of such
events, Landlord may dispossess Tenant by summary proceedings or otherwise, and
the legal representative of Tenant or other occupant of Demised Premises and
remove their effects and hold the Demised Premises as if this lease had not been
made, and Tenant hereby waives the service of notice of intention to re-enter or
to institute legal proceedings to that end. If Tenant shall make default
hereunder prior to the date fixed as the commencement of any renewal or
extension of this lease, Landlord may cancel and terminate such renewal or
extension agreement by written notice and opportunity to cure.
18. REMEDIES OF LANDLORD AND WAIVER OF REDEMPTION: In case of any
such default, re-entry, expiration and/or dispossess by summary proceedings or
otherwise, (a) the rent, and additional rent, shall become due thereupon and be
paid up to the time of such re-entry, dispossess and/or expiration, (b) Landlord
may re-let the Demised Premises or any part or parts thereof, either in the name
of Landlord or otherwise, for a term or terms, which may at Landlord's option be
less than or exceed the period which would otherwise have constituted the
balance of the term of this lease and may grant such reasonable concessions or
free rent or charge a higher rental than that in this lease, (c) Tenant or the
legal
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representatives of Tenant shall also pay Landlord as liquidated damages for the
failure of Tenant to observe and perform said Tenant's covenants herein
contained, any deficiency between the rent hereby reserved and or covenanted to
be paid and the net amount, if any, of the rents collected on account of the
subsequent lease or leases of the Demised Premises for each month of the period
which would otherwise have constituted the balance of the term of this lease.
The failure of Landlord to re-let the Demised Premises or any part or parts
thereof shall not release or affect Tenant's liability for damages hereunder.
In computing such liquidated damages there shall be added to the said deficiency
such reasonable expenses as Landlord may incur in connection with re-letting,
such as reasonable legal expenses, reasonable attorneys' fees, reasonable
brokerage fees, advertising and reasonable costs for keeping the Demised
Premises in good order or for preparing the same for re-letting. Any such
liquidated damages shall be paid in monthly installments by Tenant on the rent
day specified in this lease and any suit brought to collect the amount of the
deficiency for any month shall not prejudice in any way the rights of Landlord
to collect the deficiency for any subsequent month by a similar proceeding.
Landlord, in putting the Demised Premises in good order or preparing the same
for re-rental may, at Landlord's option, make such reasonable alterations,
repairs, replacements, and/or decorations in the Demised Premises as Landlord,
in Landlord's reasonable judgment, considers advisable and necessary for the
purpose of re-letting the Demised Premises, and the making of such alterations,
repairs, replacements, and/or decorations shall not operate or be construed to
release Tenant from liability hereunder as aforesaid. Landlord shall in no
event be liable in any way whatsoever for failure to re-let the Demised
Premises, or in the event that the Demised Premises are re-let, for failure to
collect the rent thereof under such re-letting, and in no event shall Tenant be
entitled to receive any excess, if any, of such net rents collected over the
sums payable by Tenant to Landlord hereunder. In the event of a breach or
threatened breach by Tenant of any of the covenants or provisions hereof,
Landlord shall have the right of injunction and the right to invoke any remedy
allowed at law or in equity as if re-entry, summary proceedings and other
remedies were not herein provided for. Mention in this lease of any particular
remedy, shall not preclude Landlord from any other remedy, in law or in equity.
Tenant hereby expressly waives any and all rights of redemption granted by or
under any present or future laws.
19. FEES AND EXPENSES: If Tenant shall default in the observance or
performance of any term or covenant on Tenant's part to be observed or performed
under or by virtue of any of the terms or provisions in any Article of this
lease after the expiration of any applicable grace, notice and cure periods,
then, unless otherwise provided elsewhere in this lease, Landlord may
immediately or at any time thereafter and without notice perform the obligation
of Tenant hereunder. If Landlord, in connection with the foregoing or in
connection with any default by Tenant in the covenant to pay rent hereunder,
makes any expenditures or incurs any obligations for the payment of money,
including but not limited to attorney's fees, in instituting, prosecuting or
defending any action or proceedings, then Tenant will reimburse Landlord for
such sums so paid or obligations incurred with interest and costs. Interest
shall be computed at the rate of two (2) percentage points above the prime
lending rate established by Citibank, N.A. from time to time. The foregoing
expenses incurred by reason of Tenant's default shall be deemed to be additional
rent hereunder and shall be paid by Tenant to Landlord within thirty (30) days
after rendition of any bill or statement to Tenant therefor. If Tenant's lease
term shall have expired at the time of making of such expenditures or incurring
of such obligations, such sums shall be recoverable by Landlord as damages.
20. BUILDING ALTERATIONS AND MANAGEMENT: Landlord shall have the
right at any time without the same constituting an eviction and without
incurring liability to Tenant therefor to change the arrangement and or location
of public entrances, passageways, doors, doorways, corridors, elevators, stairs,
toilets or other public parts of the Building and to change the name, number or
designation by which the Building may be known, provided that Landlord's rights
hereunder shall not reduce the usable area of the Demised Premises. Except as
hereinafter expressly provided, there shall be no allowance to Tenant for
diminution of rental value and no liability on the part of Landlord by reason of
inconvenience, annoyance or injury to business arising from Landlord or other
Tenant making any repairs in the Building or any such alterations, additions and
improvements. Furthermore, Tenant shall not have any claim against Landlord by
reason of Landlord's imposition of any controls of the manner of access to the
Building by Tenant's invitees as the Landlord may deem reasonably necessary for
the security of the Building and its occupants.
21. NO REPRESENTATIONS BY LANDLORD: Except as hereinafter provided,
neither Landlord nor Landlord's agents have made any representations or promises
with
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respect to the physical condition of the Building, the land upon which it is
erected or the Demised Premises, the rents, leases, expenses of operation or any
other matter or thing affecting or related to the Demised Premises or the
Building except as herein expressly set forth and no rights, easements or
licenses are acquired by Tenant by implication or otherwise except as expressly
set forth in the provisions of this lease. Tenant has inspected the Building
and the Demised Premises and is thoroughly acquainted with their condition and,
subject to Article 38 hereof, agrees to take the same "as is" on the date
possession is tendered and acknowledges that the taking of possession of the
Demised Premises by Tenant shall be conclusive evidence that the said Demised
Premises and the Building of which the same form a part were in good and
satisfactory condition at the time such possession was so taken except for
latent defects. All understandings and agreements heretofore made between the
parties hereto are merged in this contract, which alone fully and completely
expresses the agreement between Landlord and Tenant and any executory agreement
hereafter made shall be ineffective to change, modify, discharge or effect an
abandonment of it in whole or in part, unless such executory agreement is in
writing and signed by the party against whom enforcement of the change,
modification, discharge or abandonment is sought, provided, however, that
Landlord shall exercise all reasonable diligence to minimize interference with
Tenant's business and shall not, in any event, reduce the usable area of the
Demised Premises. Landlord hereby represents and warrants to Tenant that the
existing floor load is 250 pounds per square foot (live load) and that 400 amps
of electrical service is available to the Demised Premises, exclusive of the
additional 100 amps to be provided by Landlord pursuant to Article 38. Landlord
represents and warrants that all Building systems servicing the Demised Premises
(including the existing 30-ton A/C unit) will be delivered in good working order
on the Commencement Date.
22. END OF TERM: Upon the expiration or other termination of the
term of this lease, Tenant shall quit and surrender to Landlord the Demised
Premises, broom clean, in good order and condition, ordinary wear and damages
which Tenant is not required to repair as provided elsewhere in this lease
excepted, and Tenant shall remove all its property from the Demised Premises.
Tenant's obligation to observe or perform its covenant shall survive the
expiration or other termination of its lease. If the last day of the term of
this Lease or any renewal thereof, falls on Sunday, this lease shall expire at
noon on the preceding Saturday unless it be a legal holiday in which case it
shall expire at noon on the preceding business day.
23. QUIET ENJOYMENT: Landlord covenants and agrees with Tenant that
upon Tenant paying the rent and additional rent and observing and performing all
the terms, covenants and conditions, on Tenant's part to be observed and
performed, Tenant may peaceably and quietly enjoy the Demised Premises hereby
demised, subject, nevertheless, to the terms and conditions of this lease
including, but not limited to, Article 31 hereof and to the ground leases,
underlying leases and mortgages hereinbefore mentioned.
24. INTENTIONALLY OMITTED.
25. NO WAIVER: The failure of Landlord to seek redress for violation
of, or to insist upon the strict performance of any covenant or condition of
this lease or of any of the Rules or Regulations, set forth or hereafter adopted
by Landlord, shall not prevent a subsequent act which would have originally
constituted a violation from having all the force and effect of an original
violation. The receipt by Landlord of rent with knowledge of the breach of any
covenant of this lease shall not be deemed a waiver of such breach and no
provision of this lease shall be deemed to have been waived by Landlord unless
such waiver be in writing signed by Landlord. No payment by Tenant or receipt
by Landlord of a lesser amount than the monthly rent herein stipulated shall be
deemed to be other than on account of the earliest stipulated rent, nor shall
any endorsement or statement of any check, any letter accompanying any check or
payment of rent be deemed an accord and satisfaction and Landlord may accept
such check or payment without prejudice to Landlord's right to recover the
balance of such rent or pursue any other remedy in this lease provided. All
checks tendered to Landlord as and for the rent of the Demised Premises shall be
deemed payments for the account of Tenant. Acceptance by Landlord of rent from
anyone other that Tenant shall not be deemed to operate as an attornment to
Landlord by the payor of such rent or as a consent by Landlord to an assignment
or subletting by Tenant of the Demised Premises to such payor, or as a
modification of the provisions of this lease. No act or thing done by Landlord
or Landlord's agents during the term hereby demised shall be deemed an
acceptance of a surrender of said Demised Premises and no agreement to accept
such
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surrender shall be valid unless in writing signed by Landlord. No employee of
Landlord or Landlord's agent shall have any power to accept the keys of said
Demised Premises prior to termination of the lease and the delivery of keys to
any such agent or employee shall not operate as a termination of the lease or a
surrender of the Demised Premises.
26. WAIVER OF TRIAL BY JURY: It is mutually agreed by and between
Landlord and Tenant that the respective parties hereto shall and they hereby do
waive trial by jury in any action, proceeding or counterclaim brought by either
of the parties hereto against the other (except for personal injury or property
damage) on any matters whatsoever arising out of or in any way connected with
this lease, the relationship of Landlord and Tenant, Tenant's use of or
occupancy of the Demised Premises, and any emergency statutory or any other
statutory remedy. It is further mutually agreed that in the event Landlord
commences any summary proceeding for possession of the Demised Premises, Tenant
will not interpose any counterclaim of whatever nature or description in any
such proceeding, other than mandatory counterclaims which would otherwise be
waived.
27. INABILITY TO PERFORM: This Lease and the obligation of Tenant to
pay rent hereunder and perform all of the other covenants and agreements
hereunder on part of Tenant to be performed shall in no wise be affected,
impaired or excused because Landlord is unable to fulfill any of its obligations
under this lease or to supply or is delayed in supplying any service expressly
or impliedly to be supplied or is unable to make, or is delayed in making any
repair, additions, alterations or decorations or is unable to supply or is
delayed in supplying any equipment or fixtures if Landlord is prevented or
delayed from so doing by reason of strike or labor troubles or any cause
whatsoever beyond Landlord's reasonable control including, but not limited to,
government preemption in connection with a National Emergency or by reason of
any rule, order or regulation of any department or subdivision thereof of any
government agency or by reason of the condition of supply and demand which have
been or are affected by war or other emergency.
Notwithstanding anything contained in this Lease to the contrary, if due to
any work or installation performed by Landlord under the Lease or otherwise or
failure by Landlord to perform its obligations under the Lease, (i) Tenant shall
be unable for at least ten (10) consecutive days to operate its business in the
Demised Premises in substantially the same manner as such business was operated
prior to the performance of such work or installation or such failure, and (ii)
such interruption shall occur during business hours, then, the Fixed Rent and
the Additional Rent shall be reduced on a per diem basis in the proportion in
which the area of the part of the Demised Premises which is unusable bears to
the total area of the Demised Premises for each day subsequent to the aforesaid
ten (10) consecutive day period that such portion of the Demised Premises
remains untenantable or inaccessible.
28. BILLS AND NOTICES: Except as otherwise in this lease provided, a
bill, statement, notice or communication which Landlord may desire or be
required to give to Tenant, shall be deemed sufficiently given or rendered if,
in writing, delivered to Tenant personally or sent by overnight courier or
registered or certified mail addressed to Tenant at the Building of which the
Demised Premises form a part or at the last known residence address or business
address of Tenant or left at any of the aforesaid Demised Premises addressed to
Tenant, and the time of the rendition of such bill or statement and of the
giving of such notice or communication shall be deemed to be the time when the
same is delivered to Tenant, mailed, or left at the Demised Premises as herein
provided. Any notice by Tenant to Landlord must be served by registered or
certified mail addressed to Landlord at the address first hereinabove given or
at such other address as Landlord shall designate by written notice. Copies of
notices of default to Tenant shall also go to Brad Steinberg, Esq., Dahan &
Nowick, 689 Fifth Avenue, New York, New York.
29. SERVICES PROVIDED BY LANDLORD: As long as this lease is in full
force and effect, Landlord shall provide the following services:
A. ELEVATOR SERVICE.
(i) PASSENGER ELEVATOR SERVICE. Landlord shall provide necessary
passenger elevator facilities twenty-four (24) hours a day, three hundred, sixty
five (365) days a year to the Demised Premises.
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(ii) FREIGHT ELEVATOR SERVICE. Landlord shall provide freight
elevator service to the Demised Premises on a first-come, first-served basis
(i.e., no advance scheduling) on business days from 8:00 a.m. to 4:30 p.m.
Freight elevator service shall, provided same is available also be provided to
the Demised Premises on a reserved basis at all other times, upon the payment of
Landlord's then established charges therefor which shall constitute additional
rent hereunder.
B. NO CLEANING SERVICES.
(i) Tenant shall clean the Demised Premises at Tenant's sole cost and
expense, using a cleaning contractor reasonably approved by Landlord.
(ii) Only Landlord or any one or more persons, firms or corporations
authorized in writing by Landlord shall be permitted to act as maintenance
contractor for any waxing, polishing, cleaning and maintenance work in the
Demised Premises. Nothing herein contained shall prohibit Tenant from
performing such work for itself by use of its regular employees. Landlord may
fix, in its absolute discretion, at any time and from time to time, the hours
during which and regulations under which such services are to be furnished.
Landlord expressly reserves the right to act as or to designate, at any time and
from time to time, an exclusive contractor for all or any one or more of such
services, provided that the quality thereof and the charges therefor are
reasonably comparable to that of other contractors, and Landlord expressly
reserves the right to exclude from the Building any person, firm or corporation
attempting to furnish any of such services.
C. WATER. Landlord shall provide water for ordinary lavatory purposes,
but if Tenant uses or consumes water for any other purposes or in unusual
quantities (of which fact Landlord shall be the sole judge), Landlord may
install a water meter at Tenant's expense which Tenant shall thereafter maintain
at Tenant's expense in good working order and repair to register such water
consumption and Tenant shall pay for water consumed as shown on said meter as
additional rent as and when bills are rendered.
D. HVAC. Landlord shall provide heat to the Demised Premises when and as
required by law, on business days from 8 a.m. to 6 p.m. (holidays excepted), and
if the Demised Premises is serviced by Landlord's air conditioning/cooling and
ventilating system, air conditioning/cooling will be furnished to Tenant from
May 15th through September 30th on business days (Mondays through Fridays,
holidays excepted) from 8:00 a.m. to 6:00 p.m., and ventilation will be
furnished on business days during the aforesaid hours except when air
conditioning/cooling is being furnished as aforesaid. If Tenant shall request
heating, ventilating or air-conditioning services for extended hours or at any
time other than as set forth above, Landlord may, provided same is available,
furnish such service for such times upon no less than forty-eight (48) hours'
advance notice, and Tenant shall pay to Landlord upon demand as additional rent
Landlord's then established charges therefor.
E. DIRECTORY. Landlord shall at Landlord's expense, maintain a directory
board in the lobby of the Building and shall, list thereon the names that Tenant
may request in writing from time to time, during the term hereof, provided that
Tenants listings do not exceed Tenant's Proportionate Share of the total
listings. Any changes to or additional listings shall be at Tenant's sole cost
and expense.
F. Landlord reserves the right, without same constituting an actual or
constructive eviction or entitling Tenant to any abatement and/or diminution of
fixed rent and/or additional rent, to stop services of the heating, elevators,
plumbing, air-conditioning, power systems or cleaning or other services, if any,
when necessary by reason of accident or for repairs, alterations, replacements
or improvements necessary or desirable in the judgment of Landlord for as long
as may be reasonably required by reason thereof. If the Building of which the
Demised Premises are a part supplies manually-operated elevator service,
Landlord at any time may substitute automatic-control elevator service and upon
ten days' written notice to Tenant, proceed with alterations necessary therefor
without in any manner affecting this lease or the obligation of Tenant
hereunder. The same shall be done with a minimum of inconvenience to Tenant and
Landlord shall pursue the alteration with due diligence.
30. CAPTIONS: The Captions are inserted only as a matter of
convenience and for reference and in no way define, limit or describe the scope
of this lease nor the intent of any provision thereof.
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31. DEFINITIONS: The term "Landlord" as used in this lease means
only the Landlord of the fee or of the leasehold of the Building, or the
mortgagee in possession, for the time being of the land and Building (or the
Landlord of a lease of the Building or of the land and Building) of which the
Demised Premises form a part, so that in the event of any sale or sales of said
land and Building or of said lease, or in the event of a lease of said Building,
or of the land and Building, Landlord shall be and hereby is entirely freed and
relieved of all covenants and obligations of Landlord accruing from and after
the effective date of such sale or lease hereunder and it shall be deemed and
construed without further agreement between the parties or their successors in
interest, or between the parties and the purchaser, at any such sale, or the
said lessee of the Building, or of the land and Building, that the purchaser or
the lessee of the Building has assumed and agreed to carry out any and all
covenants and obligations of Landlord hereunder. Notwithstanding the provisions
of this Article 31 or of Article 34, no sale, assignment or transfer by Landlord
of Tenant's security deposit (in connection with the sale, transfer or
assignment by Landlord of its rights and obligations under this Lease and/or in
the Building) shall operate to release Landlord from its responsibility and
liability to Tenant for said security deposit, unless and until the party to
whom such security deposit has been assigned or transferred has acknowledged to
Tenant its receipt of such security deposit, and has assumed all of the
obligations of Landlord with respect thereto. The words "re-enter" and
"re-entry" as used in this lease are not restricted to their technical legal
meaning. The term "business days" as used in this lease, shall exclude
Saturdays, Sundays and all days observed by the State or Federal Government as
legal holidays and those designated as holidays by the applicable Building
service union employees service contract or by the applicable Operating
Engineers contract with respect to HVAC service.
32. INTENTIONALLY OMITTED.
33. RULES AND REGULATIONS: Tenant and Tenant's servants, employees,
agents, visitors, and licensees shall observe faithfully, and comply strictly
with, the Rules and Regulations annexed hereto and made a part hereof as Exhibit
D and such other and further reasonable Rules and Regulations as Landlord or
Landlord's agents may from time to time adopt. Notice of additional rules or
regulations shall be given in writing to Tenant in accordance with the
provisions of Article 28 of this Lease. All rules and regulations shall be
promulgated and enforced in a non-discriminatory manner. In case Tenant
disputes the reasonableness of any additional Rule or Regulation hereafter made
or adopted by Landlord or Landlord's agents, the parties hereto agree to submit
the question of the reasonableness of such Rule or Regulation for decision to
the New York office of the American Arbitration Association, whose determination
shall be final and conclusive upon the parties hereto. The right to dispute the
reasonableness of any additional Rule or Regulation upon Tenant's part shall be
deemed waived unless the same shall be asserted by service of a notice, in
writing upon Landlord within thirty (30) days after the giving of notice
thereof.
34. SECURITY. Tenant shall, upon execution of this lease, deposit
with Landlord the sum of FORTY-ONE THOUSAND TWO HUNDRED FIFTY ($41,250.00)
DOLLARS security for the faithful performance and observance by Tenant of the
terms, provisions and conditions of this lease; it is agreed that in the event
Tenant defaults in respect of any of the terms, provisions and conditions of
this lease, including, but not limited to, the payment of rent and additional
rent, and fails to cure the same within any applicable grace and/or notice
periods, then, Landlord may use, apply or retain the whole or any part of the
security so deposited to the extent required for the payment of any rent and
additional rent or any other sum as to which tenant is in default or for any sum
which Landlord may expend or may be required to expend by reason of Tenant's
default in respect of any of the terms, covenants and conditions of this lease,
including but not limited to, any damages or deficiency in the re-letting of the
Demised Premises, whether such damages or deficiency accrued before or after
summary proceedings or other re-entry by Landlord. Landlord shall hold the
security deposit hereunder in trust in an interest-bearing escrow account and
said security deposit shall not be commingled with other funds of Landlord. Any
interest which accrues on the security deposit shall be deemed to be a part of
the security deposit for all purposes under this Lease. In the event that
Tenant shall fully and faithfully comply with all of the terms, provisions,
covenants and conditions of this lease, the security together with accrued
interest thereon, if any, shall be returned to Tenant within ten (10) days after
the date fixed as the end of the Lease and after delivery of entire possession
of the Demised Premises to Landlord. In the event of a sale of the land and
Building or leasing of the Building, of which the Demised
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Premises form a part, Landlord shall have the right to transfer the security to
the vendee or lessee and Landlord shall thereupon be released by Tenant from all
liability for the return of such security; and Tenant agrees to look to the new
Landlord solely for the return of said security, and it is agreed that the
provisions hereof shall apply to every transfer or assignment made of the
security to a new Landlord. Tenant further covenants that it will not assign or
encumber or attempt to assign or encumber the monies deposited herein as
security and that neither Landlord nor its successors or assigns shall be bound
by any such assignment, encumbrance, attempted assignment or attempted
encumbrance.
35. ADJACENT EXCAVATION - SHORING: If an excavation shall be made
upon land adjacent to the Demised Premises, or shall be authorized to be made,
Tenant shall afford to the person causing or authorized to cause such
excavation, license to enter upon the demises Demised Premises for the purpose
of doing such work as said person shall deem necessary to preserve the wall or
the Building of which Demised Premises form a part from injury or damage and to
support the same by proper foundations without any claim for damages or
indemnity against Landlord, or diminution or abatement of rent.
36. SUCCESSORS AND ASSIGNS: The covenants, conditions and agreements
contained in this lease shall bind and inure to the benefit of Landlord and
Tenant and their respective heirs, distributees, executors, administrators,
successors, and except as otherwise provided in this lease, their assigns.
SEE RIDER ANNEXED HERETO AND MADE A PART HEREOF.
IN WITNESS WHEREOF, Landlord and Tenant have respectively signed and
sealed this lease as of the day and year first above written.
LANDLORD:
460 WEST 34TH STREET ASSOCIATES
-------------------------------
BY: ___________________________________
NAME:
TITLE:
TENANT:
QUIETPOWER SYSTEMS, INC.
------------------------
BY: ____________________________________
NAME:
TITLE:
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RIDER TO LEASE
BETWEEN
460 WEST 34TH STREET ASSOCIATES
("Owner" or "Landlord")
AND
QUIETPOWER SYSTEMS, INC.
("Tenant")
37. ESCALATIONS. In order to reflect presently unascertainable increases in
expenses of Landlord in connection with the ownership, operation and/or
maintenance of the land or building of which the demised premises forms a part,
Tenant agrees that the basic rent shall be increased annually in accordance with
the following escalations:
A. If the "Real Estate Taxes" (hereinafter defined) levied on the land
and the improvements thereon of which the demised premises are a part shall, for
any year after fiscal tax year 1997/1998 be in excess of the Real Estate Taxes
levied against the said property for the fiscal year 1997/1998 (the "base tax
year") the Tenant shall pay to Landlord as additional rent an amount equal to
3.33% (the "Tenant's Share") of such excess, if any. The submission of a
photocopy of the original tax bill of the Landlord shall be deemed conclusive
evidence of the amount of the taxes payable by Landlord for each year and shall
be the basis for the computation of Tenant's Share. Tenant's Share shall be
payable by Tenant within ten (10) days after rendition of a bill for same but
not earlier than thirty (30) days prior to the date such taxes are payable to
the tax authority.
The term Real Estate Taxes shall mean all the taxes and assessments,
special or otherwise, levied, assessed or imposed by the federal, state or local
governments or district management associations (pursuant to Article 19A of the
General Municipal Law or any successor statute) against or upon the building and
improvements of which the demised premises form a part or the land upon which it
is erected. If due to a future change in the method of taxation, any franchise,
income, profit or other tax, or other payment, shall be levied in whole or in
part in substitution for or in lieu of any tax which would otherwise constitute
a Real Estate Tax, such franchise, income, profit, or other tax or payment,
shall be deemed to be a Real Estate Tax for purposes hereof. All assessments
and charges levied under Article 19-A of the General Municipal Law shall be
deemed to be Real Estate Taxes for the purposes of this Lease.
If Landlord receives any refund of Real Estate Taxes for any fiscal
year in which Tenant has made a payment pursuant to this Article 37, Landlord
shall pay Tenant, Tenant's Share less Tenant's Share of the expenses incurred in
connection therewith.
B. If subsequent to December 31, 1997, the Wage Rate (as hereinafter
defined) shall exceed the Basic Wage Rate (as hereinafter defined) Tenant shall
pay Landlord, as additional rent an amount (the "Expense Escalation") equal to
the product obtained by multiplying the Multiplication Factor (as hereinafter
defined) by one cent (i.e., "penny for pay") for each one (1CENTS) cent that
such Wage Rate is over the Basic Wage Rate. Landlord shall notify Tenant
whether or not any Expense Escalation is due, and if so, the amount thereof and
furnish Tenant with reasonable documentation showing how such Expense Escalation
was calculated. Failure by Landlord to notify Tenant of any Expense Escalation)
shall not be deemed a waiver thereof. Tenant agrees to pay such Expense
Escalation within thirty (30) days after rendition of a statement therefor.
Such Expense Escalation shall commence as of the effective date of such increase
in Wage Rate and shall be paid monthly by Tenant to Landlord reflecting
one-twelfth (1/12) of the annual amount of such adjustment, and such escalation
shall be effective until a new escalation becomes effective pursuant to the
terms of this paragraph. Any such escalation for less than a year or for less
than a month shall be prorated.
"Wage Rate" shall mean the minimum regular hourly wage rate (exclusive
of all "fringe benefits") of porters engaged in the general maintenance and
operation of Class A office buildings (Landlord represents that the Building is
presently designated as a Class A office building) pursuant to collective
bargaining agreement between the Realty Advisory Board on Labor Relations, Inc.,
(or any successor thereto) and Local 32B of the Building Employees International
Union AFL-CIO (or any successor thereto). If any such agreement is not entered
into then the Wage Rate shall mean the rate of wages paid to such employees
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(either by Landlord or by the contractor furnishing such services) in said
building.
"Basic Wage Rate" shall mean the Wage Rate (exclusive of fringe
benefits) in effect on December 31, 1997.
"Multiplication Factor" shall mean 15,000.
C. Amounts payable under this Paragraph 37 shall be deemed additional
rent and shall be due and payable, without any set-off deduction. The
obligation of Tenant with respect to such additional rent is applicable
throughout the term of this Lease and any accrued amount on expiration of the
term shall survive such expiration.
D. Tenant shall have a period of 90 days after the receipt of any Expense
Escalation or Real Estate Tax statement to contest the validity or accuracy
thereof, provided, however, that Tenant shall pay the amount shown on such
statement pending such challenge. In the event of any overpayment by Tenant,
such overpayment shall be credited to Tenant against the next accruing
installment of additional rent payable pursuant to this Article 37. In the
event Landlord and Tenant cannot settle such dispute within 30 days, the parties
shall submit the dispute to arbitration in accordance with the rules of the
American Arbitration Association (or any legal successor thereto) then in
effect, and the arbitration determination shall be conclusive and binding on
Landlord and Tenant.
38. LANDLORD'S WORK.
A. Landlord, at Landlord's sole cost and expense, shall perform all of
the work shown on the Preliminary Scope of Work Plan dated April 23, 1997, a
copy of which is annexed hereto and made a part hereof as Exhibit C
(collectively, "Landlord's Work"), including, without limitation, the following
items:
(1) Bring additional 100 amps to the Demised Premises and distribute where
indicated on attached drawing;
(2) Re-install York 5-ton A/C unit in designated window and construct a
room around the A/C unit as indicated on attached drawing and deliver the 30-ton
existing A/C unit in good working order on the Commencement Date;
(3) Paint the entire Demised Premises in color and quality of paint agreed
upon between Landlord and Tenant;
(4) Install new Building standard carpet where indicated on attached
drawing;
(5) HVAC units to be delivered in good working order. Light fixtures and
electrical switches and receptacles to be delivered in good working order.
Tenant will maintain the HVAC systems during the term of the lease. If,
however, the HVAC malfunctions and cannot be repaired for any reason other than
attributable to the negligent acts or omissions of Tenant or any party lawfully
claiming through or under Tenant, Landlord will replace same with a new unit;
(6) Clean all bathrooms. Repair or replace, where necessary, all damaged
tiles, formica, light fixtures and toilet seats;
(7) Chip down concrete; file the area smooth and finish with epoxy in area
where floor pipe has been capped; and
(8) Provide an ACP-5 certificate to Tenant.
B. Except as provided in this Article, Landlord shall not be required to
spend any money or to do any work to prepare the Demised Premises for Tenant's
occupancy. The specification of Landlord's Work represents the limit of
Landlord's responsibilities in connection with the preparation of the Demised
Premises and except as so provided, and as otherwise provided for in this Lease.
Tenant shall take the Demised Premises "as-is". Any other improvements,
alterations or additions shall be performed by Tenant, but subject to all of the
terms, conditions and covenants of this Lease.
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For the purposes of this Article, Landlord's Work shall be deemed to
be substantially completed when all major construction is completed although
minor items are not completed, including, but not limited to touch-up painting
or any other uncompleted construction or improvement which does not unreasonably
interfere with Tenant's ability to carry on its business in the Demised
Premises. Tenant shall periodically inspect Landlord's Work and make any
objections thereto, if called for, without delay, so as to mitigate changes,
delays and costs.
C. The term of this lease shall commence on a date fixed by Landlord in a
written notice to Tenant, which notice shall (a) state that on or prior to the
date set forth in said notice, Landlord's Work shall be deemed substantially
completed and (b) notice which shall not be given earlier than 5 days prior to
the substantial completion date.
Subject to there being no Tenant Delay (hereinafter defined), Landlord
shall substantially complete Landlord's Work by no later than May 15, 1997. In
the event that Landlord does not substantially complete Landlord's Work by May
15, 1997, then, for each day thereafter that Landlord's Work is not
substantially completed, the Free Rent Period (hereinafter defined) shall be
extended on a per diem basis.
The term "Tenant Delay" shall mean: (i) Tenant's failure or unreasonable
delay to consult with Landlord to enable Landlord to prepare plans or
specifications; (ii) unreasonable delay or failure by Tenant in supplying
information, approving estimates or giving authorizations; (iii) Tenant's making
changes or additions in the plans or specifications or materials originally
approved; (iv) interference by Tenant or Tenant's contractors with the
performance of Landlord's Work; (v) delay or failure in the purchase or
fabrication of any special or "long lead" materials selected by Tenant,
provided, however, that Tenant shall have 2 days to withdraw any long lead
items.
39. LAWS AND ORDINANCES.
A. Tenant shall not do, and shall not permit persons under Tenant's
control to do any act or thing in or upon the Demised Premises or the building
which will violate any laws and ordinances Tenant shall comply with all laws and
ordinances which impose any violation, order or duty upon Landlord or Tenant
arising from, in, or in connection with, the Tenant's occupancy, use or manner
of use thereof or any alterations made by or at the request of tenant therein,
or required by reason of a breach of any such Tenant's covenants or agreement
hereunder, whether or not such laws and ordinances shall be presently in effect
or hereafter enacted or issued, and whether or not any work required shall be
ordinary or extraordinary or foreseen or unforeseen at this time.
B. If Tenant receives written notice of any violation of any laws or
ordinances applicable to the Demised Premises, Tenant shall give prompt notice
thereof to Landlord.
C. Tenant shall not be obligated to comply with any laws or ordinances
requiring any structural alteration of the Demised Premises, unless such
alteration is required by reason of the Tenant's manner of use of the Demised
Premises.
D. Tenant shall not violate any federal, state or local law, ordinance or
regulation relating to any "hazardous substance" or "toxic substance" (as
hereinafter defined), brought or used by Tenant, Tenant's employees, invitees or
agents within the Building or the Demised Premises. Tenant agrees to indemnify,
defend and hold Landlord and its employees and agents harmless from any claims,
judgments, damages, penalties, fines, costs, liabilities and losses, including
attorney fees, which arise as result of any such violation during or after the
term of this Lease. The term "hazardous substances" or "toxic substances",
shall include those covered by the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended, and those substances defined
as "hazardous wastes" or "hazardous materials" in the laws of the State of New
York.
40. BROKER. Each party represents and warrants to the other that it has dealt
with no broker in connection with the negotiation of this Lease other than The
Oxford Realty Group, Inc. and Landlord's agent, Kaufman Realty Corporation.
Each party agrees to indemnify and hold the other harmless from any and all
claims of brokers (other than the aforesaid Brokers) and expenses in connection
therewith arising out of or in connection with the entering into of this lease
by Landlord and Tenant. Landlord shall pay each broker its commission due in
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accordance with Landlord's separate agreement with each broker.
41. ELECTRICITY. The rate specified by Landlord as the base rate for the
attached electric rider is building service classification no. 4 ("SC No. 4"),
together with an overhead/administrative charge of 5%.
The submetering company referred to in the electricity rider to this
Lease shall be deemed an agent of Landlord for the purposes of submetering the
electric service to the Demised Premises and Landlord guarantees the submetering
Company's performance under the electricity rider for so long as the building
operates on a submetered basis.
42. ADDENDUM TO ARTICLE 11. Notwithstanding the provisions of Article 11, and
in modification and amplification thereof:
A. If Tenant shall desire to assign this Lease or to sublet all or a
portion of the Demised Premises, Tenant shall submit to Landlord a written
request for Landlord's consent to such assignment or subletting, which request
shall contain or be accompanied by the following information: (i) the name and
address of the proposed assignee or subtenant; (ii) a duplicate original or
photocopy of the executed assignment agreement or sublease (the "executed
agreement") or a true and correct photocopy of the offer from the proposed
assignee or subtenant signed by such proposed assignee or subtenant; (iii) the
nature and character of the business of the proposed assignee or subtenant and
its proposed use of the Demised Premises; and (iv) banking, financial and other
credit information with respect to the proposed assignee or subtenant reasonably
sufficient to enable Landlord to determine the financial responsibility of the
proposed assignee or subtenant. Landlord shall then not unreasonably withhold
or delay consent to the proposed assignment or subletting of all or a portion of
the Demised Premises, provided that Tenant is not then in default under this
Lease beyond the expiration of any applicable grace period and further provided
that the following further conditions shall be fulfilled:
(i) The proposed subtenant or assignee shall not be a school of any
kind, or an employment or placement agency or governmental or quasi-governmental
agency, medical office or executive recruitment office;
(ii) The subletting or assignment shall be to a tenant whose occupancy
will be in keeping with the dignity and character of the then use and occupancy
of the building and whose occupancy will not be more objectionable or more
hazardous than that of Tenant herein or impose any additional burden upon
Landlord in the operation of the building;
(iii) No space shall be advertised or openly promoted to the general
public utilizing the name of the Landlord or any principal or partner thereof,
or stating or otherwise characterizing a rental rate lower than the prevailing
rental rate then charged by Landlord in the Building.
(iv) The proposed sublessee or assignee shall not be an occupant of any
premises in the building or a party who dealt with Landlord or Landlord's agent
(directly or through a broker) with respect to space in the building during the
three (3) months immediately preceding Tenant's request for Landlord's consent;
(v) Tenant shall reimburse Landlord on demand for any reasonable costs
that may be incurred in connection with any assignment or sublease, including,
without limitation, the reasonable costs of making investigations as to the
acceptability of the proposed assignee or subtenant, and reasonable legal costs
incurred in connection with the granting of any requested consent; and
(vi) In case of a subletting, it shall be expressly subject to all of
the obligations of Tenant under this Lease and the further condition and
restriction that the sublease shall not be premises further sublet by the
sublessee in whole or in part, or any part thereof suffered or permitted by the
sublessee to be used or occupied by others, without the prior written consent of
Landlord in each instance.
B. No permitted or consented to assignment or subletting shall be
effective or valid for any purpose whatsoever unless and until a counterpart of
the assignment or a counterpart or reproduced copy of the sublease shall have
been first delivered to the Landlord, and, in the
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event of an assignment, the Tenant shall deliver to Landlord a written agreement
executed and acknowledged by the Tenant and such assignee in recordable form
wherein such assignee shall assume jointly and severally with Tenant the due
performance of this Lease on Tenant's part to be performed to the full end of
the term of this Lease notwithstanding any other or further assignment.
C. Any transfer by operation of law or otherwise, of Tenant's interest in
this Lease or of a fifty (50%) percent or greater interest in Tenant (whether
stock, partnership interest or otherwise) shall be deemed an assignment of this
Lease for purposes of this Article except that the transfer of the outstanding
capital stock of any corporate tenant shall be deemed not to include the sale of
such stock by persons or parties through the "over-the-counter-market" or
through any recognized stock exchange, other than those deemed "insiders" within
the meaning of the Securities Exchange Act of 1934, as amended.
D. Neither any assignment of Tenant's interest in this Lease nor any
subletting, occupancy or use of the Demised Premises or any part thereof by any
person other than Tenant, nor any collection of rent by Landlord from any person
other than Tenant as provided in Article 11 hereof, nor any application of any
such rent as provided in said Article 11 shall, in any circumstances, relieve
Tenant of its obligations fully to observe and perform the terms, covenants and
conditions of this Lease on Tenant's art to be observed and performed.
E. Notwithstanding anything to the contrary contained herein, if Landlord
shall consent to any assignment or subletting and Tenant shall either (i)
receive any consideration from its assignee (other than a successor corporation
as hereinafter defined) in connection with the assignment of this Lease, Tenant
shall pay over to Landlord, as additional rent, a sum equal to fifty (50%)
percent of any such consideration (including, without limitation, sums
designated by the assignee as paid for the purpose of Tenant's property in the
Demised Premises, less the then net unamortized or undepreciated cost thereof
determined on the basis of Tenant's federal income tax returns, or if Tenant
does not file such returns, on the same basis as carried on Tenant's books) as
shall exceed the brokerage commissions, leasehold improvement costs and
attorneys' fees and disbursements reasonably incurred by Tenant for such
assignment or (ii) sublet the Demised Premises or any portion thereof to anyone
for rents, additional charges or other consideration (including, without
limitation, sums designated by the subtenant as paid for the purchase of
Tenant's federal income tax returns or, if Tenant does not file such returns, on
the same basis as carried on Tenant's books) which for any period shall exceed
the rents payable for the subleased space under this Lease for the same period,
Tenant shall pay Landlord, as additional rent, a sum equal to fifty (50%)
percent of any such excess less all leasehold improvements costs, brokerage
commissions and attorneys' fees and disbursements reasonably incurred by Tenant
for such subletting. All sums payable to Landlord pursuant to subdivision (i)
of this Paragraph E shall be paid on the effective date of such assignment and
all sums payable to Landlord pursuant to subdivision (ii) of this Paragraph E
shall be paid on the date or dates such sums are paid to Tenant by the
subtenant.
F. Tenant may, without Landlord's prior written consent, but upon prior
written notice to Landlord, permit any corporations or other business entities
which control, are controlled by, or are under common control with Tenant
(herein referred to as "related corporation") to sublet all or part of the
Demised Premises for any of the purposes permitted to Tenant, subject however to
compliance with Tenant's obligations under this Lease. Such subletting shall not
be deemed to vest in any such related corporation any right or interest in this
Lease or the Demised Premises nor shall it relieve, release, impair or discharge
any of Tenant's obligations hereunder. For the purposes hereof, "control" shall
be deemed to mean ownership of not less than fifty (50%) percent of all of the
voting stock of such corporation or not less than fifty (50%) percent of all of
the legal and equitable interest in any other business entities.
G. Tenant may, without Landlord's consent, but upon prior written notice
to Landlord, assign or transfer its entire interest in this Lease and the
leasehold estate hereby created or sublet all or a portion of the Demised
Premises to a successor corporation of Tenant (as hereinafter defined);
provided, however, that (i) Tenant shall not be in default in any of the terms
of this Lease, (ii) proposed occupancy shall not increase the office cleaning
requirements (if any) or impose an extra burden upon the building equipment or
building services and (iii) the proposed subtenant or assignee shall not be
entitled, directly or indirectly, to diplomatic or sovereign immunity and shall
be subject to the service of process in, and the
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<PAGE>
jurisdiction of the courts of, New York State. A "successor corporation", as
used in this Section shall mean (a) a corporation into which or with which
Tenant, its corporate successors or assigns, is merged or consolidated, in
accordance with applicable statutory provisions for the merger or consolidation
of corporations, provided that by operation of law or by effective provisions
contained in the instruments of merger or consolidation, the liabilities of the
corporations participating in such merger or consolidation are assumed by the
corporation surviving such merger or consolidation, or (b) a corporation
acquiring this lease and the term hereof and the estate hereby granted, the
goodwill and all or substantially all of the other property and assets (other
than capital stock of such acquiring corporation) of Tenant, its corporate
successors or assigns, and assuming all or substantially all of the liabilities
of Tenant, its corporate successors and assigns, or (c) any corporate successor
to a successor corporation becoming such by either of the methods described in
subdivisions (a) and (b) above; provided that, immediately after giving effect
to any such merger or consolidation, or such acquisition and assumption, as the
case may be, the corporation surviving such merger or created by such
consolidation or acquiring such assets and assuming such liabilities, as the
case may be, shall have assets, capitalization and a net worth, as determined in
accordance with generally accepted accounting principles, at least equal to the
assets, capitalization and net worth, similarly determined, of Tenant, its
corporate successors or assigns, immediately prior to such merger or
consolidation or such acquisition and assumption, as the case may be. The
acquisition by Tenant, its corporate successors or assigns, of all or
substantially all of the assets, together with the assumption of all or
substantially all of the obligations and liabilities of any corporation, shall
be deemed to be a merger for the purposes of this Article.
43. ANNUAL RENT. Tenant shall pay Annual Rent pursuant to the following
schedule:
For the first two (2) Lease Years, ONE HUNDRED FIFTY-SEVEN THOUSAND
($157,000.00) DOLLARS per annum ($13,125.00 per month); and
For Lease Years 3-10, ONE HUNDRED SIXTY-FIVE THOUSAND ($165,000.00) DOLLARS
per annum ($13,750.00 per month).
For purposes hereof, the term "Lease Year" shall mean the twelve (12) month
period commencing on the Commencement Date and each successive twelve (12) month
period thereafter.
All annual rent shall be payable in equal monthly installments as stated
above on the first day of each calendar month, without offset, deduction or
counterclaim whatsoever.
Provided Tenant is not in default under the terms, covenants and conditions
of the within lease, Tenant shall have the right to use and occupy the Demised
Premises free of Annual Rent for the first three (3) months following the
Commencement Date (the Free Rent Period), provided, however, Tenant shall pay to
Landlord all sums due under Article 41 and the annexed Electrical Rider hereof
representing reimbursement to Landlord for the furnishing to Tenant of electric
current during said period. Except for the free fixed rent allowance as herein
provided, Tenant shall use and occupy the Demised Premises pursuant to all of
the other terms, covenants and conditions of the within lease.
44. USE. Tenant shall use and occupy the Demised Premises for executive,
administrative, marketing, sales, and shipping purposes in connection with
Tenant's engineering services (including, without limitation, acoustics, digital
signal processing, mechanical design and software engineering) and active
electronic noise and vibration control/reduction and related electronic
businesses and technologies (including, without limitation, research,
development, marketing and sales of products and technologies related to
electronic active noise cancellation systems, magnetic field cancellation
systems, quieting reactors and other substation equipment, active noise control
silencers for power generation, active industrial fan quieting systems, active
diesel industrial safety communications, failure diagnostics systems for power
equipment) and for no other purposes. Under no circumstances shall
manufacturing be conducted or permitted in any portion of the Demised Premises.
In connection with Tenant's use as aforesaid, all manufacturing shall be
outsourced, although finished components may be warehoused in the Demised
Premises and in addition, Tenant may utilize no more than 1,000 usable square
feet within the Demised Premises for purposes of integrating circuitry and
assembling such finished components.
Tenant acknowledges and agrees that its covenant to use the Demised
Premises solely
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<PAGE>
as set forth above is a material inducement for Landlord to enter into this
lease, and any violation of this Article 44 by Tenant with respect to using the
Demised Premises for manufacturing purposes or using more than 1,000 usable
square feet within the Demised Premises for purposes of integrating circuitry
and assembling finished components shall be deemed a material default hereunder,
entitling Landlord to exercise any remedies it has under the lease or pursuant
to law, including, without limitation, injunctive relief.
45. INSURANCE. Tenant shall secure and keep in full force and effect
throughout the term hereof, at Tenant's sole cost and expense Comprehensive
General Liability Insurance, written on an occurrence basis, to afford
protection in a $2,000,000 combined single limit for personal and bodily injury
and death arising therefrom and Broad Form property damage (including a
"personal injury") endorsement.
46. TENANT'S TERMINATION RIGHT. Provided Tenant is not in default under the
terms, covenants and conditions of the within lease, Tenant shall have the
option to terminate this Lease effective one (1) day prior to the seventh (7th)
anniversary of the Commencement Date (the "Effective Date"), provided (a) Tenant
delivers the Contiguous Space Notice (hereinafter defined) to Landlord prior to
the Effective Date and (b) Landlord has not delivered to Tenant the Contiguous
Additional Space (hereinafter defined) vacant and free and clear of all
tenancies and occupancies as hereinafter provided, on or prior to the Effective
Date.
Tenant shall notify Landlord by written notice (the "Contiguous Space
Notice") given no later than the date which is six (6) months prior to the
Effective Date, that Tenant requires contiguous additional space in the Building
on either the 6th, 7th or 8th floor of the Building containing no less than
5,000 rentable square feet and no more than 30,000 rentable square feet (the
"Contiguous Additional Space").
In the event Landlord cannot, within thirty (30) days (said 30-day period
herein called "Landlord's Contiguous Space Period") after receipt of the
Contiguous Space Notice, provide Tenant with the Contiguous Additional Space
vacant and free and clear of all tenancies and occupancies, then, Landlord shall
deliver to Tenant written notice of the unavailability of the Contiguous
Additional Space (the "Unavailability Notice") and Tenant shall have the
termination option set forth above, exercisable within thirty (30) days after
receipt of the Unavailability Notice.
If Landlord does provide the Contiguous Additional Space vacant and free
and clear of all tenancies and occupancies prior to the expiration of Landlord's
Contiguous Space Period, then, in such event, Tenant shall be obligated to lease
the Contiguous Additional Space at the same fixed rent and additional rent
payable hereunder (i.e., utilizing the same base years), and Landlord and Tenant
shall enter into a lease or letter modification agreement adding the Contiguous
Additional Space to the Demised Premises as hereinbefore provided, provided,
however, that neither party's failure to execute such lease or Letter
Modification Agreement shall vitiate the foregoing provisions hereof.
If Landlord has not provided Tenant with the Contiguous Additional Space
and Tenant exercises its termination option, then, in such event, this Lease
shall be deemed terminated as of the Effective Date, and Tenant shall be
released of all liability for the performance of Tenant's obligations under this
Lease accruing subsequent to the effective date of such termination.
47. INTENTIONALLY OMITTED.
-21-
<PAGE>
48. RIDER CONTROLS. In case of a conflict between the rider and the printed
form, the rider shall govern.
LANDLORD:
460 WEST 34TH STREET ASSOCIATES
-------------------------------
BY:__________________________________
TENANT:
QUIETPOWER SYSTEMS, INC.
------------------------
BY:__________________________________
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<PAGE>
EXHIBIT A
FLOOR PLAN
-23-
<PAGE>
EXHIBIT B
CERTIFICATE OF OCCUPANCY
-24-
<PAGE>
EXHIBIT C
WORK PLAN
-25-
<PAGE>
EXHIBIT D
RULES AND REGULATIONS
1. The sidewalks, entrances, driveways, passages, courts, elevators,
vestibules, stairways, corridors or halls shall not be obstructed or encumbered
by any tenant or used for any purpose other than for ingress to and egress from
the Demised Premises and for delivery of merchandise and equipment in a prompt
and efficient manner using elevators and passageways designated for such
delivery by Landlord. There shall not be used in any space, or in the public
hall of the Building, either by any tenant or by jobbers or others in the
delivery or receipt of merchandise, any hand trucks except those equipped with
rubber tires and sideguards.
2. The water and wash closets and plumbing fixtures shall not be used for any
purposes other than those for which they were designed or constructed and no
sweepings, rubbish, rags, acids or other substances shall be deposited therein,
and the expense of any breakage, stoppage, or damage resulting from the
violation of this rule shall be borne by the tenant who, or whose clerks,
agents, employees or visitors, shall have caused it.
3. No carpet, rug or other article shall be hung or shaken out of any window
of the Building; and no tenant shall sweep or throw or permit to be swept or
thrown from the Demised Premises any dirt or other substances into any of the
corridors or halls, elevators, or out of the doors or windows or stairways of
the Building and tenant shall not use, keep or permit to be used or kept any
foul or noxious gas or substance in the Demised Premises, or permit or suffer
the Demised Premises to be occupied or used in a manner offensive or
objectionable to Landlord or other occupants of the Building by reason of noise,
odors, and/or vibrations or interfere in any way with other tenants or those
having business therein, nor shall any animals or birds be kept in or about the
Building. Smoking or carrying lighted cigars or cigarettes in the elevators of
the Building is prohibited.
4. No awnings or other projections shall be attached to the outside walls of
the Building without the prior written consent of Landlord.
5. No sign, advertisement, notice or other lettering shall be exhibited,
inscribed, painted or affixed by any tenant on any part of the outside of the
Demised Premises or the Building or on the inside of the Demised Premises if the
same is visible from the outside of the Demised Premises without the prior
written consent of Landlord, except that the name of any tenant may appear on
the entrance door of the Demised Premises.
6. No additional locks or bolts of any kind shall be placed upon any of the
doors or windows by any tenant, nor shall any changes be made in existing locks
or mechanism thereof. Each tenant must, upon the termination of his Tenancy,
restore to Landlord all keys of stores, offices and toilet rooms, either
furnished to, or otherwise procured by, such tenant, and in the event of the
loss of any keys, so furnished, such tenant shall pay to Landlord the cost
thereof.
7. Freight, furniture, business equipment, merchandise and bulky matter of any
description shall be delivered to and removed from the Demised Premises only on
the freight elevators and through the service entrances and corridors, and only
during hours and in a manner reasonably approved by Landlord.
8. Canvassing, soliciting and peddling in the Building is prohibited and each
tenant shall cooperate to prevent the same.
9. Landlord reserves the right to exclude from the Building between the hours
of 6 P.M. and 8 A.M. and at all hours on Sundays, and legal holidays all persons
who do not present a pass to the Building signed by Landlord. Landlord will
furnish passes to persons for whom any tenant requests same in writing. Each
tenant shall be responsible for all persons for whom he requests such pass and
shall be liable to Landlord for all acts of such persons.
10. Tenant shall not bring or permit to be brought or kept in or on the
Demised Premises, any inflammable, combustible or explosive fluid, material,
chemical or substance other than normal office cleaning supplies and materials,
or cause or permit any odors of cooking or other processes, or any unusual or
other objectionable odors to permeate in or emanate from the Demised Premises.
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<PAGE>
ELECTRICAL RIDER
During the term of this lease, the Tenant agrees to purchase from
Consolidated Electric Meter Co., Inc. (hereinafter referred to as the "Meter
Company"), supplying electric current to the building, all electric current
consumed, used or to be used in the Demised Premises. The amount to be paid by
the Tenant for current consumed shall be determined by the meter or meters on
the premises, or to be installed and billed according to each meter. Bills for
current consumed shall be rendered by the meter company to the Tenant at such
times as the Meter Company may elect, but not more than once monthly. Tenant
shall pay such amount within thirty (30) days after rendition of a statement
therefore, provided, however, that the Meter Company shall have the option to
terminate the furnishing of electric current unless Tenant has paid such amount
within thirty (30) days after written notice of non-payment or has a good faith
dispute regarding payment. The Tenant further agrees, within 30 days after
written request by the Meter Company, to sign an application for electric
service. Tenant agrees to pay for all electric current consumed, pursuant to
service classification number 4. If any increased utility rate, component of
the utility rate, component of the utility bill, charge or cost, is imposed on
the building at any time from any source after the date of this lease, such
increase or increases shall be charged to and paid by the Tenant to the Meter
Company pursuant to service classification number 4. If, in the reasonable
opinion of the Meter Company as determined by independent engineers, the
Tenant's installation overloads any riser or risers, and/or switch or switches,
and/or meter or meters in the building of which the Demised Premises are a part,
the Landlord will at Tenant's reasonable expense, provide, install and maintain
any riser or risers, and/or any or all switch and/or switches or meter or meters
that may be necessary, but no riser or risers, and/or switch or switches or
meter and/or meters will be installed without the written permission of the
Meter Company, not to be unreasonably withheld or delayed, unless Tenant elects
to reduce such anticipated overload prior to installation. All meters to be
installed will be purchased from the Meter Company at competitive rates and all
risers, switches and meters so installed shall be, become and remain the
property of the building. Any tax or charge now in effect or hereinafter
imposed upon the receipts of the Meter Company from the sale or resale of
electrical energy to the Tenant by any Municipal, State or Federal agency shall
be passed on to the Tenant and included in the bill and paid by the Tenant to
the Meter Company. In the event that permission is granted by the Meter Company
for any alternating current installations within the Demised Premises after the
Lease Commencement Date, the Tenant will, at its own expense, furnish and
install all equipment, risers, service wiring, switches and meters that may be
necessary for such installation and will at Tenant's own cost and expense
maintain and keep in good repair all such riser, risers, wiring and/or switch or
switches, and/or meter or meters. The Meter Company and/or the Landlord shall
not in any way be liable or responsible to the Tenant for any loss or damage or
expense which Tenant may sustain or incur if either the quantity, quality or
character of electric service is changed, is not available or suitable for
Tenant's requirements. In lieu of such meter, in the event any legislature,
order of the Public Service Commission, any judicial or governmental body enacts
any law, ruling or regulation to affect the service classification, rate or
charge under which the Tenant now purchases electric current from the Meter
Company, then and in such event, Tenant will pay, in addition to such newly
promulgated rate or change, such additional or further payments to the Meter
Company for the rental, use, maintenance and amortization of the building
electrical distribution system in an amount as, together with such newly
promulgated rates or charges shall equal the rates or charges in effect prior to
the rates or charges as set forth by any legislature, order of the Public
Service Commission or any judicial or governmental body after date hereof.
In the event the sale of the electric current in the building containing
the Demised Premises is hereafter prohibited and/or regulated by any law
hereinafter enacted, or by any order or ruling of the Public Service Commission
of the State of New York, or by any judicial decision of any appropriate court,
then the Meter Company, by reason of such prohibition, and/or regulation, may
elect to terminate the practice of submetering in the building containing the
Demised Premises; and upon such election, the Tenant will, upon notice from the
Meter Company, apply within thirty (30) days thereafter to the appropriate
Public Service Corporation servicing the building containing the Demised
Premises for electric service, and comply with all the rules and regulations of
such Public Service Corporation, and all costs associated with and pertaining
thereto, and the Meter Company shall be relieved of any further obligation to
furnish electric current to the Tenant, and the Tenant shall pay to the Meter
Company on the first day of the month next following such furnishing of
unmetered current is furnished to the Tenant, a sum equal to one-twelfth of the
invoices billed to the Tenant for all electric current consumed in the Demised
Premises for the twelve month period directly preceding the month in which the
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<PAGE>
furnishing of unmetered current to the Tenant is commenced by the Meter Company
and/or as estimated at any time by the Meter Company as hereinabove and below
provided. The Meter Company shall have the right, in the event of any
non-payment by the Tenant of such bill within thirty (30) days after rendition,
to terminate the furnishing of electric current unless Tenant has a good faith
dispute regarding payment. Tenant will not install or use any electrically
operated equipment, machinery or appliances which were not in the Demised
Premises during the twelve month period immediately preceding the Meter Company
supplying unmetered electric current to the Demised Premises as aforesaid, nor
shall Tenant make any change in the wiring of the Demised Premises without the
prior written consent of the Meter Company or Landlord first obtained, which
consent shall not be unreasonably withheld or delayed. If after the date the
Meter Company commences supplying unmetered current to the Tenant, any
additional electrically operated equipment is installed in the premises or the
hours of usage of the electric installation are increased in the Demised
Premises, then the monthly payment to the Meter Company shall be increased to
equal the value of the additional electric current consumed by such newly
installed electrically operated equipment and/or increased hours of usage of the
electric installation, such increased value to be determined by the Tenant's
base rate in effect at the time of such installation of additional electrically
operated equipment and/or increased hours of usage, same to be reasonably
determined by the Meter Company. Tenant shall pay the amount of such increase
or increases within thirty (30) days retroactively to the date of the
installation of all newly installed electrically operated equipment and/or the
increase in usage by the Tenant, subject to Tenant's right to hire its own
electrical consultant. Notwithstanding the foregoing, if Tenant disputes the
Meter Company's determination, Tenant within twenty (20) days of being informed
of the same, shall notify the Meter Company of such dispute. In such event, an
independent reputable electrical consultant selected and paid for by Tenant
shall consult with the Meter Company as to said adjustment; if they shall both
agree upon the same (after a further survey if necessary, cost to be shared
equally between the Meter Company and Tenant, of the value of equipment,
fixtures and machinery calculated as provided in this Article) their said
agreement shall be binding upon the parties, or if the difference between them
is ten (10%) percent or less, then the adjustment determined by the Meter
Company shall be binding upon the parties. If the Meter Company and Tenant's
consultant cannot agree within the said ten (10%) percent of each other, they
shall jointly select a third duly qualified independent, reputable electrical
consultant who shall determine the matter and whose decision shall be binding
upon both parties with the same force and effect as if a no-appealable judgment
had been enetered by a court of competent jurisdiction. If the Meter Company
and Tenant's consultant cannot agree upon such a third electrical consultant,
the matter shall be submitted to the American Arbitration Association in New
York City to be determined in accordance with its rules and regulations and the
decision of the arbitrators shall be binding upon the parties with the same
force and effect as if a non-appealable judgment had been entered by a court of
competent jurisdiction. Any charges of such third consultant or of the American
Arbitration Association and all costs and expenses of either shall be borne
equally by both parties. When the amount of such increase has been determined,
the parties shall execute an agreement supplementary hereto to reflect such
adjustment in the amount of fixed rent effective from the date determined by
such final determination, Tenant shall pay rent to the Meter Company in
accordance with the Meter Company's determination, and, if such final
determination shall reflect an overpayment by Tenant, Landlord shall refund such
overpayment withn thirty (30) days after such final determination.
If after the date the Meter Company commences supplying unmetered electric
current to the Tenant there is any increase in the utility bill, charge or cost
is imposed upon the building at any time from any source, such increase or
increases shall be charged to and paid by the Tenant to the Meter Company
pursuant to Service Classification number 4 or any successor thereto. If the
Meter Company is required to terminate the furnishing of unmetered current, as
hereinabove described, or in the event permission is granted to the Tenant by
the Meter Company for direct service from the utility company, the Landlord will
furnish and install all risers, service wiring, switches, meter equipment and
meters and any and all other equipment or related expenses, charges or costs
that may be necessary for such installation and will, at Tenant's own cost and
expense, maintain and keep in good repair, all such riser or risers, wiring
and/or switch or switches, metering equipment and/or meter or meters; and all
such wiring and/or switches and/or meters so installed shall be, become and
remain the property of the building. In the event any legislature, order of the
Public Service Commission or any judicial or governmental body enacts any law,
ruling or regulation to affect the Service Classification, rate or charge under
which the Tenant receives unmetered electric current from the Meter Company,
then and in such event Tenant will pay to the Meter Company that rate or
-28-
<PAGE>
charge as set forth by said legislature, order of the Public Service Commission
or any judicial or governmental body enacts any law, ruling or regulation to
effect the Service Classification, rate or charge under which the Tenant
receives unmetered electric current from the Meter Company, then and in such
event Tenant will pay to the Meter Company that rate or charge as set forth by
said legislature, order of the Public Service Commission or judicial or
governmental body and an additional amount as reasonably determined by the Meter
Company for the rental, use, maintenance and amortization of the building
electrical distribution system including any and all switches, risers, meters,
wiring and other equipment that together with the rate set forth by said
legislature, order of the Public Service Commission shall equal the rates or
charges hereinabove described and set forth for furnishing unmetered electric
current. Anything to the contrary notwithstanding, if at any time the Meter
Company elects to furnish unmetered current or sell electric current from any
source whatsoever to Tenant, and provided such electric current rates are less
than what Tenant is then paying to the Public Service Company, then and in
either of such events, Tenant agrees to discontinue the purchase of electric
service within thirty (30) days from the date of notice thereof from the Public
Service Company servicing the part of the city where the building is located, or
from any other source, and to sign a release, or any other necessary papers
required by said utility company for the discontinuance of electric service; and
the Tenant agrees to purchase from or pay to the Meter Company for all electric
current consumed in the Demised Premises subject to all of the terms and
conditions as set forth above. No current shall be furnished until the
equipment of the Tenant has been approved by the proper public authorities, the
New York Board of Fire Underwriters and the New York Fire Insurance Rating
Organization or similar organization having jurisdiction, and no changes shall
be made in such equipment without the consent of the Meter Company, which
consent shall not be unreasonably withheld or delayed. The Tenant shall make no
changes in and/or additions to the electrical equipment, wiring and/or
appliances in the Demised Premises, without the written consent of the Meter
Company first had and obtained, which consent shall not be unreasonably withheld
or delayed. Rigid conduit only will be allowed by the Landlord for exposed
work.
Notwithstanding anything to the contrary contained herein, Tenant's base
rate for electricity shall be Con Edison's Service Classification #4 plus 5%
plus applicable taxes thereon.
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<PAGE>
EXHIBIT 21
SUBSIDIARIES OF QUIETPOWER SYSYTEMS, INC.
-----------------------------------------
None.
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the inclusion in the Registration Statement on Form SB-2 of
our report dated April 29, 1997 based on our audits of the financial statements
of QuietPower Systems, Inc. as of December 31, 1996 and each of the years in the
two-year period ended December 31, 1996. We also consent to the reference to our
firm under the caption "Experts," "Selected Financial Data" and "Summary
Financial Data."
Richard A. Eisner & Company, LLP
New York, New York
May 7, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 6,000
<SECURITIES> 0
<RECEIVABLES> 81,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 95,000
<PP&E> 40,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 463,000
<CURRENT-LIABILITIES> 1,543,000
<BONDS> 0
0
1,059,000
<COMMON> 7,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 463,000
<SALES> 216,000
<TOTAL-REVENUES> 216,000
<CGS> 260,000
<TOTAL-COSTS> 2,161,000
<OTHER-EXPENSES> 1,901,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 333,000
<INCOME-PRETAX> (2,278,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,278,000)
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<NET-INCOME> (2,278,000)
<EPS-PRIMARY> (1.53)
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</TABLE>
