-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ALe1c80l1puATJ5qeY25/L/W3dx+svLjtAqYxejaWAr212rtW++mejMuXzzjlYu2 DybCFQs2LqZ7+1VcITHVCw== 0000898430-96-004160.txt : 19960903 0000898430-96-004160.hdr.sgml : 19960903 ACCESSION NUMBER: 0000898430-96-004160 CONFORMED SUBMISSION TYPE: SB-2 PUBLIC DOCUMENT COUNT: 54 FILED AS OF DATE: 19960830 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: JAVELIN SYSTEMS INC CENTRAL INDEX KEY: 0001021917 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 521945748 STATE OF INCORPORATION: DE FILING VALUES: FORM TYPE: SB-2 SEC ACT: 1933 Act SEC FILE NUMBER: 333-11217 FILM NUMBER: 96624633 BUSINESS ADDRESS: STREET 1: 2882 C WALNUT AVE CITY: TUSTIN STATE: CA ZIP: 92786 BUSINESS PHONE: 7147341390 MAIL ADDRESS: STREET 1: JAVELIN SYSTEMS, INC STREET 2: 2882 C WALNUT AVENUE CITY: TUSTIN STATE: CA ZIP: 92786 SB-2 1 ORIGINAL FILING OF FORM SB-2 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 30, 1996 REGISTRATION NO. 333- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------- JAVELIN SYSTEMS, INC. (NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER) DELAWARE 3571 52-1945748 (STATE OR JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
2882C WALNUT AVENUE, TUSTIN, CALIFORNIA 92780; (714) 734-1390 (ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES AND PRINCIPAL PLACE OF BUSINESS) RICHARD P. STACK, PRESIDENT AND CHIEF EXECUTIVE OFFICER 2882C WALNUT AVENUE, TUSTIN, CALIFORNIA 92780; (714) 734-1390 (NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE) --------------- Copies to: JEREMY D. GLASER, ESQ. RUSSELL M. FRANDSEN, ESQ. ALLEN, MATKINS, LECK, GAMBLE & MALLORY LLP RADCLIFF, FRANDSEN, TRICKER & DONGELL 18400 VON KARMAN AVENUE, 4TH FLOOR 777 SOUTH FIGUEROA, 40TH FLOOR IRVINE, CALIFORNIA 92612 LOS ANGELES, CALIFORNIA 90017 (714) 553-1313 (213) 614-1990
--------------- APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this registration statement. 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: [_] CALCULATION OF REGISTRATION FEE - --------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION SECURITIES TO BE REGISTERED REGISTERED PER UNIT(1) OFFERING PRICE(1) FEE - --------------------------------------------------------------------------------------------------- Common Stock, $.01 par value ("Common Stock")(2)................. 977,500 $7.00 $6,842,500.00 $2,360 - --------------------------------------------------------------------------------------------------- Representative's Warrants(3)......... 85,000 $0.0001 $8.50 (3) - --------------------------------------------------------------------------------------------------- Common Stock underlying Representative's Warrants(4)........ 85,000 $8.40 $714,000.00 $246 - --------------------------------------------------------------------------------------------------- Total............................ $7,556,508.50 $2,606 - --------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------
(1) Computed pursuant to Rule 457(a) based upon an estimate of the maximum offering price. Estimated solely for purposes of calculating the registration fee. (2) Includes 127,500 shares of Common Stock which may be purchased by the Underwriters to cover over-allotments, if any. (3) Issuable to the Representative or its designees. The 85,000 shares of Common Stock issuable upon exercise thereof are set forth in footnote (4) below. Pursuant to Rule 457(g), no separate fees are required to register the Representative's Warrants. (4) Represents 85,000 shares of Common Stock issuable upon exercise of the Representative's Warrants. --------------- 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 THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- JAVELIN SYSTEMS, INC. CROSS-REFERENCE SHEET SHOWING LOCATION IN PROSPECTUS OF PART I ITEMS OF FORM SB-2 REGISTRATION STATEMENT.
REGISTRATION STATEMENT ITEMS AND HEADINGS LOCATION IN PROSPECTUS ------------------------------ ------------------------------------------- 1. Front of Registration Statement and Outside Front Cover of Prospectus.......... Facing Page; Cover Page of Prospectus. 2. Inside Front and Outside Back Cover Pages of Prospectus.... Inside Front and Outside Back Cover Pages of Prospectus; Additional Information. 3. Summary Information and Risk Factors...................... Prospectus Summary; Risk Factors. 4. Use of Proceeds............... Use of Proceeds. 5. Determination of Offering Price........................ Cover Page of Prospectus; Underwriting. 6. Dilution...................... Dilution. 7. Selling Security Holders...... Security Ownership of Certain Beneficial Owners and Management; Selling Stockholders. 8. Plan of Distribution.......... Cover Page of Prospectus; Underwriting. 9. Legal Proceedings............. Business--Legal Proceedings. 10. Directors, Executive Officers, Promoters and Control Persons...................... Management. 11. Security Ownership of Certain Beneficial Owners and Management................... Security Ownership of Certain Beneficial Owners and Management. 12. Description of Securities..... Description of Capital Stock. 13. Interest of Named Experts and Counsel...................... Not Applicable. 14. Disclosure of Commission Position on Indemnification for Securities Act Liabilities.................. Description of Capital Stock--Certain Provisions of Delaware Law and Charter Documents; Underwriting. 15. Organization Within Last Five Years........................ Management--Certain Transactions. 16. Description of Business....... Prospectus Summary; Business. 17. Management's Discussion and Analysis or Plan of Operation.................... Management's Discussion and Analysis of Financial Condition and Results of Operations. 18. Description of Property....... Business--Properties. 19. Certain Relationships and Related Transactions......... Management--Certain Transactions. 20. Market for Common Equity and Related Stockholder Matters.. Cover Page of Prospectus; Description of Capital Stock; Shares Eligible For Future Sale; Dividend Policy. 21. Executive Compensation........ Management--Executive Compensation. 22. Financial Statements.......... Selected Financial Data; Index to Financial Statements. 23. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................... Not Applicable.
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +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. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION PRELIMINARY PROSPECTUS DATED AUGUST 30, 1996 850,000 SHARES JAVELIN SYSTEMS, INC. COMMON STOCK All of the 850,000 shares of common stock, $.01 par value (the "Common Stock"), offered hereby are being sold by Javelin Systems, Inc. (the "Company"). Prior to this offering there has been no public market for the Company's Common Stock. It is currently estimated that the initial public offering price will be between $5.00 and $7.00 per share. See "Underwriting" for information relating to the factors to be considered in determining the initial public offering price. The Company has made application to have the Common Stock approved for quotation on the Nasdaq SmallCap Market under the symbol "JVLN." ----------- AN INVESTMENT IN THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING AT PAGE 6 OF THIS PROSPECTUS FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY. ----------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
UNDERWRITING PRICE DISCOUNTS AND PROCEEDS TO TO PUBLIC COMMISSIONS(1) COMPANY(2) - -------------------------------------------------------------------------------- Per Share................................. $ $ $ - -------------------------------------------------------------------------------- Total(3).................................. $ $ $
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (1) Excludes a non-accountable expense allowance payable to Meridian Capital Group, Inc., the representative (the "Representative") of the several Underwriters (the "Underwriters"), and the value of warrants to be issued to the Representative or its designees to purchase up to 85,000 shares of Common Stock (the "Representative's Warrants"). The Company (and the Selling Stockholders (as defined below) with respect to the over-allotment option) has agreed to indemnify the Underwriters against certain liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deducting expenses, other than underwriting discounts and commissions, payable by the Company, estimated to be approximately $455,000, including the Representative's non-accountable expense allowance. (3) The Company and certain stockholders of the Company (the "Selling Stockholders") have granted the Underwriters a 45-day option to purchase up to 111,250 and 16,250 additional shares of Common Stock, respectively, on the same terms and conditions as set forth above solely to cover over- allotments, if any. If all such shares are purchased, the total Price to Public, Underwriting Discounts and Commissions and Proceeds to the Company will be $ , $ and $ , respectively, and the Selling Stockholders will receive proceeds of $ . See "Security Ownership of Certain Beneficial Owners and Management" and "Underwriting." ----------- The shares of Common Stock are being offered severally by the Underwriters subject to prior sale, when, as and if delivered to and accepted by the Underwriters and subject to certain other conditions. The Underwriters reserve the right to reject any order in whole or in part and to withdraw, cancel or modify the offer without notice. It is expected that delivery of the shares will be made at the offices of Meridian Capital Group, Inc., Newport Beach, California, on or about , 1996. ----------- MERIDIAN CAPITAL GROUP, INC. The date of this Prospectus is , 1996. [COLOR PHOTOGRAPHS] IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ SMALLCAP MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. THE COMPANY INTENDS TO FURNISH ITS STOCKHOLDERS WITH ANNUAL REPORTS CONTAINING AUDITED FINANCIAL STATEMENTS CERTIFIED BY ITS INDEPENDENT AUDITORS AND QUARTERLY REPORTS FOR EACH OF THE FIRST THREE QUARTERS OF EACH FISCAL YEAR CONTAINING UNAUDITED FINANCIAL INFORMATION. This Prospectus refers to certain trademarks of the Company and certain companies other than the Company. 2 PROSPECTUS SUMMARY The following summary should be read in conjunction with, and is qualified in its entirety by, the more detailed information and Financial Statements and Notes thereto appearing elsewhere in this Prospectus. Unless otherwise indicated, the information contained in this Prospectus (i) assumes that there has been no exercise of (a) the Underwriters' over-allotment option, (b) outstanding options to purchase shares of Common Stock granted or to be granted under the Company's 1996 Stock Incentive Award Plan and (c) outstanding warrants to purchase shares of Common Stock issued in connection with the Company's calendar year 1996 private placement and (ii) reflects a 4,300 for 1 stock split of the Common Stock effected in August 1996. THE COMPANY Javelin Systems, Inc. (the "Company") designs, develops, markets and sells open system touch screen point-of-sale ("POS") computers primarily for the foodservice industry. The Company's POS systems integrate substantially all of the functionality of a standard desktop PC into a small footprint, network ready package and run on industry standard operating systems, such as Microsoft's DOS, Windows, Windows 95 and Windows NT. The Company's POS systems provide quick service restaurants ("QSR"), full service restaurants and hospitality and retail establishments with a hardware solution for transaction processing, in-store controls and management information. The Company's systems are sealed to protect against spillage and other foreign matter entering the interior electronic chamber. The Company's systems are currently being marketed by a number of original equipment manufacturers ("OEMs") and value added resellers ("VARs"). The Company believes it has achieved a strategic advantage by introducing higher performance POS systems that integrate many of the most recent technological innovations. While PC-based systems have become the standard platform in most industries, the foodservice POS industry is a unique vertical market that has not kept pace with the technological developments and productivity gains associated with most other industries. Traditional POS systems have typically been proprietary and inflexible and could not be easily integrated into the organization's management information system. In response to these industry conditions, the Company has elected to focus its efforts on the development and sale of open system PC-based hardware that addresses the increasing industry demand for open system restaurant management software written around Microsoft operating systems and hardware that uses Intel or similar microprocessors. The Company believes that it has established a competitive advantage because of its engineering, product management and marketing experience refined in the PC industry. The Company's growth strategies include enhancing its emerging position as a leading OEM supplier by: incorporating the latest PC technology in its POS systems in order to achieve a technological advantage; focusing on rapidly launching new products in order to achieve product-to-market time advantage; outsourcing manufacturing and maximizing in-house design expertise in order to reduce production and overhead costs; using OEMs and VARs to provide more comprehensive and accelerated market penetration; and expanding the sale of its products into additional industries. These strategies have resulted in the rapid deployment of the Company's products in numerous establishments, such as some Taco Bell, Kenny Rogers Roasters and Blimpies locations. The Company's products are primarily distributed through strategic relationships with OEMs and VARs, which allows the Company to take advantage of the existing name recognition and market position of its strategic partners and reach a broader market for its products while avoiding incurring significant expenditures for sales, marketing, technical support and service. In addition, the Company works closely with POS software providers in order to market the Company's products to the software providers' VARs, thereby enabling the VARs to offer a complete POS solution. 3 The Company's products are manufactured by third party contract manufacturers located in Hong Kong and California. The Company was incorporated in Delaware on September 19, 1995, and its principal office is located at 2882C Walnut Avenue, Tustin, California 92780. Its telephone number is (714) 734-1390 and its address on the World Wide Web is http://www.jvln.com. THE OFFERING Common Stock offered by the Company............... 850,000 shares Common Stock to be outstanding after the offering. 2,954,250 shares(1) Risk factors...................................... This offering involves a high degree of risk. See "Risk Factors." Use of proceeds by the Company.................... To fund increased inventory and accounts receivable, repay approximately $725,000 of indebtedness, increase marketing expenditures, add marketing and sales personnel, increase capital expenditures, including purchasing test equipment and tooling, increase engineering and operations personnel and for working capital and other general corporate purposes. See "Use of Proceeds." Proposed Nasdaq SmallCap Market symbol............ JVLN
- -------- (1) Excludes (i) 111,250 shares which may be purchased from the Company by the Underwriters to cover over-allotments, if any, (ii) 85,000 shares of Common Stock issuable upon exercise of the Representative's Warrants, (iii) 300,000 shares of Common Stock issuable in the future upon exercise of options granted or to be granted under the Company's 1996 Stock Incentive Award Plan (the "Incentive Plan") and (iv) 137,500 shares of Common Stock (assuming an initial public offering price of $6.00 per share) issuable upon exercise of warrants (the "Private Placement Warrants") issued to certain investors in connection with the Company's calendar year 1996 private placement (the "1996 Private Placement"). See "Underwriting;" "Management--Stock Incentive Award Plan" and "Description of Capital Stock." 4 SUMMARY FINANCIAL INFORMATION
INCEPTION TO JUNE 30, 1996(1) ---------------- STATEMENT OF OPERATIONS DATA: Net sales.................................................... $1,463,627 Cost of sales................................................ 1,104,171 ---------- Gross profit................................................. 359,456 Operating expenses........................................... 374,202 ---------- Operating loss............................................... (14,746) Interest expense............................................. (38,796) ---------- Loss before provision for income taxes....................... (53,542) Provision for state franchise tax............................ (800) ---------- Net loss..................................................... $ (54,342) ========== Net loss per share(2)........................................ $ (0.03) ========== Shares used in computing net loss per share(2)............... 2,086,260 ==========
JUNE 30, 1996 ----------------------- ACTUAL AS ADJUSTED(3) -------- -------------- BALANCE SHEET DATA: Cash................................................. $ 6,404 $3,809,852 Working capital...................................... 232,246 4,292,246 Total assets......................................... 951,313 4,754,761 Long-term debt and notes payable to stockholders, net of current portion.................................. 75,000 -- Total stockholders' equity........................... 195,019 4,330,019
- -------- (1) The Company commenced business on September 19, 1995, accordingly, the fiscal year ended June 30, 1996 contains less than twelve months. (2) See Note 1 of Notes to Financial Statements for a description of the calculation of net loss per share. (3) Adjusted to give effect to the sale by the Company of the 850,000 shares of Common Stock offered hereby at an assumed public offering price of $6.00 per share and the application of the estimated net proceeds therefrom. See "Use of Proceeds." 5 RISK FACTORS In addition to the other information in this Prospectus, the following risk factors should be considered carefully in evaluating the Company and its business before purchasing any shares of Common Stock offered hereby. An investment in the Common Stock offered hereby is speculative in nature and involves a high degree of risk. START-UP COMPANY; LACK OF OPERATING HISTORY The Company was incorporated in September 1995 and commenced shipment of its initial products in December 1995. Consequently, the Company has an unproven track record and extremely limited operating history upon which an evaluation of the Company and its prospects can be based. Because of the Company's extremely limited operating history, the Company's prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in their early stage of development. To address these risks, the Company must, among other things, respond to competitive developments, continue to attract, retain and motivate qualified personnel, continue to develop and improve its technologies and products and continue to expand its customer base and distribution network. There can be no assurance that the Company will be successful in addressing such risks. Moreover, because of the relatively short period of time during which the Company has been in operation, there can be no assurance that the Company will be able to successfully market its products over an extended period of time. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." HISTORY OF OPERATING LOSSES; CONTINUED PROFITABILITY UNCERTAIN; EXPECTED NON- RECURRING INTEREST EXPENSE From September 1995 through the present, the Company has expended significant resources in developing its technologies and products and establishing distribution channels for its products, which has resulted in the Company incurring net losses of approximately $54,300 from inception through June 30, 1996. During the quarter ended June 30, 1996, however, the Company was profitable with net income of approximately $86,000. There can be no assurance that the Company will be able to realize sufficient revenues in the future to sustain profitable operations. In connection with the Company's 1996 Private Placement, the Company issued promissory notes and the Private Placement Warrants. The Private Placement Warrants, in general, provide that the holders thereof are entitled to purchase the number of shares of Common Stock that results from dividing the principal amount of the promissory notes issued to the investors by the actual per share initial public offering price of the Company's Common Stock (or, in some instances, 50% of the per share initial public offering price). Based on the foregoing formula, an aggregate of 137,500 shares of Common Stock will be issuable upon exercise of the Private Placement Warrants assuming an initial public offering price of $6.00 per share. The aggregate exercise price for the issuance of the Common Stock upon exercise of all of the Private Placement Warrants is $23.00. Consequently, upon consummation of the offering contemplated hereby, the Company will incur a non-recurring, non-cash interest charge in the amount of approximately $614,500 in connection with the issuance of the Private Placement Warrants, most of which will be expensed in the quarter in which the offering contemplated hereby is consummated. This interest expense is attributable to the imputation of interest based upon the fair market value of the Private Placement Warrants and does not represent a cash expense of the Company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." EVOLVING TECHNOLOGY AND MARKET; DEPENDENCE UPON SINGLE PRODUCT The point-of-sale ("POS") system industry is characterized by evolving technology and industry standards. The Company's POS systems presently consist of the NexDisplay-4 POS computer, which is sold in various configurations to meet the needs of the Company's customers. The Company is in the process of developing additional POS systems and intends to introduce several new POS products during the current fiscal year, 6 although no assurance can be given that the Company will be successful in developing any new products. The Company's success will depend, in part, on its ability to maintain and enhance its existing products and broaden its product offerings by developing and introducing new products that keep pace with technological developments in a cost effective manner, respond to evolving customer preferences and requirements and achieve market acceptance. Lack of market acceptance for the Company's existing or new products, the Company's failure to introduce new products in a timely or cost-effective manner, or the Company's failure to achieve a technological advantage over its competition while also remaining price competitive, would materially adversely affect the Company's results of operations and financial condition. There can be no assurance that the Company will be successful in its product development efforts. In addition, there can be no assurance that the Company's products, even if successfully developed, will achieve timely market acceptance. Moreover, the introduction of products embodying new technology and the emergence of new industry standards could render the Company's existing products obsolete and unmarketable. The Company's future success will depend on its ability to continue to develop and manufacture new competitive products and to enhance its existing products, both of which will require continued investment in engineering and product development. The success of product enhancements and new products depends on a variety of factors, including product selection and specification, timely and efficient completion of product design, cost effective implementation of manufacturing and assembly processes and effective sales and marketing efforts. There can be no assurance that the Company will be able to successfully manage all of the diverse aspects of successful new product development in order to develop and maintain competitive products. COMPETITION The market for POS products is highly competitive, and the Company expects this competition to increase as open systems architecture in POS products becomes more common. The principal elements of the competition in the Company's markets include product features and performance, price, quality and reliability, brand awareness, compatibility with open systems, accuracy of touch-screen input, quality of display, and level of customer service. The Company's products compete with a number of products designed to provide user friendly touch screen workstations. Most of the Company's competitors, as well as certain potential competitors, are more established, benefit from greater name recognition, have significantly greater financial, technological, production and marketing resources, and have more extensive distribution networks than the Company. The Company believes its use of open systems architecture in POS systems is an important competitive element. Several of the Company's competitors currently also offer open system POS systems and the Company believes that the number of competitors offering open systems solutions will grow over the next several years. The Company anticipates that a significant source of such future competition may be from existing competitors in the POS market that the Company believes are currently attempting to develop POS systems utilizing open systems architecture. Due to the greater sales, marketing, product development and financial resources of the Company's competitors, the Company anticipates that competition from these competitors will intensify in the future. In order to effectively compete against these competitors, the Company will need to grow and attain sufficient size to have the resources to timely develop new products in response to evolving technology and customer demands and to sell products through a broad distribution channel in competition with these other existing and potential competitors. No assurance can be given that the Company will be able to grow sufficiently to enable it to compete effectively in this marketplace. The Company's competitors include a substantial number of large well- established companies including International Business Machines (IBM), Micros Systems, Inc., PAR Technology Corporation, ATT/GIS, Panasonic and Olivetti, each of which also offers open systems architecture POS systems. Although the Company believes that it currently has a competitive advantage with respect to these competitors from a technological and cost standpoint, including compatibility with open systems, there can be no assurance that the Company will be able to maintain its competitive advantage or that these existing substantial competitors, or new competitors, will not develop competitive products utilizing open systems architecture and with favorable pricing. Moreover, the Company has little or no proprietary barriers to entry that could keep its competitors from developing similar 7 products and technology or selling competing products in the Company's markets. The Company anticipates that as the existing and potential competitors increasingly perceive the market opportunity for open systems architecture POS systems, these competitors will try to "clone" market leading products and sell such cloned products at significantly reduced prices. There can be no assurance that such competitors will not develop products that are competitive with or superior to the Company's products or achieve greater market acceptance. Increased competition from manufacturers or distributors of products similar to or competitive with the Company's products could result in price reductions, reduced margins and loss of market share or could render the Company's technology obsolete, all of which could have a material adverse effect on the Company's results of operations and financial condition. There can be no assurance that the Company will be able to successfully compete in this marketplace or develop sufficient new products to remain competitive, and any failure to do so could have a material adverse effect on its results of operations and financial condition. See "Business--Competition." MANAGEMENT OF COMPANY GROWTH The rapid execution necessary for the Company to fully exploit the market for its products requires an effective planning and management process. The Company's future operating results will depend on its ability to expand its sales and marketing organization, successfully develop and market enhanced and new products and implement and manage new and evolving distribution channels. The Company is a relatively new company and has been experiencing significant revenue and personnel growth. This growth will continue to make significant demands on the Company's management, resources and operations. To manage its growth effectively, the Company intends to continue to improve its operational, financial, sales and marketing systems and to hire and train new employees and better manage its current employees. The Company does not currently have a full-time Chief Financial Officer, but intends to commence a search for a Chief Financial Officer following consummation of this offering. See "Management." There can be no assurance that the Company will be able to identify, hire, train and retain qualified individuals or otherwise manage its growth effectively, and such failure could have a material adverse effect on the Company's results of operations and financial condition. Although the Company believes that it has made adequate allowances for the costs and risks associated with its planned expansion, there can be no assurance that the Company's operations and financial systems, procedures or controls will be adequate to support the Company's operations or that Company management will be able to achieve the rapid execution necessary to fully exploit the market for the Company's products. See "Risk Factors--Dependence on Key Personnel; Limited Experience." In addition, the Company plans to increase its operating expenses following consummation of the offering contemplated hereby in order to expand its product line, increase its sales and marketing operations, develop new distribution channels and broaden its customer support capabilities. See "Use of Proceeds." There can be no assurance that such internal expansion will be successfully implemented, that the cost of such expansion will not exceed the revenues generated, or that the Company's sales and marketing organization will be able to successfully compete against the significantly more extensive and well-funded sales and marketing operations of many of the Company's current or potential competitors. If the Company is unable to effectively manage its internal expansion, the Company's results of operations and financial condition could be materially adversely affected. Moreover, the foregoing expenses will, by necessity, be incurred prior to any potential positive impact on revenues. If such expenses are not subsequently followed by sufficient increased revenues, the Company's operating results and financial condition would be materially adversely affected. EVOLVING DISTRIBUTION CHANNELS The Company's distribution strategy is to develop multiple distribution channels. The Company has historically sold its products through original equipment manufacturers ("OEMs") and value added resellers ("VARs" and collectively with OEMs, "Resellers") and intends to continue to utilize these distribution channels in the future. The Company's net sales have been significantly dependent on sales by Resellers, with such sales representing approximately 99% of the Company's net sales since inception. Any factors, such as 8 general adverse economic conditions, high inventory levels, intellectual property issues, financial condition, marketing considerations or government regulations and restrictions, that affect the ability of the Company's Resellers to sell the Company's products will adversely affect the Company's sales and could have a material adverse impact on the Company's results of operations and financial condition. The use by the Company of these secondary distribution channels to sell its products may limit the Company's knowledge of the requirements and concerns of the end users of the Company's products and thereby reduce the ability of the Company to anticipate or react quickly to changes in the market for POS products. There is no assurance that circumstances affecting the Company's Resellers will not have an adverse effect on the Company. Moreover, there can be no assurance that the Company will be able to attract Resellers that will be able to market the Company's products effectively and will be qualified to provide timely and cost-effective customer support and service or that the Company will be able to manage conflicts among its Resellers. In addition, the Company's agreements with Resellers typically do not restrict Resellers from distributing competing products, and in most cases may be terminated by either party without cause. The inability to recruit, manage or retain important Resellers, or their inability to penetrate their respective market segments, could materially adversely affect the Company's results of operations and financial condition. See "Business--Product Distribution." DEPENDENCE UPON SIGNIFICANT CUSTOMERS During its fiscal year ended June 30, 1996, the Company derived approximately 30% and 24%, respectively, of its total net sales from Touch Menus and Positran, Inc., respectively. No other customers accounted for more than 10% of the Company's net sales during the fiscal year ended June 30, 1996. Any significant decrease in sales to the Company's principal customers, including Touch Menus or Positran, Inc., or any termination of existing relationships with any of the Company's principal Resellers which are not offset by increases in sales to other existing or new Resellers, could have a material adverse effect upon the Company's results of operations and financial condition. See "Business--Product Distribution." DEPENDENCE UPON INDEPENDENT SOFTWARE PROVIDERS The Company's business strategy is to produce PC-based open system hardware for the POS industry. The Company does not develop or sell software. Consequently, the Company is dependent upon third party software providers to develop new and improved software that runs on the Company's hardware platform. As in other sectors of the computer industry, hardware sales are often driven by advances in software technology. Accordingly, if software providers do not continue to provide state-of-the art software that runs on the Company's hardware, the Company's results of operations and financial condition could be materially adversely affected. See "Business--Products." VARIABILITY IN OPERATING RESULTS As a result of the Company's extremely limited operating history, the Company does not have historical financial data on which to base planned operating expenses. Accordingly, the Company's expense levels are based in part on its expectations as to future revenues and to a large extent are fixed. Moreover, the Company typically operates with no backlog. As a result, quarterly sales and operating results generally depend on the volume and timing of and ability to fulfill orders received within the quarter, which are difficult to forecast. The Company may be unable to adjust spending in a timely manner to compensate for any unexpected changes in revenues. Accordingly, any significant shortfall of demand for the Company's products in relation to the Company's expectations would have an immediate adverse impact on the Company's results of operations and financial condition. The Company may experience significant fluctuations in future operating results due to a number of factors including, among other things, demand for the Company's products, the size and timing of customer orders, new or increased competition, delays in product enhancements and new product introductions, quality control difficulties, changes in market demand, market acceptance of new products, product returns, seasonality in product purchases by Resellers and end users, the mix of domestic and international revenues, fluctuations in 9 costs of components, pricing trends in the POS systems industry in general and in the specific markets in which the Company is active and general economic conditions. Any of these factors could cause operating results to vary significantly from prior periods. Significant variability in orders during any period may have a material adverse impact on the Company's cash flow, and any significant decrease in orders could have a material adverse impact on the Company's results of operations and financial condition. As a result, the Company believes that period-to-period comparisons of its results of operations are not necessarily meaningful and should not be relied upon as any indication of future performance and that one or more periods of favorable results should not be relied upon as an indication of future favorable results. Fluctuations in the Company's operating results could cause the price of the Company's Common Stock to fluctuate substantially. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business." FUTURE CAPITAL REQUIREMENTS The Company expects that the estimated net proceeds from the offering contemplated hereby, together with other available funds, will enable the Company to maintain its current and planned operations for the next 18 to 24 months. There can be no assurance that the net proceeds from this offering will be sufficient to enable the Company to increase its revenues in an amount sufficient to sustain profitable operations. To the extent that the proceeds from this offering and cash flow from operations, if any, are insufficient to fund the Company's activities, the Company will be required to raise additional funds through equity or debt financings. No assurance can be given that such financings will be available on terms acceptable to the Company, if at all, and, if available, such financings may result in further dilution to the Company's stockholders and/or in additional interest expense. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." LACK OF PATENTS The Company holds no patents and believes that its competitive position is not materially dependent upon patent protection. The Company believes that most of the technology used in the design and manufacture of most of the Company's products is generally known and available to others. Consequently, there can be no assurances that others will not develop, market and sell products substantially equivalent to the Company's products or utilizing technologies similar to those used by the Company. Although the Company believes that its products do not infringe on any third party's patents, there can be no assurance that the Company will not become involved in litigation involving patents or proprietary rights. Patent and proprietary rights litigation entails substantial legal and other costs, and there can be no assurance that the Company will have the necessary financial resources to defend or prosecute its rights in connection with any such litigation. Responding to, defending or bringing claims related to the Company's rights to its intellectual property may require the Company's management to redirect its resources to address such claims, which could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business--Intellectual Property." CONTROL BY EXISTING STOCKHOLDERS Upon consummation of this offering, the Company's directors and officers will collectively beneficially own approximately 62.4% of the Company's Common Stock (or approximately 60.1% if the Underwriters' over-allotment option is exercised in full). Consequently, these persons will have the ability to control the election of all the Company's directors, to determine the outcome of most corporate actions submitted to the vote of the Company's stockholders and to generally control the affairs and management of the Company. See "Security Ownership of Certain Beneficial Owners and Management." In addition, such concentration of ownership and control may have the effect of delaying, deferring or preventing a change of control in the Company. See "Description of Capital Stock." DEPENDENCE ON KEY PERSONNEL; LIMITED EXPERIENCE The Company's success is dependent, in part, upon the continued services of certain key executive officers, including Richard P. Stack, the Company's President and Chief Executive Officer, C. Norman Campbell, the 10 Company's Vice President Engineering, and Alexander J. Nelson, the Company's Vice President, Sales and Marketing. Mr. Stack is 31 years old and he has had approximately four years of experience as chief executive officer of a privately held company engaged in the business of manufacturing and distributing personal computers and components in South Africa which he founded and grew to approximately $6 million in annual revenues prior to its sale. None of the Company's executive officers has previously been involved in the manufacturing or sale of POS systems nor have had previous executive experience with a publicly-traded company. Consequently, it is possible that the Company's future business or results of operation may be negatively impacted by the limited experience of the Company's executive officers. Moreover, the loss of any one of the Company's key executive officers could have a material adverse effect on the Company's results of operations. The Company intends to purchase key man life insurance on Mr. Campbell in the amount of $2 million. The continued success of the Company will also be dependent upon its ability to attract and retain highly qualified technical, marketing, sales and other personnel necessary in order to manage the Company's anticipated growth. There can be no assurance that the Company will be able to recruit and retain such personnel. See "Management." DILUTION Purchasers of the Common Stock offered hereby will incur immediate and substantial dilution of $4.53 per share in net tangible book value of the Common Stock from an assumed initial public offering price of $6.00 per share. The exercise of existing and/or future warrants and options may also have an additional dilutive effect on the interests of the investors in this offering. See "Dilution." BROAD DISCRETION IN APPLICATION OF PROCEEDS A substantial portion of the net proceeds of this offering has been allocated for working capital and will be used for such specific purposes as management may determine. Accordingly, management will have broad discretion with respect to the expenditure of substantial portions of the net proceeds of this offering. See "Use of Proceeds." POSSIBLE ISSUANCE OF PREFERRED STOCK; ANTI-TAKEOVER EFFECT OF DELAWARE LAW AND CERTAIN CHARTER PROVISIONS The Company is authorized to issue up to 1,000,000 shares of preferred stock, par value $.01 per share (the "Preferred Stock"). The Preferred Stock may be issued in one or more series, the terms of which may be determined at the time of issuance by the Board of Directors, without further action by the Company's stockholders, and may include voting rights, preferences as to dividends and liquidation, conversion and redemption rights, and sinking fund provisions as determined by the Board of Directors. Although the Company has no present plans to issue any shares of Preferred Stock following consummation of this offering, the issuance of any additional shares of Preferred Stock in the future could affect the rights of the holders of Common Stock and thereby reduce the value of the Common Stock. In particular, specific rights granted to future holders of Preferred Stock could be used to restrict the Company's ability to merge with or sell its assets to a third party, thereby preserving control of the Company by its present owners. In addition, the Company's Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws contain provisions creating a classified board and prohibiting the removal of directors except for cause by the holders of a majority of the Company's outstanding voting stock. These provisions, together with certain provisions of Delaware law, may also have the effect of delaying or preventing changes in control or management of the Company which could adversely affect the market price of the Company's Common Stock. See "Description of Capital Stock." ABSENCE OF PUBLIC MARKET AND POSSIBLE VOLATILITY OF STOCK PRICE Prior to this offering, there has been no public market for the Common Stock. There can be no assurance that an active trading market will develop after completion of this offering or, if developed, that it will be sustained. There can be no assurance that the market price of the Common Stock will not decline below the initial offering price. The market for securities of early stage companies has been highly volatile, often as a result 11 of factors unrelated or disproportionate to the operating performance of such companies. The Common Stock will be traded on the Nasdaq SmallCap Market, which market has experienced and is likely to experience in the future significant price and volume fluctuations, which could adversely affect the price of the Common Stock without regard to the operating performance of the Company. The Company believes factors such as quarterly fluctuations in financial results, increased competition from existing and new competitors and developments in the POS industry could contribute to the volatility of the price of its Common Stock, causing it to fluctuate significantly. These factors as well as general economic conditions such as recessions or high interest rates, may adversely affect the market price of the Common Stock. NO DIVIDENDS The Company has never paid any cash dividends on shares of its Common Stock and does not anticipate that it will pay dividends in the foreseeable future. The Company intends to apply any earnings to fund the development of its business. See "Dividend Policy." LIMITED EXPERIENCE OF THE REPRESENTATIVE The Representative does not have substantial experience in acting as lead underwriter in public offerings. The Representative has previously participated in two public offerings as lead underwriter. There can be no assurance that the Representative's lack of experience will not adversely affect the offering contemplated hereby or the ability to maintain a market for the Company's Common Stock following the completion of the offering. The Representative does not currently act as a market maker. Accordingly, the market for the Company's Common Stock could be adversely affected if other firms are unwilling to make a market in the Company's Common Stock. See "Underwriting." SHARES ELIGIBLE FOR FUTURE SALE Future sales of shares by existing stockholders could lead to a decline in the market price of the Company's Common Stock. Because all of the Company's Common Stock sold prior to this offering was sold pursuant to Rule 504 of Regulation D, none of such shares of Common Stock are "restricted securities" as defined in Rule 144 promulgated under the Securities Act of 1933, as amended (the "Securities Act"). Consequently, in the absence of agreements with the Representative, all of the 2,104,250 shares of outstanding Common Stock could be sold immediately following the effective date of this offering. However, 1,848,733 shares owned beneficially by officers and directors of the Company and 239,267 shares owned beneficially by Selling Stockholders and other existing stockholders of the Company which would otherwise be available for sale in the public market, may not be sold, with certain exceptions, until the expiration of the lock-up agreements with the Representative. See "Shares Eligible for Future Sale" and "Underwriting." POSSIBLE EFFECT OF OUTSTANDING OPTIONS AND WARRANTS As of August 30, 1996, there were 300,000 shares of Common Stock reserved for issuance as restricted stock or upon exercise of outstanding stock options granted and available for grant under the Company's Incentive Plan. Of such reserved shares, there were 121,000 shares of Common Stock reserved for issuance upon the exercise of stock options granted in August 1996 and 179,000 shares were available for future grant. None of the outstanding options are currently exercisable. In addition, 137,500 shares of Common Stock (assuming an initial public offering price of $6.00 per share) are reserved for issuance upon the exercise of the Private Placement Warrants, and 85,000 shares of Common Stock are reserved for issuance upon the exercise of the Representative's Warrants. In the event a significant number of outstanding options and/or warrants were to be exercised in any period, the trading price of the Common Stock may be adversely impacted. See "Shares Eligible for Future Sale" and "Description of Capital Stock." 12 USE OF PROCEEDS The net proceeds to the Company from the sale of the shares of Common Stock offered by it hereby, assuming a public offering price of $6.00 per share and after deducting underwriting discounts and commissions and estimated offering expenses, are estimated to be approximately $4,135,000 ($4,715,725 if the Underwriters' over-allotment option is exercised in full). The Company will not receive any proceeds from the sale of shares by the Selling Stockholders. The Company anticipates that it will use approximately $2,350,000 of the net proceeds of this offering to finance increases in inventory and accounts receivable. The cash demands of the Company's anticipated revenue growth will depend upon the rate of sales growth, the timeliness of customer payments for purchases, and the availability of receivables and inventory financing from third parties. There can be no assurances, however, that the Company will continue to realize growth in its revenues or that the Company will be able to obtain financing from third parties. See "Risk Factors." The Company anticipates that it will use approximately $796,000 of the net proceeds of this offering to pay accrued interest on certain indebtedness held by Main Credit Corp. in the approximate amount of $60,000, and to repay accrued interest and principal of indebtedness held by certain investors (the "Investors") in the approximate amount of $736,000, including approximately $52,000 of which will be paid to The Steven J. Goodman Charitable Remainder Trust of which Steven J. Goodman, a director of the Company, is the trustee and an income beneficiary and approximately $25,000 to the Jay Louis Kear Family Trust of which Jay L. Kear, a director of the Company, is the trustee. $600,000 of the indebtedness to the Investors was incurred after June 30, 1996. The indebtedness held by Main Credit Corp. bears interest at a minimum rate of 2.5% per month and the actual interest rate is increased or decreased (but not below a rate of 2.5% per month) monthly in an amount equal to 120% of the increase or decrease in the prime rate of interest in effect on the last day of each preceding month and such indebtedness does not have a fixed maturity date. All of the indebtedness held by the Investors bears interest at 10%. Pursuant to the terms of the promissory notes related to the indebtedness held by the Investors, approximately $100,000 of such indebtedness becomes due and payable two years from the date of issuance of the notes related thereto, approximately $625,000 of such indebtedness becomes due and payable one year from the date of issuance of the notes related thereto and the repayment of all of such indebtedness accelerates and becomes due and payable on the effective date of an initial public offering of the Company. All of this indebtedness was incurred primarily to fund the Company's operations and for working capital. The Company anticipates that it will use approximately $350,000 of the net proceeds of this offering for the expansion of its marketing and sales activities, including hiring additional marketing and sales personnel. The Company anticipates that it will use approximately $325,000 of such net proceeds for the development of enhanced versions of its existing products and new products. See "Business-Products." It is anticipated that development of these products will include the construction of additional beta units, field testing, and the initiation of manufacturing of production units, as well as expenditures for engineering design services and purchases of tooling and test equipment. The Company anticipates that it will use approximately $275,000 of the net proceeds of this offering for salaries and other costs associated with the hiring of additional engineering and operations personnel. The balance of the net proceeds are expected to be used for working capital and general corporate purposes. The Company has not determined the exact amounts it plans to expend on each of such uses or the timing of such expenditures. The amounts actually expended for each such use, if any, are at the discretion of the Company and may vary significantly depending upon a number of factors, including expenses, delays and complications frequently encountered by companies in the early stage of development and experiencing significant growth, changes in the Company's future revenue growth, changes in the Company's product 13 development plans or activities, the amount of cash generated by the Company's operations, and changing competitive or economic conditions. See "Risk Factors--Broad Discretion in Application of Proceeds." There can be no assurance that the Company's estimates will prove accurate, that product introduction efforts will not require considerable additional expenditures, or that unforeseen expenses will not occur. Pending their use as set forth above, the net proceeds of this offering will be invested in United States government or governmental agency securities, short-term insured certificates of deposit, short term bankers' acceptances or money market funds invested primarily in United States government or governmental agency securities. DIVIDEND POLICY The Company has never paid any cash dividends on its Common Stock and does not anticipate that it will pay dividends in the foreseeable future. The Company intends to apply any earnings to the development and expansion of its business. 14 DILUTION As of June 30, 1996, the Company had a net tangible book value of approximately $193,503 or $0.09 per share. "Net tangible book value" per share represents the amount of total tangible assets less total liabilities, divided by the number of shares of common stock issued and outstanding. After giving effect to the sale of the Common Stock offered by the Company hereby at the assumed initial public offering price of $6.00 per share, and assuming no other changes in the net tangible book value after June 30, 1996, the Company's net tangible book value (after deduction of underwriting discounts and commissions and estimated offering expenses) at June 30, 1996 would have been approximately $4,330,019 or $1.47 per share. This represents an immediate increase in net tangible book value of $1.38 per share to existing stockholders and an immediate dilution to new investors of $4.53 per share. Dilution is determined by subtracting net tangible book value per share after the offering from the amount of cash paid by a new investor for a share of Common Stock. The following table illustrates the per share dilution: Assumed initial public offering price per share.............. $6.00 Net tangible book value per share as of June 30, 1996........ $0.09 Increase per share attributable to new investors............. 1.38 ----- Net tangible book value per share after the offering......... 1.47 ----- Dilution per share to new investors.......................... $4.53 =====
The following table summarizes the differences in the total consideration and the average price per share of Common Stock paid or contributed by existing stockholders and to be paid by the purchasers of Common Stock in this offering at the assumed initial public offering price of $6.00 per share.
SHARES PURCHASED(1) TOTAL CONSIDERATION ---------------------- ----------------------AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ----------- ---------- ----------- ----------------------- Existing stockholders(2)........ 2,104,250 71.23% $ 239,206 4.48% $0.11 New investors........... 850,000 28.77 5,100,000 95.52 6.00 ----------- -------- ----------- ------- Total................. 2,954,250 100.00% $ 5,339,206 100.00% =========== ======== =========== =======
- -------- (1) As of June 30, 1996, assumes no issuance of 33,333 shares of Common Stock (assuming an initial public offering price of $6.00 per share) issuable upon exercise of the Private Placement Warrants at an aggregate exercise price for all such shares of $4.00. Also assumes no issuance of the following shares of Common Stock upon exercise of options and warrants granted and/or issued subsequent to June 30, 1996: (i) 300,000 shares of Common Stock reserved for issuance under the Company's Incentive Plan, of which 111,000 shares are issuable upon exercise of options granted in August 1996 at exercise prices of $3.50 per share and 10,000 shares issuable upon exercise of an option granted in August 1996 at an exercise price of $4.50 per share, (ii) 104,166 shares of Common Stock (assuming an initial public offering price of $6.00 per share) issuable upon exercise of additional Private Placement Warrants issued after June 30, 1996 at an aggregate exercise price for all of such Warrants of $19.00 and (iii) 85,000 shares of Common Stock issuable upon exercise of the Representative's Warrants at an assumed exercise price of $7.20 per share. See "Management--Stock Incentive Award Plan"; "Management--Certain Transactions"; "Underwriting" and "Description of Capital Stock." (2) If the Underwriters' over-allotment option is exercised in full, the sale of 111,250 shares by the Company and 16,250 shares by the Selling Stockholders in the offering will reduce the number of shares held by existing stockholders to 2,088,000 or approximately 68.11% and will increase the number of shares held by new investors to 977,500 or approximately 31.89% of the total shares of Common Stock outstanding after this offering. 15 CAPITALIZATION The following table sets forth the capitalization of the Company (i) at June 30, 1996 and (ii) as adjusted to reflect the receipt of the net proceeds from the sale of the 850,000 shares of Common Stock offered hereby by the Company at an assumed public offering price of $6.00 per share and the application of the estimated net proceeds as described in "Use of Proceeds." This table should be read in conjunction with the financial statements and notes thereto included elsewhere in this Prospectus.
JUNE 30, 1996 --------------------- AS ACTUAL ADJUSTED --------- ---------- Long-term debt and notes payable to stockholders, net of current portion......................................... $ 75,000 $ -- --------- ---------- Stockholders' equity: Preferred stock, $0.01 par value:1,000,000 shares authorized, no shares issued and outstanding.......... Common stock, $0.01 par value: 10,000,000 shares authorized, 2,104,250 shares issued and outstanding, actual, 2,954,250 shares issued and outstanding, as adjusted(1)........................................... 369,206 4,504,206 Deferred charge related to warrants issued in connection with notes payable(2)................................... (119,845) -- Accumulated deficit(2)................................... (54,342) (174,187) --------- ---------- Total stockholders' equity............................... 195,019 4,330,019 --------- ---------- Total capitalization..................................... $ 270,019 $4,330,019 ========= ==========
- -------- (1) As of June 30, 1996, assumes no issuance of 33,333 shares of Common Stock (assuming an initial public offering price of $6.00 per share) issuable upon exercise of the Private Placement Warrants at an aggregate exercise price for all such shares of $4.00. Also assumes no issuance of the following shares of Common Stock upon exercise of options and warrants granted and/or issued subsequent to June 30, 1996: (i) 300,000 shares of Common Stock reserved for issuance under the Company's Incentive Plan, of which 111,000 shares are issuable upon exercise of options granted in August 1996 at exercise prices of $3.50 per share and 10,000 shares issuable upon exercise of an option granted in August 1996 at an exercise price of $4.50 per share, (ii) 104,166 shares of Common Stock (assuming an initial public offering price of $6.00 per share) issuable upon exercise of additional Private Placement Warrants issued after June 30, 1996 at an aggregate exercise price for all of such shares of $19.00 and (iii) 85,000 shares of Common Stock issuable upon exercise of the Representative's Warrants at an assumed exercise price of $7.20 per share. Also excludes 111,250 shares which may be purchased from the Company by the Underwriters to cover over-allotments, if any. See "Management--Stock Incentive Award Plan"; "Management--Certain Transactions"; "Underwriting" and "Description of Capital Stock." (2) The remaining unamortized deferred charge related to warrants issued in connection with notes payable will be recognized as interest expense as a result of the retirement of the related notes payable upon the completion of the offering contemplated herein as discussed in "Use of Proceeds." 16 SELECTED FINANCIAL DATA Selected financial data set forth below as of June 30, 1996 and for the period from September 19, 1995 (inception) to June 30, 1996 has been derived from, and are qualified by reference to, the Financial Statements of the Company included elsewhere herein which have been audited by Ernst & Young LLP, independent auditors. The selected financial data set forth below should be read in conjunction with the Financial Statements (including the notes thereto) and with "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere herein.
INCEPTION TO JUNE 30, 1996(1) ---------------- STATEMENT OF OPERATIONS DATA: Net sales................................................. $1,463,627 Cost of sales............................................. 1,104,171 ---------- Gross profit.............................................. 359,456 Research and development.................................. 46,771 Selling and marketing..................................... 83,495 General and administrative................................ 243,936 ---------- Operating loss............................................ (14,746) Interest expense.......................................... (38,796) ---------- Loss before provision for income taxes.................... (53,542) Provision for state franchise tax......................... (800) ---------- Net loss.................................................. $ (54,342) ========== Net loss per share(2)..................................... $ (0.03) ========== Shares used in computing net loss per share............... 2,086,260
JUNE 30, 1996 ------------- BALANCE SHEET DATA: Working capital............................................. $232,246 Total assets................................................ 951,313 Long-term debt and notes payable to stockholders, net of current portion............................................ 75,000 Total stockholders' equity.................................. 195,019
- -------- (1) The Company commenced business on September 19, 1995, accordingly, the fiscal year ended June 30, 1996 contains less than twelve months. (2) See Note 1 of Notes to Financial Statements for a description of the calculation of net loss per share. 17 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the Financial Statements and the Notes thereto included elsewhere in this Prospectus. This discussion contains forward-looking statements which involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in the forward-looking statements as a result of certain factors, including, but not limited to those discussed in "Risk Factors" and elsewhere in this Prospectus. GENERAL Javelin Systems, Inc. (the "Company") designs, develops, markets and sells open system touch screen POS computers primarily for the foodservice industry. From September 19, 1995 (the date of incorporation) to December 31, 1995, management of the Company devoted substantially all of its efforts to the raising of capital and the design and refinement of its NexDisplay-4 system. RESULTS OF OPERATIONS Fiscal Year Ended June 30, 1996 The Company's 1996 fiscal year reflects results of operations for the period from September 19, 1995 (date of incorporation) to June 30, 1996. The Company's fiscal 1996 revenues totaled $1,463,627. These revenues were realized primarily during the period from January 1, 1996 through June 30, 1996 and were solely from the sale of 777 NexDisplay-4 systems. Based upon current market conditions and the competitive products currently available in the market, management does not anticipate significant price erosion for this product for the next twelve months. Management intends to introduce two additional products in the fiscal year ending June 30, 1997: the NexDisplay-P system and the Wheelman kitchen monitor. See "Business--Products." Cost of sales for fiscal 1996 amounted to $1,104,171. Prior to June 1996, the Company performed the final assembly and testing of its products in-house. Commencing July 1996, substantially all of the Company's manufacturing and assembly process is being performed by outside contractors. Management anticipates that for the foreseeable future it will continue to outsource substantially all of the manufacturing and assembly process. Management anticipates that if the Company's revenues continue to increase, the cost per unit may decrease in the fiscal year ending June 30, 1997 due primarily to reductions in prices from the Company's suppliers and contract manufacturers resulting from increased volume of purchases by the Company. Research and development expenses for fiscal 1996 amounted to $46,771. Such expenses consisted primarily of payroll costs. For the fiscal year ending June 30, 1997, management anticipates a substantial increase in product development costs primarily due to the anticipated introduction of several product enhancements and new products. Selling and marketing expenses for fiscal 1996 amounted to $83,495. Such expenses consisted primarily of commissions of $16,852, salaries of $35,792 and travel and entertainment of $27,882. Management anticipates that such expenses will increase substantially in the fiscal year ending June 30, 1997 as the Company implements its strategy to expand its product line, distribution network and markets. General and administrative expenses for fiscal 1996 amounted to $243,936. Such expenses consisted primarily of payroll costs of $73,288, consulting fees of $62,812, office supplies of $25,411, rent of $16,596 and printing of $10,087. For the fiscal year ending June 30, 1997 management anticipates a substantial increase in general and administrative costs, primarily related to payroll costs as the Company expands its personnel and costs associated with being a public company. 18 Interest expense for fiscal 1996 amounted to $38,796. Such expense included interest of $10,155 related to warrants issued in connection with certain promissory notes (see Note 3 of Notes to the Financial Statements). For the fiscal year ending June 30, 1997, management anticipates a substantial increase in interest expense due to the amortization of interest related to the above-mentioned warrants as well as additional amortized interest expected to be incurred in connection with the issuance of additional warrants in July and August 1996 (See Note 8 of Notes to the Financial Statements). This non- recurring interest expense is attributable to the imputation of interest based upon the fair market value of the Private Placement Warrants and does not represent a cash expense of the Company. Provision for income taxes for fiscal 1996 amounted to $800. The provision for income taxes consisted solely of state franchise taxes. A provision for federal income taxes was not required since the Company incurred losses for fiscal 1996. The Company does not anticipate that inflation will have a significant impact on the Company's results of operations in the foreseeable future. QUARTERLY RESULTS OF OPERATIONS FOR EACH OF THE QUARTERS IN THE FISCAL YEAR ENDED JUNE 30, 1996
PERIOD ENDED QUARTER ENDED QUARTER ENDED DECEMBER 31, 1995 MARCH 31, 1996 JUNE 30, 1996 ----------------- -------------- ------------- Net sales....................... $ 2,407 $275,238 $1,185,982 Cost of sales................... 2,591 221,198 880,382 -------- -------- ---------- Gross profit (loss)............. (184) 54,040 305,600 Operating expenses Research and development...... 5,975 13,869 26,927 Selling and marketing......... 2,501 21,520 59,474 General and administrative.... 72,516 77,228 94,192 -------- -------- ---------- Total operating expenses........ 80,992 112,617 180,593 -------- -------- ---------- Operating income (loss)......... (81,176) (58,577) 125,007 Interest expense................ -- (621) (38,175) -------- -------- ---------- Income (loss) before provision for income taxes............... (81,176) (59,198) 86,832 Provision for state franchise tax............................ -- -- (800) -------- -------- ---------- Net income (loss)............... $(81,176) $(59,198) $ 86,032 ======== ======== ==========
A comparison of the results of operations for the period September 19, 1995 to December 31, 1995 is not provided since the Company's activities for such period were primarily limited to the raising of capital and the design and refinement of its NexDisplay-4 system. Quarter Ended June 30, 1996 Compared to Quarter Ended March 31, 1996 Net sales for the quarter ended June 30, 1996 increased by $910,744 or 331% to $1,185,982 as compared to net sales of $275,238 for the quarter ended March 31, 1996. As discussed above, the Company's net sales since inception have been derived solely from the sale of its NexDisplay-4 system and the increase in sales was due to the continued acceptance in the market of the NexDisplay-4 system. Operating expenses increased to $180,593 for the quarter ended June 30, 1996 from $112,617 for the quarter ended March 31, 1996, an increase of 60%. The increase in operating expenses was due to the higher level of sales activity during the quarter ended June 30, 1996 and consists primarily of additional personnel and related compensation costs within substantially all functional areas of the Company's operations. Interest expense increased to $38,175 during the quarter ended June 30, 1996 from $621 for the quarter ended March 31, 1996 due primarily to increased borrowings under a line of credit and promissory notes, including the issuance of the Private Placement Warrants, the proceeds of which were used to fund working capital and other operating requirements. 19 LIQUIDITY AND CAPITAL RESOURCES Since its incorporation, the Company has financed its operations and capital expenditures with cash provided by securities issuances and financing arrangements. As of June 30, 1996, the Company had cash of $6,404. Since that date through August , 1996, the Company raised an additional $600,000 through the issuance of promissory notes and warrants. Cash used in operating activities amounted to $558,330 for fiscal 1996. Cash used in investing activities amounted to $37,833 for fiscal 1996 and represented primarily the purchase of furniture, fixtures and equipment. Cash from financing activities for fiscal 1996 amounted to $602,567 and consisted primarily of proceeds from the issuances of the Company's Common Stock of $85,050, borrowings under a line of credit of $206,552 and proceeds from the issuance of notes payable of $312,481. The Company believes that the estimated net proceeds of this offering, combined with other available funds, will be adequate to meet the Company's anticipated cash needs during the next 18 to 24 months. If the anticipated proceeds of this offering and other available funds are insufficient, or if working capital requirements are greater than anticipated, the Company could be required to raise additional financing. There can be no assurance that the Company will be successful in obtaining additional equity or debt financing, or, if available, that any such additional financing will be on terms favorable to the Company or its stockholders. Significant additional dilution may be incurred by investors in this offering as a result of such additional financings and the Company may incur additional interest expense. See "Risk Factors--Future Capital Requirements." 20 BUSINESS GENERAL Javelin Systems, Inc. (the "Company") designs, develops, markets and sells open system touch screen point-of-sale ("POS") computers primarily for the foodservice industry. The Company's POS systems integrate substantially all of the functionality of a standard desktop PC into a small footprint, network ready package and run on industry standard operating systems, such as Microsoft's DOS, Windows, Windows 95 and Windows NT. The Company's POS systems provide quick service restaurants ("QSR"), full service restaurants and hospitality and retail establishments with a hardware solution for transaction processing, in-store controls and management information. The Company's systems are sealed to protect against spillage and other foreign matter entering the interior electronic chamber. The Company's systems are currently being marketed by a number of original equipment manufacturers ("OEMs") and value added resellers ("VARs"). The Company believes it has achieved a strategic advantage by introducing higher performance POS systems that integrate many of the most recent technological innovations. The market for POS systems is divided into four major foodservice market segments: QSRs, full service restaurants, hotel restaurants, and noncommercial foodservice. According to Restaurant Consulting Group, Inc., a foodservice industry market research firm based in Skokie, Illinois ("RCG"), the total number of restaurants in the United States as of the Spring of 1995 was 394,420. The Company is primarily a supplier to the QSR and full service restaurant segments and intends to increase its penetration into the hotel restaurant and noncommercial foodservice segments. The Company's products are primarily distributed through strategic relationships with OEMs and VARs (collectively, "Resellers"). Over 90% of the Company's net sales were within the United States during the fiscal year ended June 30, 1996. The Company was incorporated in the State of Delaware on September 19, 1995 and commenced shipments of its products in December 1995. INDUSTRY BACKGROUND While PC-based systems have become the standard platform in most industries, the foodservice POS industry can be characterized as a unique vertical market that has not kept pace with the technological developments and productivity gains associated with most other industries. Rather than utilizing PC-based systems, until recently, the solutions provided by foodservice POS vendors have been of proprietary design and high cost. In addition, while in other areas of the computer industry most companies have decided to specialize either on software or hardware, in the foodservice industry, there are still major players trying to develop both hardware and software. The Company believes that the foodservice POS industry provides a major market opportunity because of the scope of the overall restaurant industry and the current shift towards open systems restaurant management software written around Microsoft operating systems and hardware that uses Intel or similar microprocessors. In responding to this market shift, the Company has elected to focus its efforts on the development and sale of open system PC-based hardware for the foodservice POS industry. The Market Opportunity Market Segments. The Company intends to target the following market segments: Quick Service Restaurants. This market is the largest segment within the foodservice industry with approximately 206,000 units in the United States as of the Spring of 1995 according to RCG. The fast food restaurants were generally the first to accept the latest touch screen technology like the NexDisplay-4. The Company's products have been sold by its Resellers to some Taco Bell, Blimpies, and Kenny Rogers Roasters restaurants. 21 Full Service Restaurants. According to RCG, this segment represented approximately 111,000 units in the United States as of the Spring of 1995. The Company has found this segment to be more price sensitive and more likely to adopt technology later in the product life cycle. The Company's product has been accepted in this market in head to head challenges with similar featured products like the Micros and IBM 4695. The Company's products have been sold by its Resellers to certain Chart House, Claim Jumper and Billboard Cafe restaurants, and to the American Culinary Institute. Hotel Restaurants. According to Technomic, Inc., a foodservice market research firm based in Chicago, Illinois, this segment represented approximately 20,260 units in the United States in 1995. The Company believes that the casino, theme park, and cruise line industries are potential growth areas within this segment. Industrial Process Control. The Company's product has been accepted as an operator interface by Mitsubishi/Siltec, a leading supplier of manufacturing equipment to the semiconductor industry. The market potential for the Company's products in this segment is currently unknown. The Company intends to conduct a market research study on this segment before the end of 1996. The Company believes that the foodservice industry, in particular, presents a significant market opportunity for the Company's products because managers in the foodservice industry face the following unique challenges that are addressed by the Company's products: . A perishable inventory that must be replenished every few days, that cannot be easily counted and is subject to employee theft. . Entry-level sales force with varying degrees of communication skills and high turnover. . Customer demands for high speed order processing. . Multiple order entry locations within one restaurant and multiple restaurants within one organization. . Frequent menu and price changes which must be updated at the POS device. . These management hurdles are compounded by the incompatibility of electronic components with the hostile environment of high heat, steam, grease, and flying food. The Javelin Contribution Traditional POS systems have typically been proprietary and inflexible and could not be easily integrated into the organization's management information system. For example, proprietary software solutions are limited in terms of their ability to address the unique customization and management control requirements in the highly dynamic foodservice environment. Additionally, traditional hardware designs have not been optimized in terms of processing speed, networking capabilities, food counter footprint and ruggedness. Against this backdrop of inadequate proprietary systems, foodservice companies are seeking greater compatibility with state of the art PC product offerings such as the Microsoft NT operating system and Pentium chip powered hardware. The Company believes that it is well situated to capitalize on this market opportunity because of its engineering, product management and marketing experience refined in the PC industry. BUSINESS STRATEGY The Company's objective is to be a significant worldwide OEM supplier of POS systems to the foodservice industry and, over time, the Company intends to explore other opportunities for sale of its POS systems in other industries. In order to pursue this objective, the Company intends to implement the following business strategies: Maintain Technological Advantage. The Company's strategy is to continue to develop new POS systems incorporating the latest PC technology. The Company intends to maintain and enhance its product development process with the goal of obsoleting its own products before the competition does. This strategy has been successful for many leading technology companies such as Intel. The Company intends to continue to build an engineering team composed of PC industry veterans in order to design and enhance products that integrate the latest PC technology. 22 Maintain Product-to-Market Time Advantage. In the fast paced computer industry, the window of opportunity to launch a product and capture a new market is months, not years. Because a significant portion of the Company's management is experienced in the PC industry, the Company believes that it will be able to quickly launch new products in the POS system industry incorporating the latest PC technologies. Maintain Cost Advantage. The Company's strategy is to continue to outsource the manufacturing and assembly of its products in order to maintain low overhead and production costs. The Company also intends to control its costs by utilizing components that are generally available in the PC industry. The Company believes that it will be able to maintain a cost advantage in the future because the Company utilizes in-house design capabilities and integrates the design and manufacturing engineering of its products, which reduces engineering costs and costly design changes. Expand Third Party Distribution Channels Relationships. The Company uses OEMs and VARs, and, in the future, intends to also use independent distributors, to sell its products. The Company intends to concentrate on building a technically proficient sales force that will support the third party sales channels and build long term customer loyalty. Expand into New Markets. The Company believes that its technology is suited for other industries in addition to the foodservice industry, such as industrial process control. The Company intends to sell its existing products into these new markets and develop new products for these markets if it determines that there is large volume potential. No assurance can be given that the Company will be able to successfully implement any of the foregoing business strategies and achieve its objectives. PRODUCTS NexDisplay-4(TM) The Company currently derives 100% of its sales from the NexDisplay-4 and derivative versions of that product. The NexDisplay-4 is a small footprint, high performance color touch screen computer. Unlike standard off-the-shelf PC products, the NexDisplay-4 has been designed and manufactured for harsh environments and optimized with features required by the foodservice industry, such as an integrated customer display. As a result of the product's inherent flexibility, the product has been successfully marketed and sold as a POS workstation, a customer activated system, and as an industrial operator interface. The Company offers a private labeling program for large customers and will be offering 4-5 different packaging styles to allow for product differentiation in the market. The Company will be introducing an enhanced version of the NexDisplay-4 (estimated release date: fourth quarter of calendar 1996) with the goal of reducing the product cost, increasing performance and increasing reliability. The suggested retail price to end users of the current product is approximately $3,400. NexDisplay-P(TM) (estimated release date: fourth quarter of calendar 1996) The Company intends to release a Pentium version of the NexDisplay in the fourth quarter of 1996. The modular design of the NexDisplay-4 ensures that the unit can be upgraded to a Pentium version by simply replacing the system board which slides out on rails. This product will offer roughly double the performance of the previous version. The NexDisplay-P will be optimized to run process intensive operating systems like Windows 95 and Windows NT. Wheelman(TM) (estimated release date: first quarter of calendar 1997) The typical Taco Bell restaurant uses 4 POS workstations like the NexDisplay-4 and 7 kitchen monitors. A kitchen monitor receives POS orders via a local area network from the front counter and displays the order to 23 the food preparers in the kitchen. This high speed communication allows the restaurant production team to operate more efficiently. The Company intends to release a state of the art kitchen monitor which integrates a networked single board computer inside a ruggedized 14 inch CRT. PRODUCT DISTRIBUTION The Company's products are primarily distributed through strategic relationships with OEMs and VARs. These Resellers typically provide installation, support and service directly to their customers. By distributing its products through Resellers, the Company has been able to take advantage of the existing name recognition and market position of its Resellers and reach a broader market for its products while avoiding incurring significant expenditures for sales, marketing, technical support and service. The Company intends to continue to distribute its products through Resellers and intends to expand its national and international distribution network by using the following channels: Original Equipment Manufacturers (OEMs) The Company currently sells its products to several OEM foodservice POS companies with significant market presence in the industry. The Company's current OEMs include Touch Menus, Positran, Inc., Hospitality System, Inc. and POSNET Computers, Inc. The OEMs market the Company's products under their own name and sell either through dealers or directly. Because of the high likelihood of the Company's product being offered by more than one OEM into an end user account, the Company offers the OEM an opportunity to choose their own customized design. The OEM is charged for mechanical design, prototyping, and tooling. Sales to OEMs and resellers represented 99% of the Company's net sales during the fiscal year ended June 30, 1996. One of the Company's principal strategies is to increase the number of OEMs selling its products. Value Added Resellers (VARs) The Company also sells its products to VARs who integrate POS software sold by independent software companies with the Company's hardware product for resale to foodservice companies. The Company works closely with POS software providers in order to market the Company's products to the software provider's VARs. Approximately 45 VARs have purchased POS systems from the Company, none of which have individually purchased a significant amount of products. The Company believes that utilizing VARs is advantageous to the Company because VARs generally have existing geographically diverse customers, focus their businesses on providing customized solutions to their customers and maintain their own sales and technical support staff. The Company believes that VARs find the Company's product attractive because the addition of the Company's hardware solution provides the VAR with an integrated product that facilitates an immediate penetration by the VAR into the markets of competitors offering full turnkey solutions such as Micros Systems, Inc. and Sulcus Computer Corporation. During the fiscal year ended June 30, 1996, sales of the Company's products to Touch Menus and Positran, Inc. accounted for approximately 30% and 24%, respectively, of the Company's net sales. No other customer accounted for more than 10% of the Company's net sales in the fiscal year ended June 30, 1996. MARKETING AND SALES The Company's marketing and sales staff currently consists of a marketing coordinator who reports directly to the Company's Vice President, Sales and Marketing. The Company's marketing department includes product development, marketing communications and market development. To date, the Company has not engaged in significant marketing activities due to its limited financial resources. The Company consults with the Company's Resellers to assist in identifying potential product enhancements and new products. The Company believes that this marketing feedback is a critical component in the Company's ability to achieve a competitive advantage in terms of rapid and seamless design innovation as well as accelerating the time to market for product enhancements and new products. The Company currently markets its products with a Company brochure and 24 participates in trade shows both in the United States and abroad. The Company also focuses on additional methods to promote its products, including product refinement, new product introduction and competitive pricing, all with the goal of increasing the distribution of the Company's products. Following consummation of this offering, the Company intends to commence more significant marketing activities, including targeted trade advertising and public relations. The Company's marketing and sales staff is also responsible for the development and support of the Company's domestic and international distribution network. The sales staff is augmented by two independent sales representatives. Commissions to sales representatives are negotiated on a customer-by-customer basis and the Company has no long term agreements with any of its sales representatives. The Company intends to expand its sales force to a total of three salespersons in 1996, each of whom will be given regional responsibilities but will be based out of the Company's executive offices located in Tustin, California. The Company maintains a computerized order entry system at its Tustin office to track incoming orders and orders in process. The Company sells to a technically sophisticated customer base that is expected to handle most technical problems without reliance on the Company, thereby reducing the need for the Company to maintain a large in-house technical support department. The Company's technical support staff currently consists of one person responsible for telephonic support and return merchandise authorization. The Company expects that an increased volume of sales will place an increased burden on its technical support staff and intends to add at least one more technician in 1996. SOURCES OF MANUFACTURING AND QUALITY ASSURANCE The Company's products are manufactured by third party contract manufacturers located in Hong Kong and California. The Company imports the motherboard utilized in its products from Sunwood Services Limited ("Sunwood"), a Hong Kong-based company owned by John R. Amos, a founder and stockholder of the Company, under purchase orders submitted from time to time. See "Management--Certain Transactions." The Company has identified other United States-based manufacturers capable of manufacturing the Company's motherboard. The Company's products are assembled in California by an ISO 9000 certified manufacturer, although the Company is not ISO 9000 certified. The Company normally must place orders 60 days in advance and current terms are open account. The Company has no written long term contracts with the manufacturers of its products or with any suppliers of the components used in the Company's products; however, the Company has submitted a purchase order for an aggregate of 5,000 units of LCD components utilized in its products, which are deliverable over 12 months commencing October 1, 1996. Moreover, the Company historically has placed orders for products and components based on its projected sales over the next approximately 90 days and does not normally have binding purchase orders for products at the time it places its orders with its manufacturers and suppliers. Consequently, the Company is subject to significant risk if actual sales of its products do not approximate its projected sales. To date, the Company has not experienced any material delays in the delivery of its products or components; however, delivery schedules are subject to various factors beyond the control of the Company and any delays in the future could adversely affect the Company's results of operations. The Company currently maintains an approximately 15 to 20 days supply of products in its inventory. However, the Company believes that a 60 day supply is more desirable, and the Company intends to increase its inventory of products following consummation of this offering. Because the Company orders components and has products manufactured in advance of binding commitments for the sale of its products, and because the Company does not have firm contracts with any of its Resellers providing for a minimum purchase requirements, no assurance can be given that the Company will be able to continue to appropriately match its inventory levels to its actual sales in the future. Although the Company does not conduct the day-to-day manufacturing or assembly of its products, the Company oversees the manufacturing process from component selection to the specification of assembly and test procedures. Although the manufacturing and substantially all of the assembly of the Company's products are currently performed by outside contractors, the Company has the ability to undertake limited production runs, customization, and product upgrades at its facility. 25 The principal components that make up the Company's products are standard electronics available from a wide variety of suppliers. Certain of the components utilized in the Company's products, however, are currently provided by a single supplier. The Company believes that, with respect to these components, there are a number of alternative suppliers that could supply components that could be integrated into the Company's products without any significant interruption in the Company's operations. No assurance can be given, however, that the Company will be able to successfully obtain alternative sources of supply for all of its components, or that the Company will be able to redesign its products on an appropriate time-table to incorporate alternative components. Any significant interruption in the supply of components could have a material adverse effect on the Company's results of operations and financial condition. BACKLOG The Company does not have any significant backlog. COMPETITION The market for POS products is highly competitive, and the Company expects this competition to increase as open systems architecture in POS products becomes more common. The principal elements of the competition in the Company's markets include product features and performance, price, quality and reliability, brand awareness, compatibility with open systems, accuracy of touch-screen input, quality of display, and level of customer service. The Company's products compete with a number of products designed to provide user friendly touch screen workstations. Most of the Company's competitors, as well as certain potential competitors, are more established, benefit from greater name recognition, have significantly greater financial, technological, production and marketing resources, and have more extensive distribution networks than the Company. The Company believes its use of open systems architecture in POS systems is an important competitive element. Several of the Company's competitors currently also offer open systems POS systems and the Company also believes that the number of competitors offering open systems solutions will grow over the next several years. The Company anticipates that a significant source of such future competition may be from existing competitors in the POS market that the Company believes are currently attempting to develop POS systems utilizing open systems architecture. Due to the greater sales, marketing, product development and financial resources of the Company's competitors, the Company anticipates that competition from these competitors will intensify in the future. In order to effectively compete against these competitors, the Company will need to grow and attain sufficient size to have the resources to timely develop new products in response to evolving technology and customer demands and to sell products through a broad distribution channel in competition with these other existing and potential competitors. No assurance can be given that the Company will be able to grow sufficiently to enable it to compete effectively in this marketplace. The Company's competitors include a substantial number of large well- established companies including International Business Machines (IBM), Micros Systems, Inc., PAR Technology Corporation, ATT/GIS, Panasonic and Olivetti, each of which also offers open systems architecture POS systems. Although the Company believes that it currently has a competitive advantage with respect to these competitors from a technological and cost standpoint, including compatibility with open systems, there can be no assurance that the Company will be able to maintain its competitive advantage or that these existing substantial competitors, or new competitors, will not develop competitive products utilizing open systems architecture and with favorable pricing. Moreover, the Company has little or no proprietary barriers to entry that could keep its competitors from developing similar products and technology or selling competing products in the Company's markets. The Company anticipates that as the existing and potential competitors increasingly perceive the market opportunity for open systems architecture POS systems, these competitors will try to "clone" market leading products and sell such cloned products at significantly reduced prices. There can be no assurance that such competitors will not develop products that are competitive with or superior to the Company's products or achieve greater market acceptance. Increased competition from manufacturers or distributors of products similar to or competitive with the Company's products could result in price reductions, reduced margins and loss of market share or could render 26 the Company's technology obsolete, all of which could have a material adverse effect on the Company's results of operations and financial condition. There can be no assurance that the Company will be able to successfully compete in this marketplace or develop sufficient new products to remain competitive, and any failure to do so could have a material adverse effect on its results of operations and financial condition. See "Risk Factors--Competition." GOVERNMENTAL REGULATION The Company's operations are subject to a number of federal, state and local laws relating to health, safety and labor matters. The Company believes its business is operated in substantial compliance with all material applicable government regulations. There can be no assurance that future regulations will not require the Company to modify its products, business or operations to meet health, safety or labor requirements, or that the Company will be able, for financial or other reasons, to comply with such future requirements. Failure to comply with future governmental regulations could subject the Company to fines and injunctions, which could result in a material adverse effect on the Company's results of operations and financial condition. Although the Company is not aware of any claim involving violation of health, safety or labor laws or regulations, there can be no assurance that such claim may not arise in the future, which may have a material adverse effect on the Company. INTELLECTUAL PROPERTY The Company relies on nondisclosure agreements to protect its intellectual property. The Company holds no patents and believes that its competitive position is not materially dependent upon patent protection. The Company believes that most of the current technology used in the design and manufacture of most of the Company's products is generally known and available to others. Before the Company was incorporated, Sunwood, the Company's motherboard manufacturer located in Hong Kong, was supplying the Company's existing motherboard technology to a North American POS company located in Canada, and Sunwood will continue to have the rights to sell the existing technology to that POS company only for sale in Canada. Sunwood and its principal, John R. Amos, have transferred to the Company all of the proprietary rights related to the motherboard utilized in the Company's products and neither Sunwood nor Mr. Amos has any rights to any future technology developed by the Company. EMPLOYEES As of August , 1996, the Company had approximately 10 full-time employees, including 2 employed in sales and marketing, 5 employed in research and development, engineering, technical support and production, and 3 employed as administrative and support staff. The Company also employed as of that date one temporary production employee and may from time to time augment its temporary staffing. None of the Company's employees are represented by unions and the Company considers its employee relations to be good. PROPERTIES The Company's executive offices, research and product development, warehousing and distribution facilities are currently housed in a single leased industrial unit comprised of approximately 3,950 square feet located in Tustin, California. Under the terms of the lease, the Company presently pays rent of approximately $2,764 per month with scheduled increases during the second and third years of the lease to approximately $2,843 and $2,922 per month, respectively. The lease expires on October 31, 1998. The Company believes that its existing facilities are adequate to meet its needs for at least the next 9 months to one year. LEGAL PROCEEDINGS There are currently no material pending legal proceedings to which the Company is a party or to which any of its property is subject. 27 MANAGEMENT DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES The directors, executive officers and key employees of the Company are as follows:
NAME AGE POSITION ---- --- -------- Richard P. Stack.................... 31 President, Chief Executive Officer and Director C. Norman Campbell.................. 42 Vice President, Engineering and Director Alexander J. Nelson................. 40 Vice President, Sales and Marketing Lawrence W. McCorkle................ 36 Controller, Treasurer and Secretary Steven J. Goodman(1)(2)............. 56 Director Jay L. Kear(1)(2)................... 59 Director
- -------- (1) Member of Audit Committee of the Board of Directors (2) Member of Compensation Committee of the Board of Directors RICHARD P. STACK. Mr. Stack has been President, Chief Executive Officer and a Director of the Company since the Company's inception in September 1995. Prior to that time, from 1991 through September 1995, Mr. Stack was Managing Director of Hi-Technology Supply, a manufacturer and distributor of personal computers and components located in South Africa which he founded and grew to approximately $6 million in annual sales and 15 employees prior to its sale to a South Africa-based personal computer and component manufacturing company. Prior to that time, from 1988 through 1991, Mr. Stack was employed by Pan American Airlines in technical management positions. Mr. Stack holds a B.A. degree from the University of California at Berkeley. C. NORMAN CAMPBELL. Mr. Campbell has been Vice President, Engineering, and a Director of the Company since its inception in September 1995. Prior to that time, from May 1991 through September 1995, Mr. Campbell served in various engineering management positions, including Director of Research and Development, for Advanced Logic Research ("ALR"), a publicly-traded $200 million revenue per year high end file server manufacturing company. Mr. Campbell was responsible for the design of ALR's first PCI bus and first Pentium Pro computers. At the time of Mr. Campbell's departure from ALR in September 1995, he was the principal designer of the Evolution QSMP-6 (Quad Pentium Pro high end file server), Revolution MP (dual Pentium file server, PCI/EISA), Evolution V STE (mini tower dual Pentium, PCI/EISA), Evolution 5 ST (mini tower Pentium PCI/ISA), and Evolution X (Pentium desktop PC, PCI/ISA). Mr. Campbell has acted as a consultant to the computer industry with such companies as Intel, ITT, Orange Micro Inc. and IBC (UK). Mr. Campbell attended Burlington College. ALEXANDER J. NELSON. Mr. Nelson joined the Company in October 1995 as Vice President, Sales and Marketing. Mr. Nelson has over 20 years experience in sales and marketing management with growing businesses in the electronics industry. Prior to joining the Company, from 1992 through 1995, he was Vice President, Sales and Marketing and co-founder of Interactive Computer Devices, Inc., a company engaged in the business of local area network (LAN) workstations. From 1990 to 1992, Mr. Nelson was Vice President, International Sales and Marketing for Republic Technology Corporation, a computer workstation manufacturing company. Mr. Nelson graduated with a B.S. degree in marketing from the California State University, Fullerton and attended post- graduate studies at UCLA in international business and marketing. LAWRENCE W. MCCORKLE. Mr. McCorkle joined the Company in July 1996 as Controller and was elected Treasurer and Secretary in August 1996. Mr. McCorkle has over 12 years of experience both in public accounting and in private industry. From July 1993 to July 1996, Mr. McCorkle was Accounting Manager for Diedrich Coffee, a chain of specialty coffee houses. Prior to that time, from July 1988 to July 1993, Mr. McCorkle was 28 financial manager and a consultant for the Republican Party of Orange County. Mr. McCorkle received a B.S. degree in Business Administration from Biola University and has passed the Uniform Certified Public Accounting exam. STEVEN J. GOODMAN. Mr. Goodman was elected as a Director of the Company in January 1996. In July 1995, Mr. Goodman joined Tessa Financial Group, Inc., a regional investment banking firm, as Vice President, Corporate Finance. From November 1991 through March 1995, Mr. Goodman was West Coast Managing Director of Creative Business Strategies, Inc., a financial corporate consulting firm. From 1990 to 1991, Mr. Goodman was a private investor. Mr. Goodman currently is a director and consultant for Tivoli Industries, Inc., a publicly-held corporation engaged in the manufacture and sale of specialty lighting. JAY L. KEAR. Mr. Kear was elected as a Director of the Company in August 1996. Mr. Kear has approximately 35 years of experience in the computer industry. Since 1988, Mr. Kear has been involved in representing the Noorda Family Trust and Kear Enterprises in working with and investing in high technology companies. These activities included assisting companies in their early growth phase looking forward to either an initial public offering or a sale or merger. He has in the past served as a director of a number of companies including Newport Systems, X-Trco, Locust Software Development, and Phaser Systems, and is currently a director of Wonderware Software Development Corp., a public corporation engaged in the development and sale of industrial automation software, and privately held Stella Interactive, an Internet content provider. Prior to 1988, Mr. Kear held sales, marketing, engineering, and general management positions with the private and public companies in the high technology sector. Mr. Kear received a BSME degree from the University of Southern California and did graduate work at the University of Rochester and the University of Southern California in an MBA program. To date, the Company has not found it necessary to retain the services of a full-time Chief Financial Officer and has instead relied upon Richard P. Stack, its President and Chief Executive Officer, and an outside consultant with respect to financial and accounting matters. In July 1996, the Company hired Lawrence W. McCorkle as its Controller, but Mr. McCorkle has had only limited involvement in the preparation of the financial information presented in this Prospectus. Following the consummation of this offering, the Company intends to commence a search for a Chief Financial Officer with the experience and salary requirements consistent with the Company's then current revenues and growth prospects. BOARD OF DIRECTORS During the nine months ended June 30, 1996, the Company's Board of Directors held two meetings and adopted five actions by written consent. The Board of Directors has established the following committees: (i) an Audit Committee, which consults with the Company's independent auditors concerning their engagement and audit plan and report and management letter and, with the assistance of the independent auditors, monitors the adequacy of the Company's internal accounting controls and financial management practices; and (ii) a Compensation Committee, which is responsible for reviewing the compensation and benefits of the Company's executive officers, making recommendations to the Board of Directors concerning the compensation and benefits of the Company's executive officers and administering the Company's 1996 Stock Incentive Award Plan. The Board of Directors is divided into three classes, with each class holding office for staggered three-year terms. The term of Steven J. Goodman expires in 1997, the term of Jay L. Kear expires in 1998 and the terms of Richard P. Stack and C. Norman Campbell expire in 1999. All executive officers of the Company are elected by the Board of Directors and serve at the Board's discretion. No family relationships exist between any of the officers or directors of the Company. DIRECTOR COMPENSATION The Company's directors who are not also employees of the Company receive $500 for attendance at each Board of Directors meeting and are reimbursed for expenses incurred in connection with attendance at Board of Directors' meetings. No additional compensation is paid for attendance at committee meetings, whether or not 29 held on the same date as Board meetings. In August 1996, Jay L. Kear, a director of the Company, was granted an option to purchase 10,000 shares of the Company's Common Stock at an exercise price of $4.50 per share. See "Management--Stock Incentive Award Plan." EXECUTIVE COMPENSATION Summary of Cash and Certain Other Compensation. The following table sets forth information regarding compensation for services in all capacities paid or accrued for the Company's nine-month fiscal year ended June 30, 1996 by the Company to the Company's chief executive officer. No other executive officer of the Company had total annual compensation in excess of $100,000 on an annualized basis during the fiscal year ended June 30, 1996: SUMMARY COMPENSATION TABLE (NINE MONTHS)
OTHER ANNUAL SALARY BONUS COMPENSATION YEAR ($) ($) ($)(1) ---- ------- ----- ------------ Richard P. Stack(2) President, Chief Executive Officer and Director.................................. 1996 $15,000 $ 0 $898
- -------- (1) The amounts indicated under the heading "Other Annual Compensation" represent health insurance benefits. (2) The Company and Richard P. Stack have entered into an Employment Agreement dated August 19, 1996 (the "Stack Employment Agreement"). The Stack Employment Agreement expires on August 19, 1999 (subject to annual renewals thereafter) and provides for payment to Mr. Stack of an annual salary of $84,000 through December 31, 1996, $95,000 from January 1, 1997 through December 31, 1997 and $105,000 from and after January 1, 1998. In addition to his salary, Mr. Stack is reimbursed for all reasonable and necessary travel and other business expenses incurred in connection with the performance of his duties, the Company is obligated to pay the premium for a life insurance policy insuring Mr. Stack's life providing for death benefits of up to $750,000 and Mr. Stack receives a $100 per month car allowance. If Mr. Stack's employment with the Company is terminated for cause (as defined in the Stack Employment Agreement), then Mr. Stack is entitled to receive his base salary through the date of termination. If Mr. Stack's employment with the Company is terminated without cause, then he is entitled to receive payment of his base salary for the greater of (i) the remaining term of the Stack Employment Agreement or (ii) one year from the date of termination. The Company anticipates that Richard P. Stack, the Company's President and Chief Executive Officer, C. Norman Campbell, the Company's Vice President, Engineering, and Alexander J. Nelson, the Company's Vice President, Sales and Marketing, will each earn total compensation in excess of $100,000 during the fiscal year ending June 30, 1997. The terms of Mr. Stack's Employment Agreement are described above. The Company and C. Norman Campbell have entered into an Employment Agreement dated August 19, 1996 (the "Campbell Employment Agreement"). The Campbell Employment Agreement expires on August 19, 1999 (subject to annual renewals thereafter) and provides for payment to Mr. Campbell of an annual salary of $84,000 through December 31, 1996, $95,000 from January 1, 1997 through December 31, 1997 and $105,000 from and after January 1, 1998. In addition to his salary, Mr. Campbell is reimbursed for all reasonable and necessary travel and other business expenses incurred in connection with the performance of his duties, the Company is obligated to pay the premium for a life insurance policy insuring Mr. Campbell's life providing for death benefits of up to $750,000 and Mr. Campbell receives a $100 per month car allowance. If Mr. Campbell's employment with the Company is terminated for cause (as defined in the Campbell Employment Agreement), then Mr. Campbell is entitled to receive his base salary through the date of termination. If Mr. Campbell's employment with the Company is terminated without cause, then he is entitled to receive payment of his base salary for the greater of (i) the remaining term of the Campbell Employment Agreement or (ii) one year from the date of termination. The Company does not have any employment agreements with any other executive officer of the Company. 30 STOCK INCENTIVE AWARD PLAN The Company's 1996 Stock Incentive Award Plan (the "Incentive Plan") was adopted by the Board of Directors and approved by the written consent of the stockholders in August 1996. The purpose of the Incentive Plan is to attract and retain qualified personnel, provide additional incentives to employees, officers, directors and consultants of the Company and promote the success of the Company's business. Pursuant to the Incentive Plan, the Company may grant incentive and nonqualified stock options, restricted stock, stock appreciation rights, dividend equivalents, stock payments and/or performance awards (collectively "Incentive Awards") to key employees, officers, directors, and consultants of the Company. As of August 30, 1996, a total of 300,000 shares of Common Stock were reserved for issuance under the Incentive Plan, 121,000 of which are subject to outstanding options. The Board of Directors has delegated to the Compensation Committee the discretionary authority to designate the persons to whom Incentive Awards may be granted (provided that incentive stock options can only be granted to employees of the Company), determine the time when Incentive Awards will be granted, the amounts, terms and conditions of such grants (consistent with the terms of the Incentive Plan), interpret the Incentive Plan, and adopt rules for the operation of the Incentive Plan. The maximum term of Incentive Awards granted under the Incentive Plan is ten years. Incentive Awards granted under the Incentive Plan are nontransferable and generally expire three months after the termination of the grantee's service to the Company. In general, if a grantee is permanently disabled or dies during his or her service to the Company, such Incentive Award may be exercised up to 12 months following such disability or death. Stock Options. Under the Incentive Plan, the exercise price of incentive and non-qualified stock options must equal at least the fair market value of the Common Stock on the date of grant. In addition, the exercise price of incentive and non-qualified stock options granted to any person who at the time of grant owns stock possessing more than 10% of the total combined voting power of all classes of stock must be at least 110% of the fair market value of such stock on the date of grant and, with respect to incentive stock options only, the term of those incentive stock options cannot exceed five years. The aggregate fair market value of the stock with respect to which incentive stock options are first exercisable in any calendar year may not exceed $100,000 per optionee. Stock Appreciation Rights. Stock appreciation rights awarded under the Incentive Plan vest or become exercisable as determined by the Compensation Committee. Upon exercise of a stock appreciation right, the grantee is entitled to receive an amount equal to the excess of the fair market value of a share of Common Stock on the exercise date of such stock appreciation right over the fair market value of a share of Common Stock on the date of grant of such stock appreciation right. Restricted Stock. Restricted stock granted under the Incentive Plan generally may not be sold, transferred or otherwise hypothecated until the restrictions on transferability imposed by the Compensation Committee are removed or expire. Generally, holders of restricted stock have all the rights of a stockholder with respect to the restricted stock granted, including the right to vote the shares and receive all dividends and other distributions paid or made with respect thereto. Performance Awards. Performance awards may be granted by the Compensation Committee based on the performance of the Company's stock over a period determined by the Compensation Committee or any other measures determined appropriate by the Compensation Committee. Payment of performance awards generally will be in cash unless replaced by a stock payment in full or in part as determined by the Compensation Committee. Stock Payments and Dividend Equivalents. The Compensation Committee may grant stock payments to eligible persons for all or any portion of the compensation (other than base salary) that would otherwise become payable to such eligible person in cash. The Compensation Committee may also grant dividend equivalent rights 31 based on the dividends declared on the stock of the Company on record dates during the period between the date an option or stock appreciation right is granted and the date such option or stock appreciation right is exercised or such other periods as determined by the Compensation Committee. Dividend equivalents are converted into additional shares of stock or cash in accordance with a formula determined by the Compensation Committee. The Board of Directors may amend, suspend, alter or terminate the Incentive Plan at any time provided that the Board of Directors shall not amend the Incentive Plan to reduce the minimum option price requirements set forth in the Incentive Plan, to increase the maximum number of stock appreciation rights or shares of stock subject to Incentive Awards available for grant under the Incentive Plan, to provide for the administration of the Incentive Plan other than by the Board of Directors or the Compensation Committee, to change the classes of persons eligible to receive Incentive Awards, to extend the maximum period during which Incentive Awards may be exercised or to extend the term of the Incentive Plan, without the approval of a majority of the outstanding voting stock of the Company. The Compensation Committee may, in its discretion, provide that upon the consummation of certain events, including the dissolution or liquidation of the Company, the merger or consolidation of the Company, the sale of all or substantially all of the assets of the Company, the acquisition of equity securities of the Company representing 20% or more of the aggregate voting power of the outstanding equity securities of the Company or a change in the composition of a majority of the Board of Directors (collectively, a "Terminating Transaction"), that outstanding Incentive Awards shall become immediately exercisable upon the occurrence of such events. Stock Options Granted. No options were granted by the Company during the Company's fiscal year ended June 30, 1996 to the Chief Executive Officer or any other executive officer of the Company. In August 1996, options to purchase an aggregate of 111,000 shares of Common Stock of the Company at an exercise price of $3.50 per share were granted to certain employees of the Company, including options with respect to 30,000 shares granted to Alexander J. Nelson, the Company's Vice President, Sales and Marketing, and an option to purchase 10,000 shares of the Company's Common Stock at an exercise price of $4.50 per share was granted to Jay L. Kear, a director of the Company. Each of the options expires five years from the date of grant. All of the options become exercisable at the rate of 40% on the date that is one year from the date of grant, 30% on the second anniversary of the grant date and 30% on the third anniversary of the grant date. In addition, the Compensation Committee may, in its discretion, provide that upon the occurrence of a Terminating Transaction, the options shall become immediately exercisable with respect to all of the shares subject to the options. During fiscal 1996, no options to purchase shares of the Company's Common Stock were exercised by any executive officers of the Company and no executive officers held any outstanding options to purchase shares of the Company's Common Stock. CERTAIN TRANSACTIONS Prior to this offering, the Company entered into various transactions with certain officers, directors and affiliates. Any future transactions, including any loan transactions, between the Company and its officers, directors or stockholders owning 5% or more of the voting securities of the Company, or their affiliates, will be subject to approval by a majority of the disinterested directors after a finding that the proposed transaction is on terms no less favorable to the Company than could be obtained from an independent third party. Since the formation of the Company, the Company has purchased the motherboard components of its products from Sunwood Services Limited, a Hong Kong corporation ("Sunwood"), which has the components manufactured by a contract manufacturer located in Hong Kong. John R. Amos ("J. Amos") is the sole stockholder of Sunwood and is a stockholder of the Company and a founder of the Company. The total amount of purchases from Sunwood during the fiscal year ended June 30, 1996 was approximately $445,000. The Company believes that the purchases of components from Sunwood have been and currently are on terms no less favorable to the Company than were and currently are available from independent third parties. On October 1, 1995, the Company borrowed $80,481.45 from Richard P. Stack ("R.P. Stack"), the President and Chief Executive Officer and a director of the Company, $40,000 from Teresa M. McRae ("T. McRae"), the mother of R.P. Stack, and $12,000 from Richard A. Stack ("R.A. Stack"), the father of 32 R.P. Stack. In connection with these loans, the Company entered into non- interest bearing convertible promissory notes with each of R.P. Stack, T. McRae and R.A. Stack, which were due and payable on demand. On April 1, 1996, May 1, 1996 and May 31, 1996, each of R.P. Stack, T. McRae and R.A. Stack, respectively, elected to convert the aggregate principal amounts outstanding under their respective notes into 430,000 shares, 86,000 shares and 17,200 shares, respectively, of Common Stock of the Company. The Company believes that each of the loans and other related transactions between it and each of R.P. Stack, T. McRae and R.A. Stack were on terms no less favorable to the Company than were available from independent third parties. The Company was formed September 19, 1995 by R.P. Stack, C. Norman Campbell ("C.N. Campbell") and J. Amos (collectively, the "Founders"). In connection with such formation, on September 26, 1995 R.P. Stack purchased 430,000 shares of Common Stock of the Company in exchange for payment to the Company of $2,500, C.N. Campbell purchased 288,100 shares of Common Stock of the Company in exchange for the assignment to the Company of equipment (which C.N. Campbell acquired in July 1995 at the cost of $1,750) valued at $1,675 by the Founders based upon the estimated replacement cost of such equipment and C.N. Campbell's interest in certain intellectual property (which C.N. Campbell and J. Amos developed in January 1995 at an out-of-pocket cost of less than $500) valued at less than $500 by the mutual agreement of the Founders, and J. Amos purchased 77,400 shares of Common Stock of the Company in exchange for the agreement by J. Amos to pay to the Company $450 (the "Amos Indebtedness"). On October 1, 1995, the Company borrowed $15,000 from R.P. Stack pursuant to a promissory note (the "Stack Note") bearing no interest and which provided that the principal amount of such note was due and payable on October 1, 1996. On November 1, 1995, C.N. Campbell purchased 288,100 shares of Common Stock of the Company in exchange for payment to the Company of $1,675. On April 1, 1996, R.P. Stack purchased 430,000 shares of Common Stock of the Company upon conversion of a convertible promissory note in the amount of $80,481.45. On May 31, 1996, the Company borrowed $25,000 from J. Amos pursuant to a promissory note (the "Amos Note") bearing interest at the rate of 10% per annum and providing that the principal amount of and all accrued and unpaid interest on such note is due and payable upon the earlier of May 31, 1998 or the effectiveness of a public offering of the Company. In connection with the issuance of the Amos Note, the Company granted to J. Amos a warrant to purchase the number of shares of Common Stock of the Company that results from dividing 50% of the per share offering price of the Company's Common Stock in the public offering into $25,000. The aggregate exercise price of such warrant is $1.00. On July 22, 1996, the Company agreed to cancel the Amos Indebtedness in exchange for the assignment by J. Amos to the Company of J. Amos' interest in certain intellectual property (which C.N. Campbell and J. Amos developed in January 1995 at an out-of-pocket cost of less than $500) valued at $450 by the mutual agreement of the Founders. On August 6, 1996, the Company granted to Quinciana D. Campbell, an employee of the Company and the wife of C.N. Campbell for no consideration, an option to purchase 13,500 shares of Common Stock of the Company at an exercise price of $3.50 per share under the Incentive Plan. On August 26, 1996, the Company repaid to R.P. Stack the principal amount outstanding under the Stack Note. 33 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information regarding the beneficial ownership of the Company's Common Stock as of August 30, 1996 by each director and each executive officer of the Company whose compensation is required to be disclosed in the Summary Compensation Table, each person known to the Company to be the beneficial owner of more than 5% of the outstanding Common Stock, and all directors and executive officers of the Company as a group. Except as otherwise indicated below, the Company believes that each person listed below has sole voting and investment power with respect to the shares owned, subject to applicable community property laws.
NAME AND ADDRESS OF SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY OWNED BENEFICIAL PRIOR TO THE OFFERING(1) AFTER THE OFFERING(2) OWNER OR IDENTITY OF ----------------------------------------------------------- GROUP NUMBER PERCENT NUMBER PERCENT -------------------- -------------- --------------------------- ------------- Richard P. Stack(3)..... 860,000 40.86% 860,000 29.11% C. Norman Campbell(3)... 576,200 27.38% 576,200 19.50% Steven J. Goodman(3).... 305,033(4) 14.44% 305,033 10.29% Alexander J. Nelson(3).. 107,500 5.11% 107,500 3.64% Jay L. Kear(3).......... 4,166(5) * 4,166 * All directors and executive officers as a group (6 persons)(6)... 1,852,899 87.49% 1,848,733 62.39%
- -------- * Less than one percent. (1) Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Shares of Common Stock subject to options or warrants currently exercisable or convertible, or exercisable or convertible within 60 days of August 30, 1996, are deemed outstanding for computing the percentage of the persons holding such options but are not deemed outstanding for computing the percentage of any other person. As of August 30, 1996, no options to acquire shares of Common Stock were exercisable or became exercisable within 60 days. Includes 12,499 shares of Common Stock subject to warrants exercisable within 60 days of August 30, 1996 (assuming an initial public offering price of $6.00 per share). See Footnotes 4 and 5 below. (2) Assumes the Underwriters' over-allotment option is not exercised. In the event that the Underwriters' over-allotment option is exercised in full, the Company will sell an additional 111,250 shares of Common Stock and certain Selling Stockholders will sell 16,250 shares of Common Stock. (3) The address of such stockholder is c/o Javelin Systems, Inc., 2882C Walnut Avenue, Tustin, California 92780. (4) Includes 296,700 shares issued in favor of The Steven J. Goodman Revocable Living Trust of which Steven J. Goodman, a director of the Company, is the sole trustee and the sole beneficiary, and with respect to which Mr. Goodman has sole voting and investment power. Also, includes 8,333 shares (assuming an initial public offering price of $6.00 per share) subject to warrants exercisable within 60 days of August 30, 1996 held by The Steven J. Goodman Charitable Remainder Trust of which Steven J. Goodman, a director of the Company, is the sole trustee and an income beneficiary, and with respect to which Mr. Goodman has sole voting and investment powers. Mr. Goodman disclaims beneficial ownership of all of the shares issuable upon exercise of such warrants for all other purposes. (5) Represents 4,166 shares (assuming an initial public offering price of $6.00 per share) subject to a warrant exercisable within 60 days of August 30, 1996 held by the Jay Louis Kear Family Trust of which Jay L. Kear, a director of the Company, is the trustee. (6) Includes directors' and executive officers' shares listed above, including 16,665 shares subject to warrants exercisable within 60 days after August 30, 1996. 34 SELLING STOCKHOLDERS The following table sets forth certain information as of August 30, 1996 with respect to each Selling Stockholder that will sell shares of the Company's Common Stock to the Underwriters if the Underwriters exercise the over-allotment option granted by the Selling Stockholders and the Company to the Underwriters. If the over-allotment option is exercised in full, the Underwriters will purchase an aggregate of 16,250 shares of Common Stock from the Selling Stockholders as set forth in the following table, and 111,250 shares of Common Stock from the Company. If the over-allotment option is exercised only in part, the Underwriters have agreed that they first will purchase from each Selling Stockholder a pro rata portion of the number of shares to be purchased in connection with the exercise of the over-allotment option, which pro rata portion shall be determined based upon the number of shares which each Selling Stockholder has requested to be sold in the offering and which shall not exceed the number of shares specified in the following table as being offered by each such Selling Stockholder. If and only if all Selling Stockholders have sold all of the shares of Common Stock specified in the following table as being offered by the Selling Stockholders, the Underwriters will then purchase from the Company any additional shares to be purchased in connection with such partial exercise of the over-allotment option, but in no event will more than 111,250 additional shares of Common Stock be purchased from the Company.
SHARES OF COMMON NUMBER OF SHARES OF NUMBER OF SHARES OF STOCK OWNED AFTER COMMON STOCK COMMON STOCK TO BE THE OFFERING NAME OF OWNED BEFORE OFFERED IN THE ------------------- SELLING STOCKHOLDER THE OFFERING OFFERING NUMBER PERCENT ------------------- ------------------- ------------------- --------- --------- Herbert R. and Janice N. Donica, as joint ten- ants by the entire- ties(1)................ 10,750 6,250 4,500 0.15% Teresa M. McRae(2)...... 86,000 10,000 76,000 2.48% ------ ------ --------- ------- Total .............. 96,750 16,250 80,500 2.63% ====== ====== ========= =======
- -------- (1) At no time since the date that the Company was formed (September 19, 1995) has the Selling Stockholder had any position, office or other material relationship with the Company or any of its predecessors or affiliates. (2) Teresa M. McRae is the mother of Richard P. Stack, the President, Chief Executive Officer and a Director of the Company. 35 DESCRIPTION OF CAPITAL STOCK The authorized capital stock of the Company consists of 10,000,000 shares of Common Stock, $.01 par value, and 1,000,000 shares of Preferred Stock, $.01 par value. The following description of the Company's capital stock is qualified in all respects by reference to the Company's Amended and Restated Certificate of Incorporation ("Certificate of Incorporation"), which has been filed as an exhibit to the Registration Statement incorporating this Prospectus. COMMON STOCK The holders of outstanding shares of Common Stock are entitled to receive dividends out of assets legally available therefor at such times and in such amounts as the Board of Directors may, from time to time, determine, subject to any preferences which may be granted to the holders of Preferred Stock. Holders of Common Stock are entitled to one vote per share on all matters on which the holders of Common Stock are entitled to vote. The Common Stock is not entitled to preemptive rights and is not subject to redemption or conversion. Upon liquidation, dissolution or winding-up of the Company, the assets (if any) legally available for distribution to stockholders are distributable ratably among the holders of the Common Stock after payment of all debt and liabilities of the Company and the liquidation preference of any outstanding class or series of Preferred Stock. All outstanding shares of Common Stock are, and the shares of Common Stock to be issued pursuant to this offering will be, when issued and delivered, validly issued, fully paid and nonassessable. The rights, preferences and privileges of holders of Common Stock are subject to any series of Preferred Stock that the Company may issue in the future. Certain holders of Common Stock are entitled to the registration rights discussed below. PREFERRED STOCK Preferred Stock may be issued from time to time in one or more series, and the Board of Directors, without action by the holders of the Common Stock, may fix or alter the voting rights, redemption provisions (including sinking fund provisions), dividend rights, dividend rates, liquidation preferences, conversion rights and any other rights, preferences, privileges and restrictions of any wholly unissued series of Preferred Stock. The Board of Directors, without stockholder approval, can issue shares of Preferred Stock with rights that could adversely affect the rights of the holders of Common Stock. No shares of Preferred Stock presently are outstanding, and the Company has no present plans to issue any such shares. The issuance of shares of Preferred Stock could adversely affect the voting power of holders of Common Stock and could have the effect of delaying, deferring or preventing a change in control of the Company or other corporate action. REPRESENTATIVE'S WARRANTS The Company has agreed to sell to the Representative warrants to purchase up to 85,000 shares of Common Stock at an exercise price per share equal to 120% of the initial public offering price per share (the "Representative's Warrants"). The Representative's Warrants, which are not transferable (other than to officers or partners of the Representative) are exercisable for a period of four years beginning one year from the date of this Prospectus. See "Underwriting." PRIVATE PLACEMENT WARRANTS The Company issued the Private Placement Warrants to accredited investors in connection with the Company's 1996 Private Placement of $725,000 of promissory notes. Pursuant to the terms of the Private Placement Warrants, the investors, in the aggregate, have the right to purchase up to 137,500 shares of the Company's Common Stock (assuming an initial public offering price of $6.00 per share) for an aggregate exercise price for all of such shares of $23.00. The Private Placement Warrants are transferable and may be exercised at any time after the effectiveness of an underwritten public offering by the Company. The holders of the Private Placement Warrants are entitled to the registration rights discussed below. 36 REGISTRATION RIGHTS In connection with the sale of 371,950 shares of Common Stock during the first six months of 1996, the Company granted to the holders of such shares (the "Private Placement Shares") certain rights to register such shares. In addition, in connection with the 1996 Private Placement, the Company granted to the holders of the Private Placement Warrants certain rights to register the shares of Common Stock issuable upon exercise of the Private Placement Warrants. If the Company registers any of its Common Stock for its own account, the holders of the Private Placement Shares and the Private Placement Warrants are entitled to include their shares of Common Stock in the registration, subject to certain limitations. Any such shares of Common Stock not sold in this offering will continue to have the foregoing registration rights. The Representative's Warrants have certain rights of registration with respect to the 85,000 shares of Common Stock issuable upon exercise thereof. The holders of the shares issuable upon exercise of the Representative's Warrants may require the Company to file one registration statement under the Securities Act with respect to such shares. In addition, if the Company registers any of its Common Stock either for its own account or for the account of other security holders, the holders of the shares issuable upon exercise of the Representative's Warrants are entitled to include their shares of Common Stock in the registration, subject to certain limitations. The Company generally is required to bear substantially all costs incurred in connection with any such registrations, other than underwriting discounts and commissions. The foregoing registration rights could result in substantial future expense to the Company and could adversely affect any future equity or debt offerings of the Company. CERTAIN PROVISIONS OF DELAWARE LAW AND CHARTER DOCUMENTS The Company is a Delaware corporation and subject to Section 203 of the Delaware General Corporation Law (the "Delaware GCL"), an anti-takeover law. In general, Section 203 of the Delaware GCL prevents an "interested stockholder" (defined generally as a person owning 15% or more of a corporation's outstanding voting stock) from engaging in a "business combination" (as defined) with a Delaware corporation for three years following the date such person became an interested stockholder, subject to certain exceptions such as the approval of the board of directors and of the holders of at least two-thirds of the outstanding shares of voting stock not owned by the interested stockholder. The existence of this provision would be expected to have an anti-takeover effect, including attempts that might result in a premium over the market price of the shares of Common Stock held by stockholders. As permitted by the Delaware GCL, the Company has included in its Certificate of Incorporation a provision to eliminate the personal liability of its directors for monetary damages for breach or alleged breach of their fiduciary duties as directors to the extent permitted by the Delaware GCL. In addition, the Amended and Restated Bylaws ("Bylaws") of the Company provide that the Company is required to indemnify its officers and directors under certain circumstances, including those circumstances in which indemnification would otherwise be discretionary, and the Company is required to advance expenses to its officers and directors as incurred in connection with proceedings against them for which they may be indemnified. The Company has entered into indemnification agreements with its officers and directors containing provisions that are in some respects broader than the specific indemnification provisions contained in the Delaware GCL. The indemnification agreements require the Company, among other things, to indemnify such officers and directors against certain liabilities that may arise by reason of their status or service as directors or officers to the fullest extent permitted by Delaware law and to advance their expenses incurred as a result of any proceedings against them as to which they could be indemnified. The Company intends to obtain directors' and officers' liability insurance concurrent with the effectiveness of this offering. The foregoing provisions of the Company's Bylaws and indemnification agreements would be available for indemnification of, and advancing of expenses to, officers and directors of the Company in connection with liabilities under the Securities Act. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Company pursuant 37 to the Company's Bylaws and/or indemnification agreements, or otherwise, the Company has been advised that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. At present, the Company is not aware of any pending or threatened litigation or proceeding involving a director, officer, employee or agent of the Company in which indemnification would be required or permitted. The Company believes that its charter provisions and indemnification agreements are necessary to attract and retain qualified persons as directors and officers. The Company's Certificate of Incorporation and Bylaws provide for the Board of Directors to be divided into three classes of directors serving staggered three-year terms. As a result, approximately one-third of the Board of Directors will be elected each year. Directors may be removed by the holders of a majority of the Company's outstanding voting stock only for cause. The provisions of the Certificate of Incorporation and Bylaws of the Company with respect to the foregoing matters may be amended, modified or rescinded by the holders of at least 66-2/3% of the Company's outstanding voting stock. These provisions could have the effect of delaying, deferring or preventing a change in control or other corporation action. TRANSFER AGENT AND REGISTRAR The stock transfer agent and registrar for the Common Stock is U.S. Stock Transfer Corporation, Glendale, California. 38 SHARES ELIGIBLE FOR FUTURE SALE Upon completion of this offering, the Company will have 2,954,250 shares of Common Stock outstanding. All of such outstanding shares will be freely transferable by persons other than "affiliates" of the Company (as that term is defined under the Securities Act) without restriction or further registration under the Securities Act. In addition, all of the 137,500 shares of Common Stock (assuming an initial public offering price of $6.00 per share) issuable upon exercise of the Private Placement Warrants will be similarly freely transferable by persons other than "affiliates" of the Company. As of August 30, 1996, the Company had 10 holders of record of its Common Stock and 22 holders of its Private Placement Warrants. Pursuant to the terms of certain lock-up agreements and the Underwriting Agreement, the Representative has required that 2,088,000 shares of such Common Stock owned by the Selling Stockholders, officers, directors and other holders, as well as Common Stock obtained by them upon exercise of stock options, and all of the 137,500 shares of Common Stock (assuming an initial public offering price of $6.00 per share) issuable upon exercise of the Private Placement Warrants, may not be sold until one year from the effective date of the Registration Statement of which this Prospectus is a part (the "Effective Date"); provided, however, that holders of Common Stock other than the officers and directors of the Company may sell up to fifty percent (50%) of the shares of Common Stock held by them at the Effective Date after the expiration of 180 days from the Effective Date; and, provided, further, however, that holders of Common Stock acquired upon exercise of the Private Placement Warrants may sell up to twenty-five percent (25%) of the shares of Common Stock held by them at the Effective Date every 90 days following the Effective Date. With respect to persons who are deemed to be "affiliates" of the Company, in general, under Rule 144, as currently in effect, an "affiliate" is entitled to sell, within any three-month period, a number of shares that does not exceed the greater of 1% of the then outstanding shares of Common Stock (approximately 30,000 shares immediately following the offering) or the average weekly trading volume during the four calendar weeks preceding such sale. Sales under Rule 144 are also subject to certain manner of sale limitations, notice requirements and the availability of current public information about the Company. In addition to the shares of Common Stock that are currently outstanding, a total of (a) 300,000 shares of Common Stock have been reserved for issuance under the Company's Incentive Plan, of which options to acquire 121,000 shares of Common Stock have been granted, (b) 137,500 shares of Common Stock may be issued upon the exercise of the Private Placement Warrants (assuming an initial public offering price of $6.00 per share), and (c) 85,000 shares of Common Stock may be issued upon the exercise of the Representative's Warrants. See "Description of Capital Stock;" "Management--Certain Transactions" and "Management--Stock Incentive Award Plan." Any employee, officer or director of or consultant to the Company who purchased his or her shares pursuant to a written compensatory plan or contract (such as the Incentive Plan) is entitled to rely on the resale provisions of Rule 701, which permits non-affiliates to sell their Rule 701 shares to the extent vested on the Effective Date without having to comply with the public-information, holding-period, volume-limitation or notice provisions of Rule 144 and permits affiliates to sell their Rule 701 shares without having to comply with the holding period restrictions of Rule 144, in each case commencing 90 days after the Effective Date. Following the consummation of this offering, the Company may file a registration statement under the Securities Act to register shares of Common Stock reserved for issuance under the Incentive Plan, thus permitting the resale of such shares by non-affiliates in the public market without restriction under the Securities Act. Such registration statement will become effective immediately upon its filing. The Company is unable to estimate the number of shares that may be sold in the future by its existing stockholders or the effect, if any, that sales of shares by such stockholders will have on the market price of Common Stock prevailing from time to time. Sales of a substantial number of shares of Common Stock by existing stockholders could adversely affect prevailing market prices. 39 UNDERWRITING The Underwriters named below, represented by Meridian Capital Group, Inc. (the "Representative"), have severally agreed, subject to the terms and conditions contained in the Underwriting Agreement, to purchase from the Company the number of shares of Common Stock indicated below opposite their respective names at the public offering price less the underwriting discounts and commissions set forth on the cover page of this Prospectus. The Underwriting Agreement provides that the obligations of the Underwriters are subject to certain conditions and that the Underwriters are committed to purchase all of such shares (other than the Common Stock covered by the over- allotment option as described below), if any are purchased.
NUMBER OF UNDERWRITERS SHARES ------------ --------- Meridian Capital Group, Inc.................................... ------- Total...................................................... 850,000 =======
The Company has been advised by the Representative that the Underwriters propose to offer the shares to the public at the public offering price set forth on the cover page of this Prospectus, and to certain securities dealers at such price less a concession of not more than $. per share, and that the Underwriters and such dealers may reallow to other dealers, including the Underwriters, a discount not in excess of $. per share. After the public offering, the public offering price and concessions and discounts may be changed by the Representative. No change in such terms shall change the amount of proceeds to be received by the Company as set forth on the cover page of this Prospectus. The Company and Selling Stockholders have granted an option to the Underwriters, exercisable in the discretion of the Representative for a period of 45 days after the date of this Prospectus, to purchase up to an additional 111,250 shares and 16,250 shares of Common Stock, respectively, at the public offering price set forth on the cover page of this Prospectus less the underwriting discounts and commissions. The Representative may exercise this option only to cover over-allotments, if any. To the extent such option is exercised, each Underwriter will become obligated, subject to certain conditions, to purchase pro rata from the Company and each Selling Stockholder an aggregate percentage of such additional shares approximately equal to the percentage of shares it was obligated to purchase from the Company pursuant to the Underwriting Agreement. The Representative has informed the Company that it does not expect any sales in excess of 5% of the number of shares of Common Stock offered hereby to be made to discretionary accounts by the Underwriters. The Company has agreed to pay the Representative a non-accountable expense allowance of 3% of the offering proceeds, including any proceeds from the sale of shares subject to the Underwriter's over-allotment option, if exercised. The Representative's expenses in excess of the non-accountable expense allowance, including its legal expenses, will be borne by the Representative. To the extent that the expenses of the Representative are less than the non- accountable expense allowance, the excess may be deemed to be compensation to the Representative. The Underwriting Agreement provides that the Company (and the Selling Stockholders, with respect to the over-allotment option) will indemnify the Underwriters and their controlling persons against certain liabilities 40 under the Securities Act or will contribute to payments the Underwriters and their controlling persons may be required to make in respect thereof. The Company and the Selling Stockholders have been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. The Company has agreed to sell to the Representative, for a total of $8.50, warrants (the "Representative's Warrants") to purchase up to 85,000 shares of Common Stock at an exercise price per share equal to 120% of the initial public offering price per share. The Representative's Warrants are exercisable for a period of four years beginning one year from the date of this Prospectus, and are not transferable for a period of one year except to officers of the Representative or any successor to the Representative. In addition, the Company has granted certain rights to the holders of the Representative's Warrants to register the Common Stock underlying the Representative's Warrants under the Securities Act. The Company, the Selling Stockholders, certain other existing stockholders, the holders of the Private Placement Warrants and the officers and directors of the Company have agreed not to sell any shares of Common Stock prior to the expiration of one year from the date of this Prospectus; provided, however, that the Selling Stockholders and the other existing stockholders (other than the officers and directors of the Company) may sell up to fifty percent (50%) of the shares of Common Stock held by them at the Effective Date after the expiration of 180 days from the Effective Date and, provided, further, however, that holders of Common Stock acquired upon exercise of the Private Placement Warrants may sell up to twenty-five percent (25%) of the shares of Common Stock held by them at the Effective Date every 90 days following the Effective Date. See "Shares Eligible for Future Sale." Prior to this offering, there has been no market for the Common Stock of the Company. Accordingly, the initial public offering price has been determined by negotiations between the Company and the Representative. Among the factors considered in determining the initial public offering price were the Company's results of operations, current financial condition and products, the markets addressed by the Company's products, the Company's future prospects, the experience of its management, the general condition of the equity securities market and the demand for similar securities of companies considered comparable to the Company. The Representative was registered as a broker/dealer and became a member of the National Association of Securities Dealers, Inc. in October 1994. The Representative has previously participated in two public offerings as an underwriter. The foregoing sets forth the material terms and conditions of the Underwriting Agreement, but does not purport to be a complete statement of the terms and conditions thereof, copies of which are on file at the offices of the Company and the Securities and Exchange Commission, Washington, D.C. See "Additional Information." 41 LEGAL MATTERS The legality of the issuance of the shares of Common Stock offered hereby and certain other legal matters will be passed upon for the Company by Allen, Matkins, Leck, Gamble & Mallory LLP, a limited liability partnership including professional corporations, Irvine, California. Certain legal matters will be passed upon for the Underwriters by Radcliff, Frandsen, Tricker & Dongell, Los Angeles, California. EXPERTS The financial statements of Javelin Systems, Inc. at June 30, 1996 and for the period from September 19, 1995 (date of inception) to June 30, 1996 appearing in this Prospectus and Registration Statement have been audited by Ernst & Young 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 A registration statement on Form SB-2, including amendments thereto (herein, the "Registration Statement") relating to the Common Stock offered hereby has been filed by the Company with the Securities and Exchange Commission (the "Commission"). This Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto. Statements contained in this Prospectus as to the contents 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. For further information with respect to the Company and the Common Stock offered hereby, reference is made to such Registration Statement, exhibits and schedules. A copy of the Registration Statement may be inspected by anyone without charge at the Commission's principal office located at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, as well as at the following regional offices: the New York Regional Office located at 7 World Trade Center, 13th Floor, New York, New York 10048, and the Chicago Regional Office located at Northwestern Atrium Center, 500 West Madison Street, Chicago Illinois 60661-2511 and copies of all or any part thereof may be obtained from the Public Reference Branch of the Commission upon the payment of certain fees prescribed by the Commission. The Commission maintains a Web site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the Commission. The Commission's address on the World Wide Web is http://www.sec.gov. 42 JAVELIN SYSTEMS, INC. FINANCIAL STATEMENTS FOR THE PERIOD FROM SEPTEMBER 19, 1995 (DATE OF INCEPTION) TO JUNE 30, 1996 CONTENTS Report of Independent Auditors.............................................. F-2 Financial Statements Balance Sheet............................................................... F-3 Statement of Operations..................................................... F-4 Statement of Stockholders' Equity........................................... F-5 Statement of Cash Flows..................................................... F-6 Notes to Financial Statements............................................... F-7
F-1 REPORT OF INDEPENDENT AUDITORS The Board of Directors Javelin Systems, Inc. We have audited the accompanying balance sheet of Javelin Systems, Inc. as of June 30, 1996, and the related statements of operations, stockholders' equity and cash flows for the period from September 19, 1995 (date of inception) to June 30, 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 audit. We conducted our audit 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 audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Javelin Systems, Inc. at June 30, 1996, and the results of its operations and its cash flows for the period from September 19, 1995 (date of inception) to June 30, 1996 in conformity with generally accepted accounting principles. Ernst & Young LLP Orange County, California August 15, 1996 except as to Note 8, as to which the date is August 29, 1996. F-2 JAVELIN SYSTEMS, INC. BALANCE SHEET JUNE 30, 1996 ASSETS Current assets: Cash.............................................................. $ 6,404 Accounts receivable............................................... 693,679 Inventories....................................................... 209,350 Other current assets.............................................. 4,107 --------- Total current assets................................................ 913,540 Furniture, fixtures and equipment, at cost: Computer equipment................................................ 21,960 Furniture and fixtures............................................ 4,455 Leasehold improvements............................................ 4,551 --------- 30,996 Less accumulated depreciation and amortization.................... 3,044 --------- 27,922 Other assets, net................................................... 9,851 --------- Total assets........................................................ $ 951,313 ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Line of credit.................................................... $ 206,552 Accounts payable.................................................. 356,769 Accrued expenses.................................................. 32,973 Current maturities of notes payable to stockholders............... 65,000 Current maturities of long-term debt.............................. 20,000 --------- Total current liabilities........................................... 681,294 Notes payable to stockholders, net of current portion............... 25,000 Long-term debt, net of current portion.............................. 50,000 Commitments and contingencies Stockholders' equity: Preferred stock, $0.01 par value: Authorized shares--1,000,000 Issued and outstanding shares--none............................. -- Common stock, $0.01 par value: Authorized shares--10,000,000 Issued and outstanding shares--2,104,250........................ 369,206 Deferred charge related to warrants issued in connection with notes payable.................................................... (119,845) Accumulated deficit............................................... (54,342) --------- Total stockholders' equity.......................................... 195,019 --------- Total liabilities and stockholders' equity.......................... $ 951,313 =========
See accompanying notes. F-3 JAVELIN SYSTEMS, INC. STATEMENT OF OPERATIONS FOR THE PERIOD FROM SEPTEMBER 19, 1995 (DATE OF INCEPTION) TO JUNE 30, 1996 Net sales.......................................................... $1,463,627 Cost of sales...................................................... 1,104,171 ---------- Gross profit....................................................... 359,456 Operating expenses: Research and development......................................... 46,771 Selling and marketing............................................ 83,495 General and administrative....................................... 243,936 ---------- Total operating expenses........................................... 374,202 ---------- Operating loss..................................................... (14,746) Interest expense................................................... 38,796 ---------- Loss before provision for income taxes............................. (53,542) Provision for state franchise tax.................................. 800 ---------- Net loss........................................................... $ (54,342) ========== Net loss per share................................................. $ (0.03) ========== Shares used in computing net loss per share........................ 2,086,260 ==========
See accompanying notes. F-4 JAVELIN SYSTEMS, INC. STATEMENT OF STOCKHOLDERS' EQUITY FOR THE PERIOD FROM SEPTEMBER 19, 1995 (DATE OF INCEPTION) TO JUNE 30, 1996
DEFERRED CHARGE RELATED TO WARRANTS ISSUED IN COMMON STOCK CONNECTION ------------------ WITH NOTES ACCUMULATED SHARES AMOUNT PAYABLE DEFICIT TOTAL --------- -------- -------------- ----------- -------- Issuance of common stock for cash............... 1,274,950 $ 85,050 $ -- $ -- $ 85,050 Issuance of common stock for equipment.......... 288,100 1,675 -- -- 1,675 Issuance of common stock upon conversion of notes payable.......... 541,200 152,481 -- -- 152,481 Value assigned to war- rants issued in connec- tion with notes pay- able................... -- 130,000 (130,000) -- -- Amortization of deferred charge................. -- -- 10,155 -- 10,155 Net loss................ -- -- -- (54,342) (54,342) --------- -------- --------- -------- -------- Balance at June 30, 1996................... 2,104,250 $369,206 $(119,845) $(54,342) $195,019 ========= ======== ========= ======== ========
See accompanying notes. F-5 JAVELIN SYSTEMS, INC. STATEMENT OF CASH FLOWS FOR THE PERIOD FROM SEPTEMBER 19, 1995 (DATE OF INCEPTION) TO JUNE 30, 1996 OPERATING ACTIVITIES Net loss........................................................... $ (54,342) Adjustments to reconcile net loss to net cash used in operating ac- tivities: Depreciation and amortization.................................... 3,251 Amortization of deferred charge related to warrants.............. 10,155 Changes in operating assets and liabilities: Accounts receivables........................................... (693,679) Inventories.................................................... (209,350) Other current assets........................................... (4,107) Accounts payable............................................... 356,769 Accrued expenses............................................... 32,973 --------- Net cash used in operating activities.............................. (558,330) INVESTING ACTIVITIES Purchase of furniture, fixtures and equipment...................... (29,291) Other.............................................................. (8,542) --------- Net cash used in investing activities.............................. (37,833) FINANCING ACTIVITIES Net borrowings under line of credit................................ 206,552 Proceeds from issuance of notes payable to related parties......... 222,481 Increase in long-term debt......................................... 90,000 Issuance of common stock........................................... 85,050 Deferred offering costs............................................ (1,516) --------- Net cash provided by financing activities.......................... 602,567 --------- Net increase in cash............................................... 6,404 Cash at beginning of period........................................ -- --------- Cash at end of period.............................................. $ 6,404 ========= SUPPLEMENTARY DISCLOSURE OF CASH PAID DURING THE PERIOD FOR: Interest........................................................... $ 28,641 ========= Income taxes....................................................... $ 800 ========= SUPPLEMENTARY DISCLOSURE OF NON CASH FINANCING ACTIVITIES: Equipment acquired for common stock................................ $ 1,675 ========= Notes payable converted to common stock............................ $ 152,481 =========
See accompanying notes. F-6 JAVELIN SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS JUNE 30, 1996 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES GENERAL Javelin Systems, Inc. ("the Company") was incorporated in the State of Delaware under the name of Sunwood Research, Inc. on September 19, 1995. The Company designs, develops, markets and sells open system touch screen point- of-sale ("POS") computers, primarily for the foodservice industry. The Company has incurred losses of $54,342 from inception, primarily due to the start-up nature of its business. The ability of the Company to establish itself as a successful operating entity on an ongoing basis is dependent upon future events, including further marketing of its products and achieving profitable operations. As discussed in Note 8, the Company plans to sell its common stock through an initial public offering. 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 amounts reported in the accompanying financial statements. Actual results could differ from those estimates. INVENTORIES Inventories consist primarily of computer hardware and components and are stated at the lower of cost (first-in, first-out) or market as follows: Raw materials....................................................... $203,950 Finished goods...................................................... 5,400 -------- $209,350 ========
CONCENTRATION OF BUSINESS AND CREDIT RISK The Company operates within an industry that is subject to rapid technological advancement, intense competition and uncertain market acceptance. The introduction of new technologies, competitors' alternative products and ultimate market acceptance of the products sold by the Company, could have a substantial impact on the future operations of the Company. Financial instruments which potentially subject the Company to a concentration of credit risk consist primarily of trade receivables. In the normal course of business, the Company provides credit terms to its customers and collateral is generally not required. Accordingly, the Company performs ongoing credit evaluations of its customers and maintains allowances for potential losses which, when realized, have been within the range of management's expectations. As of June 30, 1996, four customers accounted for 68% of total accounts receivable. Sales to two customers aggregated 30% and 24%, respectively, of net sales since inception. DEFERRED OFFERING COSTS Deferred offering costs of $1,516 consist of incremental costs incurred in connection with the planned initial public offering described in Note 8. Such costs will be offset against the proceeds from the sale of securities upon successful completion of the planned public offering. F-7 JAVELIN SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) DEPRECIATION AND AMORTIZATION Depreciation is computed using the straight line method over the estimated useful lives of the respective assets, generally three years. WARRANTIES The Company's products are under warranty for defects in material and workmanship for one year. Certain components included in the Company's products are covered by manufacturer's warranties. Costs related to after-sale service and repair are accrued as warranty expense at the time of sale, and to date, such costs have been insignificant. REVENUE RECOGNITION Revenues from sales of products are recognized upon shipment of the products. The Company generally does not have any significant remaining obligations upon shipment of its products. Product returns and sales allowances, which have not been significant historically, are provided for at the date of sale. RESEARCH AND DEVELOPMENT The Company expenses the cost of research and development as incurred. Continuous research and development is necessary for the Company to maintain its competitive position. ADVERTISING COSTS The Company expenses the production costs of advertising as incurred. To date, advertising expenses have not been significant. TAXES BASED ON INCOME Deferred taxes are provided for items recognized in different periods for financial and tax reporting purposes in accordance with Financial Accounting Standards Board Statement No. 109, Accounting for Income Taxes. NET LOSS PER COMMON SHARE Net loss per common share is computed using the weighted average number of common shares and common share equivalents outstanding during the period presented. Common share equivalents result from the effect of outstanding options and warrants to purchase common stock. Pursuant to the requirements of the Securities and Exchange Commission, common shares and common share equivalents issued by the Company during the twelve months immediately preceding the proposed initial public offering have been included in the calculation of the shares used in computing net loss per common share as if they were outstanding for the entire period presented (using the treasury stock method and the estimated public offering price of $6 per share in calculating equivalent shares). RECENTLY ISSUED ACCOUNTING STANDARDS In October 1995, Statement of Financial Accounting Standards No. 123, Accounting for Stock Based Compensation (FAS 123) was issued and is effective for fiscal years that begin after December 15, 1995. The Company intends to continue to account for employee stock options in accordance with APB Opinion No. 25 and will make the pro forma disclosures required by FAS 123 in fiscal 1997. Accordingly, the adoption of the standard will not have a material effect on the Company's financial position or results of operations. F-8 JAVELIN SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 2. LINE OF CREDIT The Company has a line of credit with a financial institution under which it may borrow up to 80% of the Company's eligible accounts receivable (as defined) with monthly interest based upon the prime rate of a national financial institution, however, such rate cannot be less than 2.5% per month. Borrowings under the line of credit are collateralized by substantially all the assets of the Company. The line of credit expires in December 1996. As of June 30, 1996, borrowings under the line aggregated $206,552 (2.5% per month) and there was $20,898 available for future borrowings. 3. STOCKHOLDERS' EQUITY STOCK OPTIONS In August 1996, the Company adopted a stock incentive award plan (the "Plan") under which the Board of Directors, or a committee appointed for such purpose, may from time to time grant options, restricted stock or other stock- based compensation to the directors, officers, eligible employees or consultants of the Company to acquire up to an aggregate of 300,000 shares of common stock, in such numbers, under such terms and at such exercise prices as are determined by the Board or such committee. It is the Company's intention to grant options under the Plan principally to employees. In August 1996, the Company granted options to certain employees and a director to purchase an aggregate of 121,000 shares of its common stock at exercise prices of $3.50 to $4.50 per share. WARRANTS In connection with the issuance of various promissory notes through June 30, 1996 the Company granted warrants to acquire the Company's common stock to the noteholders. The number of shares that can be acquired under the warrants is based upon the per share offering price in an initial public offering by the Company. Assuming an offering price of $6 per share, the warrants will entitle the holders to purchase a total of 33,333 shares of the Company's common stock for an aggregate purchase price of $4. The outstanding warrants become exercisable following the effectiveness of a public offering of the Company's common stock and have no expiration date. The Company has assigned a value of $130,000 to the warrants which has been accounted for as additional paid in capital in the accompanying financial statements. The deferred charge related to the warrants is being amortized over the lives of the related promissory notes. 4. INCOME TAXES The provision for income taxes consists of State of California franchise taxes. No provision for federal income taxes is required since the Company has incurred losses since inception. Deferred income taxes reflect the tax consequences on future years of differences between the tax bases of assets and liabilities and their bases for financial reporting purposes. Temporary differences which give rise to deferred tax assets are as follows: Net operating loss carryforwards................................... $ 7,200 Accrued liabilities................................................ 10,400 Valuation allowance................................................ (17,600) -------- Net deferred tax assets............................................ $ -- ========
The Company has incurred operating losses since inception, and due to the uncertainty regarding future results of operations, the Company has provided a full valuation allowance against its net deferred tax assets. F-9 JAVELIN SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 4. INCOME TAXES (CONTINUED) At June 30, 1996, the Company has a net operating loss carryforward available to offset future taxable income of approximately $18,000 which expires in 2011. Under the change in ownership provisions of the Tax Reform Act of 1986, net operating loss carryforwards for federal income tax reporting purposes may be subject to annual limitations. Should a change in ownership occur, the availability of net operating loss carryforwards may be limited in future years. 5. NOTES PAYABLE TO STOCKHOLDERS AND LONG-TERM DEBT Notes payable to stockholders at June 30, 1996 consists of the following: Promissory notes, bearing interest at 10%, due on various dates in 1997 and 1998..................................................... $75,000 Unsecured, noninterest bearing demand note......................... 15,000 ------- 90,000 Less current portion............................................... 65,000 ------- $25,000 =======
Long-term debt at June 30, 1996 consists of the following: Unsecured demand note, bearing interest at 8%....................... $20,000 Promissory notes, bearing interest at 10% due on various dates in 1997 and 1998...................................................... 50,000 ------- 70,000 Less current portion................................................ 20,000 ------- $50,000 =======
Annual maturities of notes payable to stockholders and long-term debt are as follows: 1997................................................................. $85,000 1998................................................................. 75,000
Promissory notes become due and payable upon the effectiveness of a public offering of the Company's common stock. Due to their short-term nature and/or market rate of interest, the fair values of the Company's notes payable to stockholders, long-term debt and other financial instruments approximate their carrying values. 6. COMMITMENTS AND CONTINGENCIES OPERATING LEASES The Company leases its facilities and certain equipment under noncancelable operating leases which expire at various dates through 1998. Future minimum annual lease payments at June 30, 1996 are as follows: 1997................................................................. $42,853 1998................................................................. 42,718 1999................................................................. 8,767 ------- $94,338 =======
F-10 JAVELIN SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 6. COMMITMENTS AND CONTINGENCIES (CONTINUED) Rent expense under operating lease agreements aggregated $16,596 for the period ended June 30, 1996, and is included in general and administrative expenses in the accompanying statement of operations. 7. RELATED PARTY During the period ended June 30, 1996, the Company purchased a total of approximately $445,000 of electronic components from a company owned by a shareholder and founder of the Company. Included in accounts payable at June 30, 1996, is $73,580 due to that Company. 8. SUBSEQUENT EVENTS STOCK SPLIT On August 23, 1996, the Company effected a 4,300-for-1 stock split. All references in the accompanying financial statements and notes to shares outstanding and per share amounts have been adjusted to reflect the impact of this stock split. BRIDGE FINANCING In July and August 1996, the Company issued $600,000 the Company's 10% Promissory Notes, due on the earlier of (i) one year from the date of the respective notes, or (ii) the effectiveness of a public offering of the Company's common stock, together with warrants to purchase shares of the Company's common stock. The majority of the warrants expire 90 days after the effectiveness of a public offering of the Company's common stock. The number of shares of common stock that can be acquired under the warrants will be based upon the offering price of the Company's common stock in a public offering. Assuming an initial public offering price of $6 per share, these warrants will entitle the holders to purchase a total of 104,167 shares of the Company's common stock for the aggregate exercise price of $19.00. REGISTRATION STATEMENT On August 6, 1996, the Board of Directors authorized the Company to file a registration statement on Form SB-2 with the Securities and Exchange Commission for an initial public offering of 850,000 shares of common stock at an estimated offering price of $5.00 to $7.00 per share. In connection with the offering, the Company will sell the representatives of the underwriters a warrant, for $8.50, to purchase 85,000 shares of the Company's common stock at 120 percent of the offering price. F-11 [COLOR PHOTOGRAPHS] - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDERS OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY ANY SECURITY OTHER THAN THE SHARES OF THE COMMON STOCK OFFERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY THE SHARES OF COMMON STOCK 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 ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. ---------------- TABLE OF CONTENTS
PAGE ---- Prospectus Summary.................... 3 Risk Factors.............................................................. 6 Use of Proceeds........................................................... 13 Dividend Policy........................................................... 14 Dilution.................................................................. 15 Capitalization............................................................ 16 Selected Financial Data................................................... 17 Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................... 18 Business.................................................................. 21 Management................................................................ 28 Security Ownership of Certain Beneficial Owners and Management............ 34 Selling Stockholders...................................................... 35 Description of Capital Stock.............................................. 36 Shares Eligible for Future Sale........................................... 39 Underwriting.............................................................. 40 Legal Matters............................................................. 42 Experts................................................................... 42 Additional Information.................................................... 42 Index to Financial Statements............................................. F-1
UNTIL , 1996 (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 IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- JAVELIN SYSTEMS, INC. 850,000 SHARES COMMON STOCK ---------------- PROSPECTUS ---------------- MERIDIAN CAPITAL GROUP, INC. 1996 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The Company's Bylaws require that directors and officers be indemnified to the maximum extent permitted by Delaware law. The Delaware GCL provides that a director or officer of a corporation (i) shall be indemnified by the corporation for all expenses of litigation or other legal proceedings when he is successful on the merits, (ii) may be indemnified by the corporation for the expenses, judgments, fines and amounts paid in settlement of such litigation (other than a derivative suit) even if he is not successful on the merits 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, in the case of a criminal proceeding, had no reason to believe his conduct was unlawful), and (iii) may be indemnified by the corporation for expenses of a derivative suit (a suit by a stockholder alleging a breach by a director or officer of a duty owed to the corporation), even if he is not successful on the merits, 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, provided that no such indemnification may be made in accordance with this clause (iii) if the director or officer is adjudged liable to the corporation, unless a court determines that, despite such adjudication but in view of all of the circumstances, he is entitled to indemnification of such expenses. The indemnification described in clauses (ii) and (iii) above shall be made upon order by a court or a determination by (i) a majority of disinterested directors, (ii) if there are no such directors or if such directors so direct, by independent legal counsel in a written opinion or (iii) the stockholders that indemnification is proper because the applicable standard of conduct is met. Expenses incurred by a director or officer in defending an action may be advanced by the corporation prior to the final disposition of such action upon receipt of an undertaking by such director or officer to repay such expenses if it is ultimately determined that he is not entitled to be indemnified in connection with the proceeding to which the expenses relate. The Company's Certificate of Incorporation includes a provision eliminating, to the fullest extent permitted by Delaware law, director liability for monetary damages for breaches of fiduciary duty. The Company has entered into indemnity agreements (the "Indemnity Agreements") with each director or officer designated by the Board of Directors. The Indemnity Agreements require that the Company indemnify directors and officers who are parties thereto in all cases to the fullest extent permitted by Delaware law. Under the Delaware GCL, except in the case of litigation in which a director or officer is successful on the merits, indemnification of a director or officer is discretionary rather than mandatory. Consistent with the Company's Bylaw provision on the subject, the Indemnity Agreements require the Company to make prompt payment of litigation expenses at the request of the director or officer in advance of indemnification provided that he undertakes to repay the amounts if it is ultimately determined that he is not entitled to indemnification for such expenses. The advance of litigation expenses is mandatory; under the Delaware GCL such advance would be discretionary. Under the Indemnity Agreements, the director or officer is permitted to bring suit to seek recovery of amounts due under the Indemnity Agreements and is entitled to recover the expenses of seeking such recovery unless a court determines that the action was not made in good faith or was frivolous. Without the Indemnity Agreements, the Company would not be required to pay the director or officer for his expenses in seeking indemnification recovery against the Company. Under the Indemnity Agreements, directors and officers are not entitled to indemnity or advancing of expenses (i) if such director or officer has recovered payment under an insurance policy for the subject claim, or has otherwise been indemnified against the subject claim, (ii) for actions initiated or brought by the director or officer and not by way of defense (except for actions seeking indemnity or expenses from the Company), (iii) if the director or officer violated section 16(b) of the Securities Exchange Act of 1934 or similar provisions of law or (iv) if a court of competent jurisdiction determines that the director or officer failed to act in good faith and in a manner reasonably believed to be in or not opposed to the best interests of the Company or, with respect to any proceeding which is of a criminal nature, had reasonable cause to believe his conduct was unlawful. Absent the Indemnity Agreements, indemnification that might be made available to directors and officers could be changed by amendments to the Company's Certificate of Incorporation or Bylaws. II-1 The Company intends to have a policy of directors and officers liability insurance in effect upon consummation of the offering contemplated hereby which will insure directors and officers against the cost of defense, settlement or payment of a judgment under certain circumstances. The Underwriting Agreement to be filed as Exhibit 1.1 to this Registration Statement provides for indemnification by the Underwriters of the Registrant and its officers and directors for certain liabilities arising under the Securities Act, or otherwise. ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth all expenses, other than the underwriting discounts and commissions and the non-accountable expense allowance, payable by the Registrant in connection with the sale of the Common Stock being registered. All of the amounts will be paid by the Registrant, and Selling Stockholders will not be required to pay any portion of such amounts. All of the amounts are estimates except for the registration fee and the NASD filing fee. Registration fee.................................................. $2,606 NASD filing fee................................................... 1,256 Nasdaq inclusion fee.............................................. * Blue sky qualification fees and expenses.......................... * Directors and officers Insurance.................................. * Printing and engraving expenses................................... * Legal fees and expenses........................................... * Accounting fees and expenses...................................... * Transfer agent and registrar fees................................. * Miscellaneous..................................................... * ------ Total........................................................... $ * ======
- -------- * To be completed by Amendment. ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES. Since inception (September 19, 1995), the Registrant has sold and issued the following unregistered securities pursuant to an exemption under the Securities Act: 1. On September 26, 1995, the Registrant issued 430,000 shares of Common Stock to Richard P. Stack, 288,100 shares of Common Stock to C. Norman Campbell and 77,400 shares of Common Stock to John R. Amos at a per share price of approximately $.006 per share. The issuance of the Common Stock was deemed to be exempt from registration under the Securities Act by virtue of Section 4(2) of the Securities Act and Rule 504 of Regulation D promulgated thereunder because the issuance did not involve a public offering. 2. On November 1, 1995, the Registrant issued 288,100 shares of Common Stock to C. Norman Campbell and 107,500 shares of Common Stock to Alex Nelson at a per share price of approximately $.006 per share. The issuance of the Common Stock was deemed to be exempt from registration under the Securities Act by virtue of Section 4(2) of the Securities Act and Rule 504 of Regulation D promulgated thereunder because the issuance did not involve a public offering. 3. On January 9, 1996, the Registrant issued 180,600 shares of Common Stock to The Steven J. Goodman Revocable Living Trust ("Goodman") and 25,800 shares of Common Stock to GAK Limited, a Delaware limited partnership ("GAK"), of which Horace and Madeleine Hertz are the general partners, at a per share price of approximately $.02 per share. The issuance of the Common Stock was deemed to be exempt from registration under the Securities Act by virtue of Section 4(2) of the Securities Act and Rule 504 of Regulation D promulgated thereunder because the issuance did not involve a public offering. II-2 4. On April 1, 1996, the Registrant issued 430,000 shares of Common Stock to Richard P. Stack at a per share price of approximately $.19 per share upon conversion of a convertible promissory note originally issued in October 1995. The issuance of the convertible promissory note and the Common Stock was deemed to be exempt from registration under the Securities Act by virtue of Section 4(2) of the Securities Act and Rule 504 of Regulation D promulgated thereunder because the issuance did not involve a public offering. 5. On April 3, 1996, the Registrant issued 116,100 shares of Common Stock to Goodman at a per share price of approximately $.22 per share. The issuance of the Common Stock was deemed to be exempt from registration under the Securities Act by virtue of Section 4(2) of the Securities Act and Rule 504 of Regulation D promulgated thereunder because the issuance did not involve a public offering. 6. On May 1, 1996, the Registrant issued 86,000 shares of Common Stock to Teresa M. McRae at a per share price of approximately $.47 per share upon conversion of a convertible promissory note originally issued in October 1995. The issuance of the convertible promissory note and the Common Stock was deemed to be exempt from registration under the Securities Act by virtue of Section 4(2) of the Securities Act and Rule 504 of Regulation D promulgated thereunder because the issuance did not involve a public offering. 7. On May 23, 1996, the Registrant issued 38,700 shares of Common Stock to GAK at a per share price of approximately $.65 per share. The issuance of the Common Stock was deemed to be exempt from registration under the Securities Act by virtue of Section 4(2) of the Securities Act and Rule 504 of Regulation D promulgated thereunder because the issuance did not involve a public offering. 8. On May 31, 1996, the Registrant issued 17,200 shares of Common Stock to Richard A. Stack at a per share price of approximately $.70 per share upon conversion of a convertible promissory note originally issued in October 1995. The issuance of the convertible promissory note and the Common Stock was deemed to be exempt from registration under the Securities Act by virtue of Section 4(2) of the Securities Act and Rule 504 of Regulation D promulgated thereunder because the issuance did not involve a public offering. 9. On June 3, 1996, the Registrant issued 10,750 shares of Common Stock to Herbert R. and Janice N. Donica, as joint tenants by the entireties, at a per share price of approximately $2.33 per share. The issuance of the Common Stock was deemed to be exempt from registration under the Securities Act by virtue of Section 4(2) of the Securities Act and Rule 504 of Regulation D promulgated thereunder because the issuance did not involve a public offering. 10. On October 1, 1995, the Registrant issued a Promissory Note in the amount of $15,000 to Richard P. Stack. The issuance of the Promissory Note was deemed to be exempt from registration under the Securities Act by virtue of Section 4(2) of the Securities Act and Rule 504 of Regulation D promulgated thereunder because the issuance did not involve a public offering. 11. In February 1996, the Company issued two Promissory Notes, each in the original principal amount of $20,000, to each of Peter Aiello and Jim Cox. The Promissory Note issued to Mr. Cox is convertible at his option into shares of Common Stock at a per share price of $2.50 per share. Effective as of June 30, 1996, Mr. Cox converted his Promissory Note into 8,000 shares of Common Stock. The issuance of the Promissory Notes and the Common Stock issued upon conversion of Mr. Cox's Promissory Note was deemed to be exempt from registration under the Securities Act by virtue of Section 4(2) of the Securities Act and Rule 504 of Regulation D promulgated thereunder because the issuance did not involve a public offering. 12. At various times commencing May 1996 through August 1996, the Registrant issued Promissory Notes to the following accredited investors in the following original principal amounts: (1) The Steven J. Goodman Charitable Remainder Trust (the "Goodman CRT"), $50,000; (2) John R. Amos, $25,000; (3) Kanayo Partabrai Gangwani, $25,000; (4) Jack S. Kompan, two Promissory Notes aggregating $50,000; (5) Universal Partners, L.P., a partnership that specializes in providing bridge financing of which Windy City Bridges, Inc. is a general partner, $25,000; (6) Scott Robinson, $25,000; (7) Rebecca L. Gregarek, $12,500; (8) David M. Munch, $25,000; II-3 (9) David J. Gregarek, $25,000; (10) Jay Louis Kear Family Trust, $25,000; (11) Mildred J. Geiss, $37,500; (12) Westerling Family Trust, $100,000; (13) Yu Family Revocable Trust, $25,000; (14) Kenneth and Linda Bloom, $25,000; (15) Christopher Neil, $25,000; (16) Izzy Rabinowitz, $50,000; (17) Cheyenne Capital, $50,000; (18) Mark Ratto, $12,500; (19) B.C. Investments, $12,500; (20) Chris Brown, $50,000; (21) Victor A. Ince and Terry A. Ince, joint tenants, $25,000; and (22) Caribou Bridge Fund, LLC, $25,000. Concurrent with the issuance of each of the foregoing Promissory Notes, the Registrant issued warrants to purchase shares of Common Stock (the "Warrants") in an amount equal to the number of shares that results from dividing the initial public offering price into the original principal amount of the Promissory Note, with the exception of the Promissory Notes issued to Mr. Amos, Mr. Gangwani and Mr. Kompan which provided for 50% of the initial public offering price being divided into the original principal amount of their respective Promissory Notes. The total purchase price for all of the shares of Common Stock issuable upon the exercise of such Warrants is an aggregate of $1.00 per Warrant, or $23.00 in the aggregate. The Warrants become exercisable after the Registrant obtains effectiveness of an underwritten public offering of its Common Stock. In connection with the sales of certain of the Promissory Notes and Warrants, the Registrant paid a total of $15,000 in commissions to Spencer Edwards in its capacity as a selling agent and $27,500 to Meridian Capital Group, Inc. in its capacity as a selling agent. The issuance of the Promissory Notes and the Warrants was deemed to be exempt from registration under the Securities Act by virtue of Section 4(2) of the Securities Act and Rule 504 of Regulation D promulgated thereunder because the issuance did not involve a public offering. 13. In August 1996, the Registrant granted options to purchase an aggregate of 111,000 shares of Common Stock at exercise prices of $3.50 per share and 10,000 shares at an exercise price of $4.50 per share to certain officers, directors, key employees and consultants under the Registrant's 1996 Stock Incentive Award Plan. The grant of all such options was deemed to be exempt from registration under the Securities Act by virtue of Rule 701 promulgated under the Securities Act. The foregoing information has been adjusted to reflect a 4,300 for 1 stock split of the Common Stock effected in August 1996. ITEM 27. EXHIBITS. The following is a list of exhibits filed as a part of this Registration Statement:
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT ------- ----------------------- 1.1 Form of Underwriting Agreement by and between the Registrant and Meridian Capital Group, Inc.(1) 3.1 Amended and Restated Certificate of Incorporation of Registrant 3.2 Amended and Restated Bylaws of Registrant 4.1 Form of Representative's Warrant Agreement by and between the Registrant and Meridian Capital Group, Inc.(1) 4.2 Form of Certificate Evidencing Shares of Registrant's Common Stock(1) 5.1 Opinion of Allen, Matkins, Leck, Gamble & Mallory LLP(1) 10.1 1996 Stock Incentive Award Plan of Registrant 10.2 Form of 1996 Director Non-Qualified Stock Option Agreement 10.3 Form of 1996 Employee Non-Qualified Stock Option Agreement 10.4 Employment Agreement dated August 19, 1996 by and between the Registrant and Richard P. Stack 10.5 Employment Agreement dated August 19, 1996 by and between the Registrant and C. Norman Campbell 10.6 Form of Indemnity Agreement entered into with each of the Registrant's officers and directors 10.7 Form of Stockholders Lock-Up Agreement to be entered into by the stockholders of Registrant 10.8 Form of Directors and Officers Lock-Up Agreement to be entered into by directors and officers of Registrant 10.9 Form of Bridge Investors Lock-Up Agreement to be entered into by the holders of Warrants to purchase Common Stock of Registrant
II-4
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT ------- ----------------------- 10.10 Promissory Note dated October 1, 1995 in the original principal amount of $80,481.45 payable by the Registrant in favor of Richard P. Stack (the "R.P. Stack Note") 10.11 Letter Agreement dated April 1, 1996 between the Registrant and Richard P. Stack regarding the conversion of the R.P. Stack Note into shares of the Common Stock of the Registrant 10.12 Promissory Note dated October 1, 1995 in the original principal amount of $40,000 payable by the Registrant in favor of Teresa M. McRae (the "T. McRae Note") 10.13 Letter Agreement dated May 1, 1996 between the Registrant and Teresa M. McRae regarding the conversion of the T. McRae Note into shares of the Common Stock of the Registrant 10.14 Promissory Note dated October 1, 1995 in the original principal amount of $12,000 payable by the Registrant in favor of Richard A. Stack (the "R.A. Stack Note") 10.15 Letter Agreement dated May 31, 1996 between the Registrant and Richard A. Stack regarding the conversion of the R.A. Stack Note into shares of the Common Stock of the Registrant 10.16 Standard Industrial/Commercial Single-Tenant Lease-Gross dated October 19, 1995 by and between Robert P. Peebles Trust, Dated 4-11-79, and the Registrant for that certain real property located at 2882C Walnut Avenue, Tustin, California 92780 10.17 Loan and Security Agreement dated December 4, 1995 by and between Main Credit Corp. and the Registrant, as amended by that certain letter agreement dated June 17, 1996 10.18 Accounts Collateral Security Agreement dated December 4, 1995 by and between Main Credit Corp. and the Registrant 10.19 Inventory Collateral Security Agreement dated December 4, 1995 by and between Main Credit Corp. and the Registrant 10.20 Equipment Collateral Security Agreement dated December 4, 1995 by and between Main Credit Corp. and the Registrant 10.21 Stock Purchase Agreement dated January 9, 1996 by and among the Registrant, the Steven J. Goodman Revocable Living Trust and Richard P. Stack 10.22 Stock Purchase Agreement dated January 9, 1996 by and among the Registrant, GAK Limited and Richard P. Stack 10.23 Letter Agreement dated February 15, 1996 between the Registrant and Jim Cox regarding loan in the original principal amount of $20,000 made by Jim Cox to the Registrant (the "Cox Note") 10.24 Letter Agreement dated June 30, 1996 between the Registrant and Jim Cox regarding the conversion of the Cox Note into shares of the Common Stock of Registrant 10.25 Letter Agreement dated February 16, 1996 between the Registrant and Peter Aiello regarding loan in the original principal amount of $20,000 made by Peter Aiello to the Registrant 10.26 Stock Purchase Agreement dated April 3, 1996 by and among the Registrant, the Steven J. Goodman Revocable Living Trust and Richard P. Stack 10.27 Securities Purchase Agreement dated May 17, 1996 by and between the Registrant and John R. Amos 10.28 Promissory Note dated May 31, 1996 in the original principal amount of $25,000 payable by the Registrant in favor of John R. Amos 10.29 Warrant dated May 31, 1996 issued by the Registrant in favor of John R. Amos 10.30 Securities Purchase Agreement dated May 17, 1996 by and between the Registrant and Jack S. Kompan
II-5
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT ------- ----------------------- 10.31 Promissory Note dated May 31, 1996 in the original principal amount of $25,000 payable by the Registrant in favor of Jack S. Kompan 10.32 Warrant dated May 31, 1996 issued by the Registrant in favor of Jack S. Kompan 10.33 Securities Purchase Agreement dated May 17, 1996 by and between the Registrant and Kanayo Partabrai Gangwani 10.34 Promissory Note dated May 31, 1996 in the original principal amount of $25,000 payable by the Registrant in favor of Kanayo Partabrai Gangwani 10.35 Warrant dated May 31, 1996 issued by the Registrant in favor of Kanayo Partabrai Gangwani 10.36 Stock Purchase Agreement dated May 23, 1996 by and among the Registrant, GAK Limited and Richard P. Stack 10.37 Securities Purchase Agreement dated May 23, 1996 by and between the Registrant and the Steven J. Goodman Charitable Remainder Trust 10.38 Promissory Note dated May 23, 1996 in the original principal amount of $50,000 payable by the Registrant in favor of the Steven J. Goodman Charitable Remainder Trust 10.39 Warrant dated May 23, 1996 issued by the Registrant in favor of the Steven J. Goodman Charitable Remainder Trust 10.40 Securities Purchase Agreement dated July 2, 1996 by and between the Registrant and Jack S. Kompan 10.41 Promissory Note dated July 2, 1996 in the original principal amount of $25,000 payable by the Registrant in favor of Jack S. Kompan 10.42 Warrant dated July 2, 1996 issued by the Registrant in favor of Jack S. Kompan 10.43 Subscription Agreement dated June 3, 1996 by and between the Registrant and Herbert R. Donica and Janice N. Donica 10.44 Letter Agreement dated July 22, 1996 between the Registrant and John R. Amos regarding the transfer of certain intellectual property by John R. Amos to the Registrant 10.45 Letter Agreement dated July 29, 1996 between the Registrant and C. Norman Campbell regarding the transfer of certain intellectual property by C. Norman Campbell to the Registrant 10.46 Purchase Order dated July 29, 1996 between Registrant and LG Electronics with respect to LCD displays 10.47 Form of Securities Purchase Agreement, including form of Promissory Note and Warrant, utilized in 1996 Private Placement 11.1 Statement re Calculation of Net Loss Per Share 21.1 Subsidiaries of the Registrant 23.1 Consent of Allen, Matkins, Leck, Gamble & Mallory LLP (included in the opinion to be filed as Exhibit 5.1) 23.2 Consent of Ernst & Young LLP 24.1 Power of Attorney (included on page II-8) 27 Financial Data Schedule
- -------- (1) To be filed by amendment. II-6 ITEM 28. UNDERTAKINGS. The small business issuer (the "Registrant") hereby undertakes the following: (1) 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. (2) For determining any liability under the Securities Act, to 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 under 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. (3) For determining any liability under the Securities Act, to 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. 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 the final adjudication of such issue. The Registrant hereby undertakes that the Registrant will: (1) File, during any period in which it offers or sells securities, a post- effective amendment to this registration statement to: (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 information in the registration statement; and (iii) Include additional or changed material information on the plan of distribution. (2) For determining 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-7 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 authorizes this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Tustin, State of California, on the 30th day of August, 1996. Javelin Systems, Inc. /s/ Richard P. Stack By: _________________________________ Richard P. Stack, President and Chief Executive Officer (Principal Executive Officer) POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Richard P. Stack and C. Norman Campbell, and each of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement, with all exhibits thereto and other documents in connection therewith, and to file the same with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, 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 attorneys-in-fact and agents, or any of them, or their or his substitutes, may lawfully do or cause to be done by virtue hereof. 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/ Richard P. Stack President, Chief Executive August 30, 1996 ____________________________________ Officer and Director Richard P. Stack (Principal Executive Officer) /s/ C. Norman Campbell Vice President, Engineering August 30, 1996 ____________________________________ and Director C. Norman Campbell /s/ Lawrence W. McCorkle Controller, Treasurer and August 30, 1996 ____________________________________ Secretary (Principal Lawrence W. McCorkle Financial and Accounting Officer)
II-8
SIGNATURE TITLE DATE --------- ----- ---- /s/ Steven J. Goodman Director August 30, 1996 ____________________________________ Steven J. Goodman /s/ Jay L. Kear Director August 30, 1996 ____________________________________ Jay L. Kear
II-9 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT ------- ----------------------- 1.1 Form of Underwriting Agreement by and between the Registrant and Meridian Capital Group, Inc.(1).................................. 3.1 Amended and Restated Certificate of Incorporation of Registrant.. 3.2 Amended and Restated Bylaws of Registrant........................ 4.1 Form of Representative's Warrant Agreement by and between the Registrant and Meridian Capital Group, Inc.(1)................... 4.2 Form of Certificate Evidencing Shares of Registrant's Common Stock(1)......................................................... 5.1 Opinion of Allen, Matkins, Leck, Gamble & Mallory LLP(1)......... 10.1 1996 Stock Incentive Award Plan of Registrant.................... 10.2 Form of 1996 Director Non-Qualified Stock Option Agreement....... 10.3 Form of 1996 Employee Non-Qualified Stock Option Agreement....... 10.4 Employment Agreement dated August 19, 1996 by and between the Registrant and Richard P. Stack.................................. 10.5 Employment Agreement dated August 19, 1996 by and between the Registrant and C. Norman Campbell................................ 10.6 Form of Indemnity Agreement entered into with each of the Registrant's officers and directors.............................. 10.7 Form of Stockholders Lock-Up Agreement to be entered into by the stockholders of Registrant....................................... 10.8 Form of Directors and Officers Lock-Up Agreement to be entered into by directors and officers of Registrant..................... 10.9 Form of Bridge Investors Lock-Up Agreement to be entered into by the holders of Warrants to purchase Common Stock of Registrant... 10.10 Promissory Note dated October 1, 1995 in the original principal amount of $80,481.45 payable by the Registrant in favor of Richard P. Stack (the "R.P. Stack Note")......................... 10.11 Letter Agreement dated April 1, 1996 between the Registrant and Richard P. Stack regarding the conversion of the R.P. Stack Note into shares of the Common Stock of the Registrant................ 10.12 Promissory Note dated October 1, 1995 in the original principal amount of $40,000 payable by the Registrant in favor of Teresa M. McRae (the "T. McRae Note")...................................... 10.13 Letter Agreement dated May 1, 1996 between the Registrant and Teresa M. McRae regarding the conversion of the T. McRae Note into shares of the Common Stock of the Registrant................ 10.14 Promissory Note dated October 1, 1995 in the original principal amount of $12,000 payable by the Registrant in favor of Richard A. Stack (the "R.A. Stack Note")................................. 10.15 Letter Agreement dated May 31, 1996 between the Registrant and Richard A. Stack regarding the conversion of the R.A. Stack Note into shares of the Common Stock of the Registrant................ 10.16 Standard Industrial/Commercial Single-Tenant Lease-Gross dated October 19, 1995 by and between Robert P. Peebles Trust, Dated 4- 11-79, and the Registrant for that certain real property located at 2882C Walnut Avenue, Tustin, California 92780.................
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT ------- ----------------------- 10.17 Loan and Security Agreement dated December 4, 1995 by and between Main Credit Corp. and the Registrant, as amended by that certain letter agreement dated June 17, 1996.................... 10.18 Accounts Collateral Security Agreement dated December 4, 1995 by and between Main Credit Corp. and the Registrant................ 10.19 Inventory Collateral Security Agreement dated December 4, 1995 by and between Main Credit Corp. and the Registrant............. 10.20 Equipment Collateral Security Agreement dated December 4, 1995 by and between Main Credit Corp. and the Registrant............. 10.21 Stock Purchase Agreement dated January 9, 1996 by and among the Registrant, the Steven J. Goodman Revocable Living Trust and Richard P. Stack................................................ 10.22 Stock Purchase Agreement dated January 9, 1996 by and among the Registrant, GAK Limited and Richard P. Stack.................... 10.23 Letter Agreement dated February 15, 1996 between the Registrant and Jim Cox regarding loan in the original principal amount of $20,000 made by Jim Cox to the Registrant (the "Cox Note")...... 10.24 Letter Agreement dated June 30, 1996 between the Registrant and Jim Cox regarding the conversion of the Cox Note into shares of the Common Stock of Registrant.................................. 10.25 Letter Agreement dated February 16, 1996 between the Registrant and Peter Aiello regarding loan in the original principal amount of $20,000 made by Peter Aiello to the Registrant............... 10.26 Stock Purchase Agreement dated April 3, 1996 by and among the Registrant, the Steven J. Goodman Revocable Living Trust and Richard P. Stack................................................ 10.27 Securities Purchase Agreement dated May 17, 1996 by and between the Registrant and John R. Amos................................. 10.28 Promissory Note dated May 31, 1996 in the original principal amount of $25,000 payable by the Registrant in favor of John R. Amos............................................................ 10.29 Warrant dated May 31, 1996 issued by the Registrant in favor of John R. Amos.................................................... 10.30 Securities Purchase Agreement dated May 17, 1996 by and between the Registrant and Jack S. Kompan............................... 10.31 Promissory Note dated May 31, 1996 in the original principal amount of $25,000 payable by the Registrant in favor of Jack S. Kompan.......................................................... 10.32 Warrant dated May 31, 1996 issued by the Registrant in favor of Jack S. Kompan.................................................. 10.33 Securities Purchase Agreement dated May 17, 1996 by and between the Registrant and Kanayo Partabrai Gangwani.................... 10.34 Promissory Note dated May 31, 1996 in the original principal amount of $25,000 payable by the Registrant in favor of Kanayo Partabrai Gangwani.............................................. 10.35 Warrant dated May 31, 1996 issued by the Registrant in favor of Kanayo Partabrai Gangwani....................................... 10.36 Stock Purchase Agreement dated May 23, 1996 by and among the Registrant, GAK Limited and Richard P. Stack.................... 10.37 Securities Purchase Agreement dated May 23, 1996 by and between the Registrant and the Steven J. Goodman Charitable Remainder Trust...........................................................
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT ------- ----------------------- 10.38 Promissory Note dated May 23, 1996 in the original principal amount of $50,000 payable by the Registrant in favor of the Steven J. Goodman Charitable Remainder Trust.................... 10.39 Warrant dated May 23, 1996 issued by the Registrant in favor of the Steven J. Goodman Charitable Remainder Trust................ 10.40 Securities Purchase Agreement dated July 2, 1996 by and between the Registrant and Jack S. Kompan............................... 10.41 Promissory Note dated July 2, 1996 in the original principal amount of $25,000 payable by the Registrant in favor of Jack S. Kompan.......................................................... 10.42 Warrant dated July 2, 1996 issued by the Registrant in favor of Jack S. Kompan.................................................. 10.43 Subscription Agreement dated June 3, 1996 by and between the Registrant and Herbert R. Donica and Janice N. Donica.......................... 10.44 Letter Agreement dated July 22, 1996 between the Registrant and John R. Amos regarding the transfer of certain intellectual property by John R. Amos to the Registrant...................... 10.45 Letter Agreement dated July 29, 1996 between the Registrant and C. Norman Campbell regarding the transfer of certain intellectual property by C. Norman Campbell to the Registrant... 10.46 Purchase Order dated July 29, 1996 between Registrant and LG Electronics with respect to LCD displays........................ 10.47 Form of Securities Purchase Agreement, including form of Promissory Note and Warrant, utilized in 1996 Private Placement. 11.1 Statement re Calculation of Net Loss Per Share.................. 21.1 Subsidiaries of the Registrant.................................. 23.1 Consent of Allen, Matkins, Leck, Gamble & Mallory LLP (included in the opinion to be filed as Exhibit 5.1)...................... 23.2 Consent of Ernst & Young LLP.................................... 24.1 Power of Attorney (included on page II-8)....................... 27 Financial Data Schedule.........................................
- -------- (1) To be filed by amendment. EX-3.1 2 AMENDED CERTIFICATE OF INCORPORATION EXHIBIT 3.1 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF SUNWOOD RESEARCH, INC. --------------------- SUNWOOD RESEARCH, INC. (the "Corporation"), a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware (the "DGCL"), does hereby certify that: 1. The name of the Corporation is Sunwood Research, Inc. The Certificate of Incorporation for Sunwood Research, Inc. was filed with the Secretary of State of the State of Delaware (the "Secretary of State") on September 19, 1995. 2. Pursuant to an Action by Unanimous Written Consent in lieu of a meeting of the Board of Directors of the Corporation, the Corporation adopted resolutions setting forth a proposed Amended and Restated Certificate of Incorporation of the Corporation, declaring said Amended and Restated Certificate of Incorporation to be advisable and authorizing the officers of the Corporation to present the proposed Amended and Restated Certificate of Incorporation to the stockholders of the Corporation for their consideration. 3. Thereafter, the proposed Amended and Restated Certificate of Incorporation of the Corporation was approved by an Action by Written Consent of the holders of a majority of the outstanding shares of stock of the Corporation entitled to vote thereon in accordance with Sections 228(a) and (d) and 242(b) of the DGCL and written notice of the taking of such action has been given to those stockholders who have not consented in writing in accordance with Section 228(d) of the DGCL. 4. Pursuant to Sections 242 and 245 of the DGCL, this Amended and Restated Certificate of Incorporation restates and further amends the provisions of the Certificate of Incorporation of this Corporation filed with the Secretary of State on September 19, 1995. 5. This Amended and Restated Certificate of Incorporation was duly adopted in accordance with the provisions of Sections 242 and 245 of the DGCL. 6. The text of the Certificate of Incorporation of the Corporation is hereby restated and further amended to read in its entirety as follows: FIRST. The name of the Corporation is Javelin Systems, Inc. ----- SECOND. The address of the Corporation's registered office in the ------ State of Delaware is 1209 Orange Street, in the City of Wilmington, County of New Castle 19801. The name of its registered agent at such address is The Corporation Trust Company. 1 THIRD. The purpose of the Corporation is to engage in any lawful act ----- or activity for which corporations may be organized under the DGCL. FOURTH. ------ (A) Authorized Shares. The total number of shares which the ----------------- Corporation shall have authority to issue is eleven million (11,000,000) shares of capital stock, of which ten million (10,000,000) shares shall be designated Common Stock, par value of $.0l per share, and one million (1,000,000) shares shall be designated Preferred Stock, par value of $.0l per share. (B) Automatic Conversion. Upon the restatement and amendment of this -------------------- Article FOURTH, each outstanding share of Common Stock is automatically converted into Four Thousand Three Hundred (4,300) shares of fully paid and nonassessable Common Stock, par value of $.01 per share, without any further action on the part of the holder thereof or the Corporation. On and after the effective date of this Amended and Restated Certificate of Incorporation, notwithstanding that any certificates representing shares of the Common Stock shall not have been surrendered, the person or persons holding certificates representing Common Stock shall be regarded for all corporate purposes as the holder or holders of the number of shares of Common Stock to which such holder or holders are entitled upon the conversion of the Common Stock described above. (C) Preferred Stock. Shares of Preferred Stock may be issued from --------------- time to time in one or more classes or series as the Board of Directors, by resolution or resolutions, may from time to time determine, each of said classes or series to be distinctively designated (each such resolution and designation hereinafter being referred to as a "Preferred Stock Designation"). The voting powers, preferences and relative, participating, optional and other special rights, and the qualifications, limitations or restrictions thereof, if any, of each such class or series may differ from those of any and all other classes or series of Preferred Stock at any time outstanding, and the Board of Directors is hereby expressly granted authority to fix or alter, by resolution or resolutions, the designation, number, voting powers, preferences and relative, participating, optional and other special rights, and the qualifications, limitations and restrictions thereof, of each such class or series, including, but without limiting the generality of the foregoing, the following: (1) The distinctive designation of, and the number of shares of Preferred Stock that shall constitute, such class or series, which number (except as otherwise provided by the Board of Directors in the resolution establishing such class or series) may be increased or decreased (but not below the number of shares of such class or series then outstanding) from time to time by like action of the Board of Directors; (2) The rights in respect of dividends, if any, of such class or series of Preferred Stock, the extent of the preference or relation, if any, of such dividends to the dividends payable on any other class or classes or any other series of the same or other class or classes of capital stock of the Corporation, and whether such dividends shall be cumulative or noncumulative; 2 (3) The right, if any, of the holders of such class or series of Preferred Stock to convert the same into, or exchange the same for, shares of any other class or classes or of any other series of the same or any other class or classes of capital stock of the Corporation and the terms and conditions of such conversion or exchange; (4) Whether or not shares of such class or series of Preferred Stock shall be subject to redemption, and the redemption price or prices and the time or times at which, and the terms and conditions on which, shares of such class or series of Preferred Stock may be redeemed; (5) The rights, if any, of the holders of such class or series of Preferred Stock upon the voluntary or involuntary liquidation, dissolution or winding up of the Corporation or in the event of any merger or consolidation of or sale of assets by the Corporation; (6) The terms of any sinking fund or redemption or purchase account, if any, to be provided for shares of such class or series of Preferred Stock; (7) The voting powers, if any, of the holders of any class or series of Preferred Stock generally or with respect to any particular matter, which may be less than, equal to or greater than one vote per share, and which may, without limiting the generality of the foregoing, include the right, voting as a class or series by itself or together with the holders of any other class or classes or series of the same or other class or classes of Preferred Stock or all classes or series of Preferred Stock, to elect one or more directors of the Corporation (which, without limiting the generality of the foregoing, may include a specified number or portion of the then-existing number of authorized directorships of the Corporation, or a specified number or portion of directorships in addition to the then-existing number of authorized directorships of the Corporation) generally or under such specific circumstances and on such conditions, as shall be provided in the resolution or resolutions of the Board of Directors adopted pursuant hereto; and (8) Such other powers, preferences and relative, participating, optional and other special rights, and the qualifications, limitations and restrictions thereof, as the Board of Directors shall determine. FIFTH. The Board of Directors shall consist of not less than three ----- (3) nor more than seven (7) directors, the precise number thereof to be fixed from time to time by vote of a majority of the Board of Directors; provided, however, that the number of directors shall not be reduced so as to shorten the term of any director at the time in office. The Board of Directors shall be divided into three classes, designated Class I, Class II and Class III. Each class shall consist, as nearly as may be possible, of one-third of the total number of directors constituting the entire Board of Directors. Initially, Class I directors shall be elected for a one-year term, Class II directors for a two-year term and Class III directors for a three-year term. At the annual meeting of stockholders beginning in 1997, and at each annual meeting thereafter, successors to the class of directors whose term expires at that annual meeting of stockholders shall be elected for a three-year term. If the number of directors has 3 changed, any increase or decrease shall be apportioned among the classes so as to maintain the number of directors in each class as nearly equal as possible, and any additional director of any class elected to fill a vacancy resulting from an increase in such class shall hold office for a term that shall coincide with the remaining term of that class, but in no case will a decrease in the number of directors shorten the term of any incumbent director. A director shall hold office until the annual meeting of stockholders for the year in which his term expires and until his successor shall be elected and shall qualify, subject, however, to prior death, resignation, retirement, disqualification or removal from office. Any vacancy on the Board of Directors that results from an increase in the number of directors shall be filled by a majority of the Board of Directors then in office, provided that a quorum is present, and any other vacancy occurring in the Board of Directors shall be filled by a majority of the directors then in office, even if less than a quorum, or by a sole remaining director. Any director elected to fill a vacancy not resulting from an increase in the number of directors shall have the same remaining term as that of his predecessor. Notwithstanding the foregoing, whenever the holders of any one or more classes or series of Preferred Stock issued by the Corporation, if any, shall have the right, voting separately by class or series, to elect directors at an annual or special meeting of stockholders, the election, term of office, filling of vacancies and other features of such directorships shall be governed by the terms of this Certificate of Incorporation or the Preferred Stock Designation applicable thereto, and such directors so elected shall not be divided into classes pursuant to this Article FIFTH unless expressly provided by such terms. SIXTH. Directors of the Corporation may be removed by stockholders ----- only for cause by the affirmative vote of the holders of a majority of the outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors, voting together as a single class. SEVENTH. All the powers of the Corporation, insofar as the same may ------- be lawfully vested by this Certificate of Incorporation in the Board of Directors, are hereby conferred upon the Board of Directors in furtherance and not in limitation of the powers conferred by statute. In furtherance and not in limitation of such powers, the Board of Directors shall have the power to make, adopt, alter, amend and repeal from time to time bylaws of the Corporation, subject to the right of the stockholders entitled to vote with respect thereto to adopt, alter, amend and repeal bylaws made by the Board of Directors. EIGHTH. A director of the Corporation shall not be liable to the ------ Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except to the extent such exemption from liability or limitation thereof is not permitted under the DGCL as the same exists or may hereafter be amended. Any amendment, modification or repeal of the foregoing sentence by the stockholders of the Corporation shall not adversely affect any right or protection of a director of the Corporation in respect of any act or omission occurring prior to the time of such amendment, modification or repeal. NINTH. Elections of directors need not be by written ballot except ----- and to the extent provided in the bylaws of the Corporation. 4 TENTH. The Corporation reserves the right to amend, alter or repeal ----- any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed herein or by statute, and all rights and powers conferred herein are subject to this reserved power; provided, however, that -------- ------- subject to the powers and rights provided for herein or in any Preferred Stock Designation with respect to Preferred Stock issued by the Corporation, if any, but notwithstanding anything else contained in this Certificate of Incorporation to the contrary, the affirmative vote of the holders of at least sixty-six and two-thirds percent (66-2/3%) of the voting power of all of the then outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors, voting together as a single class, shall be required to amend, alter, repeal or adopt any provision inconsistent with, this Article TENTH or Articles FIFTH or SIXTH of this Certificate of Incorporation. ELEVENTH. The Board of Directors shall have the power to hold its -------- meetings within or outside the State of Delaware, at such place as from time to time may be designated by the bylaws of the Corporation or by resolution of the Board of Directors. IN WITNESS WHEREOF, the Corporation has caused this Amended and Restated Certificate to be signed by Richard Phillip Stack, its President, and attested by Lawrence W. McCorkle, its Secretary, this 22nd day of August, 1996. JAVELIN SYSTEMS, INC., a Delaware corporation /s/ Richard Phillip Stack --------------------------------- Richard Phillip Stack President ATTEST: /s/ Lawrence W. McCorkle - --------------------------------------- Lawrence W. McCorkle, Secretary 5 EX-3.2 3 AMENDED BYLAWS OF REGISTRANT EXHIBIT 3.2 AMENDED AND RESTATED BYLAWS OF JAVELIN SYSTEMS, INC. ARTICLE I STOCKHOLDERS ------------ Section 1.1 Place of Meetings. Meetings of the stockholders for the ----------------- election of directors or for any other purpose shall be held at such time and place, either within or without the State of Delaware, as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting or in a duly executed waiver of notice thereof. Section 1.2 Annual Meetings. The annual meetings of stockholders --------------- shall be held on such date and at such time as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting, at which meetings the stockholders shall elect in accordance with Sections 2.1 and 2.2 of Article II of these bylaws, by a majority vote, those directors belonging to the class or classes of directors to be elected at such meeting, and transact such other business as may properly be brought before the meeting. Section 1.3 Special Meetings. Special meetings of stockholders for ---------------- any purpose or purposes may be called at any time by the Board of Directors, or by a committee of the Board of Directors that has been duly designated by the Board of Directors and whose powers and authority, as expressly provided in a resolution of the Board of Directors, include the power to call such meetings, or by the holders of shares entitled to cast not less than ten percent (10%) of the votes at that meeting, but such special meetings may not be called by any other person or persons. Section 1.4 Notice of Meetings. Whenever stockholders are required ------------------ or permitted to take any action at a meeting, a written notice of the meeting shall be given that shall state the place, date and hour of the meeting and, in the case of a special meeting, the purpose or purposes for which the meeting is called. Unless otherwise provided by law, the certificate of incorporation or these by-laws, the written notice of any meeting shall be given not less than ten (10) nor more than sixty (60) days before the date of the meeting to each stockholder entitled to vote at such meeting. If mailed, such notice shall be deemed to be given when deposited in the United States mail, postage prepaid, directed to the stockholder at his address as it appears on the records of the corporation. Section 1.5 Adjournments. Any meeting of stockholders, annual or ------------ special, may adjourn from time to time to reconvene at the same or some other place, and notice need not be given of any such adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting the corporation may transact any -1- business which might have been transacted at the original meeting. If the adjournment is for more than thirty (30) days, or if after the adjournment a new record date is fixed for the adjourned meeting, notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. Section 1.6 Quorum. Except as otherwise provided by law, the ------ certificate of incorporation or these bylaws, at each meeting of stockholders the presence in person or by proxy of the holders of a majority in voting power of the outstanding shares of stock entitled to vote at the meeting shall be necessary and sufficient to constitute a quorum. In the absence of a quorum, the stockholders so present may, by majority vote, adjourn the meeting from time to time in the manner provided in Section 1.5 of this Article I until a quorum shall attend. Shares of its own stock belonging to the corporation or to another corporation, if a majority of the shares entitled to vote in the election of directors of such other corporation is held, directly or indirectly, by the corporation, shall neither be entitled to vote nor be counted for quorum purposes; provided, however, that the foregoing shall not limit the right of the corporation or any subsidiary of the corporation to vote stock, including, but not limited to, its own stock, held by it in a fiduciary capacity. Section 1.7 Organization. Meetings of stockholders shall be presided ------------ over by the Chairman of the Board, if any, or in his absence by the Vice Chairman of the Board, if any, or in his absence by the President, or in his absence by a Vice President, or in the absence of the foregoing persons by a chairman chosen at the meeting. The Secretary shall act as secretary of the meeting, but in his absence the chairman of the meeting may appoint any person to act as secretary of the meeting. The chairman of the meeting shall announce at the meeting of stockholders the date and time of the opening and the closing of the polls for each matter upon which the stockholders will vote. Section 1.8 Voting; Proxies. Except as otherwise provided by law or --------------- by the certificate of incorporation, each stockholder entitled to vote at any meeting of stockholders shall be entitled to one vote for each share of stock held by him which has voting power upon the matter in question. Each stockholder entitled to vote at a meeting of stockholders may authorize another person or persons to act for him by proxy, but no such proxy shall be voted or acted upon after three years from its date, unless the proxy provides for a longer period. A proxy shall be irrevocable if it states that it is irrevocable and if, and only as long as, it is coupled with an interest sufficient in law to support an irrevocable power. A stockholder may revoke any proxy which is not irrevocable by attending the meeting and voting in person or by filing an instrument in writing revoking the proxy or by delivering a proxy in accordance with applicable law bearing a later date to the Secretary of the corporation. Voting at meetings of stockholders need not be by written ballot. At all meetings of stockholders for the election of directors, directors shall be elected by a plurality of the votes of the shares present in person or represented by proxy at the meeting and entitled to vote on the election of directors. All other elections and questions shall, unless otherwise provided by law, the certificate of incorporation or these bylaws, be decided by the affirmative vote of the holders of a majority in voting power of the shares of stock which are present in person or represented by proxy at the meeting and entitled to vote thereon. -2- Section 1.9 Fixing Date for Determination of Stockholders of Record. ------------------------------------------------------- In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date: (a) in the case of determination of stockholders entitled to vote at any meeting of stockholders or adjournment thereof, shall, unless otherwise required by law, not be more than sixty (60) nor less than ten (10) days before the date of such meeting; and (b) in the case of determination of stockholders entitled to express consent to corporate action in writing without a meeting, shall not be more than ten (10) days from the date upon which the resolution fixing the record date is adopted by the Board of Directors; and (c) in the case of any other action, shall not be more than sixty (60) days prior to such other action. If no record date is fixed: (i) the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held; and (ii) the record date for determining stockholders entitled to express consent to corporate action in writing without a meeting, when no prior action of the Board of Directors is required by law, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the corporation in accordance with applicable law, or, if prior action by the Board of Directors is required by law, shall be at the close of business on the day on which the Board of Directors adopts the resolution taking such prior action; and (iii) the record date for determining stockholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. Section 1.10 List of Stockholders Entitled to Vote. The Secretary ------------------------------------- shall prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof and may be inspected by any stockholder who is present. Upon the willful neglect or refusal of the directors to produce such a list at any meeting for the election of directors, they shall be ineligible for election to any office at such meeting. Except as otherwise provided by law, the stock ledger shall be the only evidence as to who are the stockholders entitled to examine the stock ledger, the list of stockholders or the books of the corporation, or to vote in person or by proxy at any meeting of stockholders. -3- Section 1.11 Action by Consent of Stockholders. Unless otherwise --------------------------------- restricted by the certificate of incorporation, any action required or permitted to be taken at any annual or special meeting of the stockholders may be taken without a meeting, without prior notice and without a vote, if a consent or consents 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 and shall be delivered (by hand or by certified or registered mail, return receipt requested) to the corporation by delivery to its registered office in the State of Delaware, its principal place of business, or an officer or agent of the corporation having custody of the book in which proceedings of minutes of stockholders are recorded. 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. Section 1.12 Inspectors of Election. The corporation may, and shall ---------------------- if required by law, in advance of any meeting of stockholders, appoint one or more inspectors of election, who may be employees of the corporation, to act at the meeting or any adjournment thereof and to make a written report thereof. The corporation may designate one or more persons as alternate inspectors to replace any inspector who fails to act. In the event that no inspector so appointed or designated is able to act at a meeting of stockholders, the person presiding at the meeting shall appoint one or more inspectors to act at the meeting. Each inspector, before entering upon the discharge of his or her duties, shall take and sign an oath to execute faithfully the duties of inspector with strict impartiality and according to the best of his or her ability. The inspector or inspectors so appointed or designated shall (a) ascertain the number of shares of capital stock of the corporation outstanding and the voting power of each such share, (b) determine the shares of capital stock of the corporation represented at the meeting and the validity of proxies and ballots, (c) count all votes and ballots, (d) determine and retain for a reasonable period a record of the disposition of any challenges made to any determination by the inspectors, and (e) certify their determination of the number of shares of capital stock of the corporation represented at the meeting and such inspectors' count of all votes and ballots. Such certification and report shall specify such other information as may be required by law. In determining the validity and counting of proxies and ballots cast at any meeting of stockholders of the corporation, the inspectors may consider such information as is permitted by applicable law. No person who is a candidate for an office at an election may serve as an inspector at such election. If required by law, the date and time of the opening and the closing of the polls for each matter upon which the stockholders will vote at a meeting shall be announced at the meeting. To the extent required by law, no ballot, proxies or votes, nor any revocations thereof or changes thereto, shall be accepted by the inspector or inspectors after the closing of the polls unless the Court of Chancery upon application by a stockholder shall determine otherwise. Section 1.13 Conduct of Meetings. The Board of Directors of the ------------------- corporation may adopt by resolution such rules and regulations for the conduct of the meeting of stockholders as it shall deem appropriate. Except to the extent inconsistent with such rules and regulations as adopted by the Board of Directors, the chairman of any meeting of stockholders shall have the right and authority to prescribe such rules, regulations and procedures and to do all such acts as, in the judgment of such chairman, are appropriate for the proper conduct of the meeting. Such rules, regulations or procedures, whether adopted by the Board of Directors or prescribed by the -4- chairman of the meeting, may include, without limitation, the following: (a) the establishment of an agenda or order of business for the meeting; (b) rules and procedures for maintaining order at the meeting and the safety of those present; (c) limitations on attendance at or participation in the meeting to stockholders of record of the corporation, their duly authorized and constituted proxies or such other persons as the chairman of the meeting shall determine; (d) restrictions on entry to the meeting after the time fixed for the commencement thereof; and (e) limitations on the time allotted to questions or comments by participants. Unless and to the extent determined by the Board of Directors or the chairman of the meeting, meetings of stockholders shall not be required to be held in accordance with the rules of parliamentary procedure. ARTICLE II BOARD OF DIRECTORS ------------------ Section 2.1 Number; Qualifications. The Board of Directors shall ---------------------- consist of not less than three (3) nor more than seven (7) directors, the precise number thereof to be fixed at five (5) until changed from time to time by vote of a majority of the Board of Directors; provided, however, that the number of directors shall not be reduced so as to shorten the term of any director at the time in office. Section 2.2 Terms. The Board of Directors shall be divided into ----- three classes, designated Class I, Class II and Class III. Each class shall consist, as nearly as may be possible, of one-third of the total number of directors constituting the entire Board of Directors. Initially, Class I directors shall be elected for a one-year term, Class II directors for a two- year term and Class III directors for a three-year term. At the annual meeting of stockholders beginning in 1997, and at each annual meeting thereafter, successors to the class of directors whose term expires at that annual meeting of stockholders shall be elected for a three-year term. If the number of directors has changed, any increase or decrease shall be apportioned among the classes so as to maintain the number of directors in each class as nearly equal as possible, and any additional director of any class elected to fill a vacancy resulting from an increase in such class shall hold office for a term that shall coincide with the remaining term of that class, but in no case will a decrease in the number of directors shorten the term of any incumbent director. A director shall hold office until the annual meeting of stockholders for the year in which his term expires and until his successor shall be elected and shall qualify, subject, however, to prior death, resignation, retirement, disqualification or removal from office. Any vacancy on the Board of Directors that results from an increase in the number of directors shall be filled by a majority of the Board of Directors then in office, provided that a quorum is present, and any other vacancy occurring in the Board of Directors shall be filled by a majority of the directors then in office, even if less than a quorum, or by a sole remaining director. Any director elected to fill a vacancy not resulting from an increase in the number of directors shall have the same remaining term as that of his predecessor. Notwithstanding the foregoing, whenever the holders of any one or more classes or series of preferred stock issued by the corporation, if any, shall have the right, voting separately by class or series, to elect directors at an annual or special meeting of stockholders, the election, term of office, filling of vacancies and other features of such directorships shall be governed by -5- the terms of the certificate of incorporation applicable thereto, and such directors so elected shall not be divided into classes pursuant to this Section 2.2 of this Article II unless expressly provided by such terms. Section 2.3 Removal. At any meeting of stockholders properly called ------- for such purpose and with prior notice thereof, all the directors, or all the directors of a particular class, or any individual director, may be removed only for cause by the affirmative vote of a majority of the issued and outstanding shares of the capital stock of the corporation entitled to vote generally in the election of directors, voting together as a single class. Section 2.4 Vacancies. Any vacancy on the Board of Directors that --------- results from an increase in the number of directors shall be filled by a majority of the Board of Directors then in office, provided that a quorum is present, and any other vacancy occurring in the Board of Directors shall be filled by a majority of the directors then in office, even if less than a quorum, or by a sole remaining director. Any director of any class elected to fill a vacancy resulting from an increase in the number of directors in such class shall hold office for a term that shall coincide with the remaining term of that class. Any director elected to fill a vacancy not resulting from an increase in the number of directors shall have the same remaining term as that of his predecessor. Section 2.5 Duties and Powers. The business of the corporation shall ----------------- be managed by or under the direction of the Board of Directors which may exercise all such 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 bylaws directed or required to be exercised or done by the stockholders. Section 2.6 Regular Meetings. Regular meetings of the Board of ---------------- Directors may be held at such places within or without the State of Delaware and at such times as the Board of Directors may from time to time determine, and if so determined notices thereof need not be given. Section 2.7 Special Meetings. Special meetings of the Board of ---------------- Directors may be held at any time or place within or without the State of Delaware whenever called by the President, any Vice President, the Secretary, or by any member of the Board of Directors. Notice of a special meeting of the Board of Directors shall be given by the person or persons calling the meeting at least twenty-four hours before the special meeting. Section 2.8 Telephonic Meetings Permitted. Members of the Board of ----------------------------- Directors, or any committee designated by the Board of Directors, may participate in a meeting thereof by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this by- law shall constitute presence in person at such meeting. Section 2.9 Quorum; Vote Required for Action. At all meetings of the -------------------------------- Board of Directors a majority of the whole Board of Directors shall constitute a quorum for the transaction of business. Except in cases in which the certificate of incorporation, these by-laws or -6- applicable law otherwise provides, the vote of a majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors. Section 2.10 Organization. Meetings of the Board of Directors shall ------------ be presided over by the Chairman of the Board, if any, or in his absence by the Vice Chairman of the Board, if any, or in his absence by the President, or in their absence by a chairman chosen at the meeting. The Secretary shall act as secretary of the meeting, but in his absence the chairman of the meeting may appoint any person to act as secretary of the meeting. Section 2.11 Informal Action by Directors. Unless otherwise ---------------------------- restricted by the certificate of incorporation or these by-laws, any action required or permitted to be taken at any meeting of the Board of Directors, or of any committee thereof, may be taken without a meeting if all members of the Board of Directors or such 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 of Directors or such committee. Section 2.12 Interested Directors. No contract or transaction -------------------- between the corporation and one or more of its directors or officers, or between the corporation and any other corporation, partnership, association or other organization in which one or more of its directors or officers are directors or officers, or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the Board of Directors or committee thereof which authorizes the contract or transaction, or solely because his or their votes are counted for such purpose if (a) the material facts as to his or their relationship or interest and as to the contract or transaction are disclosed or are known to the Board of Directors or the committee, and the Board of Directors or committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; or (b) the material facts as to his or their relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the stockholders; or (c) the contract or transaction is fair as to the corporation as of the time it is authorized, approved or ratified by the Board of Directors, a committee thereof or the stockholders. Common or interested directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or of a committee which authorizes the contract or transaction. Section 2.13 Fees and Compensation of Directors. Directors and ---------------------------------- members of committees shall be reimbursed for all expenses incurred in connection with attending Board of Directors and/or committee meetings including, but not limited to, travel and lodging expenses. In addition, directors and members of committees may receive such compensation, if any, for their services, and such additional reimbursement of expenses, as may be fixed or determined by resolution of the Board of Directors. This Section 2.13 shall not be construed to preclude any director from serving the corporation in any other capacity as an officer, agent, employee, or otherwise, and receiving compensation for those services. -7- ARTICLE III COMMITTEES ---------- Section 3.1 Committees. The Board of Directors may, by resolution ---------- passed by a majority of the whole Board, designate one or more committees, each committee to consist of one or more of the directors of the corporation. Any such committee and each member thereof shall serve at the pleasure of the Board of Directors. The Board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence of any such designation of one or more directors as alternate members of any committee, any vacancy occurring in any such committee may be filled by the Board of Directors. In the absence or disqualification of a member of the committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not such person or persons constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in place of any such absent or disqualified member. Any such committee, to the extent permitted by law and to the extent provided in the resolution of the Board of Directors, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers which may require it. No such committee shall have power or authority in reference to amending the Certificate of Incorporation of the corporation (except that a committee may, to the extent authorized in the resolution or resolutions providing for the issuance of shares of stock adopted by the Board of Directors pursuant to Paragraph C of Article FOURTH of the Amended and Restated Certificate of Incorporation, fix the designations and any of the preferences or rights of such shares relating to dividends, redemption, dissolution, any distribution of assets of the corporation or the conversion into, or the exchange of such shares for, shares of any other class or classes or any other series of the same or any other class or classes of stock of the corporation or fix the number of shares of any such series or class of stock or authorize the increase or decrease of the shares of any such series or class), adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease or exchange of all or substantially all of the corporation's property and assets, recommending to the stockholders a dissolution of the corporation or revocation of dissolution, or amending these bylaws; and, unless the resolution expressly so provides, no such committee shall have the power or authority to declare a dividend, to authorize the issuance of stock or adopt a certificate of ownership and merger. Section 3.2 Committee Rules. Unless the Board of Directors otherwise --------------- provides, each committee designated by the Board of Directors may make, alter and repeal rules for the conduct of its business. In the absence of such rules each committee shall conduct its business in the same manner as the Board of Directors conducts its business pursuant to Article II of these bylaws. -8- ARTICLE IV OFFICERS -------- Section 4.1 Executive Officers; Election; Qualifications; Term of ----------------------------------------------------- Office; Resignation; Removal; Vacancies. The Board of Directors shall elect a - --------------------------------------- President, a Secretary and a Treasurer, and it may, if it so determines, choose a Chairman of the Board and a Vice Chairman of the Board from among its members. The Board of Directors may also choose one or more Vice Presidents, one or more Assistant Secretaries, and one or more Assistant Treasurers. Each such officer shall hold office until the first meeting of the Board of Directors after the annual meeting of stockholders next succeeding his election, and until his successor is elected and qualified or until his earlier resignation or removal. Any officer may resign at any time upon written notice to the corporation. The Board of Directors may remove any officer with or without cause at any time, but such removal shall be without prejudice to the contractual rights of such officer, if any, with the corporation. Any number of offices may be held by the same person. Any vacancy occurring in any office of the corporation by death, resignation, removal or otherwise may be filled for the unexpired portion of the term by the Board of Directors at any regular or special meeting. Section 4.2 Chairman of the Board. The Chairman of the Board, if --------------------- such an officer be elected, shall, if present, preside at meetings of the Board of Directors and exercise and perform such other powers and duties as may be from time to time prescribed by these bylaws. If there is no President, the Chairman of the Board shall in addition be the chief executive officer of the corporation and shall have the powers and duties prescribed in Section 4.3 of this Article IV. Section 4.3 President. Subject to such supervisory powers, if any, --------- as may be given by the Board of Directors to the Chairman of the Board, if there be such an officer, the President shall be the chief executive officer of the corporation and shall, subject to the control of the Board of Directors, have general supervision, direction, and control of the business and the officers of the corporation. He shall preside at all meetings of the stockholders and, in the absence of the Chairman of the Board, or if there be none, at all meetings of the Board of Directors. He shall have the general powers and duties of management usually vested in the office of president of a corporation, and shall have such other powers and duties as may be prescribed by the Board of Directors or the bylaws. Section 4.4 Vice Presidents. In the absence or disability of the --------------- President, the Vice Presidents, if any, in order of their rank as fixed by the Board of Directors or, if not ranked, a Vice President designated by the Board of Directors, shall perform all the duties of the President, and when so acting shall have all the powers of, and be subject to all the restrictions upon, the President. The Vice Presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the Board of Directors, the bylaws, the President or the Chairman of the Board. Section 4.5 Secretary. The Secretary shall keep or cause to be kept, --------- at the principal executive office of the corporation or such other place as the Board of Directors may direct, a book of minutes of all meetings and actions of directors, committees of directors, and -9- stockholders, with the time and place of holding, whether regular or special, and, if special, how authorized, the notice given, the names of those present at directors' meetings, the number of shares present or represented at stockholders' meetings, and the proceedings. The Secretary shall keep, or cause to be kept, at the principal executive office of the corporation or at the office of the corporation's transfer agent or registrar, as determined by resolution of the Board of Directors, a share register, or a duplicate share register, showing the names of all stockholders and their addresses, the number and classes of shares held by each, the number and date of certificates issued for the same, and the number and date of cancellation of every certificate surrendered for cancellation. The Secretary shall give, or cause to be given, notice of all meetings of the stockholders and of the Board of Directors required by these bylaws or by law to be given, and shall keep the seal of the corporation if one be adopted, in safe custody, and shall have such other powers and perform such other duties as may be prescribed by the Board of Directors, the bylaws, the President or the Chairman of the Board. Section 4.6 Treasurer. The Treasurer shall keep and maintain, or --------- cause to be kept and maintained, adequate and correct books and records of accounts of the properties and business transactions of the corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital, retained earnings, and shares. The books of account shall at all reasonable times be open to inspection by any director. The Treasurer shall deposit all moneys and other valuables in the name and to the credit of the corporation with such depositories as may be designated by the Board of Directors. The Treasurer shall disburse the funds of the corporation as may be ordered by the Board of Directors, shall render to the President and directors, whenever they request it, an account of all of his transactions as Treasurer and of the financial condition of the corporation, and shall have other powers and perform such other duties as may be prescribed by the Board of Directors, the bylaws, the President or the Chairman of the Board. ARTICLE V STOCK ----- Section 5.1 Certificates. Every holder of stock shall be entitled to ------------ have a certificate signed by or in the name of the corporation by the Chairman or Vice Chairman of the Board of Directors, if any, or the President or a Vice President, and by the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary, of the corporation certifying the number of shares owned by him in the corporation. Any of or all the signatures on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent, or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if he were such officer, transfer agent, or registrar at the date of issue. -10- Section 5.2 Lost, Stolen or Destroyed Stock Certificates; Issuance of --------------------------------------------------------- New Certificates. The corporation may issue a new certificate of stock in the - ---------------- place of any certificate theretofore issued by it, alleged to have been lost, stolen or destroyed, and the corporation may require the owner of the lost, stolen or destroyed certificate, or his legal representative, to give the corporation a bond sufficient to indemnify it against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate. Section 5.3 Beneficial Owners. The corporation shall be entitled to ----------------- recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and to hold liable for calls and assessments a person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by law. ARTICLE VI INDEMNIFICATION --------------- Section 6.1 Right to Indemnification. The corporation shall ------------------------ indemnify and hold harmless, to the fullest extent permitted by applicable law as it presently exists or may hereafter be amended, any person who was or is made or is threatened to be made a party or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (a "proceeding"), by reason of the fact that he, or a person for whom he is the legal representative, is or was a director or officer of the corporation or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust, enterprise or nonprofit entity, including service with respect to employee benefit plans (an "indemnitee"), against all liability and loss suffered and expenses (including attorneys' fees) reasonably incurred by such indemnitee. The corporation shall be required to indemnify an indemnitee in connection with a proceeding (or part thereof) initiated by such indemnitee only if the initiation of such proceeding (or part thereof) by the indemnitee was authorized by the Board of Directors of the corporation. Section 6.2 Prepayment of Expenses. The corporation shall pay the ---------------------- expenses (including attorneys' fees) incurred by an indemnitee in defending any proceeding in advance of its final disposition; provided, however, that the -------- ------- payment of expenses incurred by a director or officer in advance of the final disposition of the proceeding shall be made only upon receipt of an undertaking by the director or officer to repay all amounts advanced if it should be ultimately determined that the director or officer is not entitled to be indemnified under this Article or otherwise. Section 6.3 Claims. If a claim for indemnification or payment of ------ expenses under this Article is not paid in full within sixty (60) days after a written claim therefor by the indemnitee has been received by the corporation, the indemnitee may file suit to recover the unpaid amount of such claim and, if successful in whole or in part, shall be entitled to be paid the expense of prosecuting such claim. In any such action the corporation shall have the burden of -11- proving that the indemnitee was not entitled to the requested indemnification or payment of expenses under applicable law. Section 6.4 Nonexclusivity of Rights. The rights conferred on any ------------------------ person by this Article VI shall not be exclusive of any other rights which such person may have or hereafter acquire under any statute, provision of the Certificate of Incorporation, these bylaws, agreement, vote of stockholders or disinterested directors or otherwise. Section 6.5 Other Indemnification. The corporation's obligation, if --------------------- any, to indemnify any person who was or is serving at its request as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, enterprise or nonprofit entity shall be reduced by any amount such person may collect as indemnification from such other corporation, partnership, joint venture, trust, enterprise or nonprofit enterprise. Section 6.6 Amendment or Repeal. Any repeal or modification of the ------------------- foregoing provisions of this Article VI shall not adversely affect any right or protection hereunder of any person in respect of any act or omission occurring prior to the time of such repeal or modification. ARTICLE VII MISCELLANEOUS ------------- Section 7.1 Fiscal Year. The fiscal year of the corporation shall be ----------- determined by resolution of the Board of Directors. Section 7.2 Seal. The corporate seal shall have the name of the ---- corporation inscribed thereon and shall be in such form as may be approved from time to time by the Board of Directors. Section 7.3 Notices. Whenever written notice is required by law, the ------- certificate of incorporation or these bylaws, to be given to any director, member of a committee or stockholder, such notice may be given by mail, addressed to such director, member of a committee or stockholder, at his address as it appears on the records of the corporation, with postage thereon prepaid, and such notice shall be deemed to be given at the time when the same shall be deposited in the United States mail. Written notice may also be given personally or by electronic facsimile, telegram, telex or cable. Section 7.4 Waiver of Notice of Meetings of Stockholders, Directors ------------------------------------------------------- and Committees. Any written waiver of notice, signed by the person entitled to - -------------- notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at nor the purpose of any regular or special meeting of the stockholders, directors, or members of a committee of directors need be specified in any written waiver of notice. -12- Section 7.5 Dividends. Dividends upon the capital stock of the --------- corporation, subject to the provisions of the certificate of incorporation, if any, may be declared by the Board of Directors at any regular or special meeting, and may be paid in cash, in property, or in shares of the capital stock. Before payment of any dividend, there may be set aside out of any funds of the corporation available for dividends such sum or sums as the Board of Directors from time to time, in its absolute discretion, deems proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the corporation, or for any proper purpose, and the Board of Directors may modify or abolish any such reserve. Section 7.6 Form of Records. Any records maintained by the --------------- corporation in the regular course of its business, including its stock ledger, books of account, and minute books, may be kept on, or be in the form of, punch cards, magnetic tape, photographs, microphotographs, or any other information storage device, provided that the records so kept can be converted into clearly legible form within a reasonable time. Section 7.7 Amendment of Bylaws. These bylaws may be altered, ------------------- amended or repealed or new bylaws may be adopted by the stockholders or by the Board of Directors, when such power is conferred upon the Board of Directors by the certificate of incorporation, at any regular meeting of the stockholders or of the Board of Directors or at any special meeting of the stockholders or of the Board of Directors if notice of such alteration, amendment, repeal or adoption of new bylaws be contained in the notice of such special meeting. If the power to adopt, amend or repeal bylaws is conferred upon the Board of Directors by the certificate of incorporation it shall not divest or limit the power of the stockholders to adopt, amend or repeal bylaws. Except as otherwise provided in the certificate of incorporation, all amendments, alterations or repeals of these bylaws or additions to these bylaws must be approved by either the holders of more than fifty percent (50%) of the voting power of all of the then outstanding capital stock entitled to vote generally in the election of directors ("Voting Stock"), voting together as a single class, or by a majority of the entire Board of Directors then in office; provided, however, that the -------- ------- affirmative vote of sixty-six and two-thirds percent (66-/2//3%) of the then outstanding shares of Voting Stock of the Corporation, voting together as a single class, shall be required to amend, alter, repeal or adopt any provision inconsistent with this Section 7.7 or Sections 2.1, 2.2 or 2.3 of these Bylaws. -13- CERTIFICATE OF SECRETARY I HEREBY CERTIFY that I am the duly elected, qualified and acting Secretary of JAVELIN SYSTEMS, INC., and that the above and foregoing Amended and Restated Bylaws were adopted as the bylaws of said corporation on the 6th day of August, 1996, by the directors of the corporation pursuant to an Unanimous Written Consent in lieu of a meeting of the Board of Directors of Javelin Systems, Inc., dated August 6, 1996, and by a majority of the stockholders of the corporation pursuant to a written consent dated August 6, 1996. IN WITNESS WHEREOF, I have hereunto set my hand as of this 20th day of August, 1996. /s/ Lawrence W. McCorkle -------------------------------------------- Lawrence W. McCorkle, Secretary -14- EX-10.1 4 1996 STOCK INCENTIVE AWARD PLAN EXHIBIT 10.1 JAVELIN SYSTEMS, INC. 1996 STOCK INCENTIVE AWARD PLAN ------------------------------- ARTICLE I --------- PURPOSE OF PLAN --------------- The purpose of this Plan is to promote the growth and profitability of the Company by providing, through the granting of stock appreciation rights, options to purchase stock and other incentive awards, incentives to attract highly talented persons to positions with one (1) or more of the Participating Companies, to retain such persons and to motivate them to use their best efforts on behalf of the Participating Companies. ARTICLE II DEFINITIONS ----------- For the purposes of this Plan, unless the context otherwise requires, the following terms shall have the meanings set forth in this Article II: Board. The term "Board" shall mean the Board of Directors of the ----- Company. Committee. The term "Committee" shall mean a committee appointed by --------- the Board pursuant to Section 3.02 constituting not less than two (2) members of the Board. Common Stock. The term "Common Stock" shall mean the Company's common ------------ stock, par value $.01 per share. Company. The term "Company" shall mean Javelin Systems, Inc., a ------- Delaware corporation, or any successor thereof. Director. The term "Director" shall mean a member of the Board or a -------- member of the board of directors of any Participating Company. Dividend Equivalent. The term "Dividend Equivalent" shall mean the ------------------- cash or additional Common Stock earned in connection with an Option or Right, as described in Article XII. Effective Date. The term "Effective Date" shall mean the date of -------------- adoption of this Plan by the Board. Eligible Employee. The term "Eligible Employee" shall mean any ----------------- Eligible Person who is an employee of any Participating Company and is eligible to receive Incentive Stock Options under I.R.C. Section 422(a)(2). Eligible Person. The term "Eligible Person" shall mean any employee, --------------- consultant, officer or director of any Participating Company, including officers who are directors. Eligible Person Termination Date. The term "Eligible Person -------------------------------- Termination Date" shall mean the date as of which the employment, directorship or consultant status of such person by a Participating Company terminates. Exchange Act. The term "Exchange Act" shall mean the Securities ------------ Exchange Act of 1934, as it may be amended from time to time. Exercise Date. The term "Exercise Date" shall mean the date a Right ------------- or Option, or any portion thereof, is exercised. Fair Market Value. The term "Fair Market Value," when used with ----------------- respect to the determination of the fair market value of a share of the Common Stock, shall mean: (a) if the Common Stock is traded on a national stock exchange or traded on the Nasdaq National Market ("NMS"), the closing sales price per share of the Common Stock; (b) if the Common Stock is regularly traded in any over-the-counter market other than the NMS, the average of the bid and asked prices per share of the Common Stock; and (c) if the Common Stock is not traded as described in (a) or (b) above, the fair market value of a share of the Common Stock as determined in good faith by the Board on such basis as the Board in its sole discretion shall choose. The date of determination of Fair Market Value with respect to subparagraphs (a), (b) and (c) shall be the date specified in the Plan or, if no trading in the Common Stock takes place on such date, on the next preceding trading day on which there has been such trading. Holder. The term "Holder" shall mean a person holding an Incentive ------ Award. Incentive Award. The term "Incentive Award" shall mean any --------------- Nonqualified Stock Option, Incentive Stock Option, Restricted Stock, Right, Dividend Equivalent, Stock Payment or Performance Award granted under the Plan. Incentive Award Agreement. The term "Incentive Award Agreement" shall ------------------------- mean an agreement relating to the grant of an Incentive Award under the Plan. Incentive Award Termination Date. The term "Incentive Award -------------------------------- Termination Date" shall mean the date as of which an Incentive Award shall expire and terminate as the Board (or the Committee, if applicable) shall determine. Incentive Stock Option. The term "Incentive Stock Option" shall mean ---------------------- an option as defined under Section 422(b) of the I.R.C., including an Incentive Stock Option granted pursuant to Article VIII of the Plan. I.R.C. The term "I.R.C." shall mean the Internal Revenue Code of ----- 1986, as it may be amended from time to time. -2- Non-Employee Director. The term "Non-Employee Director" shall mean, --------------------- when and if the Common Stock has been registered under the Exchange Act, a Non- Employee Director as that term is defined in Rule 16b-3. Nonqualified Stock Option. The term "Nonqualified Stock Option" shall ------------------------- mean an option other than an Incentive Stock Option, granted pursuant to Article VII of the Plan. Option. The term "Option" shall mean a Nonqualified Stock Option or ------ an Incentive Stock Option. Option Agreement. The term "Option Agreement" shall mean the ---------------- agreements required pursuant to Section 7.01 hereof with respect to Nonqualified Stock Options and Section 8.01 hereof with respect to Incentive Stock Options. Option Termination Date. The term "Option Termination Date" shall ----------------------- mean the date as of which an Option shall expire and terminate as the Board (or the Committee, if applicable) shall determine. Parent Corporation. The term "Parent Corporation" shall mean a parent ------------------ corporation as that term is defined in I.R.C. Section 424(e). Participating Company. The term "Participating Company" shall mean --------------------- the Company and any Parent Corporation or Subsidiary Corporation. Participant. The term "Participant" shall mean an Eligible Person who ----------- has been granted one (1) or more Incentive Awards. Performance Award. The term "Performance Award" shall mean an award ----------------- whose value may be limited to stock value, book value or other specific performance criteria which may be set by the Board (or the Committee, if applicable), but which is paid in cash, stock or a combination of both. Person. The term "Person" shall mean a person as that term is defined ------ in Section 13(d)(3) of the Exchange Act. Plan. The term "Plan" shall mean this Javelin Systems, Inc. 1996 ---- Stock Incentive Award Plan. Plan Termination Date. The term "Plan Termination Date" shall mean --------------------- the tenth (10th) anniversary of the Effective Date. Restricted Stock. The term "Restricted Stock" shall mean Common Stock ---------------- sold or granted to an Eligible Person pursuant to this Plan which is nontransferable and subject to substantial risk of forfeiture until certain restrictions lapse. Right. The term "Right" shall mean a stock appreciation right granted ----- pursuant to this Plan which will entitle the holder of such right to receive an amount of cash based on the -3- increase in the Fair Market Value of a share of the Common Stock during the period such stock appreciation right is held by such holder. Right Grant Date. The term "Right Grant Date" shall mean the ---------------- effective date of the grant of a Right. The effective date of the grant shall be deemed to be the date on which the Board (or the Committee, if applicable) authorizes the grant of the Right, unless a subsequent date is specified in such authorization. Right Termination Date. The term "Right Termination Date" shall mean ---------------------- the date as of which a Right shall expire and terminate as the Board (or the Committee, if applicable) shall determine. Rule 16b-3. The term "Rule 16b-3" shall mean Rule 16b-3 promulgated ---------- by the Securities and Exchange Commission under the Exchange Act or any successor provision thereto, as such rule or successor provision may be amended from time to time. SAR Agreement. The term "SAR Agreement" shall mean the agreement ------------- required pursuant to Section 6.01 hereof. Stock Payment. The term "Stock Payment" shall mean a payment of ------------- shares of Common Stock to replace all or any portion of the compensation (other than base salary) that would otherwise become payable to an employee in cash. Subsidiary Corporation. The term "Subsidiary Corporation" shall mean ---------------------- a subsidiary corporation as that term is defined in I.R.C. Section 424(f). Terminating Transaction. The term "Terminating Transaction" shall ----------------------- mean any of the following events: (a) stockholder approval of the dissolution or liquidation of the Company; (b) stockholder approval of a reorganization, merger or consolidation of the Company with or into one (1) or more other corporations (other than any Participating Company and other than any transaction the sole purpose of which is to change the domicile of the Company), as a result of which the Company goes out of existence or becomes a subsidiary of another corporation (which shall be deemed to have occurred if another corporation shall own, directly or indirectly, fifty percent (50%) or more of the aggregate voting power of all outstanding equity securities of the Company); (c) stockholder approval of a sale of all or substantially all of the Company's assets; (d) the acquisition by a Person (other than an existing stockholder of the Company as of the Effective Date, the Company, any Participating Company, a Participant or any employee benefit plan of the Company) of equity securities of the Company representing twenty percent (20%) or more of the aggregate voting power of all outstanding equity securities of the Company; or (e) during any period of two (2) consecutive years, individuals who at the beginning of such two (2) year period constituted the entire Board shall cease for any reason to constitute a majority thereof unless the election, or the nomination for election by the Company's stockholders, of each new Director was approved by a vote of at least two-thirds (2/3) of the Directors then still in office who were Directors at the beginning of such two (2) year period. -4- Total Disability. The term "Total Disability" shall mean a permanent ---------------- and total disability as that term is defined in I.R.C. Section 22(e)(3). Vested Incentive Award. The term "Vested Incentive Award" shall mean ---------------------- an Incentive Award, or any portion thereof, that has become exercisable pursuant to the terms and conditions of an applicable Incentive Award Agreement. ARTICLE III ADMINISTRATION OF PLAN ---------------------- 3.01 Administration by Board. ----------------------- (a) Subject to the provisions of Section 3.02(a) hereof, the Plan shall be administered by the Board, or at the option of the Board, by a committee designated by the Board pursuant to Section 3.02 hereof. (b) The Board shall have full and absolute power and authority in its sole discretion to (i) determine which Eligible Persons shall receive Incentive Awards, (ii) determine the time when Incentive Awards shall be granted, (iii) determine the terms and conditions, not inconsistent with the provisions of the Plan, of any Incentive Awards granted hereunder, and (iv) interpret the provisions of the Plan and of any Incentive Awards granted under the Plan. 3.02 Administration by Committee. --------------------------- (a) From and after such time as the Common Stock is registered under the Exchange Act, a Committee of no less than two (2) Board members shall administer the Plan and, subject to applicable law, exercise all of the powers, authority, and discretion of the Board under this Plan. The Board may from time to time remove members from, or add members to, the Committee, and vacancies on the Committee shall be filled by the Board. Notwithstanding the foregoing, the Board may abolish the Committee at any time or revest in the Board the administration of the Plan. (b) From and after such time as the Common Stock is registered under the Exchange Act, the Board shall require each member of the Committee to be a Non-Employee Director, and the Board may, but is not required to, at such time, take such other actions as it deems necessary or advisable to conform this Plan or the administration of this Plan to the requirements of Rule 16b-3 (such actions to conform the Plan or the administration thereof to the requirements of Rule 16b-3 (other than a change which requires the approval of the stockholders of the Company pursuant to I.R.C. Section 422(b)) may be taken by the Board or the Committee, as appropriate, without the approval of the Company's stockholders). (c) The Committee shall report to the Board the names of Eligible Persons granted Incentive Awards, the number of Incentive Awards granted to Eligible Persons, and the terms and conditions of such Incentive Awards. -5- (d) No member of the Board or the Committee will be liable for any action or determination made in good faith by the Board or the Committee with respect to the Plan or any Incentive Award granted under it. 3.03 Rules and Regulations. The Board (or the Committee, if --------------------- applicable) may adopt such rules and regulations as it, in its discretion, may deem necessary or appropriate to carry out the purposes of the Plan. 3.04 Binding Authority. All decisions, determinations, ----------------- interpretations, or other actions by the Board (or the Committee, if applicable) shall be final, conclusive, and binding on all Eligible Persons, Participants, Participating Companies and any successors-in-interest to such persons. ARTICLE IV NUMBER OF RIGHTS OR SHARES AVAILABLE UNDER THE PLAN --------------------------------------------------- 4.01 Maximum Number of Rights or Shares in the Aggregate. Subject to --------------------------------------------------- Sections 4.02 and 14.08 hereof, the maximum number of Rights and shares of Common Stock which may become subject to Incentive Awards granted under the Plan shall be three hundred thousand (300,000) shares (after giving effect to a 4,300 to 1 stock split to increase the outstanding shares of Common Stock of the Company prior to the contemplated public offering of the Company to approximately two million one hundred thousand (2,100,000) shares ). 4.02 Additional Availability. If Incentive Awards granted under the ----------------------- Plan shall for any reason terminate, lapse, be forfeited, or expire without being exercised, the Rights or shares of Common Stock related thereto, if any, shall again be available for grant under the Plan. All shares of Common Stock issued under the Plan, whether or not those shares are subsequently repurchased by the Company pursuant to its repurchase rights under the Plan, shall reduce on a share-for-share basis the number of shares of Common Stock available for subsequent issuance under the Plan. In addition, should the exercise price of an Option under the Plan be paid with shares of Common Stock or should shares of Common Stock otherwise issuable under the Plan be withheld by the Company in satisfaction of the withholding taxes incurred in connection with the exercise of an Option or the vesting of Restricted Stock under the Plan, then the number of shares of Common Stock available for issuance under the Plan shall be reduced by the gross number of shares for which the Option is exercised or which vest under the Restricted Stock, and not by the net number of shares of Common Stock issued to the holder of such Option or Restricted Stock. ARTICLE V TERM OF PLAN ------------ The Plan shall be effective as of the Effective Date and shall terminate on the Plan Termination Date. No Incentive Awards may be granted hereunder after the Plan Termination Date. -6- ARTICLE VI STOCK APPRECIATION RIGHTS ------------------------- 6.01 Form of SAR Agreement. Any Right granted under the Plan shall --------------------- be evidenced by an SAR Agreement in such form as the Board (or the Committee, if applicable), in its discretion, may from time to time approve. Any SAR Agreement shall incorporate the Plan by reference and shall contain such terms and conditions as the Board (or the Committee, if applicable), in its discretion, may deem necessary or appropriate and which are not inconsistent with the provisions of the Plan. 6.02 Limitations on Grants. No Right may be granted which is --------------------- exercisable after the expiration of ten (10) years after the Right Grant Date. 6.03 Exercisability of Rights. ------------------------ (a) Vesting. The Board (or the Committee, if applicable) shall ------- determine when a Right shall vest or become exercisable, provided that from and after such time as the Common Stock is registered under the Exchange Act and to the extent necessary to comply with the provisions of Rule 16b- 3, no Right granted under this Plan shall be exercisable until six (6) months and one (1) day after the Right Grant Date. (b) Rule 16b-3 Limitations. The Board (or the Committee, if ---------------------- applicable) may, at the time a Right is granted, impose such conditions on the exercise of a Right as may be required to comply with Rule 16b-3 to the extent such provision is applicable. (c) Termination of Rights. Each Right shall expire and terminate --------------------- on the Right Termination Date determined by the Board (or the Committee, if applicable). 6.04 Payment Upon Exercise of Rights. ------------------------------- (a) Amount of Payment. Upon exercise of each Right, the ----------------- Participant shall receive an amount equal to the excess of (i) the Fair Market Value of a share of Common Stock on the Exercise Date of such Right, over (ii) the Fair Market Value of a share of Common Stock on the Right Grant Date of such Right. (b) Means and Timing of Payment. Within ten (10) days after the --------------------------- Exercise Date, the Company shall pay to the Participant in cash the amount determined under Section 6.04(a) above. -7- ARTICLE VII NONQUALIFIED STOCK OPTIONS -------------------------- 7.01 The Board (or the Committee, if applicable) may grant Nonqualified Stock Options to purchase shares of Common Stock to Eligible Persons, subject to the following terms and conditions: (a) The per share purchase price of the shares of Common Stock under each Nonqualified Stock Option may not be less than one hundred (100%) percent of the Fair Market Value of a share of Common Stock on the date the Nonqualified Stock Option is granted; provided, however, that if an Eligible Employee, at the time a Nonqualified Stock Option is granted to such Eligible Employee, owns stock representing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company, its Parent Corporation or any Subsidiary Corporation, then the purchase price of each share of Common Stock subject to such Nonqualified Stock Option shall be at least one hundred and ten percent (110%) of the Fair Market Value of a share of the Common Stock. (b) No Nonqualified Stock Option may be exercised after ten (10) years and one (1) day from the date of grant. Each Nonqualified Stock Option granted under this Plan shall also be subject to earlier termination as provided in this Plan. (c) Upon the exercise of a Nonqualified Stock Option, the purchase price will be payable in full in cash or by check. Should the Common Stock be registered under the Exchange Act, the purchase price may also be payable in shares of Common Stock held for the requisite period necessary to avoid a charge to the Company's earnings for financial reporting purposes. To the extent necessary to comply with the provisions of Rule 16b-3, any Holder subject to Section 16(b) of the Exchange Act shall have beneficially owned any shares of Common Stock used for such payment for at least six (6) months and one (1) day. Any shares of Common Stock so assigned and delivered to the Company in payment or partial payment of the purchase price will be valued at their Fair Market Value on the exercise date. (d) No fractional shares will be issued pursuant to the exercise of a Nonqualified Stock Option nor will any cash payment be made in lieu of fractional shares. (e) To the extent necessary to comply with the provisions of Rule 16b-3, no Nonqualified Stock Option granted to an Eligible Person subject to Section 16(b) of the Exchange Act, nor any shares of Common Stock issuable upon exercise of any such Nonqualified Stock Option, may be sold or otherwise disposed of prior to the date that is six (6) months and one (1) day following the date of grant of the Nonqualified Stock Option. -8- (f) Recipients of Nonqualified Stock Options shall enter into Option Agreements, in such form deemed appropriate by the Board (or the Committee, if applicable). ARTICLE VIII INCENTIVE STOCK OPTIONS ----------------------- 8.01 Incentive Stock Options. The Board (or the Committee, if ----------------------- applicable) may grant Incentive Stock Options to purchase shares of Common Stock to Eligible Employees, subject to the following terms and conditions: (a) The purchase price of each share of Common Stock under an Incentive Stock Option shall be not less than one hundred percent (100%) of the Fair Market Value of a share of the Common Stock on the date of grant; provided, however, that if an Eligible Employee, at the time an Incentive Stock Option is granted to such Eligible Employee, owns (within the meaning of I.R.C. Section 424(d)) stock representing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company, its Parent Corporation or any Subsidiary Corporation, then the purchase price of each share of Common Stock subject to such Incentive Stock Option shall be at least one hundred and ten percent (110%) of the Fair Market Value of a share of the Common Stock. (b) No Incentive Stock Option may be exercised after ten (10) years from the date of grant; provided, however, that if an Eligible Employee, at the time an Incentive Stock Option is granted to such Eligible Employee, owns (within the meaning of I.R.C. Section 424(d)) stock representing more than ten (10%) percent of the total combined voting power of all classes of stock of the Company, its Parent Corporation or any Subsidiary Corporation, the Incentive Stock Option granted shall not be exercisable after the expiration of five (5) years from the date of grant. Each Incentive Stock Option granted under this Plan shall also be subject to earlier termination as provided in this Plan. (c) Upon the exercise of an Incentive Stock Option, the purchase price will be payable in full in cash or by check. Should the Common Stock be registered under the Exchange Act, the purchase price may also be payable in shares of Common Stock held for the requisite period necessary to avoid a charge to the Company's earnings for financial reporting purposes. To the extent necessary to comply with the provisions of Rule 16b-3, any Holder subject to Section 16(b) of the Exchange Act shall have beneficially owned any shares of Common Stock used for such payment for at least six (6) months and one (1) day. Any shares of Common Stock so assigned and delivered to the Company in payment or partial payment of the purchase price will be valued at their Fair Market Value on the exercise date. (d) The Fair Market Value (determined at the time the Incentive Stock Option is granted) of the shares of Common Stock subject to Incentive Stock Options that are granted to any Eligible Employee and become first exercisable in any calendar year -9- (including Incentive Stock Options of such Eligible Employee under all plans of the Company, its Parent Corporation and any Subsidiary Corporation) shall not exceed One Hundred Thousand ($100,000) Dollars. (e) No fractional shares will be issued pursuant to the exercise of an Incentive Stock Option nor will any cash payment be made in lieu of fractional shares. (f) To the extent necessary to comply with the provisions of Rule 16b-3, no Incentive Stock Option granted to an Eligible Employee subject to Section 16(b) of the Exchange Act, nor any shares of Common Stock issuable upon exercise of any such Incentive Stock Option, may be sold or otherwise disposed of prior to the date that is six (6) months and one (1) day following the date of grant of the Incentive Stock Option. (g) Recipients of Incentive Stock Options shall enter into Option Agreements in such form deemed appropriate by the Board (or the Committee, if applicable). ARTICLE IX RESTRICTED STOCK ---------------- The Board (or the Committee, if applicable) may grant Restricted Stock to Eligible Persons, subject to the following terms and conditions: (a) The Board (or the Committee, if applicable) in its discretion will determine the purchase price per share of Restricted Stock, if any. (b) All shares of Restricted Stock sold or granted pursuant to the Plan (including any shares of Restricted Stock received by the Holder as a result of stock dividends, stock splits, or any other forms of capitalization) will be subject to the following restrictions: (i) The shares may not be sold, transferred, or otherwise alienated or hypothecated until the restrictions are removed or expire. (ii) The Board (or the Committee, if applicable) may require the Holder to enter into an escrow agreement providing that the certificates representing Restricted Stock sold or granted pursuant to the Plan will remain in the physical custody of an escrow holder until all restrictions are removed or expire. (iii) Each certificate representing Restricted Stock sold or granted pursuant to the Plan will bear a legend making appropriate reference to the restrictions imposed on the Restricted Stock. (iv) The Committee may impose restrictions on any shares sold pursuant to the Plan as it may deem advisable, including, without limitation, -10- restrictions designed to facilitate exemption from or compliance with the Exchange Act, the requirements of any stock exchange upon which such shares or shares of the same class are then listed and any blue sky or other securities laws applicable to such shares. (v) To the extent necessary to comply with the provisions of Rule 16b-3, no Restricted Stock sold or granted to an Eligible Person subject to Section 16(b) of the Exchange Act may be sold or otherwise disposed of prior to the date that is six (6) months and one (1) day following the date of grant of the Restricted Stock. (c) The restrictions imposed under subparagraph (b) above upon Restricted Stock (other than those imposed under subparagraph (b)(v)) will lapse in accordance with a schedule or other conditions as determined by the Board (or the Committee, if applicable), subject to the provisions of Section 14.07. (d) Subject to the provisions of subparagraph (b) above and Section 14.07, the Holder will have all rights of a stockholder with respect to the Restricted Stock granted or sold, including the right to vote the shares and receive all dividends and other distributions paid or made with respect thereto. ARTICLE X PERFORMANCE AWARDS ------------------ The Board (or the Committee, if applicable) may grant Performance Awards to Eligible Persons. Such awards may be based on Common Stock performance over a period determined in advance by the Board (or the Committee, if applicable) or any other measures as determined appropriate by the Board (or the Committee, if applicable). Payment will be in cash unless replaced by a Stock Payment in full or in part as determined by the Board (or the Committee, if applicable). Concurrent with the receipt of a Performance Award, the Holder shall enter into an Incentive Award Agreement in the form approved by the Board (or the Committee, if applicable). To the extent necessary to comply with the provisions of Rule 16b-3, no shares of Common Stock granted as part of a Performance Award granted to an Eligible Person subject to l6(b) of the Exchange Act may be sold or otherwise disposed of prior to the date that is six (6) months and one (1) day following the date of grant. ARTICLE XI STOCK PAYMENT ------------- The Board (or the Committee, if applicable) may grant Stock Payments to Eligible Persons for all or any portion of the compensation (other than base salary) that would otherwise become payable to an Eligible Person in cash. To the extent necessary to comply with the provisions of Rule 16b-3, no shares of Common Stock granted as part of a Stock Payment -11- granted to an Eligible Person subject to l6(b) of the Exchange Act may be sold or otherwise disposed of prior to the date that is six (6) months and one (1) day following the date of grant. ARTICLE XII DIVIDEND EQUIVALENTS -------------------- The Board (or the Committee, if applicable) may grant a Holder at no additional cost "Dividend Equivalents" based on the dividends declared on the Common Stock on record dates during the period between the date an Option or Right is granted and the date such Option or Right is exercised, or such other equivalent period, as determined by the Board (or the Committee, if applicable). Such Dividend Equivalents shall be converted to additional shares of Common Stock or cash by such formula as may be determined by the Board (or the Committee, if applicable). Dividend Equivalents shall be computed, as of each dividend record date, both with respect to the number of shares of Common Stock covered by the Option or Right and with respect to the number of Dividend Equivalent shares of Common Stock previously earned by the Holder (or his successor in interest) and not issued during the period prior to the dividend record date. ARTICLE XIII AMENDMENT OR TERMINATION OF PLAN -------------------------------- 13.01 Board Authority. Subject to the provisions of Section 13.02 --------------- below, the Board may amend, suspend, alter, or terminate the Plan at any time; provided, however, that unless required by applicable law, rule, or regulation, the Board shall not amend the Plan in the following respects without approval of the amendment by either (i) a majority of the votes cast at a duly held stockholders' meeting at which a quorum representing a majority of all of the outstanding voting stock of the Company is, either in person or by proxy, present and voting on the amendment; or (ii) the written consent of the holders of a majority of the outstanding shares of the Company's voting stock: (a) To reduce the minimum option price requirements set forth in the Plan; (b) To increase the maximum number of Rights or shares of Common Stock which may become subject to Incentive Awards available for grant under the Plan (except pursuant to the provisions of the Plan providing for adjustments upon the occurrence of certain events); (c) To provide for the administration of the Plan other than by the Board or the Committee; (d) To change the classes of Eligible Persons or Participating Companies; or -12- (e) To extend the maximum period during which Incentive Awards may be exercised or to extend the term of the Plan. 13.02 Limitation on Board Authority. The Board (or the Committee, if ----------------------------- applicable) may amend the terms of any Incentive Awards previously granted, prospectively or retroactively, and the Board may amend the Plan in accordance with the provisions of Section 13.01; provided, however, that unless required by applicable law, rule, or regulation, no amendment of the Plan or of any Incentive Award Agreement shall, without the consent of any Participant holding any such affected Incentive Awards, be permitted if such amendment would affect in a material and adverse manner an Incentive Award granted prior to the date of any such amendment. 13.03 Contingent Grants Based on Amendments. Incentive Awards may be ------------------------------------- granted in reliance on and consistent with any amendment adopted by the Board and which is necessary to enable such Incentive Awards to be granted under the Plan even though such amendment requires future stockholder approval; provided, however, that any such contingent Incentive Awards by its terms may not be exercised prior to stockholder approval of such amendment, and provided further, that in the event stockholder approval is not obtained within twelve (12) months of the date of grant of such contingent Incentive Awards, then such contingent Incentive Awards shall be canceled and become null and void. ARTICLE XIV GENERAL PROVISIONS ------------------ 14.01 Termination of Eligible Person Status Other Than by Reason of ------------------------------------------------------------- Death or Disability. In the event that the Eligible Person status of a - ------------------- Participant is terminated for any reason other than by reason of death or Total Disability, any Incentive Awards, or portions thereof, held by such Participant which have not vested as of the Eligible Person Termination Date shall expire and become unexercisable as of such date. Except as set forth in Section 14.04 hereof, all Vested Incentive Awards, or portions thereof, which have not been exercised prior to the Eligible Person Termination Date shall expire and become unexercisable as of the earlier of: (a) The date which is three (3) months following the Eligible Person Termination Date; or (b) The Right Termination Date, the Option Termination Date or the termination date of any other Incentive Award Agreement, as applicable; provided, however, that the provisions of this Section 14.01(b) may not cause the expiration of any Vested Incentive Award prior to the date that is thirty (30) days from the Eligible Person Termination Date. 14.02 Leave of Absence. In the case of any Eligible Person on an ---------------- approved leave of absence, the Board (or the Committee, if applicable) may make such provision respecting continuance of the Incentive Awards as the Board (or the Committee, if applicable), in its discretion, deems appropriate, except that in no event shall an Incentive Award be exercisable -13- after the date by which the Board (or the Committee, if applicable) has determined for the termination of such Incentive Award. 14.03 Death or Total Disability of a Participant. In the event that ------------------------------------------ the Eligible Person status of a Participant is terminated by reason of death or Total Disability, any Incentive Award, or portions thereof, held by such Participant which have not vested as of the Eligible Person Termination Date shall expire and become unexercisable as of such date, and except as set forth in Section 14.04 hereof, all Vested Incentive Awards, or portions thereof, held by such Participant which have not been exercised prior to the Eligible Person Termination Date shall expire and become unexercisable as of the earlier of: (a) The Right Termination Date, the Option Termination Date or the termination date of any other Incentive Award Agreement, as applicable; provided, however, that the provisions of this Section 14.03(a) may not cause the expiration of any Vested Incentive Award prior to the date that is six (6) months from the Eligible Person Termination Date; or (b) The first (1st) anniversary of the Eligible Person Termination Date. Any vested Incentive Awards of a deceased Participant may be exercised prior to their respective expiration dates only by the person or persons to whom the Participant's Incentive Award pass by will or the laws of descent and distribution. 14.04 Extensions. Notwithstanding the provisions covering the ---------- exercisability of Incentive Awards following the Eligible Person Termination Date set forth in Sections 14.01 and 14.03, respectively, the Board (or the Committee, if applicable) may, in its sole discretion, with the consent of the Participant, extend the period of time during which a Vested Incentive Award shall remain exercisable, provided that in no event shall such extension extend beyond the Incentive Award Termination Date established in the Incentive Award Agreement with respect to such Incentive Award. 14.05 Partial Exercise. A Participant may exercise all or less than ---------------- all of his or her Incentive Awards. Incentive Awards may be exercised by the Participant by giving written notice of exercise to the Company, which notice shall specify the number of Incentive Awards to be exercised. 14.06 Incentive Awards Not Transferable. Incentive Awards granted --------------------------------- under this Plan may not be sold, pledged, hypothecated, assigned, encumbered, transferred by gift or otherwise transferred or alienated in any manner, either voluntarily or involuntarily, or by operation of law, other than by will or the laws of descent and distribution, and may be exercised during the lifetime of a Participant only by such Participant. Upon any attempt to transfer Incentive Awards other than by will or the laws of descent and distribution, or to assign, pledge, hypothecate or otherwise dispose of Incentive Awards, or upon the levy of any execution, attachment or similar process thereon, such Incentive Awards shall become null and void and any subsequent attempted exercise of the Incentive Awards shall be ineffective against the Company. -14- The terms of the Incentive Awards shall be binding upon the executors, administrators, heirs, devisees, legatees, legal representatives, successors and assigns of the Participants. 14.07 Restrictions on Grants, Exercise and Transferability. ---------------------------------------------------- (a) Representations. As a condition to the granting or exercise --------------- of any Incentive Award, the Board (or the Committee, if applicable) may require the person receiving or exercising such Incentive Award to make any representation and/or warranty to the Company as may be required (or deemed appropriate by the Board (or the Committee, if applicable), in its discretion) under any applicable law, rule or regulation. (b) Stockholder Approval Required. The exercise of Incentive ----------------------------- Awards under this Plan is conditioned on approval of the Plan within twelve (12) months of the initial adoption of the Plan by the Board either (i) by a majority of the votes cast at a duly held stockholders' meeting at which a quorum representing a majority of all of the outstanding voting stock of the Company is, either in person or by proxy, present and voting; or (ii) by the written consent of the holders of a majority of the outstanding shares of the Company's voting stock. No Incentive Awards may be exercised prior to the obtaining of such stockholder approval. In the event such approval is not obtained within such twelve (12) month period, any Incentive Awards previously granted hereunder shall be canceled and become null and void. (c) Compliance with Securities Laws. The Board (or the ------------------------------- Committee, if applicable) may delay the granting, vesting or exercisability of an Incentive Award for such time as reasonably necessary to comply with applicable state or federal securities laws. (d) Transfer Restrictions. The Board (or the Committee, if --------------------- applicable), in its discretion, may impose such restrictions on the transferability of the shares of Common Stock purchasable upon the exercise of an Incentive Award as it deems appropriate. Without limiting the generality of the foregoing, the Board (or the Committee, if applicable), may provide in any Incentive Award Agreement that any or all shares of Common Stock issued to a Participant upon exercise of an Incentive Award may be repurchased by the Company at the current Fair Market Value of such shares in the event that the Eligible Person status of a Participant is terminated for any reason. Any such restrictions shall be set forth in the respective Incentive Award Agreement and shall be referred to on the certificates evidencing such shares. The Board (or the Committee, if applicable) may require the Participant to give the Company prompt notice of any disposition of shares of Common Stock acquired by exercise of an Incentive Stock Option within two years from the date of grant of such Incentive Stock Option or one (1) year after the transfer of such shares to such Participant. The Board (or the Committee, if applicable) may direct that the certificates evidencing shares acquired by exercise of an Incentive Award refer to such any transfer restrictions and notice requirements. 14.08 Capitalization Adjustments. If the outstanding shares of -------------------------- Common Stock of the Company are increased, decreased, changed into or exchanged for a different number or kind -15- of shares of the Company through reorganization, recapitalization, reclassification, stock dividend, stock split (other than the stock split described in Section 4.01 hereof), reverse stock split or combination of shares, upon authorization by the Board (or the Committee, if applicable) an appropriate and proportionate adjustment shall be made in the maximum number of shares of Common Stock issuable under the Plan, the number and the kind of shares of Common Stock to which Incentive Awards relate, and the exercise price per share in effect under each outstanding Right and Option in order to prevent the dilution or enlargement of benefits thereunder; provided, however, that, in the case of an Incentive Stock Option, each such adjustment shall be made in such manner as not to constitute a "modification" within the meaning of I.R.C. Section 424(h)(3). Any such adjustment made by the Board (or the Committee, if applicable) shall be final and binding upon all Participants, the Company and all other interested persons. 14.09 Acceleration Upon a Terminating Transaction. The Board (or the ------------------------------------------- Committee, if applicable) may, in its discretion, and on such terms and conditions as it deems appropriate, provide, either by the terms of any Incentive Award or by a resolution adopted prior to the consummation of a Terminating Transaction, that, upon the occurrence of a Terminating Transaction and for a specified period thereafter, Participants holding outstanding Incentive Awards shall have the right to exercise his or her Incentive Awards to the full extent not theretofore exercised, including any Incentive Awards which have not yet become Vested Incentive Awards (subject, however, to the provisions of Sections 6.03(a) and 8.01(d) above). For purposes of determining the cash payment pursuant to Section 6.04(a) hereof upon an exercise of Right: the Fair Market Value of a share of Common Stock on the Exercise Date shall equal the highest reported sales price of a share of Common Stock within the sixty (60) day period immediately preceding the date of the Terminating Transaction, as reported on any securities exchange or quotation reporting system upon which the shares of Common Stock are traded or included. 14.10 Taxes. The Board (or the Committee, if applicable) shall make ----- such provisions and take such steps as it deems necessary or appropriate for the withholding of any federal, state, local and other tax required by law to be withheld with respect to the grant or exercise of the Incentive Awards under the Plan, including, without limitation, (i) the deduction of the amount of any such withholding tax from any compensation, any amounts payable hereunder, or other amounts payable to a Participant by any member of the Participating Companies, or (ii) requiring a Participant (or the Participant's beneficiary or legal representative) as a condition of granting or exercising a Incentive Award to pay to any Participating Company any amount required to be withheld, or to execute much other documents as the Board (or the Committee, if applicable) deems necessary or desirable in connection with the satisfaction of any applicable withholding obligation. 14.11 Legends on Agreements. Each Incentive Award Agreement shall be --------------------- endorsed with all legends, if any, required by applicable federal and state securities laws to be placed on the Incentive Award Agreement. The determination of which legends, if any, shall be placed upon these agreements shall be made by the Board (or the Committee, if applicable) in its sole discretion and such decision shall be final and binding. -16- 14.12 Availability of Plan. A copy of this Plan shall be delivered -------------------- to any Eligible Person making reasonable inquiry concerning the Plan. 14.13 Notice. Any notice or other communication required or ------ permitted to be given pursuant to the Plan or under any Incentive Award Agreement must be in writing and may be given by registered or certified mail, and if given by registered or certified mail, shall be determined to have been given and received on the date three (3) days after a registered or certified letter containing such notice, properly addressed with postage prepaid, is deposited in the United States mails; and if given other than by registered or certified mail, it shall be deemed to have been given when delivered to and received by the party to whom addressed. Notice shall be given to Participants at their most recent addresses shown in the Company's records. Notice to the Company shall be addressed to the Company at the address of the Company's principal executive offices, to the attention of the Secretary of the Company. 14.14 Titles and Headings. Titles and headings of sections and ------------------- articles of this Plan are for convenience of reference only and shall not affect the construction of any provision of this Plan. 14.15 Governing Law. Except with respect to matters relating to ------------- general corporation law which shall be governed by the General Corporation Law of the State of Delaware, this Plan shall be governed by, interpreted under, and construed and enforced in accordance with the internal laws, and not the laws pertaining to conflicts or choice of laws, of the State of California applicable to agreements made and to be performed wholly within the State of California. 14.16 Information. During the period that Incentive Awards are ----------- outstanding, the Company will provide Participants with copies of all reports, proxy statements and other communications distributed to its stockholders generally and copies of the Company's annual financial statements. -17- IN WITNESS WHEREOF, pursuant to the due authorization and adoption of this Plan by the Board and the stockholders of the Company, the Company has caused this Plan to be duly executed by its duly authorized officers. JAVELIN SYSTEMS, INC., a Delaware corporation By: /s/ Richard P. Stack ----------------------------------------------- Richard P. Stack, President and Chief Executive Officer * * * * * I hereby certify that the foregoing Plan was duly adopted by the Board of Directors of JAVELIN SYSTEMS, INC. on August 6, 1996. Executed as of this 20th day of August, 1996. /s/ Lawrence W. McCorkle ----------------------------------------------- Lawrence W. McCorkle, Secretary * * * * * I hereby certify that the foregoing Plan was duly approved by the stockholders of JAVELIN SYSTEMS, INC. on August 6, 1996. Executed as of this 20th day of August, 1996. /s/ Lawrence W. McCorkle ----------------------------------------------- Lawrence W. McCorkle, Secretary -18- EX-10.2 5 1996 DIRECTOR NON-QUALIFIED STOCK OPTION AGMT. EXHIBIT 10.2 1996 DIRECTOR NON-QUALIFIED STOCK OPTION AGREEMENT ------------------------------------ THIS AGREEMENT, dated as of ___________, 1996, is made by and between JAVELIN SYSTEMS, INC., a Delaware corporation (the "Company"), and __________________, a member of the Board of Directors of the Company (the "Optionee"). WHEREAS, the Company wishes to afford the Optionee the opportunity to purchase shares of its Common Stock; and WHEREAS, the Company wishes to carry out the 1996 Stock Incentive Award Plan of Javelin Systems, Inc. (the "Plan") (the terms of which are hereby incorporated by reference and made a part of this Agreement); and WHEREAS, the Board of Directors or the Compensation Committee of the Company's Board of Directors (the "Committee"), appointed to administer said Plan, has determined that it would be to the advantage and best interest of the Company and its stockholders to grant the Non-Qualified Option provided for herein to the Optionee as an inducement to remain in the service of the Company and as an incentive for increased efforts during such service, and has advised the Company thereof and instructed the undersigned officers to issue said Option. NOW, THEREFORE, in consideration of the mutual covenants herein contained and other good and valuable consideration, receipt of which is hereby acknowledged, the parties hereto do hereby agree as follows: ARTICLE I --------- DEFINITIONS ----------- Whenever the following terms are used in this Agreement, they shall have the meaning specified below unless the context clearly indicates to the contrary. Terms used herein and not otherwise defined herein have the meanings given to such terms in the Plan. The masculine pronoun shall include the feminine and neuter, and the singular the plural, where the context so indicates. Section 1.1 - Code - ----------- ---- "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. Section 1.2 - Common Stock - ----------- ------------ "Common Stock" shall mean the Company' s common stock, $.01 par value. Section 1.3 - Company - ----------- ------- "Company" shall mean Javelin Systems, Inc. Sunwood Research, Inc., a Delaware corporation. In addition, "Company" shall mean any corporation assuming, or issuing new director employee stock options in substitution for the Option and any Incentive Stock Options outstanding under the Plan in a transaction to which Section 424(a) of the Code applies. Section 1.3 - Option - ----------- ------ "Option" shall mean the non-qualified option to purchase Common Stock of the Company granted under this Agreement. Section 1.4 - Parent Corporation - ----------- ------------------ "Parent Corporation" shall mean a parent corporation as that term is defined in Section 424(e) of the Code. Section 1.5 - Plan - ----------- ---- "Plan" shall mean the 199 6 5 Stock Incentive Award Plan of Javelin Systems, Inc. Sunwood Research, Inc. Section 1.6 - Secretary - ----------- --------- "Secretary" shall mean the Secretary of the Company. Section 1.7 - Securities Act - ----------- -------------- "Securities Act" shall mean the Securities Act of 1933, as amended. Section 1.8 - Subsidiary Corporation - ----------- ---------------------- "Subsidiary Corporation" shall mean a subsidiary corporation as that term is defined in Section 424(f) of the Code. Section 1.9 - Termination of Directorship - ----------- --------------------------- "Termination of Directorship" shall mean the time when the directorship of Optionee is terminated for any reason, with or without cause, including, but not by way of limitation, a termination by resignation, discharge, death or retirement, but excluding any termination where Optionee is simultaneously appointed or elected as a director of the Company, a Parent Corporation or a Subsidiary Corporation. The Committee, in its absolute discretion, shall determine the effect of all other matters and questions relating to Termination of Directorship, including, but not by way of limitation, the question of whether a Termination of Directorship resulted from a discharge for good cause, and all questions of whether particular leaves of absence constitute a Termination of Directorship. -2- ARTICLE II ---------- GRANT OF OPTION --------------- Section 2.1 - Grant of Option - ----------- --------------- In consideration of the Optionee's agreement to remain as a director of the Company, its Parent Corporations or its Subsidiary Corporations and for other good and valuable consideration, on the date hereof the Company irrevocably grants to the Optionee the option to purchase any part or all of an aggregate of _______ shares of its Common Stock upon the terms and conditions set forth in this Agreement (after giving effect to a 4,300 to 1 stock split to increase the outstanding shares of Common Stock of the Company prior to the contemplated public offering of the Company to approximately two million one hundred thousand (2,100,000) shares). Section 2.2 - Purchase Price - ----------- -------------- The purchase price of the shares of Common Stock covered by the Option shall be $______ per share without commission or other charge. Section 2.3 - Consideration to Company - ----------- ------------------------ In consideration of the granting of this Option by the Company, the Optionee agrees to render faithful and efficient services as a director of the Company with such duties and responsibilities as the Company shall from time to time prescribe, for a period of at least one (1) year from the date this Option is granted. Nothing in this Agreement or in the Plan shall confer upon the Optionee any right to continue as a director of the Company, any Parent Corporation or any Subsidiary Corporation, or shall interfere with or restrict in any way the rights of the Company, its Parent Corporations and its Subsidiary Corporations, or their respective stockholders, which are hereby expressly reserved, to remove the Optionee as a director at any time in accordance with the Delaware General Corporation Law. Section 2.4 - Adjustments in Option - ----------- --------------------- In the event that the outstanding shares of the stock subject to the Option are changed into or exchanged for a different number or kind of shares or other securities of the Company or of another corporation by reason of reorganization, merger, consolidation, recapitalization, reclassification, stock split (other than the stock split described in Section 2.1 hereof), reverse stock split up, stock dividend or combination of shares, the Committee shall make an appropriate and equitable adjustment in the number and kind of shares as to which the Option, or portions thereof then unexercised, shall be exercisable, to the end that after such event the Optionee's proportionate interest shall be maintained as before the occurrence of such event. Such adjustment in the Option shall be made without change in the total price applicable to the unexercised portion of the Option (except for any change in the aggregate price resulting from rounding-off of share quantities or prices) and with any necessary corresponding adjustment in the -3- Option price per share. Any such adjustment made by the Committee shall be final and binding upon the Optionee, the Company and all other interested persons. ARTICLE III ----------- PERIOD OF EXERCISABILITY ------------------------ Section 3.1 - Commencement of Exercisability - ----------- ------------------------------ (a) The Option shall become exercisable in three cumulative installments as follows: Forty percent (40%) of the shares covered by the Option shall become exercisable on the first anniversary date of the date the Option is granted, the Option shall become exercisable with respect to thirty percent (30%) of the shares covered by the Option on the second anniversary date of the date the Option is granted, and on the third anniversary date of the date the Option is granted, the Option shall become exercisable with respect to the final thirty percent (30%) of the shares covered by the Option for a total of one hundred percent (100%) of the shares covered by the Option. (b) No portion of the Option which is unexercisable at Termination of Directorship of the Optionee shall thereafter become exercisable. Section 3.2 - Duration of Exercisability - ----------- -------------------------- The installments provided for in Section 3.1 are cumulative. Each such installment which becomes exercisable pursuant to Section 3.1 shall remain exercisable until it becomes unexercisable under Section 3.3. Section 3.3 - Expiration of Option - ----------- -------------------- The Option may not be exercised to any extent by anyone after the first to occur of the following events: (a) The expiration of five (5) years from the date the Option was granted; or (b) The expiration of thirty (30) days from the date of the Optionee's Termination of Directorship unless such Termination of Directorship results from his death, retirement, Total Disability (within the meaning of Section 22(e)(3) of the Code) or being discharged not for good cause; or (c) The expiration of three (3) months from the date of the Optionee's Termination of Directorship by reason of his retirement or his being discharged not for good cause, unless the Optionee dies within said three-month period; or (d) The expiration of one (1) year from the date of the Optionee's Termination of Directorship by reason of his Total Disability (within the meaning of Section 22(e)(3) of the Code); or -4- (e) The expiration of one (1) year from the date of the Optionee's death; or (f) The effective date of a Terminating Transaction, unless in connection with such Terminating Transaction the Optionee suffers a Termination of Directorship in which case the provisions of Sections 3.3(b)-(e) hereof, as applicable, shall be controlling with respect to the expiration of the Option. At least ten (10) days prior to the effective date of any Terminating Transaction, the Committee shall give the Optionee notice of such event if the Option has then neither been fully exercised nor become unexercisable under this Section 3.3. Section 3.4 - Acceleration of Exercisability - ----------- ------------------------------ In the event of a Terminating Transaction, the Committee may, in its absolute discretion and upon such terms and conditions as it deems appropriate, provide by resolution, adopted prior to such event and incorporated in the notice referred to in Section 3.3(f), that at some time prior to the effective date of such event this Option shall be exercisable as to all the shares covered hereby, notwithstanding that this Option may not yet have become fully exercisable under Section 3.1(a); provided, however, that this acceleration of -------- ------- exercisability shall not take place if: (a) This Option becomes unexercisable under Section 3.3 prior to said effective date; or (b) In connection with such Terminating Transaction, provision is made for an assumption of this Option or a substitution therefor of a new option by a successor corporation or a Parent Corporation or Subsidiary Corporation of such corporation. The Committee may make such determinations and adopt such rules and conditions as it, in its absolute discretion, deems appropriate in connection with such acceleration of exercisability, including, but not by way of limitation, provisions to ensure that any such acceleration and resulting exercise shall be conditioned upon the consummation of the contemplated Terminating Transaction and determinations regarding whether provisions for assumption or substitution have been made in accordance with subsection (b) above. ARTICLE IV ---------- EXERCISE OF OPTION ------------------ Section 4.1 - Person Eligible to Exercise - ----------- --------------------------- During the lifetime of the Optionee, only he may exercise the Option or any portion thereof. After the death of the Optionee, any exercisable portion of the Option may, prior to the time when the Option becomes unexercisable under Section 3.3, be exercised by the Optionee's personal representative or by any person empowered to do so under the Optionee's will or under the then applicable laws of descent and distribution. -5- Section 4.2 - Partial Exercise - ----------- ---------------- Any exercisable portion of the Option or the entire Option, if then wholly exercisable, may be exercised in whole or in part at any time prior to the time when the Option or portion thereof becomes unexercisable under Section 3.3; provided, however, that each partial exercise shall be for not less than -------- ------- one thousand (1,000) shares (or the minimum installment set forth in Section 3.1, if a smaller number of shares) and shall be for whole shares only. Section 4.3 - Manner of Exercise - ----------- ------------------ The Option, or any exercisable portion thereof, may be exercised solely by delivery to the Secretary or the Secretary/'/s office of all of the following prior to the time when such exercisable Option or portion thereof becomes unexercisable under Section 3.3: (a) Notice in writing signed by the Optionee, or such other person then entitled to exercise the Option or portion thereof, stating that the Option or portion thereof is thereby exercised, such notice complying with all applicable rules established by the Committee; and (b) (i) Full payment (in cash or by check) for the shares with respect to which such Option or portion thereof is exercised; or (ii) With the consent of the Committee, shares of the Company's Common Stock owned by the Optionee duly endorsed for transfer to the Company with a Fair Market Value on the date of delivery equal to the aggregate purchase price of the shares with respect to which such Option or portion thereof is exercised; or (iii) With the consent of the Committee, a full recourse promissory note bearing interest (at such rate determined by the Committee as shall then preclude the imputation of interest under the Code) and payable upon such terms as may be prescribed by the Committee. The Committee may also prescribe the form of such note and the security to be given for such note. The Option may not be exercised, however, by delivery of a promissory note or by a loan from the Company when or where such loan or other extension of credit is prohibited by law; or (iv) Any combination of the consideration provided in the foregoing subparagraphs (i), (ii) and (iii); and (c) Full payment to the Company of all amounts which it is required to withhold under federal, state or local law upon exercise of the Option; and (d) In the event the Option or portion thereof shall be exercised pursuant to Section 4.1 by any person or persons other than the Optionee, appropriate proof of the right of such person or persons to exercise the Option or portion thereof. -6- Section 4.4 - Conditions to Issuance of Stock Certificates - ----------- -------------------------------------------- The shares of stock deliverable upon the exercise of the Option, or any portion thereof, may be either previously authorized but unissued shares or issued shares which have then been reacquired by the Company. Such shares shall be fully paid and non-assessable. The Company shall not be required to issue or deliver any certificate or certificates for shares of stock purchased upon the exercise of the Option or portion thereof prior to fulfillment of all of the following conditions: (a) The admission of such shares to listing on all stock exchanges, if any, on which such class of stock is then listed; (b) The completion of any registration or other qualification of such shares under any state or federal law or under the rulings or regulations of the Securities and Exchange Commission or any other governmental regulatory body, which the Committee shall, in its absolute discretion, deem necessary or advisable; (c) The obtaining of any approval or other clearance from any state or federal governmental agency which the Committee shall, in its absolute discretion, determine to be necessary or advisable; (d) The payment to the Company of all amounts which it is required to withhold under federal, state or local law in connection with the exercise of the Option; and (e) The lapse of such reasonable period of time following the exercise of the Option as the Committee may from time to time establish for reasons of administrative convenience. Section 4.5 - Rights as Stockholder - ----------- --------------------- The holder of the Option shall not be, nor shall such holder have any of the rights or privileges of, a stockholder of the Company in respect of any shares purchasable upon the exercise of any part of the Option unless and until a certificate or certificates representing such shares shall have been issued by the Company to such holder. ARTICLE V --------- OTHER PROVISIONS ---------------- Section 5.1 - Administration - ----------- -------------- Subject to the powers reserved under the Plan to the Board of Directors of the Company, the Committee shall have the power to interpret the Plan and this Agreement and to adopt such rules for the administration, interpretation and application of the Plan as are consistent therewith and to interpret, amend or revoke any such rules. All actions taken and all -7- interpretations and determinations made by the Committee in good faith shall be final and binding upon the Optionee, the Company and all other interested persons. No member of the Committee shall be personally liable for any action, determination or interpretation made in good faith with respect to the Plan or the Option. In its absolute discretion, the Board may at any time and from time to time exercise any and all rights and duties of the Committee under the Plan and this Agreement. Section 5.2 - Option Not Transferable - ----------- ----------------------- Neither the Option nor any interest or right therein or part thereof (all of which for purposes of this Section 5.2 collectively shall be referred to as the "Option") shall be subject to or liable for the debts, contracts or engagements of the Optionee or his successors in interest or shall be subject to disposition by transfer, alienation, anticipation, pledge, encumbrance, gift, assignment or any other means whether such disposition be voluntary or involuntary or by operation of law by judgment, levy, attachment, garnishment or any other legal or equitable proceedings (including bankruptcy), and any attempted disposition thereof shall be null and void and of no effect; provided, -------- however, that this Section 5.2 shall not prevent transfers by will or by the - ------- applicable laws of descent and distribution. Notwithstanding the foregoing, the Option may be assigned during the Optionee's lifetime in accordance with the terms of a Qualified Domestic Relations Order (as hereinafter defined). The assigned Option may only be exercised by the person or persons who acquire a proprietary interest in such Option pursuant to such Qualified Domestic Relations Order. For purposes of this Section 5.2, a "Qualified Domestic Relations Order" shall mean any judgment, decree or order which provides or otherwise conveys, pursuant to applicable State domestic relations laws, marital property rights to any spouse or former spouse of the Optionee, which substantially complies with the requirements of Code Section 414(p). The terms of the Option shall be binding upon the executors, administrators, heirs, devisees, legatees, legal representatives, successors and assigns of the Optionee. Section 5.3 - Shares to Be Reserved - ----------- --------------------- The Company shall at all times during the term of the Option reserve and keep available such number of shares of Common Stock as will be sufficient to satisfy the requirements of this Agreement. Section 5.4 - Notices - ----------- ------- Any notice to be given under the terms of this Agreement to the Company shall be addressed to the Company in care of its Secretary, and any notice to be given to the Optionee shall be addressed to him at the address given beneath his signature hereto. By a notice given pursuant to this Section 5.4, either party may hereafter designate a different address for notices to be given to him. Any notice which is required to be given to the Optionee shall, if the Optionee is then deceased, be given to the Optionee's personal representative if such representative has previously informed the Company of his status and address by written notice under this Section 5.4. Any notice shall be deemed duly given when enclosed in a properly sealed envelope or wrapper addressed as aforesaid, deposited (with postage prepaid) in a post office or branch post office regularly maintained by the United States Postal Service. Section 5.5 - Titles - ----------- ------ Titles are provided herein for convenience only and are not to serve as a basis for interpretation or construction of this Agreement. Section 5.6 - Construction - ----------- ------------ -8- This Agreement shall be administered, interpreted and enforced under the laws of the State of California. This Agreement constitutes the entire agreement and understanding of the parties with respect to the transactions contemplated hereby, and supersedes all prior agreements, arrangements and understandings relating to the subject matter hereof, written or otherwise. Section 5.7 - Restrictions on Transfer of Shares - ----------- ---------------------------------- (a) Until such time as the Company has consummated a registered public offering of the shares of its Common Stock, there can be no valid transfer (as hereinafter defined) of any shares of stock purchased on exercise of the Option, or any interest in such shares, by any holder of such shares or interests unless such transfer is solely for cash consideration and is made in compliance with the following provisions: (i) Before there can be a valid transfer of any shares or any interest therein, the record holder of the shares to be transferred (the "Offered Shares") shall give written notice (by registered or certified mail) to the Company (the "Offer Notice"). The Offer Notice shall specify the identity of the proposed transferee, the cash price offered for the Offered Shares by the proposed transferee and the other terms and conditions of the proposed transfer. The date such Offer Notice is mailed shall be hereinafter referred to as the "Notice Date" and the record holder of the Offered Shares shall be hereinafter referred to as the "Offeror." (ii) For a period of thirty (30) calendar days after the Notice Date (the "Offer Period"), the Company shall have the option to purchase all (but not less than all) of the Offered Shares at the cash price offered for the Offered Shares by the proposed transferee and on the other terms set forth in the Offer Notice. The Option shall be exercisable by the Company by mailing (by registered or certified mail) written notice of exercise to the Offeror, accompanied by full payment for the Offered Shares, prior to the end of the Offer Period. (iii) If, and only if, the option granted pursuant to subsection (a)(ii) of this Section 5.7 is not exercised, the transfer proposed in the Offer Notice may take place; provided, however, that such transfer must, in -------- ------- all respects, be exactly as proposed in the Offer Notice except that such transfer must take place not later than the ninetieth (90th) calendar day after the expiration of the Offer Period. If such transfer has not taken place within such 90-day period, then the Offeror may not transfer any shares of Common Stock without once again complying with this Section 5.7. (b) As used in this Section 5.7, the term "transfer" means any sale, encumbrance, pledge, gift or other form of disposition or transfer of shares of the Common Stock or any legal or equitable interest therein; provided, however, -------- ------- that the term "transfer" does not include a transfer of such shares or interests by will or by the applicable laws of descent and distribution or a gift of such shares if the donee agrees to be bound by the provisions of this Section 5.7. -9- (c) None of the shares of the Company's Common Stock purchased on exercise of the Option shall be transferred on the Company's books nor shall the Company recognize any such transfer of any such shares or any interest therein unless and until all applicable provisions of this Section 5.7 have been complied with in all respects. Until the restrictions imposed under this Section 5.7 have lapsed, the certificates of stock evidencing shares of Common Stock purchased on exercise of the Option shall bear an appropriate legend referring to the transfer restrictions imposed by this Section 5.7. IN WITNESS WHEREOF, this Agreement has been executed and delivered by the parties hereto. JAVELIN SYSTEMS, INC., a Delaware corporation By: -------------------------------------------- Richard Stack, President and Chief Executive Officer - ---------------------------- Signature of Optionee Print Name: ----------------- Address: -------------------- -------------------- -------------------- Optionee's Taxpayer Identification Number: - ---------------------------- -10- EX-10.3 6 1996 EMPLOYEE NON-QUALIFIED STOCK OPTION AGMT. EXHIBIT 10.3 1996 EMPLOYEE NON-QUALIFIED STOCK OPTION AGREEMENT ------------------------------------ THIS AGREEMENT, dated as of ___________, 1996, is made by and between JAVELIN SYSTEMS, INC., a Delaware corporation (the "Company"), and __________________, an employee of the Company (the "Optionee"). WHEREAS, the Company wishes to afford the Optionee the opportunity to purchase shares of its Common Stock; and WHEREAS, the Company wishes to carry out the 1996 Stock Incentive Award Plan of Javelin Systems, Inc. (the "Plan") (the terms of which are hereby incorporated by reference and made a part of this Agreement); and WHEREAS, the Board of Directors or the Compensation Committee of the Company's Board of Directors (the "Committee"), appointed to administer said Plan, has determined that it would be to the advantage and best interest of the Company and its stockholders to grant the Non-Qualified Option provided for herein to the Optionee, and has advised the Company thereof and instructed the undersigned officers to issue said Option. NOW, THEREFORE, in consideration of the mutual covenants herein contained and other good and valuable consideration, receipt of which is hereby acknowledged, the parties hereto do hereby agree as follows: ARTICLE I --------- DEFINITIONS ----------- Whenever the following terms are used in this Agreement, they shall have the meaning specified below unless the context clearly indicates to the contrary. Terms used herein and not otherwise defined herein have the meanings given to such terms in the Plan. The masculine pronoun shall include the feminine and neuter, and the singular the plural, where the context so indicates. Section 1.1 - Code - ----------- ---- "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. Section 1.2 - Common Stock - ----------- ------------ "Common Stock" shall mean the Company's common stock, $.01 par value. Section 1.3 - Company - ----------- ------- "Company" shall mean Javelin Systems, Inc., a Delaware corporation. In addition, "Company" shall mean any corporation assuming, or issuing new employee stock options in substitution for the Option and any Incentive Stock Options outstanding under the Plan in a transaction to which Section 424(a) of the Code applies. Section 1.3 - Option - ----------- ------ "Option" shall mean the non-qualified option to purchase Common Stock of the Company granted under this Agreement. Section 1.4 - Parent Corporation - ----------- ------------------ "Parent Corporation" shall mean a parent corporation as that term is defined in Section 424(e) of the Code. Section 1.5 - Plan - ----------- ---- "Plan" shall mean the 1996 Stock Incentive Award Plan of Javelin Systems, Inc. Section 1.6 - Secretary - ----------- --------- "Secretary" shall mean the Secretary of the Company. Section 1.7 - Securities Act - ----------- -------------- "Securities Act" shall mean the Securities Act of 1933, as amended. Section 1.8 - Subsidiary Corporation - ----------- ---------------------- "Subsidiary Corporation" shall mean a subsidiary corporation as that term is defined in Section 424(f) of the Code. Section 1.9 - Termination of Employment - ----------- ------------------------- "Termination of Employment" shall mean the time when the employee relationship between the Optionee and the Company, a Parent Corporation or a Subsidiary Corporation is terminated for any reason, with or without cause, including, but not by way of limitation, a termination by resignation, discharge, death or retirement, but excluding any termination where Optionee simultaneously becomes an employee of the Company, a Parent Corporation or a Subsidiary Corporation. The Committee, in its absolute discretion, shall determine the effect of all other matters and questions relating to Termination of Employment, including, but not by way of limitation, the question of whether a Termination of Employment resulted from a discharge for good cause, and all questions of whether particular leaves of absence constitute a Termination of Employment. -2- ARTICLE II ---------- GRANT OF OPTION --------------- Section 2.1 - Grant of Option - ----------- --------------- In consideration of the Optionee's services as an employee to the Company and for other good and valuable consideration, on the date hereof the Company irrevocably grants to the Optionee the option to purchase any part or all of an aggregate of ________ shares of its Common Stock upon the terms and conditions set forth in this Agreement (after giving effect to a 4,300 to 1 stock split to increase the outstanding shares of Common Stock of the Company prior to the contemplated public offering of the Company to approximately two million one hundred thousand (2,100,000) shares). Section 2.2 - Purchase Price - ----------- -------------- The purchase price of the shares of Common Stock covered by the Option shall be $_____ per share without commission or other charge. Section 2.3 - Consideration to Company - ----------- ------------------------ In consideration of the granting of this Option by the Company, the Optionee agrees to render faithful and efficient services as an employee to the Company, a Parent Corporation or a Subsidiary Corporation for a period of at least one (1) year from the date this Option is granted. Nothing in this Agreement or in the Plan shall confer upon the Optionee any right to continue as an employee to the Company, any Parent Corporation or any Subsidiary Corporation, or shall interfere with or restrict in any way the rights of the Company, its Parent Corporations and its Subsidiary Corporations, which are hereby expressly reserved, to discharge the Optionee at any time for any reason whatsoever, with or without cause. Section 2.4 - Adjustments in Option - ----------- --------------------- In the event that the outstanding shares of the stock subject to the Option are changed into or exchanged for a different number or kind of shares or other securities of the Company or of another corporation by reason of reorganization, merger, consolidation, recapitalization, reclassification, stock split (other than the stock split described in Section 2.1 hereof), reverse stock split stock dividend or combination of shares, the Committee shall make an appropriate and equitable adjustment in the number and kind of shares as to which the Option, or portions thereof then unexercised, shall be exercisable, to the end that after such event the Optionee's proportionate interest shall be maintained as before the occurrence of such event. Such adjustment in the Option shall be made without change in the total price applicable to the unexercised portion of the Option (except for any change in the aggregate price resulting from rounding-off of share quantities or prices) and with any necessary corresponding adjustment in the Option price per share. Any such adjustment made by the Committee shall be final and binding upon the Optionee, the Company and all other interested persons. -3- ARTICLE III ----------- PERIOD OF EXERCISABILITY ------------------------ Section 3.1 - Commencement of Exercisability - ----------- ------------------------------ (a) The Option shall become exercisable in three cumulative installments as follows: Forty percent (40%) of the shares covered by the Option shall become exercisable on the first anniversary date of the date the Option is granted, the Option shall become exercisable with respect to thirty percent (30%) of the shares covered by the Option on the second anniversary date of the date the Option is granted, and on the third anniversary date of the date the Option is granted, the Option shall become exercisable with respect to the final thirty percent (30%) of the shares covered by the Option for a total of one hundred percent (100%) of the shares covered by the Option. (b) No portion of the Option which is unexercisable at Termination of Employment of the Optionee shall thereafter become exercisable. Section 3.2 - Duration of Exercisability - ----------- -------------------------- The installments provided for in Section 3.1 are cumulative. Each such installment which becomes exercisable pursuant to Section 3.1 shall remain exercisable until it becomes unexercisable under Section 3.3. Section 3.3 - Expiration of Option - ----------- -------------------- The Option may not be exercised to any extent by anyone after the first to occur of the following events: (a) The expiration of five (5) years from the date the Option was granted; or (b) The expiration of thirty (30) days from the date of the Optionee's Termination of Employment unless such Termination of Employment results from his death, retirement, Total Disability (within the meaning of Section 22(e)(3) of the Code) or being discharged not for good cause; or (c) The expiration of three (3) months from the date of the Optionee's Termination of Employment by reason of his retirement or his being discharged not for good cause, unless the Optionee dies within said three-month period; or (d) The expiration of one (1) year from the date of the Optionee's Termination of Employment by reason of his Total Disability (within the meaning of Section 22(e)(3) of the Code); or (e) The expiration of one (1) year from the date of the Optionee's death; or -4- (f) The effective date of a Terminating Transaction, unless in connection with such Terminating Transaction the Optionee suffers a Termination of Employment in which case the provisions of Sections 3.3(b)-(e) hereof, as applicable, shall be controlling with respect to the expiration of the Option. At least ten (10) days prior to the effective date of any Terminating Transaction, the Committee shall give the Optionee notice of such event if the Option has then neither been fully exercised nor become unexercisable under this Section 3.3. Section 3.4 - Acceleration of Exercisability - ----------- ------------------------------ In the event of a Terminating Transaction, the Committee may, in its absolute discretion and upon such terms and conditions as it deems appropriate, provide by resolution, adopted prior to such event and incorporated in the notice referred to in Section 3.3(f), that at some time prior to the effective date of such event this Option shall be exercisable as to all the shares covered hereby, notwithstanding that this Option may not yet have become fully exercisable under Section 3.1(a); provided, however, that this acceleration of -------- ------- exercisability shall not take place if: (a) This Option becomes unexercisable under Section 3.3 prior to said effective date; or (b) In connection with such Terminating Transaction, provision is made for an assumption of this Option or a substitution therefor of a new option by a successor corporation or a Parent Corporation or Subsidiary Corporation of such corporation. The Committee may make such determinations and adopt such rules and conditions as it, in its absolute discretion, deems appropriate in connection with such acceleration of exercisability, including, but not by way of limitation, provisions to ensure that any such acceleration and resulting exercise shall be conditioned upon the consummation of the contemplated Terminating Transaction and determinations regarding whether provisions for assumption or substitution have been made in accordance with subsection (b) above. ARTICLE IV ---------- EXERCISE OF OPTION ------------------ Section 4.1 - Person Eligible to Exercise - ----------- --------------------------- During the lifetime of the Optionee, only he may exercise the Option or any portion thereof. After the death of the Optionee, any exercisable portion of the Option may, prior to the time when the Option becomes unexercisable under Section 3.3, be exercised by the Optionee's personal representative or by any person empowered to do so under the Optionee's will or under the then applicable laws of descent and distribution. -5- Section 4.2 - Partial Exercise - ----------- ---------------- Any exercisable portion of the Option or the entire Option, if then wholly exercisable, may be exercised in whole or in part at any time prior to the time when the Option or portion thereof becomes unexercisable under Section 3.3; provided, however, that each partial exercise shall be for not less than -------- ------- one thousand (1,000) shares (or the minimum installment set forth in Section 3.1, if a smaller number of shares) and shall be for whole shares only. Section 4.3 - Manner of Exercise - ----------- ------------------ The Option, or any exercisable portion thereof, may be exercised solely by delivery to the Secretary or the Secretary/'/s office of all of the following prior to the time when such exercisable Option or portion thereof becomes unexercisable under Section 3.3: (a) Notice in writing signed by the Optionee, or such other person then entitled to exercise the Option or portion thereof, stating that the Option or portion thereof is thereby exercised, such notice complying with all applicable rules established by the Committee; and (b) (i) Full payment (in cash or by check) for the shares with respect to which such Option or portion thereof is exercised; or (ii) With the consent of the Committee, shares of the Company's Common Stock owned by the Optionee duly endorsed for transfer to the Company with a Fair Market Value on the date of delivery equal to the aggregate purchase price of the shares with respect to which such Option or portion thereof is exercised; or (iii) With the consent of the Committee, a full recourse promissory note bearing interest (at such rate determined by the Committee as shall then preclude the imputation of interest under the Code) and payable upon such terms as may be prescribed by the Committee. The Committee may also prescribe the form of such note and the security to be given for such note. The Option may not be exercised, however, by delivery of a promissory note or by a loan from the Company when or where such loan or other extension of credit is prohibited by law; or (iv) Any combination of the consideration provided in the foregoing subparagraphs (i), (ii) and (iii); and (c) Full payment to the Company of all amounts which it is required to withhold under federal, state or local law upon exercise of the Option; and (d) In the event the Option or portion thereof shall be exercised pursuant to Section 4.1 by any person or persons other than the Optionee, appropriate proof of the right of such person or persons to exercise the Option or portion thereof. Section 4.4 - Conditions to Issuance of Stock Certificates - ----------- -------------------------------------------- -6- The shares of stock deliverable upon the exercise of the Option, or any portion thereof, may be either previously authorized but unissued shares or issued shares which have then been reacquired by the Company. Such shares shall be fully paid and non-assessable. The Company shall not be required to issue or deliver any certificate or certificates for shares of stock purchased upon the exercise of the Option or portion thereof prior to fulfillment of all of the following conditions: (a) The admission of such shares to listing on all stock exchanges, if any, on which such class of stock is then listed; (b) The completion of any registration or other qualification of such shares under any state or federal law or under the rulings or regulations of the Securities and Exchange Commission or any other governmental regulatory body, which the Committee shall, in its absolute discretion, deem necessary or advisable; (c) The obtaining of any approval or other clearance from any state or federal governmental agency which the Committee shall, in its absolute discretion, determine to be necessary or advisable; (d) The payment to the Company of all amounts which it is required to withhold under federal, state or local law in connection with the exercise of the Option; and (e) The lapse of such reasonable period of time following the exercise of the Option as the Committee may from time to time establish for reasons of administrative convenience. Section 4.5 - Rights as Stockholder - ----------- --------------------- The holder of the Option shall not be, nor shall such holder have any of the rights or privileges of, a stockholder of the Company in respect of any shares purchasable upon the exercise of any part of the Option unless and until a certificate or certificates representing such shares shall have been issued by the Company to such holder. ARTICLE V --------- OTHER PROVISIONS ---------------- Section 5.1 - Administration - ----------- -------------- Subject to the powers reserved under the Plan to the Board of Directors of the Company, the Committee shall have the power to interpret the Plan and this Agreement and to adopt such rules for the administration, interpretation and application of the Plan as are consistent therewith and to interpret, amend or revoke any such rules. All actions taken and all interpretations and determinations made by the Committee in good faith shall be final and binding upon the Optionee, the Company and all other interested persons. No member of the Committee shall be personally liable for any action, determination or interpretation made in good faith with -7- respect to the Plan or the Option. In its absolute discretion, the Board may at any time and from time to time exercise any and all rights and duties of the Committee under the Plan and this Agreement. Section 5.2 - Option Not Transferable - ----------- ----------------------- Neither the Option nor any interest or right therein or part thereof (all of which for purposes of this Section 5.2 collectively shall be referred to as the "Option") shall be subject to or liable for the debts, contracts or engagements of the Optionee or his successors in interest or shall be subject to disposition by transfer, alienation, anticipation, pledge, encumbrance, gift, assignment or any other means whether such disposition be voluntary or involuntary or by operation of law by judgment, levy, attachment, garnishment or any other legal or equitable proceedings (including bankruptcy), and any attempted disposition thereof shall be null and void and of no effect; provided, -------- however, that this Section 5.2 shall not prevent transfers by will or by the - ------- applicable laws of descent and distribution. The terms of the Option shall be binding upon the executors, administrators, heirs, devisees, legatees, legal representatives, successors and assigns of the Optionee. Section 5.3 - Shares to Be Reserved - ----------- --------------------- The Company shall at all times during the term of the Option reserve and keep available such number of shares of Common Stock as will be sufficient to satisfy the requirements of this Agreement. Section 5.4 - Notices - ----------- ------- Any notice to be given under the terms of this Agreement to the Company shall be addressed to the Company in care of its Secretary, and any notice to be given to the Optionee shall be addressed to him at the address given beneath his signature hereto. By a notice given pursuant to this Section 5.4, either party may hereafter designate a different address for notices to be given to him. Any notice which is required to be given to the Optionee shall, if the Optionee is then deceased, be given to the Optionee's personal representative if such representative has previously informed the Company of his status and address by written notice under this Section 5.4. Any notice shall be deemed duly given when enclosed in a properly sealed envelope or wrapper addressed as aforesaid, deposited (with postage prepaid) in a post office or branch post office regularly maintained by the United States Postal Service. Section 5.5 - Titles - ----------- ------ Titles are provided herein for convenience only and are not to serve as a basis for interpretation or construction of this Agreement. Section 5.6 - Construction - ----------- ------------ This Agreement shall be administered, interpreted and enforced under the laws of the State of California. This Agreement constitutes the entire agreement and understanding of the -8- parties with respect to the transactions contemplated hereby, and supersedes all prior agreements, arrangements and understandings relating to the subject matter hereof, written or otherwise. Section 5.7 - Restrictions on Transfer of Shares - ----------- ---------------------------------- (a) Until such time as the Company has consummated a registered public offering of the shares of its Common Stock, there can be no valid transfer (as hereinafter defined) of any shares of stock purchased on exercise of the Option, or any interest in such shares, by any holder of such shares or interests unless such transfer is solely for cash consideration and is made in compliance with the following provisions: (i) Before there can be a valid transfer of any shares or any interest therein, the record holder of the shares to be transferred (the "Offered Shares") shall give written notice (by registered or certified mail) to the Company (the "Offer Notice"). The Offer Notice shall specify the identity of the proposed transferee, the cash price offered for the Offered Shares by the proposed transferee and the other terms and conditions of the proposed transfer. The date such Offer Notice is mailed shall be hereinafter referred to as the "Notice Date" and the record holder of the Offered Shares shall be hereinafter referred to as the "Offeror." (ii) For a period of thirty (30) calendar days after the Notice Date (the "Offer Period"), the Company shall have the option to purchase all (but not less than all) of the Offered Shares at the cash price offered for the Offered Shares by the proposed transferee and on the other terms set forth in the Offer Notice. The Option shall be exercisable by the Company by mailing (by registered or certified mail) written notice of exercise to the Offeror, accompanied by full payment for the Offered Shares, prior to the end of the Offer Period. (iii) If, and only if, the option granted pursuant to subsection (a)(ii) of this Section 5.7 is not exercised, the transfer proposed in the Offer Notice may take place; provided, however, that such transfer must, in -------- ------- all respects, be exactly as proposed in the Offer Notice except that such transfer must take place not later than the ninetieth (90th) calendar day after the expiration of the Offer Period. If such transfer has not taken place within such 90-day period, then the Offeror may not transfer any shares of Common Stock without once again complying with this Section 5.7. (b) As used in this Section 5.7, the term "transfer" means any sale, encumbrance, pledge, gift or other form of disposition or transfer of shares of the Common Stock or any legal or equitable interest therein; provided, however, -------- ------- that the term "transfer" does not include a transfer of such shares or interests by will or by the applicable laws of descent and distribution or by a gift of such shares if the donee agrees to be bound by the provisions of this Section 5.7. (c) None of the shares of the Company's Common Stock purchased on exercise of the Option shall be transferred on the Company's books nor shall the Company recognize any such transfer of any such shares or any interest therein unless and until all -9- applicable provisions of this Section 5.7 have been complied with in all respects. Until the restrictions imposed under this Section 5.7 have lapsed, the certificates of stock evidencing shares of Common Stock purchased on exercise of the Option shall bear an appropriate legend referring to the transfer restrictions imposed by this Section 5.7. -10- IN WITNESS WHEREOF, this Agreement has been executed and delivered by the parties hereto. JAVELIN SYSTEMS, INC., a Delaware corporation By: ----------------------------------------------- Richard P. Stack, President and Chief Executive Officer - -------------------------------------- Signature of Optionee Print Name: --------------------------- Address: ----------------------------- ----------------------------- ----------------------------- Optionee's Taxpayer Identification Number: - -------------------------------------- -11- EX-10.4 7 EMPLOYMENT AGREEMENT BETWEEN REGISTRANT AND R. STACK EXHIBIT 10.4 EMPLOYMENT AGREEMENT -------------------- THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of August 19, 1996, by and between JAVELIN SYSTEMS, INC., a Delaware corporation (the "Company"), and RICHARD P. STACK (the "Employee"). R E C I T A L S : ---------------- Employee and the Company desire to enter into this Agreement to establish the terms and conditions of Employee's employment by the Company during the term hereof. A G R E E M E N T : ------------------ NOW, THEREFORE, in consideration of the foregoing recital, and subject to the conditions and covenants set forth herein, the parties agree as follows: 1. Employment. ---------- (a) General Duties. The Company hereby employs Employee, and -------------- Employee hereby agrees to serve, as the President and Chief Executive Officer of the Company during the Term (as hereinafter defined) hereof. Employee shall have such duties and powers as are normally accorded to a President and Chief Executive Officer of a corporation and shall loyally, conscientiously and in good faith perform such duties as may be assigned to him from time to time by the Board of Directors of the Company. (b) Uniqueness of Employee's Services. Employee hereby --------------------------------- represents and agrees that the services to be performed under the terms of this Agreement are of a special, unique, unusual and extraordinary character which gives them a particular value, the loss of which cannot be reasonably or adequately compensated in damages in an action at law. Therefore, Employee expressly agrees that the Company, in addition to any other rights or remedies that Company shall possess, shall be entitled to temporary and permanent injunctive and other equitable relief against Employee to prevent a threatened breach or remedy an existing breach of this Agreement by Employee. 2. Term and Termination. -------------------- (a) Term of Agreement. ----------------- (i) Original Term. Unless earlier terminated as provided in ------------- this Agreement, the term of Employee's employment shall commence on the date hereof and shall continue for a period of three (3) years from the date hereof (the "Original Term"). (ii) One-Year Renewals. Unless (A) the Company or Employee ----------------- delivers written notice of its or his intention not to extend the term of this Agreement on or prior to the date that, with respect to the Original Term, is six (6) months prior to the expiration of the Original Term or, with respect to any Annual Renewal Period (as defined below), is three (3) months prior to the expiration of the then applicable Annual Renewal Period, if any, or (B) this Agreement is otherwise terminated prior to the expiration of the Original Term or the then applicable Annual Renewal Period as provided in this Agreement, this Agreement shall be automatically renewed for an unlimited number of additional one (1) year periods (the "Annual Renewal Period"). The Original Term and any Annual Renewal Periods are hereinafter collectively referred to as the "Term." (b) Termination By Company for Cause. Notwithstanding anything -------------------------------- in this Agreement to the contrary, express or implied, or Section 2924 of the California Labor Code or any similar provision, this Agreement (and Employee's employment) may be terminated immediately and without notice by the Company for cause, which shall include, without limitation, any of the following: (i) Employee's neglect of, or failure to adequately perform, his duties and obligations hereunder or misconduct by Employee, in either case in the judgment of the Board of Directors; (ii) Employee's failure to carry out the lawful instructions of the Board of Directors; (iii) Employee's engaging or participating in any activity which is competitive with or injurious to the Company in the judgment of the Board of Directors; (iv) Employee's commission of any fraud against the Company or use or appropriation for his personal use and benefit of any funds, assets or properties of the Company not authorized by the Company to be so used or appropriated; or (v) Employee's commission of a felony or a crime involving acts which tend to insult or offend community moral standards or public decency or that involves moral turpitude. Upon termination of this Agreement by the Company pursuant to this Section 2(b), Base Salary (as hereinafter defined) payable to Employee shall be prorated to the date of termination, and the Company shall have no further liability whatsoever to Employee. (c) At Will Employment; Termination By Company Without Cause. -------------------------------------------------------- Notwithstanding anything in this Agreement to the contrary, express or implied, or Section 2924 of the California Labor Code or any similar provision, this Agreement (and -2- Employee's employment) may be terminated at the will of the Company without cause upon delivery of written notice to Employee; provided, however, that Employee shall nonetheless be entitled to receive payment of the Base Salary for the greater of (i) the remaining Term of this Agreement or (ii) one year from the date of termination. If the Company elects to terminate this Agreement pursuant to this Subparagraph (c), the Company shall have no further liability whatsoever to Employee other than the payment of the Base Salary referenced in the preceding sentence. (d) Automatic Termination. This Agreement (and Employee's --------------------- employment) shall terminate immediately and without the necessity of any notice or any other action by any party hereto (except with respect to clause (v) below)upon the first to occur of any of the following: (i) The death of Employee; (ii) The loss of Employee's legal capacity to contract; (iii) Dissolution, liquidation, or bankruptcy of the Company, whether voluntary or involuntary; (iv) The inability of Employee to perform his duties or responsibilities hereunder, as a result of mental or physical ailment or incapacity, for an aggregate of ninety (90) calendar days (whether or not consecutive) during any twelve (12) month period, unless waived in writing by Company; or (v) the expiration of the Term of this Agreement. Upon termination of this Agreement pursuant to this Subparagraph (d), Base Salary payable to Employee shall be prorated to the date of termination, and Company shall have no further liability whatsoever to Employee. 3. Exclusivity of Employment. ------------------------- (a) Loyal and Conscientious Service. During the Term of this ------------------------------- Agreement, Employee shall devote his full business time, interest, abilities and energies to the Company and use his best efforts, skills and abilities to promote the general welfare and interest of the Company and to preserve, maintain and enhance its business and business relationships with its customers and employees. (b) Noncompetition. During the Term of this Agreement, Employee -------------- shall not, directly or indirectly, render services of a business, professional or commercial nature to any other person or entity, whether for compensation or otherwise, or engage in any business activities competitive with or adverse to the Company's business or welfare, whether alone, as an employee, as a partner, or as a shareholder, officer or director of any other corporation, or as a trustee, fiduciary or in any other similar representative capacity of any other entity. Notwithstanding the foregoing, the expenditure of reasonable amounts of time for educational, charitable or professional activities shall not be deemed a -3- breach of this Agreement if those activities do not materially interfere with the services required under this Agreement. 4. Compensation. ------------ (a) Base Salary. ----------- (i) Beginning on the date hereof, and continuing through December 31, 1996, the Company shall pay Employee a fixed annual salary ("Base Salary") in an amount equal to Eighty-Four Thousand Dollars ($84,000) per year. Effective January 1, 1997 through December 31, 1997, Employee's Base Salary shall be increased to Ninety-Five Thousand Dollars ($95,000) per year and effective January 1, 1998 through the remaining Term of this Agreement Employee's Base Salary shall be increased to One Hundred and Five Thousand Dollars ($105,000). (ii) The Base Salary shall be paid in equal installments (subject to proration for a period of employment of greater or less than a year or any applicable payroll period therein) on the Company's regular payroll dates. Employee authorizes the Company to make such deductions and withholdings from his Base Salary and any other earnings from Company as are required by law, which deductions shall include, without limitation, withholding for federal and state income tax and Social Security and Medicare withholdings. (b) Additional Compensation and Benefits. In addition to his ------------------------------------ Base Salary: (i) During the Term of this Agreement, Employee shall be entitled to two (2) weeks paid vacation in each year; (ii) During the Term of this Agreement, Employee shall receive a monthly automobile allowance in the amount of One Hundred Dollars ($100) (prorated for a period of employment of less than one month) and shall apply said allowance to the maintenance, upkeep, and insurance of an automobile suitable for Company business. Employee shall not be reimbursed for mileage incurred on behalf of the Company. Employee is solely responsible for the operating expenses, license and registration fees, maintenance and repairs and insurance of said automobile (which insurance shall be with a California-licensed company with coverage in the amounts of not less than $1,000,000 for bodily injury or death to one person in one accident and $100,000 for property damage per accident). Said insurance shall name the Company as an additional insured. The Company is not responsible for any damage to Employee's vehicle or for Employee's insurance deductible or for any other expenses incurred by Employee in connection with Employee's vehicle. -4- (iii) During the Term of this Agreement, the Company shall pay or reimburse Employee for all reasonable and necessary travel and other business expenses incurred or paid by Employee in connection with the performance of his services under this Agreement (except as shall be related to Employee's automobile, but including any expenses relating to business use of a portable or cellular telephone) upon approval of the Company and presentation of expense statements, vouchers, logs and such other supporting information as the Company may reasonably request from time to time. (iv) During the Term of this Agreement, the Company shall pay the annual premium for a life insurance policy insuring the life of Employee providing for benefits in the amount of up to Seven Hundred and Fifty Thousand Dollars ($750,000) payable to the beneficiary or beneficiaries designated by Employee. (v) In addition to the benefits set forth above, during the Term of this Agreement, Employee shall be entitled to participate in any other policies, programs and benefits which the Company may, in its sole and absolute discretion, make generally available to its other senior executives from time to time including, but not limited to, disability insurance, pension and retirement plans, health or medical insurance and similar programs. 5. Nondisclosure and Assignment of Proprietary and Confidential ------------------------------------------------------------ Information. In consideration and recognition of the fact that Employee has - ----------- had, or during the course of his employment with the Company may have, access to Confidential Information (as hereinafter defined) of the Company or other information and data of a secret or proprietary nature of the Company which the Company desires to keep confidential, and that the Company has furnished, or during the course of Employee's employment will furnish, such Confidential Information to Employee, Employee agrees and acknowledges as follows: (a) Confidential Information. As used herein, the term ------------------------ "Confidential Information" shall mean and include, without limitation, any and all marketing data, sales data, plans, strategies, costs, revenues and other financial information, financial projections, distributor, OEM or other customer lists, prospective distributor, OEM or other customer lists, terms of, distributor, OEM or other customer agreements or arrangements identities of customers, distributors or suppliers, sources of supplies and terms of supply arrangements, promotional ideas, data concerning the Company's products, services, designs, methods, inventions, improvements, discoveries or designs, whether or not patentable, "know-how," employment information or terms of employment of Company employees, training and/or sales techniques, and any other information of a similar nature disclosed to Employee or otherwise made known to him as a consequence of or through his employment with the Company (including information originated by Employee) during Employee's employment; provided, however, that the term Confidential Information shall not include any information that (i) at the time of the disclosure or thereafter is or becomes generally available to and known by the public, other than as a result of a disclosure by Employee or any agent or representative of Employee in violation -5- of this Agreement, or (ii) was available to Employee on a non-confidential basis from a source other than the Company, or any of its officers, directors, employees, agents or other representatives. (b) Exclusive Rights; Assignment to Company. The Company has --------------------------------------- exclusive property rights to all Confidential Information, and Employee hereby assigns to Company all rights he might otherwise possess in any Confidential Information. Except as required in the performance of his duties to the Company, Employee will not at any time during or after his employment, directly or indirectly use, communicate, disclose, disseminate, lecture upon, publish articles or otherwise disclose or put in the public domain, any Confidential Information relating to the Company, or its services, products or business. Employee agrees to deliver to the Company any and all copies of Confidential Information in the possession or control of Employee upon the expiration or termination of this Agreement, or at any other time upon request. This Paragraph 5 shall survive the termination of this Agreement and the termination of Employee's employment with the Company. 6. Solicitation of Employees. In consideration and recognition of ------------------------- the fact that Employee's position with the Company is an executive position involving fiduciary responsibility to the Company and access to the Company's Confidential Information, Employee agrees that he will not solicit or take away any employees of the Company for employment by any enterprise that competes with, or is engaged in a substantially similar business to, the business of, the Company. This Paragraph 6 shall survive for a period of two (2) years from the date of termination of this Agreement. 7. Representation by Employee. Employee represents and warrants that -------------------------- he is under no restriction or disability by reason of any prior contract or otherwise which would prevent him from entering into and performing his duties and obligations under this Agreement. 8. Notices. All notices, requests, demands and other communications ------- under this Agreement must be in writing and shall be deemed to have been duly given on the date of service if served personally on the party to whom notice is to be given, or on the date indicated on the return receipt as the date of receipt or refusal if mailed to the party to whom notice is to be given by first class mail, registered or certified, postage prepaid, return receipt requested, and properly addressed as follows: To the Company: JAVELIN SYSTEMS, INC. 2882C Walnut Avenue Tustin, CA 92680 Attention: Chief Financial Officer To the Employee: Richard P. Stack 312 Giotto Irvine, CA 92714 -6- Any party may change its address for the purpose of this Paragraph 8 by giving the other party written notice of the new address in the manner set forth above. 9. Entire Agreement. This Agreement constitutes the entire agreement ---------------- and understanding of the parties with respect to the transactions contemplated hereby, and supersedes all prior agreements, arrangements and understandings relating to the subject matter hereof, written or otherwise. 10. Amendment. This Agreement may be amended, modified, superseded --------- or canceled, and any of the terms, covenants or conditions hereof may be amended, only by a written instrument executed by Employee and by an authorized representative of the Company which expressly states the intention of the parties to modify the terms of this Agreement. 11. Waiver. Any failure to exercise or delay in exercising any ------ right, power or privilege herein contained, or any failure or delay at any time to require the other party's performance of any obligation under this Agreement, shall not affect the right to subsequently exercise that right, power or privilege, or to require performance of that obligation. A waiver of any of the provisions of this Agreement shall not be deemed, nor shall constitute, a waiver of any other provision, whether or not similar, nor shall any waiver constitute a continuing waiver. A waiver shall not be binding unless executed in writing by the party making the waiver. 12. Assignment; Binding Effect. This Agreement shall inure to the -------------------------- benefit of, and be enforceable by, the Company and its successors and assigns; however, this Agreement is personal to Employee and may not be assigned by Employee in whole or in part. 13. Severability. Whenever possible, each provision of this ------------ Agreement shall be interpreted in such manner as to be valid and effective under applicable law. If any provision of this Agreement shall be unlawful, void or for any reason unenforceable, it shall be deemed separable from, and shall in no way affect the validity or enforceability of, the remaining provisions of this Agreement, and the rights and obligations of the parties shall be enforced to the fullest extent possible. 14. Attorneys' Fees. In any judicial action or proceeding or any --------------- arbitration proceeding between the parties to enforce any of the provisions of this Agreement, to seek damages on account of the breach hereof, to seek injunctive relief to prevent the breach hereof, to seek a judicial determination of the rights or obligations of any party hereto, or in any judicial action or proceeding or any arbitration proceeding between the parties in which this Agreement is raised as a defense, regardless of whether the action or proceeding is prosecuted to judgment, and in addition to any other remedy, the unsuccessful party shall pay the successful party all costs and expenses, including reasonable attorneys' fees, incurred by the successful party. 15. Governing Law. This Agreement shall be construed in accordance ------------- with, and governed by, the laws of the State of California, excluding any choice of law principles which direct the application of the laws of another jurisdiction. -7- 16. Effect of Headings. The subject headings of this Agreement are ------------------ included for convenience only, and shall not affect the construction or interpretation of any of its provisions. 17. Counterparts. This Agreement may be executed simultaneously in ------------ one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. "Company" JAVELIN SYSTEMS, INC., a Delaware corporation By: /s/ C. Norman Campbell ------------------------------------- C. Norman Campbell Vice President, Engineering /s/ Richard P. Stack "Employee" ------------------------------------- Richard P. Stack -8- EX-10.5 8 EMPLOYMENT AGREEMENT WITH C. NORMAN CAMPBELL EXHIBIT 10.5 EMPLOYMENT AGREEMENT -------------------- THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of August 19, 1996, by and between JAVELIN SYSTEMS, INC., a Delaware corporation (the "Company"), and C. NORMAN CAMPBELL (the "Employee"). R E C I T A L S : ---------------- Employee and the Company desire to enter into this Agreement to establish the terms and conditions of Employee's employment by the Company during the term hereof. A G R E E M E N T : ------------------ NOW, THEREFORE, in consideration of the foregoing recital, and subject to the conditions and covenants set forth herein, the parties agree as follows: 1. Employment. ---------- (a) General Duties. The Company hereby employs Employee, and -------------- Employee hereby agrees to serve, as the Vice President, Engineering of the Company during the Term (as hereinafter defined) hereof. Employee shall have such duties and powers as are normally accorded to a Vice President, Engineering of a corporation and shall loyally, conscientiously and in good faith perform such duties as may be assigned to him from time to time by the President or the Board of Directors of the Company. (b) Uniqueness of Employee's Services. Employee hereby --------------------------------- represents and agrees that the services to be performed under the terms of this Agreement are of a special, unique, unusual and extraordinary character which gives them a particular value, the loss of which cannot be reasonably or adequately compensated in damages in an action at law. Therefore, Employee expressly agrees that the Company, in addition to any other rights or remedies that Company shall possess, shall be entitled to temporary and permanent injunctive and other equitable relief against Employee to prevent a threatened breach or remedy an existing breach of this Agreement by Employee. 2. Term and Termination. -------------------- (a) Term of Agreement. ----------------- (i) Original Term. Unless earlier terminated as provided in ------------- this Agreement, the term of Employee's employment shall commence on the date hereof and shall continue for a period of three (3) years from the date hereof (the "Original Term"). (ii) One-Year Renewals. Unless (A) the Company or Employee ----------------- delivers written notice of its or his intention not to extend the term of this Agreement on or prior to the date that, with respect to the Original Term, is six (6) months prior to the expiration of the Original Term or, with respect to any Annual Renewal Period (as defined below), is three (3) months prior to the expiration of the then applicable Annual Renewal Period, if any, or (B) this Agreement is otherwise terminated prior to the expiration of the Original Term or the then applicable Annual Renewal Period as provided in this Agreement, this Agreement shall be automatically renewed for an unlimited number of additional one (1) year periods (the "Annual Renewal Period"). The Original Term and any Annual Renewal Periods are hereinafter collectively referred to as the "Term." (b) Termination By Company for Cause. Notwithstanding anything -------------------------------- in this Agreement to the contrary, express or implied, or Section 2924 of the California Labor Code or any similar provision, this Agreement (and Employee's employment) may be terminated immediately and without notice by the Company for cause, which shall include, without limitation, any of the following: (i) Employee's neglect of, or failure to adequately perform, his duties and obligations hereunder or misconduct by Employee, in either case in the judgment of the Board of Directors; (ii) Employee's failure to carry out the lawful instructions of the Board of Directors; (iii) Employee's engaging or participating in any activity which is competitive with or injurious to the Company in the judgment of the Board of Directors; (iv) Employee's commission of any fraud against the Company or use or appropriation for his personal use and benefit of any funds, assets or properties of the Company not authorized by the Company to be so used or appropriated; or (v) Employee's commission of a felony or a crime involving acts which tend to insult or offend community moral standards or public decency or that involves moral turpitude. Upon termination of this Agreement by the Company pursuant to this Section 2(b), Base Salary (as hereinafter defined) payable to Employee shall be prorated to the date of termination, and the Company shall have no further liability whatsoever to Employee. (c) At Will Employment; Termination By Company Without Cause. -------------------------------------------------------- Notwithstanding anything in this Agreement to the contrary, express or implied, or Section 2924 of the California Labor Code or any similar provision, this Agreement (and -2- Employee's employment) may be terminated at the will of the Company without cause upon delivery of written notice to Employee; provided, however, that Employee shall nonetheless be entitled to receive payment of the Base Salary for the greater of (i) the remaining Term of this Agreement or (ii) one year from the date of termination. If the Company elects to terminate this Agreement pursuant to this Subparagraph (c), the Company shall have no further liability whatsoever to Employee other than the payment of the Base Salary referenced in the preceding sentence. (d) Automatic Termination. This Agreement (and Employee's --------------------- employment) shall terminate immediately and without the necessity of any notice or any other action by any party hereto (except with respect to clause (v) below)upon the first to occur of any of the following: (i) The death of Employee; (ii) The loss of Employee's legal capacity to contract; (iii) Dissolution, liquidation, or bankruptcy of the Company, whether voluntary or involuntary; (iv) The inability of Employee to perform his duties or responsibilities hereunder, as a result of mental or physical ailment or incapacity, for an aggregate of ninety (90) calendar days (whether or not consecutive) during any twelve (12) month period, unless waived in writing by Company; or (v) the expiration of the Term of this Agreement. Upon termination of this Agreement pursuant to this Subparagraph (d), Base Salary payable to Employee shall be prorated to the date of termination, and Company shall have no further liability whatsoever to Employee. 3. Exclusivity of Employment. ------------------------- (a) Loyal and Conscientious Service. During the Term of this ------------------------------- Agreement, Employee shall devote his full business time, interest, abilities and energies to the Company and use his best efforts, skills and abilities to promote the general welfare and interest of the Company and to preserve, maintain and enhance its business and business relationships with its customers and employees. (b) Noncompetition. During the Term of this Agreement, Employee -------------- shall not, directly or indirectly, render services of a business, professional or commercial nature to any other person or entity, whether for compensation or otherwise, or engage in any business activities competitive with or adverse to the Company's business or welfare, whether alone, as an employee, as a partner, or as a shareholder, officer or director of any other corporation, or as a trustee, fiduciary or in any other similar representative capacity of any other entity. Notwithstanding the foregoing, the expenditure of reasonable amounts of time for educational, charitable or professional activities shall not be deemed a -3- breach of this Agreement if those activities do not materially interfere with the services required under this Agreement. 4. Compensation. ------------ (a) Base Salary. ----------- (i) Beginning on the date hereof, and continuing through December 31, 1996, the Company shall pay Employee a fixed annual salary ("Base Salary") in an amount equal to Eighty-Four Thousand Dollars ($84,000) per year. Effective January 1, 1997 through December 31, 1997, Employee's Base Salary shall be increased to Ninety-Five Thousand Dollars ($95,000) per year and effective January 1, 1998 through the remaining Term of this Agreement Employee's Base Salary shall be increased to One Hundred and Five Thousand Dollars ($105,000). (ii) The Base Salary shall be paid in equal installments (subject to proration for a period of employment of greater or less than a year or any applicable payroll period therein) on the Company's regular payroll dates. Employee authorizes the Company to make such deductions and withholdings from his Base Salary and any other earnings from Company as are required by law, which deductions shall include, without limitation, withholding for federal and state income tax and Social Security and Medicare withholdings. (b) Additional Compensation and Benefits. In addition to his ------------------------------------ Base Salary: (i) During the Term of this Agreement, Employee shall be entitled to two (2) weeks paid vacation in each year; (ii) During the Term of this Agreement, Employee shall receive a monthly automobile allowance in the amount of One Hundred Dollars ($100) (prorated for a period of employment of less than one month) and shall apply said allowance to the maintenance, upkeep, and insurance of an automobile suitable for Company business. Employee shall not be reimbursed for mileage incurred on behalf of the Company. Employee is solely responsible for the operating expenses, license and registration fees, maintenance and repairs and insurance of said automobile (which insurance shall be with a California-licensed company with coverage in the amounts of not less than $1,000,000 for bodily injury or death to one person in one accident and $100,000 for property damage per accident). Said insurance shall name the Company as an additional insured. The Company is not responsible for any damage to Employee's vehicle or for Employee's insurance deductible or for any other expenses incurred by Employee in connection with Employee's vehicle. -4- (iii) During the Term of this Agreement, the Company shall pay or reimburse Employee for all reasonable and necessary travel and other business expenses incurred or paid by Employee in connection with the performance of his services under this Agreement (except as shall be related to Employee's automobile, but including any expenses relating to business use of a portable or cellular telephone) upon approval of the Company and presentation of expense statements, vouchers, logs and such other supporting information as the Company may reasonably request from time to time. (iv) During the Term of this Agreement, the Company shall pay the annual premium for a life insurance policy insuring the life of Employee providing for benefits in the amount of up to Seven Hundred and Fifty Thousand Dollars ($750,000) payable to the beneficiary or beneficiaries designated by Employee. (v) In addition to the benefits set forth above, during the Term of this Agreement, Employee shall be entitled to participate in any other policies, programs and benefits which the Company may, in its sole and absolute discretion, make generally available to its other senior executives from time to time including, but not limited to, disability insurance, pension and retirement plans, health or medical insurance and similar programs. 5. Nondisclosure and Assignment of Proprietary and Confidential ------------------------------------------------------------ Information. In consideration and recognition of the fact that Employee has - ----------- had, or during the course of his employment with the Company may have, access to Confidential Information (as hereinafter defined) of the Company or other information and data of a secret or proprietary nature of the Company which the Company desires to keep confidential, and that the Company has furnished, or during the course of Employee's employment will furnish, such Confidential Information to Employee, Employee agrees and acknowledges as follows: (a) Confidential Information. As used herein, the term ------------------------ "Confidential Information" shall mean and include, without limitation, any and all marketing data, sales data, plans, strategies, costs, revenues and other financial information, financial projections, distributor, OEM or other customer lists, prospective distributor, OEM or other customer lists, terms of, distributor, OEM or other customer agreements or arrangements identities of customers, distributors or suppliers, sources of supplies and terms of supply arrangements, promotional ideas, data concerning the Company's products, services, designs, methods, inventions, improvements, discoveries or designs, whether or not patentable, "know-how," employment information or terms of employment of Company employees, training and/or sales techniques, and any other information of a similar nature disclosed to Employee or otherwise made known to him as a consequence of or through his employment with the Company (including information originated by Employee) during Employee's employment; provided, however, that the term Confidential Information shall not include any information that (i) at the time of the disclosure or thereafter is or becomes generally available to and known by the public, other than as a result of a disclosure by Employee or any agent or representative of Employee in violation -5- of this Agreement, or (ii) was available to Employee on a non-confidential basis from a source other than the Company, or any of its officers, directors, employees, agents or other representatives. (b) Exclusive Rights; Assignment to Company. The Company has --------------------------------------- exclusive property rights to all Confidential Information, and Employee hereby assigns to Company all rights he might otherwise possess in any Confidential Information. Except as required in the performance of his duties to the Company, Employee will not at any time during or after his employment, directly or indirectly use, communicate, disclose, disseminate, lecture upon, publish articles or otherwise disclose or put in the public domain, any Confidential Information relating to the Company, or its services, products or business. Employee agrees to deliver to the Company any and all copies of Confidential Information in the possession or control of Employee upon the expiration or termination of this Agreement, or at any other time upon request. This Paragraph 5 shall survive the termination of this Agreement and the termination of Employee's employment with the Company. 6. Solicitation of Employees. In consideration and recognition of ------------------------- the fact that Employee's position with the Company is an executive position involving fiduciary responsibility to the Company and access to the Company's Confidential Information, Employee agrees that he will not solicit or take away any employees of the Company for employment by any enterprise that competes with, or is engaged in a substantially similar business to, the business of, the Company. This Paragraph 6 shall survive for a period of two (2) years from the date of termination of this Agreement. 7. Representation by Employee. Employee represents and warrants that -------------------------- he is under no restriction or disability by reason of any prior contract or otherwise which would prevent him from entering into and performing his duties and obligations under this Agreement. 8. Notices. All notices, requests, demands and other communications ------- under this Agreement must be in writing and shall be deemed to have been duly given on the date of service if served personally on the party to whom notice is to be given, or on the date indicated on the return receipt as the date of receipt or refusal if mailed to the party to whom notice is to be given by first class mail, registered or certified, postage prepaid, return receipt requested, and properly addressed as follows: To the Company: JAVELIN SYSTEMS, INC. 2882C Walnut Avenue Tustin, CA 92680 Attention: Chief Financial Officer To the Employee: C. Norman Campbell 3 Portmouth Irvine, California 92715 -6- Any party may change its address for the purpose of this Paragraph 8 by giving the other party written notice of the new address in the manner set forth above. 9. Entire Agreement. This Agreement constitutes the entire agreement ---------------- and understanding of the parties with respect to the transactions contemplated hereby, and supersedes all prior agreements, arrangements and understandings relating to the subject matter hereof, written or otherwise. 10. Amendment. This Agreement may be amended, modified, superseded --------- or canceled, and any of the terms, covenants or conditions hereof may be amended, only by a written instrument executed by Employee and by an authorized representative of the Company which expressly states the intention of the parties to modify the terms of this Agreement. 11. Waiver. Any failure to exercise or delay in exercising any ------ right, power or privilege herein contained, or any failure or delay at any time to require the other party's performance of any obligation under this Agreement, shall not affect the right to subsequently exercise that right, power or privilege, or to require performance of that obligation. A waiver of any of the provisions of this Agreement shall not be deemed, nor shall constitute, a waiver of any other provision, whether or not similar, nor shall any waiver constitute a continuing waiver. A waiver shall not be binding unless executed in writing by the party making the waiver. 12. Assignment; Binding Effect. This Agreement shall inure to the -------------------------- benefit of, and be enforceable by, the Company and its successors and assigns; however, this Agreement is personal to Employee and may not be assigned by Employee in whole or in part. 13. Severability. Whenever possible, each provision of this ------------ Agreement shall be interpreted in such manner as to be valid and effective under applicable law. If any provision of this Agreement shall be unlawful, void or for any reason unenforceable, it shall be deemed separable from, and shall in no way affect the validity or enforceability of, the remaining provisions of this Agreement, and the rights and obligations of the parties shall be enforced to the fullest extent possible. 14. Attorneys' Fees. In any judicial action or proceeding or any --------------- arbitration proceeding between the parties to enforce any of the provisions of this Agreement, to seek damages on account of the breach hereof, to seek injunctive relief to prevent the breach hereof, to seek a judicial determination of the rights or obligations of any party hereto, or in any judicial action or proceeding or any arbitration proceeding between the parties in which this Agreement is raised as a defense, regardless of whether the action or proceeding is prosecuted to judgment, and in addition to any other remedy, the unsuccessful party shall pay the successful party all costs and expenses, including reasonable attorneys' fees, incurred by the successful party. 15. Governing Law. This Agreement shall be construed in accordance ------------- with, and governed by, the laws of the State of California, excluding any choice of law principles which direct the application of the laws of another jurisdiction. -7- 16. Effect of Headings. The subject headings of this Agreement are ------------------ included for convenience only, and shall not affect the construction or interpretation of any of its provisions. 17. Counterparts. This Agreement may be executed simultaneously in ------------ one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. "Company" JAVELIN SYSTEMS, INC., a Delaware corporation By: /s/ Richard P. Stack ------------------------------------- Richard P. Stack President and Chief Executive Officer /s/ C. Norman Campbell "Employee" ------------------------------------- C. Norman Campbell -8- EX-10.6 9 INDEMNITY AGMT. WITH OFFICERS AND DIRECTORS EXHIBIT 10.6 INDEMNITY AGREEMENT ------------------- THIS INDEMNITY AGREEMENT (the "Agreement") is made as of this ____ day of __________, 1996, by and between JAVELIN SYSTEMS, INC., a Delaware corporation (the "Company"), and ____________________________ (the "Indemnitee"), [an officer and/or a director] of the Company. A. The Indemnitee is currently serving as [an officer and/or a director] of the Company and in such capacity renders valuable services to the Company. B. The Company has investigated whether additional protective measures are warranted to protect adequately its directors and officers against various legal risks and potential liabilities to which such individuals are subject due to their position with the Company and has concluded that additional protective measures are warranted. C. In order to induce and encourage highly experienced and capable persons such as the Indemnitee to continue to serve as officers and directors, the Board of Directors of the Company has determined, after due consideration, that this Agreement is not only reasonable and prudent, but necessary to promote and ensure the best interests of the Company and its stockholders. D. The Company's execution of this Agreement has been approved by the Board of Directors and the stockholders of the Company. E. Indemnitee has indicated to the Company that but for the Company's agreement to enter into this Agreement, Indemnitee would decline to serve as [an officer and/or director] of the Company. NOW, THEREFORE, in consideration of the continued services of the Indemnitee and as an inducement to the Indemnitee to continue to serve as [an officer and/or a director] of the Company, the Company and the Indemnitee do hereby agree as follows: l. Definitions. As used in this Agreement, the following terms shall ----------- have the meanings set forth below: (a) "PROCEEDING" shall mean any threatened, pending or completed action, suit or proceeding, whether brought in the name of the Company or otherwise and whether of a civil, criminal, administrative or investigative nature, by reason of the fact that the Indemnitee is or was an officer and/or a director of the Company, or is or was serving at the request of the Company as a director, officer, employee or agent of another enterprise, whether or not he is serving in such capacity at the time any liability or Expense is incurred for which indemnification or advancement of Expenses is to be provided under this Agreement. (b) "EXPENSES" means, all costs, charges and expenses incurred in connection with a Proceeding, including, without limitation, attorneys' fees, disbursements and retainers, accounting and witness fees, travel and deposition costs, expenses of investigations, judicial or administrative proceedings or appeals, and any expenses of establishing a right to indemnification pursuant to this Agreement or otherwise, including reasonable compensation for time spent by the Indemnitee in connection with the investigation, defense or appeal of a Proceeding or action for indemnification for which he is not otherwise compensated by the Company or any third party; provided, however, that the term Expenses includes only -------- ------- those costs, charges and expenses incurred with the Company's prior consent, which consent shall not be unreasonably withheld; and provided -------- further, that the term "Expenses" does not include (i) the amount of ------- damages, judgments, amounts paid in settlement, fines or penalties relating to any Proceeding or (ii) excise taxes under the Employee Retirement Income Security Act of 1974, as amended ("ERISA") relating to any Proceeding, either of which are actually levied against the Indemnitee or paid by or on behalf of the Indemnitee. 2. Agreement to Serve. The Indemnitee agrees to continue to serve as ------------------ [an officer and/or a director] of the Company at the will of the Company for so long as Indemnitee is duly elected or appointed or until such time as Indemnitee tenders a resignation in writing or is terminated as an officer or director by the Company. Nothing in this Agreement shall be construed to create any right in Indemnitee to continued employment with the Company or any subsidiary or affiliate of the Company. Nothing in this Agreement shall affect or alter any of the terms of any otherwise valid employment agreement or other agreement between Indemnitee and the Company relating to Indemnitee's conditions and/or terms of employment. 3. Indemnification in Third Party Actions. The Company shall -------------------------------------- indemnify the Indemnitee in accordance with the provisions of this Section 3 if the Indemnitee is a party to or threatened to be made a party to or is otherwise involved in any Proceeding (other than a Proceeding by or in the right of the Company to procure a judgment in its favor), by reason of the fact that the Indemnitee is or was an officer and/or a director of the Company, or is or was serving at the request of the Company as a director, officer, employee or agent of another enterprise, against all Expenses, damages, judgments, amounts paid in settlement, fines, penalties and ERISA excise taxes actually and reasonably incurred by the Indemnitee in connection with the defense or settlement of such Proceeding, to the fullest extent permitted by Delaware law, whether or not the Indemnitee was the successful party in any such Proceeding; provided that any -------- settlement shall be approved in writing by the Company. 4. Indemnification In Proceedings By or In the Right of the Company. ---------------------------------------------------------------- The Company shall indemnify the Indemnitee in accordance with the provisions of this Section 4 if the Indemnitee is a party to or threatened to be made a party to or is otherwise involved in any Proceeding by or in the right of the Company to procure a judgment in its favor by reason of the fact that the Indemnitee is or was an officer and/or a director of the Company, or is or was serving at the request of the Company as a director, officer, employee or agent of another enterprise, against all Expenses actually and reasonably incurred by Indemnitee in connection with the defense or settlement of such Proceeding, to the fullest extent permitted by Delaware law, whether or not the Indemnitee is the successful party in any such Proceeding. The Company shall -2- further indemnify the Indemnitee for any damages, judgments, amounts paid in settlement, fines, penalties and ERISA excise taxes actually and reasonably incurred by the Indemnitee in any such Proceeding described in the immediately preceding sentence, provided either (i) the Proceeding is settled with the approval of a court of competent jurisdiction, or (ii) indemnification of such amounts is otherwise ordered by a court of competent jurisdiction in connection with such Proceeding. 5. Conclusive Presumption Regarding Standard of Conduct. The ---------------------------------------------------- Indemnitee shall be conclusively presumed to have met the relevant standards of conduct required by Delaware law for indemnification pursuant to this Agreement, unless a determination is made that the Indemnitee has not met such standards (i) by the Board of Directors of the Company by a majority vote of a quorum thereof consisting of directors who were not parties to such Proceeding, (ii) by the stockholders of the Company by majority vote, or (iii) in a written opinion of the Company's independent legal counsel. Further, the termination of any Proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent, shall not, of itself, rebut such presumption that the Indemnitee met the relevant standards of conduct required for indemnification pursuant to this Agreement. 6. Indemnification of Expenses of Successful Party. Notwithstanding ----------------------------------------------- any other provision of this Agreement, to the extent that the Indemnitee has been successful on the merits or otherwise in defense of any Proceeding or in defense of any claim, issue or matter therein, the Indemnitee shall be indemnified against all Expenses incurred in connection therewith to the fullest extent permitted by Delaware law. For purposes of this paragraph, the Indemnitee will be deemed to have been successful on the merits if the Proceeding is terminated by settlement or is dismissed with prejudice. 7. Advances of Expenses. The Expenses incurred by the Indemnitee in -------------------- connection with any Proceeding shall be paid promptly by the Company in advance of the final disposition of the Proceeding at the written request of the Indemnitee to the fullest extent permitted by Delaware law; provided that the -------- Indemnitee shall undertake in writing to repay such amount to the extent that it is ultimately determined that the Indemnitee is not entitled to indemnification by the Company. 8. Partial Indemnification. If the Indemnitee is entitled under any ----------------------- provision of this Agreement to indemnification by the Company for some or a portion of the Expenses, damages, judgments, amounts paid in settlement, fines, penalties or ERISA excise taxes actually and reasonably incurred by Indemnitee in the investigation, defense, appeal or settlement of any Proceeding but not, however, for the total amount thereof, the Company shall nevertheless indemnify the Indemnitee for the portion of such Expenses, damages, judgments, amounts paid in settlement, fines, penalties or ERISA excise taxes to which the Indemnitee is entitled. 9. Indemnification Procedure; Determination of Right to ---------------------------------------------------- Indemnification. - --------------- (a) Promptly after receipt by the Indemnitee of notice of the commencement of any Proceeding with respect to which the Indemnitee intends to claim indemnification or advancement of Expenses pursuant to this Agreement, the Indemnitee -3- will notify the Company of the commencement thereof. The omission to so notify the Company will not relieve the Company from any liability which it may have to the Indemnitee under this Agreement or otherwise. (b) If a claim for indemnification or advancement of Expenses under this Agreement is not paid by or on behalf of the Company within 30 days of receipt of written notice thereof, Indemnitee may at any time thereafter bring suit in any court of competent jurisdiction against the Company to enforce the right to indemnification or advancement of Expenses provided by this Agreement. It shall be a defense to any such action (other than an action brought to enforce a claim for Expenses incurred in defending any Proceeding in advance of its final disposition where the required undertaking, if any is required, has been tendered to the Company) that the Indemnitee has failed to meet the standard of conduct that makes it permissible under Delaware law for the Company to indemnify the Indemnitee for the amount claimed. The burden of proving by clear and convincing evidence that indemnification or advancement of Expenses is not appropriate shall be on the Company. The failure of the directors or stockholders of the Company or independent legal counsel to have made a determination prior to the commencement of such Proceeding that indemnification or advancement of Expenses are proper in the circumstances because the Indemnitee has met the applicable standard of conduct shall not be a defense to the action or create a presumption that the Indemnitee has not met the applicable standard of conduct. (c) The Indemnitee's Expenses incurred in connection with any action concerning Indemnitee's right to indemnification or advancement of Expenses in whole or in part pursuant to this Agreement shall also be indemnified in accordance with the terms of this Agreement by the Company regardless of the outcome of such action, unless a court of competent jurisdiction determines that each of the material claims made by the Indemnitee in such action was not made in good faith or was frivolous. (d) With respect to any Proceeding for which indemnification is requested, the Company will be entitled to participate therein at its own expense and, except as otherwise provided below, to the extent that it may wish, the Company may assume the defense thereof, with counsel satisfactory to the Indemnitee. After notice from the Company to the Indemnitee of its election to assume the defense of a Proceeding, the Company will not be liable to the Indemnitee under this Agreement for any Expenses subsequently incurred by the Indemnitee in connection with the defense thereof, other than reasonable costs of investigation or as otherwise provided below. The Company shall not settle any Proceeding in any manner which would impose any penalty or limitation on the Indemnitee without the Indemnitee's prior written consent. The Indemnitee shall have the right to employ counsel in any such Proceeding, but the Expenses of such counsel incurred after notice from the Company of its assumption of the defense thereof and the Indemnitee's approval of the Company's counsel shall be at the expense of the Indemnitee, unless (i) the employment of counsel by the Indemnitee has been authorized by the Company, (ii) the Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Company and the Indemnitee in the conduct of the defense of a Proceeding, or (iii) the Company shall not in fact have employed counsel to assume the -4- defense of a Proceeding, in each of which cases the Expenses of the Indemnitee's counsel shall be at the expense of the Company. Notwithstanding the foregoing, the Company shall not be entitled to assume the defense of any Proceeding brought by or on behalf of the Company or as to which the Indemnitee has concluded that there may be a conflict of interest between the Company and the Indemnitee. 10. Retroactive Effect. Notwithstanding anything to the contrary ------------------ contained in this Agreement, the Company's obligation to indemnify the Indemnitee and advance Expenses to the Indemnitee shall be deemed to be in effect since the date that the Indemnitee first commenced serving in any of the capacities covered by this Agreement. 11. Limitations on Indemnification. No payments pursuant to this ------------------------------ Agreement shall be made by the Company: (a) to indemnify or advance Expenses to the Indemnitee with respect to actions initiated or brought voluntarily by the Indemnitee and not by way of defense, except with respect to actions brought to establish or enforce a right to indemnification or advancement of Expenses under this Agreement or any other statute or law or otherwise as required under Delaware law, but such indemnification or advancement of Expenses may be provided by the Company in specific cases if approved by the Board of Directors by a majority vote of a quorum thereof consisting of directors who are not parties to such action; (b) to indemnify the Indemnitee for any Expenses, damages, judgments, amounts paid in settlement, fines, penalties or ERISA excise taxes for which payment is actually made to the Indemnitee under a valid and collectible insurance policy, except in respect of any excess beyond the amount paid under such insurance; (c) to indemnify the Indemnitee for any Expenses, damages, judgments, amounts paid in settlement, fines, penalties or ERISA excise taxes for which the Indemnitee has been or is indemnified by the Company or any other party otherwise than pursuant to this Agreement; (d) to indemnify the Indemnitee for any Expenses, damages, judgments, fines or penalties sustained in any Proceeding for an accounting of profits made from the purchase or sale by Indemnitee of securities of the Company pursuant to the provisions of Section 16(b) of the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder or similar provisions of any federal, state or local statutory law; (e) to indemnify the Indemnitee for any Expenses, damages, judgments, amounts paid in settlement, fines, penalties or ERISA excise taxes in connection with any Proceeding where a court of competent jurisdiction has determined that (i) the Indemnitee failed to act in good faith and in a manner reasonably believed to be in or not opposed to the best interest of the Company, or (ii) with respect to any Proceeding which is of a -5- criminal nature, the Indemnitee had reasonable cause to believe his or her conduct was unlawful; or (f) if a court of competent jurisdiction shall enter a final order, decree or judgment to the effect that such indemnification or advancement of Expenses hereunder is unlawful under the circumstances. 12. Limitation of Actions and Release of Claims. Notwithstanding ------------------------------------------- anything to the contrary contained herein, no legal action shall be brought and no cause of action shall be asserted by or on behalf of the Company, any affiliate or subsidiary of the Company or any other enterprise that the Indemnitee was serving as a director, officer, employee or agent at the request of the Company against the Indemnitee, or the Indemnitee's spouse, heirs, executors or administrators after the expiration of two years from the date the Indemnitee ceases (for any reason) to serve in any one or more of the capacities covered by this Agreement, and any claim or cause of action of the Company, its affiliates or subsidiaries or any such other enterprise shall be extinguished and deemed released unless asserted by the filing of a legal action within such two-year period. 13. Maintenance of D&O Insurance. ---------------------------- (a) Upon the Indemnitee's request, the Company hereby agrees to maintain in full force and effect, at its sole cost and expense, directors' and officers' liability insurance ("D&O Insurance") by an insurer, in an amount and with a deductible reasonably acceptable to the Indemnitee, covering the period during which the Indemnitee is serving in any one or more of the capacities covered by this Agreement and for so long thereafter as the Indemnitee shall be subject to any possible claim or threatened, pending or completed Proceeding by reason of the fact that the Indemnitee is serving in any of the capacities covered by this Agreement. (b) In all policies of D&O Insurance to be maintained pursuant to Paragraph 13(a) above, the Indemnitee shall be named as an insured in such a manner as to provide Indemnitee with the greatest rights and benefits available under such policy. (c) Notwithstanding the foregoing, the Company shall have no obligation to maintain D&O Insurance if the Company determines, in good faith, that (i) such insurance cannot be obtained on terms which are commercially reasonable, (ii) the premium costs for such insurance is significantly disproportionate to the amount of coverage provided, (iii) the coverage provided by such insurance is limited by exclusions so as to provide an insufficient benefit, or (iv) the Company, after using best efforts, is otherwise is unable to obtain such insurance. 14. Indemnification Hereunder Not Exclusive. The indemnification and --------------------------------------- advancement of Expenses provided by this Agreement shall not be deemed to limit or preclude any other rights to which the Indemnitee may be entitled under the Company's Certificate of Incorporation, the Company's Bylaws, any agreement, any vote of stockholders or disinterested directors of the Company, Delaware law, or otherwise. -6- 15. Successors and Assigns. This Agreement shall be binding upon, ---------------------- and shall inure to the benefit of (i) the Indemnitee and Indemnitee's heirs, devisees, legatees, personal representatives, executors, administrators and assigns and (ii) the Company and its successors and assigns, including any transferee of all or substantially all of the Company's assets and any successor or assign of the Company by merger or by operation of law. 16. Severability. Each provision of this Agreement is a separate and ------------ distinct agreement and independent of the other, so that if any provision hereof shall be held to be invalid or unenforceable for any reason, such invalidity or unenforceability shall not affect the validity or enforceability of the other provisions hereof. To the extent required, any provision of this Agreement may be modified by a court of competent jurisdiction to preserve its validity and to provide the Indemnitee with the broadest possible indemnification and advancement of Expenses permitted under Delaware law. If this Agreement or any portion thereof is invalidated on any ground by any court of competent jurisdiction, then the Company shall nevertheless indemnify Indemnitee as to Expenses, damages, judgments, amounts paid in settlement, fines, penalties and ERISA excise taxes with respect to any Proceeding to the full extent permitted by any applicable portion of this Agreement that shall not have been invalidated or by any applicable provision of Delaware law or the law of any other applicable jurisdiction. 17. Headings. The headings used herein are for convenience only and -------- shall not be used in construing or interpreting any provision of the Agreement. 18. Governing Law. This Agreement shall be governed by and construed ------------- in accordance with the laws of the State of Delaware. 19. Amendments and Waivers. No amendment, waiver, modification, ---------------------- termination or cancellation of this Agreement shall be effective unless in writing and signed by the party against whom enforcement is sought. The indemnification rights afforded to the Indemnitee hereby are contract rights and may not be diminished, eliminated or otherwise affected by amendments to the Company's Certificate of Incorporation, Bylaws or agreements, including any directors' and officers' liability insurance policies, whether the alleged actions or conduct giving rise to indemnification hereunder arose before or after any such amendment. No waiver of any provision of this Agreement shall be deemed or shall constitute a waiver of any other provision hereof, whether or not similar, nor shall any waiver constitute a continuing waiver. 20. Counterparts. This Agreement may be executed in one or more ------------ counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each party and delivered to the other. 21. Notices. All notices and communications shall be in writing and ------- shall be deemed duly given on the date of delivery if personally delivered or the date of receipt or refusal indicated on the return receipt if sent by first class mail, postage prepaid, registered or certified, return receipt requested, to the following addresses, unless notice of a change of address is duly given by one party to the other, in which case notices shall be sent to such changed address: -7- If to the Company: Javelin Systems, Inc. 2882C Walnut Avenue Tustin, California 92680 If to Indemnitee: ------------------------- ------------------------- ------------------------- ------------------------- 22. Subrogation. In the event of any payment under this Agreement to ----------- or on behalf of the Indemnitee, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of the Indemnitee against any person, firm, corporation or other entity (other than the Company) and the Indemnitee shall execute all papers requested by the Company and shall do any and all things that may be necessary or desirable to secure such rights for the Company, including the execution of such documents necessary or desirable to enable the Company to effectively bring suit to enforce such rights. 23. Subject Matter and Parties. The intended purpose of this -------------------------- Agreement is to provide for indemnification and advancement of Expenses, and this Agreement is not intended to affect any other aspect of any relationship between the Indemnitee and the Company and is not intended to and shall not create any rights in any person as a third party beneficiary hereunder. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. "Indemnitee" --------------------------------------- Print Name: ---------------------------- "Company" JAVELIN SYSTEMS, INC., a Delaware corporation By: ------------------------------------ Its: -------------------------------- -8- EX-10.7 10 STOCKHOLDES LOCK-UP AGREEMENT EXHIBIT 10.7 STOCKHOLDERS LOCK-UP AGREEMENT ------------------------------ This Agreement is made and entered into this ____ day of August, 1996, between _________, a stockholder of Javelin Systems, Inc. (the "Stockholder"), Javelin Systems, Inc. ("the Corporation") and Meridian Capital Group, Inc. (the "Underwriter") and such other underwriters as are named in the Underwriting Agreement (as defined below) to be entered into with the Corporation. All capitalized terms not otherwise defined herein shall have the meanings assigned to them in the Underwriting Agreement. A. The Corporation and the Underwriter intend to enter into an Underwriting Agreement (the "Underwriting Agreement") pursuant to which the Corporation intends to offer for sale to the public at a purchase price between $5.00 and $7.00, 850,000 shares of the Common Stock of the Corporation. B. The Stockholder owns ______ shares of Common Stock of the Corporation. NOW, THEREFORE, in consideration of the mutual covenants and agreements contained in the Underwriting Agreement, the parties hereto set forth their agreement as follows: 1. The Stockholder shall not jointly or individually offer, sell, pledge, make any short sale of, contract to sell, lend, grant any option for the purchase of, or otherwise dispose of, directly or indirectly, any of the shares of Common Stock owned of record or beneficially by the Stockholder as of effective date of the Registration Statement or thereafter acquired (the "Shares"), for a period of three hundred sixty-five (365) days from the effective date (the "Effective Date") of the Registration Statement on Form SB-2 to be filed with the Securities and Exchange Commission by the Corporation pursuant to the Securities Act of 1933, as amended, except that the Stockholder may sell 50% of the Shares after the expiration of 180 days from the Effective Date. 2. The Stockholder further agrees that an appropriate restrictive legend in substantially the form attached hereto as Exhibit A and a stop transfer order restricting transfers of the Shares in violation of the terms of this Lock-Up Agreement may be imposed with respect to all Shares which are subject to this Lock-Up Agreement. 3. This Agreement shall inure to the benefit of and be binding upon the parties, their heirs, legal representatives, successors, and assigns. 4. This Agreement may be amended only by an instrument duly executed in writing by the parties hereto. 5. This Agreement shall be construed in accordance with and governed by the laws of the State of California. IN WITNESS WHEREOF, the parties have executed this Agreement the day and year first above written. STOCKHOLDER -------------------------------- Signature -------------------------------- Signature (to be signed by co-owner, if applicable) -------------------------------- (Print name(s)) JAVELIN SYSTEMS, INC. By: ----------------------------- Its: President MERIDIAN CAPITAL GROUP, INC. By: ----------------------------- Its: President Please execute this document using the exact name(s) in which your ----- shares are registered. -2- EXHIBIT A --------- [Legend to be placed on locked up certificates] The shares represented by this certificate are subject to an agreement ("Lock-Up Agreement") between the holder hereof, Javelin Systems, Inc. and Meridian Capital Group, Inc., which prevents an offer for sale, pledge, contract to sell or other disposition of, directly or indirectly, any of the shares represented hereby until _______________, except as otherwise provided in the Lock-Up Agreement. A copy of the Lock-Up Agreement is on file with the Secretary of the Corporation. EX-10.8 11 DIRECTORS & OFFICERS LOCK-UP AGREEMENT EXHIBIT 10.8 DIRECTORS AND OFFICERS LOCK-UP AGREEMENT ---------------------------------------- This Agreement is made and entered into this ____ day of August, 1996, between _________, an officer and/or director and a stockholder of Javelin Systems, Inc. (the "Stockholder"), Javelin Systems, Inc. ("the Corporation") and Meridian Capital Group, Inc. (the "Underwriter") and such other underwriters as are named in the Underwriting Agreement (as defined below) to be entered into with the Corporation. All capitalized terms not otherwise defined herein shall have the meanings assigned to them in the Underwriting Agreement. A. The Corporation and the Underwriter intend to enter into an Underwriting Agreement (the "Underwriting Agreement") pursuant to which the Corporation intends to offer for sale to the public at a purchase price between $5.00 and $7.00, 850,000 shares of the common stock of the Corporation. B. The Stockholder owns ______ shares ("Shares") of Common Stock of the Corporation. NOW, THEREFORE, in consideration of the mutual covenants and agreements contained in the Underwriting Agreement, the parties hereto set forth their agreement as follows: 1. The Stockholder shall not jointly or individually offer, sell, pledge, make any short sale of, contract to sell, lend, grant any option for the purchase of, or otherwise dispose of, directly or indirectly, any of the shares of Common Stock owned of record or beneficially by the Stockholder as of effective date of the Registration Statement or thereafter acquired, for a period of three hundred sixty-five (365) days from the effective date of the Registration Statement on Form SB-2 to be filed with the Securities and Exchange Commission by the Corporation pursuant to the Securities Act of 1933, as amended. 2. The Stockholder further agrees that an appropriate restrictive legend in substantially the form attached hereto as Exhibit A and a stop transfer order restricting transfers of the Shares in violation of the terms of this Lock-Up Agreement may be imposed with respect to all shares which are subject to this Lock-Up Agreement. 3. This Agreement shall inure to the benefit of and be binding upon the parties, their heirs, legal representatives, successors, and assigns. 4. This Agreement may be amended only by an instrument duly executed in writing by the parties hereto. 5. This Agreement shall be construed in accordance with and governed by the laws of the State of California. IN WITNESS WHEREOF, the parties have executed this Agreement the day and year first above written. STOCKHOLDER -------------------------------- Signature -------------------------------- Signature (to be signed by co-owner, if applicable) -------------------------------- (Print name(s)) JAVELIN SYSTEMS, INC. By: ----------------------------- Its: President MERIDIAN CAPITAL GROUP, INC. By: ----------------------------- Its: President Please execute this document using the exact name(s) in which your ----- shares are registered. -2- EXHIBIT A --------- [Legend to be placed on locked up certificates] The shares represented by this certificate are subject to an agreement ("Lock-Up Agreement") between the holder hereof, Javelin Systems, Inc. and Meridian Capital Group, Inc., which prevents an offer for sale, pledge, contract to sell or other disposition of, directly or indirectly, any of the shares represented hereby until _______________. A copy of the Lock-Up Agreement is on file with the Secretary of the Corporation. EX-10.9 12 BRIDGE INVESTORS LOCK-UP AGREEMENT EXHIBIT 10.9 BRIDGE INVESTORS LOCK-UP AGREEMENT ---------------------------------- This Agreement is made and entered into this ____ day of August, 1996, between _________, a warrant holder of Javelin Systems, Inc. (the "Warrant Holder"), Javelin Systems, Inc. ("the Corporation"), and Meridian Capital Group, Inc. (the "Underwriter") and such other underwriters as are named in the Underwriting Agreement (as defined below) to be entered into with the Corporation. All capitalized terms not otherwise defined herein shall have the meanings assigned to them in the Underwriting Agreement. A. The Corporation and the Underwriter intend to enter into an Underwriting Agreement (the "Underwriting Agreement") pursuant to which the Corporation intends to offer for sale to the public at a purchase price between $5.00 and $7.00, 850,000 shares of the common stock of the Corporation. B. The Warrant Holder owns a warrant to purchase ______ shares of Common Stock of the Corporation (assuming an initial public offering price of $6.00 per share). NOW, THEREFORE, in consideration of the mutual covenants and agreements contained in the Underwriting Agreement, the parties hereto set forth their agreement as follows: 1. The Warrant Holder shall not jointly or individually offer, sell, pledge, make any short sale of, contract to sell, lend, grant any option for the purchase of, or otherwise dispose of, directly or indirectly, any of the shares of Common Stock owned of record or beneficially by the Warrant Holder as of effective date of the Registration Statement or thereafter acquired (the "Shares"), for a period of three hundred sixty-five (365) days from the effective date (the "Effective Date") of the Registration Statement on Form SB-2 to be filed with the Securities and Exchange Commission by the Corporation pursuant to the Securities Act of 1933, as amended, except that the Warrant Holder may sell 25% of the Shares after the expiration of 90 days from the Effective Date, an additional 25% of the Shares after the expiration of 180 days from the Effective Date, and an additional 25% of the Shares after the expiration of 270 days from the Effective Date. 2. The Warrant Holder further agrees that an appropriate restrictive legend in substantially the form attached hereto as Exhibit A and a stop transfer order restricting transfers of the Shares in violation of the terms of this Lock-Up Agreement may be imposed with respect to all Shares which are subject to this Lock-Up Agreement. 3. This Agreement shall inure to the benefit of and be binding upon the parties, their heirs, legal representatives, successors, and assigns. 4. This Agreement may be amended only by an instrument duly executed in writing by the parties hereto. 5. This Agreement shall be construed in accordance with and governed by the laws of the State of California. IN WITNESS WHEREOF, the parties have executed this Agreement the day and year first above written. WARRANT HOLDER -------------------------------- Signature -------------------------------- Signature (to be signed by co-owner, if applicable) -------------------------------- (Print name(s)) JAVELIN SYSTEMS, INC. By: ----------------------------- Its: President MERIDIAN CAPITAL GROUP, INC. By: ----------------------------- Its: President Please execute this document using the exact name(s) in which your ----- shares are registered. -2- EXHIBIT A --------- [Legend to be placed on locked up certificates] The shares represented by this certificate are subject to an agreement ("Lock-Up Agreement") between the holder hereof, Javelin Systems, Inc. and Meridian Capital Group, Inc., which prevents an offer for sale, pledge, contract to sell or other disposition of, directly or indirectly, any of the shares represented hereby until _______________, except as otherwise provided in the Lock-Up Agreement. A copy of the Lock Up Agreement is on file with the Secretary of the Corporation. EX-10.10 13 10-1-95 PROMISSORY NOTE TO R. STACK EXHIBIT 10.10 $80,481.45 PROMISSORY NOTE OCTOBER 1, 1995 Sunwood Research, Inc. agrees to pay Richard P. Stack the sum of Eighty thousand four hundred eighty one dollars and forty five cents on demand. Signed: /s/ Richard Stack ----------------------------- Richard Stack President EX-10.11 14 6-1-96 NOTE CONVERSION LETTER FROM R. STACK EXHIBIT 10.11 April 1, 1996 I, Richard P. Stack, agree to convert my note for $80,481.45 into 100 shares of Sunwood Research, Inc. stock. I will forego all accrued interest. Sincerely, /s/ Richard P. Stack - ----------------------- Richard P. Stack EX-10.12 15 10-1-95 PROMISSORY NOTE TO THERESA MCRAE EXHIBIT 10.12 $40,000.00 PROMISSORY NOTE OCTOBER 1, 1995 Sunwood Research, Inc. agrees to pay Teresa M. McRae the sum of Forty thousand dollars on demand. Signed: /s/ Richard Stack --------------------- Richard Stack President EX-10.13 16 5-1-96 NOTE CONVERSION LETTER FROM THERESA MCRAE EXHIBIT 10.13 May 1, 1996 I, Teresa M. McRae, agree to convert my note for $40,000 into 20 shares of Sunwood Research, Inc. stock. I will forego all accrued interest. Sincerely, /s/ Teresa M. McRae - ----------------------- Teresa M. McRae EX-10.14 17 10-1-95 PROMISSORY NOTE TO R. STACK EXHIBIT 10.14 $12,000.00 PROMISSORY NOTE OCTOBER 1, 1995 Sunwood Research, Inc. agrees to pay Richard A. Stack the sum of Twelve thousand dollars on demand. Signed: /s/ Richard Stack ------------------------ Richard Stack President EX-10.15 18 5-31-96 NOTE CONVERSION LETTER FROM R. STACK EXHIBIT 10.15 May 31, 1996 I, Richard A. Stack, agree to convert my note for $12,000 into 4 shares of Sunwood Research, Inc. stock. I will forego all accrued interest. Sincerely, /s/ Richard A. Stack - ------------------------- Richard A. Stack EX-10.16 19 STANDARD INDUSTRIAL/COMMERCIAL LEASE-GROSS EXHIBIT 10.16 AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION ------------------------------------------- STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE-GROSS -------------------------------------------------------- (DO NOT USE THIS FORM FOR MULTI-TENANT PROPERTY) ------------------------------------------------ 1. BASIC PROVISIONS ("BASE PROVISIONS"). 1.1 PARTIES: This Lease ("LEASE"), dated for reference purposes only, __October 19_______, 1995, is made by and between ROBERT P. PEEBLES TRUST, DATED - ------------ -- ------------------------------- 4-11-79 ("LESSOR") and SUNWOOD RESEARCH, INC., a Delaware Corporation - ------- ---------------------------------------------- ("LESSEE"), (collectively the "PARTIES," or individually a "PARTY"). 1.2 PREMISES: That certain real property, including all improvements therein or to be provided by Lessor under the terms of this Lease, and commonly known by the street address of 2882-C Walnut Avenue, Tustin, California, located ---------------------------------------- in the County of Orange, State of California, and generally described as ------ ---------- (describe briefly the nature of the property): an approximately 3,949 square ----------------------------- foot industrial Planned Unit Development unit known as Orange County Assessor's - ------------------------------------------------------------------------------- Parcel Number 432-503-07. ("PREMISES"). (See Paragraph 2 for further - ------------------------- provisions). 1.3 TERM: 3 (Three) years and no months ("ORIGINAL TERM") ---------- --- commencing November 1, 1995 ("COMMENCEMENT DATE") and ending October 31, 1998 ------------------ ---------------- ("EXPIRATION DATE"). (See Paragraph 3 for further provisions.) 1.4 EARLY POSSESSION: upon mutual execution of this Lease ("EARLY ------------------------------------ POSSESSION DATE"). (See Paragraphs 3.2 and 3.3 for further provisions.) 1.5 BASE RENT: $2,764.30 per month ("BASE RENT"), payable on the --------- First day of each month commencing November 1, 1995 . (See Paragraph 4 for - ----- ----------------- further provisions.) [_]X If this box is checked, there are provisions in this Lease for the Base Rent to be adjusted. 1.6 BASE RENT PAID UPON EXECUTION: $2,764.30 (By Cashier's Check) -------------------------------- as Base Rent for the period November 1, 1995 through November 30, 1995. ------------------------------------------- 1.7 SECURITY DEPOSIT: $2,922.26 (By Cashier's Check) ("SECURITY ------------------------------ DEPOSIT"). (See Paragraph 5 for further provisions.) 1.8 PERMITTED USE: Sales, Warehousing, Distribution, and Assembly of ------------------------------------------------- Point of Purchase Computer Equipment and related office uses. (See Paragraph - ------------------------------------------------------------ 6 for further provisions.) 1.9 INSURING PARTY. Lessor is the "INSURING PARTY." $on file is ------- the "BASE PREMIUM." (See Paragraph 8 for further provisions.) -1- 1.10 REAL ESTATE BROKERS. The following real estate brokers collectively, the "BROKERS") and brokerage relationships exist in this transaction and are consented to by the Parties (check applicable boxes): Don Bakos - DAUM COMMERCIAL REAL ESTATE SERVICES represents X [_] Lessor ------------------------------------------------- exclusively ("LESSOR'S BROKER"); [_] both Lessor and Lessee, and Sam Olmstead - VOIT COMMERCIAL REAL ESTATE SERVICES represents X [_] Lessee ---------------------------------------------------- exclusively ("LESSEE'S BROKER"); [_] both Lessee and Lessor. (See Paragraph 15 for further provisions.) 1.11 GUARANTOR. The obligations of the Lessee under this Lease are to be guaranteed by Richard P. Stack and Richard A. Stack ("GUARANTOR"). (See -------------------------------------- Paragraph 37 for further provisions). 1.12 ADDENDA. Attached hereto is an Addendum or Addenda consisting of Paragraphs 49 through 54 , and ExhibitsA, B & C , all of which constitute a --- --- --------- part of this Lease. 2. PREMISES. 2.1 LETTING. Lessor hereby leases to Lessee, and Lessee hereby leases from Lessor, the Premises, for the term, at the rental, and upon all of the terms, covenants and conditions set forth in this Lease. Unless otherwise provided herein, any statement of square footage set forth in this Lease, or that may have been used in calculating rental, is an approximation which Lessor and Lessee agree is reasonable and the rental based thereon is not subject to revision whether or not the actual square footage is more or less. 2.2 CONDITION. Lessor shall deliver the Premises to Lessee clean and free of debris on the Commencement Date and warrants to Lessee that the existing plumbing, fire sprinkler system, lighting, air conditioning and heating, and loading doors, if any, in the Premises, other than those constructed by Lessee, shall be in good operating condition on the Commencement Date. If a non- compliance with said warranty exists as of the Commencement Date, Lessor shall, except as otherwise provided in this Lease, promptly after receipt of written notice from Lessee setting forth with specificity the nature and extent of such non-compliance, rectify same at Lessor's expense. If Lessee does not give Lessor written notice of a non-compliance with this warranty within thirty (30) days after the Commencement Date, correction of that non-compliance shall be the obligation of Lessee at Lessee's sole cost and expense. 2.3 COMPLIANCE WITH COVENANTS, RESTRICTIONS AND BUILDING CODE. Lessor warrants to Lessee that the improvements on the Premises comply with all applicable covenants or restrictions of record and applicable building codes, regulations and ordinances in effect on the Commencement Date. Said warranty does not apply to the use to which Lessee will put the Premises or to any Alterations or Utility Installations (defined in Paragraph 7.3(a)) made or to be made by Lessee. If the Premises do not comply with said warranty, Lessor shall, except as otherwise provided in this Lease, promptly after receipt of written notice from Lessee setting forth with specificity the nature and extent of such non-compliance, rectify the same at Lessor's -2- expense. If Lessee does not give Lessor written notice of a non-compliance with this warranty within six (6) months following the Commencement Date, correction of that non-compliance shall be the obligation of Lessee at Lessee's sole cost and expense. 2.4 ACCEPTANCE OF PREMISES. Lessee hereby acknowledges: (a) that it has been advised by the Brokers to satisfy itself with respect to the condition of the Premises (including but not limited to the electrical and fire sprinkler systems, security, environmental aspects, compliance with Applicable Law, as defined in Paragraph 6.3) and the present and future suitability of the Premises for Lessee's intended use, (b) that Lessee has made such investigation as it deems necessary with reference to such matters and assumes all responsibility therefor as the same relate to Lessee's occupancy of the Premises and/or the terms of this Lease, and (c) that neither Lessor, nor any of Lessor's agents, has made any oral or written representations or warranties with respect to said matters other than as set forth in this Lease. 2.5 LESSEE PRIOR OWNER/OCCUPANT. The warranties made by Lessor in this Paragraph 2 shall be of no force or effect if immediately prior to the date set forth in Paragraph 1.1 Lessee was the owner or occupant of the Premises. In such event, Lessee shall, at Lessee's sole cost and expense, correct any non- compliance of the Premises with said warranties. 3. TERM. 3.1 TERM. The Commencement Date, Expiration Date and Original Term of this Lease are as specified in Paragraph 1.3. 3.2 EARLY POSSESSION. If Lessee totally or partially occupies the Premises prior to the Commencement Date, the obligation to pay Base Rent shall be abated for the period of such early possession. All other terms of this Lease, however, shall be in effect during such period. Any such early possession shall not affect nor advance the Expiration Date of the Original Term. 3.3 DELAY IN POSSESSION. If for any reason Lessor cannot deliver possession of the Premises to Lessee as agreed herein by the Early Possession Date, if one is specified in Paragraph 1.4, or, if no Early Possession Date is specified, by the Commencement Date, Lessor shall not be subject to any liability therefor, nor shall such failure affect the validity of this Lease, or the obligations of Lessee hereunder, or extend the term hereof, but in such case, Lessee shall not, except as otherwise provided herein, be obligated to pay rent or perform any other obligation of Lessee under the terms of this Lease until Lessor delivers possession of the Premises to Lessee. If possession of the Premises is not delivered to Lessee within sixty (60) days after the Commencement Date, Lessee may, at its option, by notice in writing to Lessor within ten (10) days thereafter, cancel this Lease, in which event the Parties shall be discharged from all obligations hereunder; provided, however, that if such written notice by Lessee is not received by Lessor within said ten (10) day period, Lessee's right to cancel this Lease shall terminate and be of no further force or effect. Except as may be otherwise provided, and regardless of when the term actually commences, if possession is not tendered to Lessee when required by this Lease and Lessee does not terminate this Lease, as aforesaid, the period free of the obligation to pay Base Rent, if any, that Lessee would otherwise have enjoyed shall run from the date of delivery -3- of possession and continue for a period equal to what Lessee would otherwise have enjoyed under the terms hereof, but minus any days of delay caused by the acts, changes or omissions of Lessee. 4. RENT. 4.1 BASE RENT. Lessee shall cause payment of Base Rent and other rent or charges, as the same may be adjusted from time to time, to be received by Lessor in lawful money of the United States, without offset or deduction, on or before the day on which it is due under the terms of this Lease. Base Rent and all other rent and charges for any period during the term hereof which is for less than one (1) full calendar month shall be prorated based upon the actual number of days of the calendar month involved. Payment of Base Rent and other charges shall be made to Lessor at its address stated herein or to such other persons or at such other addresses as Lessor may from time to time designate in writing to Lessee. 5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon execution hereof the Security Deposit set forth in Paragraph 1.7 as security for Lessee's faithful performance of Lessee's obligations under this Lease. If Lessee fails to pay Base Rent or other rent or charges due hereunder, or otherwise Defaults under this Lease (as defined in Paragraph 13.1), Lessor may use, apply or retain all or any portion of said Security Deposit for the payment of any amount due Lessor or to reimburse or compensate Lessor for any liability, cost, expense, loss or damage (including attorneys' fees) which Lessor may suffer or incur by reason thereof. If Lessor uses or applies all or any portion of said Security Deposit, Lessee shall within ten (10) days after written request therefor deposit moneys with Lessor sufficient to restore said Security Deposit to the full amount required by this Lease. Any time the Base Rent increases during the term of this Lease, Lessee shall, upon written request from Lessor, deposit additional moneys with Lessor sufficient to maintain the same ratio between the Security Deposit and the Base Rent as those amounts are specified in the Basic Provisions. Lessor shall not be required to keep all or any part of the Security Deposit separate from its general accounts. Lessor shall, at the expiration or earlier termination of the term hereof and after Lessee has vacated the Premises, return to Lessee (or, at Lessor's option, to the last assignee, if any, of Lessee's interest herein), that portion of the Security Deposit not used or applied by Lessor. Unless otherwise expressly agreed in writing by Lessor, no part of the Security Deposit shall be considered to be held in trust, to bear interest or other increment for its use, or to be prepayment for any moneys to be paid by Lessee under this Lease. 6. USE. 6.1 USE. Lessee shall use and occupy the Premises only for the purposes set forth in Paragraph 1.8, or any other use which is comparable thereto, and for no other purpose. Lessee shall not use or permit the use of the Premises in a manner that creates waste or a nuisance, or that disturbs owners and/or occupants of, or causes damage to, neighboring premises or properties. Lessor hereby agrees to not unreasonably withhold or delay its consent to any written request by Lessee, Lessee's assignees or subtenants, and by prospective assignees and subtenants of the Lessee, its assignees and subtenants, for a modification of said permitted -4- purpose for which the premises may be used or occupied, so long as the same will not impair the structural integrity of the improvements on the Premises, the mechanical or electrical systems therein, is not significantly more burdensome to the Premises and the improvements thereon, and is otherwise permissible pursuant to this Paragraph 6. If Lessor elects to withhold such consent, Lessor shall within five (5) business days give a written notification of same, which notice shall include an explanation of Lessor's reasonable objections to the change in use. 6.2 HAZARDOUS SUBSTANCES. (a) REPORTABLE USES REQUIRE CONSENT. The term "HAZARDOUS SUBSTANCE" as used in this Lease shall mean any product, substance, chemical, material or waste whose presence, nature, quantity and/or intensity of existence, use, manufacture, disposal, transportation, spill, release or effect, either by itself or in combination with other materials expected to be on the Premises, is either: (i) potentially injurious to the public health, safety or welfare, the environment or the Premises, (ii) regulated or monitored by any governmental authority, or (iii) a basis for liability of Lessor to any governmental agency or third party under any applicable statute or common law theory. Hazardous Substance shall include, but not be limited to, hydrocarbons, petroleum, gasoline, crude oil or any products, by-products or fractions thereof. Lessee shall not engage in any activity in, on or about the Premises which constitutes a Reportable Use (as hereinafter defined) of Hazardous Substances without the express prior written consent of Lessor and compliance in a timely manner (at Lessee's sole cost and expense) with all Applicable Law (as defined in Paragraph 6.3). "REPORTABLE USE" shall mean: (i) the installation or use of any above or below ground storage tank, (ii) the generation, possession, storage, use, transportation, or disposal of a Hazardous Substance that requires a permit from, or with respect to which a report, notice, registration or business plan is required to be filed with, any governmental authority. Reportable Use shall also include Lessee's being responsible for the presence in, on or about the Premises of a Hazardous Substance with respect to which any Applicable Law requires that a notice be given to persons entering or occupying the Premises or neighboring properties. Notwithstanding the foregoing, Lessee may, without Lessor's prior consent, but in compliance with all Applicable Law, use any ordinary and customary materials reasonably required to be used by Lessee in the normal course of Lessee's business permitted on the Premises, so long as such use is not a Reportable Use and does not expose the Premises or neighboring properties to any meaningful risk of contamination or damage or expose Lessor to any liability therefor. In addition, Lessor may (but without any obligation to do so) condition its consent to the use or presence of any Hazardous Substance, activity or storage tank by Lessee upon Lessee's giving Lessor such additional assurances as Lessor, in its reasonable discretion, deems necessary to protect itself, the public, the Premises and the environment against damage, contamination or injury and/or liability therefrom or therefor, including, but not limited to, the installation (and removal on or before Lease expiration or earlier termination) of reasonably necessary protective modifications to the Premises (such as concrete encasements) and/or the deposit of an additional Security Deposit under Paragraph 5 hereof. (b) DUTY TO INFORM LESSOR. If Lessee knows, or has reasonable cause to believe, that a Hazardous Substance, or a condition involving or resulting from same, has come to be located in, on, under or about the Premises, other than as previously consented to by -5- Lessor, Lessee shall immediately give written notice of such fact to Lessor. Lessee shall also immediately give Lessor a copy of any statement, report, notice, registration, application, permit, business plan, license, claim, action or proceeding given to, or received from, any governmental authority or private party, or persons entering or occupying the Premises, concerning the presence, spill, release, discharge of, or exposure to, any Hazardous Substance or contamination in, on or about the Premises, including but not limited to all such documents as may be involved in any Reportable Uses involving the Premises. (c) INDEMNIFICATION. Lessee shall indemnify, protect, defend and hold Lessor, its agents, employees, lenders and ground lessor, if any, and the Premises, harmless from and against any and all loss of rents and/or damage, liabilities, judgments, costs, claims, liens, expenses, penalties, permits and attorney's and consultant's fees arising out of or involving any Hazardous Substance or storage tank brought onto the Premises by or for Lessee or under Lessee's control. Lessee's obligations under this Paragraph 6 shall include, but not be limited to, the effects of any contamination or injury to person, property or the environment created or suffered by Lessee, and the cost of investigation (including consultant's and attorney's fees and testing), removal, remediation, restoration and/or abatement thereof, or of any contamination therein involved, and shall survive the expiration or earlier termination of this Lease. No termination, cancellation or release agreement entered into by Lessor and Lessee shall release Lessee from its obligations under this Lease with respect to Hazardous Substances or storage tanks, unless specifically so agreed by Lessor in writing at the time of such agreement. 6.3 LESSEE'S COMPLIANCE WITH LAW. Except as otherwise provided in this Lease, Lessee shall, at Lessee's sole cost and expense, fully, diligently and in a timely manner, comply with all "APPLICABLE LAW," which term is used in this Lease to include all laws, rules, regulations, ordinances, directives, covenants, easements and restrictions of record, permits, the requirements of any applicable fire insurance underwriter or rating bureau, and the recommendations of Lessor's engineers and/or consultants, relating in any manner to the Premises (including but not limited to matters pertaining: to (i) industrial hygiene, (ii) environmental conditions on, in, under or about the Premises, including soil and groundwater conditions, and (iii) the use, generation, manufacture, production, installation, maintenance, removal, transportation, storage, spill or release of any Hazardous Substance or storage tank), now in effect or which may hereafter come into effect, and whether or not reflecting a change in policy from any previously existing policy. Lessee shall, within five (5) days after receipt of Lessor's written request, provide Lessor with copies of all documents and information, including, but not limited to, permits, registrations, manifests, applications, reports and certificates, evidencing Lessee's compliance with any Applicable Law specified by Lessor, and shall immediately upon receipt, notify Lessor in writing (with copies of any documents involved) of any threatened or actual claim, notice, citation, warning, complaint or report pertaining to or involving failure by Lessee or the Premises to comply with any Applicable law. 6.4 INSPECTION; COMPLIANCE. Lessor and Lessor's Lender(s) (as defined in Paragraph 8.3(a)) shall have the right to enter the Premises at any time, in case of an emergency, and otherwise at reasonable times, for the purpose of inspecting the condition of the Premises and for verifying compliance by Lessee with this Lease and all Applicable Laws (as defined in -6- Paragraph 6.3), and to employ experts and/or consultants in connection therewith and/or to advise Lessor with respect to Lessee's activities, including but not limited to the installation, operation use, monitoring, maintenance, or removal of any Hazardous Substance or storage tank on or from the Premises. The costs and expenses of any such inspections shall be paid by the party requesting same, unless a Default or Breach of this Lease, violation of Applicable Law, or a contamination, caused or materially contributed to by Lessee is found to exist or be imminent, or unless the inspection is requested or ordered by a governmental authority as the result of any such existing or imminent violation or contamination. In any such case, Lessee shall upon request reimburse Lessor or Lessor's Lender, as the case may be, for the costs and expenses of such inspections. 7. MAINTENANCE; REPAIRS; UTILITY INSTALLATIONS; TRADE FIXTURES AND ALTERATIONS. 7.1 LESSEE'S OBLIGATIONS. (a) Subject to the provisions of Paragraph 2.2 (Lessor's warranty as to condition), 2.3 (Lessor's warranty as to compliance with covenants, etc.), 7.2 (Lessor's obligations to repair), 9 (damage and destruction), and 14) (condemnation), Lessee shall, at Lessee's sole cost and expense and at all times, keep the Premises and every part thereof in good order, condition and repair, (whether or not such portion of the Premises requiring repair, or the means of repairing the same, are reasonably or readily accessible to Lessee, and whether or not the need for such repairs occurs as a result of Lessee's use, any prior use, the elements or the age of such portion of the Premises), including, without limiting the generality of the foregoing, all equipment or facilities serving the Premises, such as plumbing, heating, air conditioning, ventilating, electrical, lighting facilities, boilers, fired or unfired pressure vessels, fire sprinkler and/or standpipe and hose or other automatic fire extinguishing system, including fire alarm and/or smoke detection systems and equipment, fire hydrants, fixtures, walls (interior and exterior), ceilings, floors, windows, doors, plate glass, skylights, landscaping, driveways, parking lots, fences, retaining walls, signs, sidewalks and parkways located in, on, about, or adjacent to the Premises, but excluding foundations, the exterior roof and the structural aspects of the Premises. Lessee shall not cause or permit any Hazardous Substance to be spilled or released in, on, under or about the Premises (including through the plumbing or sanitary sewer system) and shall promptly, at Lessee's expense, take all investigatory and/or remedial action reasonably recommended, whether or not formally ordered or required, for the cleanup of any contamination of, and for the maintenance, security and/or monitoring of, the Premises, the elements surrounding same, or neighboring properties, that was caused or materially contributed to by Lessee, or pertaining to or involving any Hazardous Substance and/or storage tank brought onto the Premises by or for Lessee or under its control. Lessee, in keeping the Premises in good order, condition and repair, shall exercise and perform good maintenance practices. Lessee's obligation shall include restorations, replacements or renewals when necessary to keep the Premises and all improvements thereon or a part thereof in good order, condition and state of repair. (b) Lessee shall, at Lessee's sole cost and expense, procure and maintain contracts, with copies to Lessor, in customary from and substance for, and with contractors specializing and experienced in, the inspection, maintenance and service of the -7- following equipment and improvements, if any, located on the Premises: (i) heating, air conditioning and ventilation equipment, (ii) boiler, fired or unfired pressure vessels, (iii) fire sprinkler and/or standpipe and hose or other automatic fire extinguishing systems, including fire alarm and/or smoke detection, (iv) landscaping and irrigation systems, (v) roof covering and drain maintenance and (vi) asphalt and parking lot maintenance. 7.2 LESSOR'S OBLIGATIONS. Upon receipt of written notice of the need for such repairs and subject to Paragraph 13.5, Lessor shall, at Lessor's expense, keep the foundations, exterior roof and structural aspects of the Premises in good order, condition and repair, Lessor shall not, however, be obligated to paint the exterior surface of the exterior walls or to maintain the windows, doors or plate glass or the interior surface of exterior walls. Lessor shall not, in any event, have any obligation to make any repairs until Lessor receives written notice of the need for such repairs. It is the intention of the Parties that the terms of this Lease govern the respective obligations of the Parties as to maintenance and repair of the Premises. Lessee and Lessor expressly waive the benefit of any statute now or hereafter in effect to the extent it is inconsistent with the terms of this Lease with respect to, or which affords Lessee the right to make repairs at the expense of Lessor or to terminate this Lease by reason of, any needed repairs. 7.3 UTILITY INSTALLATIONS; TRADE FIXTURES; ALTERATIONS. (a) DEFINITIONS; CONSENT REQUIRED. The term "UTILITY INSTALLATIONS" is used in this Lease to refer to all carpeting, window coverings, air lines, power panels, electrical distribution, security, fire protection systems, communication systems, lighting fixtures, heating, ventilating, and air conditioning equipment, plumbing, and fencing in, on or about the Premises. The term "TRADE FIXTURES" shall mean Lessee's machinery and equipment that can be removed without doing material damage to the Premises. The term "ALTERATIONS" shall mean any modification of the improvements on the Premises from that which are provided by Lessor under the terms of this Lease, other than Utility Installations or Trade Fixtures, whether by addition or deletion. "LESSEE OWNED ALTERATIONS AND/OR UTILITY INSTALLATIONS" are defined as Alterations and/or Utility Installations made by Lessee that are not yet owned by Lessor as defined in Paragraph 7.4(a). Lessee shall not make any Alterations or Utility Installations in, on, under or about the Premises without Lessor's prior written consent. Lessee may, however, make non-structural Utility Installations to the interior of the Premises (excluding the roof), as long as they are not visible from the outside, do not involve puncturing, relocating or removing the roof or any existing walls, and the cumulative cost thereof during the term of this Lease as extended does not exceed $25,000. (b) CONSENT. Any Alterations or Utility Installations that Lessee shall desire to make and which require the consent of the Lessor shall be presented to Lessor in written form with proposed detailed plans. All consents given by Lessor, whether by virtue of Paragraph 7.3(a) or by subsequent specific consent, shall be deemed conditioned upon: (i) Lessee's acquiring all applicable permits required by governmental authorities, (ii) the furnishing of copies of such permits together with a copy of the plans and specifications for the Alteration or Utility Installation to Lessor prior to commencement of the work thereon, and (iii) the compliance by Lessee with all conditions of said permits in a prompt and expeditious -8- manner. Any Alterations or Utility Installations by Lessee during the term of this Lease shall be done in a good and workmanlike manner, with good and sufficient materials, and in compliance with all Applicable Law. Lessee shall promptly upon completion thereof furnish Lessor with as-built plans and specifications therefor. Lessor may (but without obligation to do so) condition its consent to any requested Alteration or Utility Installation that costs $10,000 or more upon Lessee's providing Lessor with a lien and completion bond in an amount equal to one and one-half times the estimated cost of such Alteration or Utility Installation and/or upon Lessee's posting an additional Security Deposit with Lessor under Paragraph 36 hereof. (c) INDEMNIFICATION. Lessee shall pay, when due, all claims for labor or materials furnished to or alleged to have been furnished to or for Lessee at or for use on the Premises, which claims are or may be secured by any mechanics' or materialmen's lien against the Premises or any interest therein. Lessee shall give Lessor not less than ten (10) days' notice prior to the commencement of any work in, on or about the Premises, and Lessor shall have the right to post notices of non-responsibility in or on the Premises as provided by law. If Lessee shall, in good faith, contest the validity of any such lien, claim or demand, then Lessee shall, at its sole expense defend and protect itself, Lessor and the Premises against the same and shall pay and satisfy any such adverse judgment that may be rendered thereon before the enforcement thereof against the Lessor or the Premises. If Lessor shall require, Lessee shall furnish to Lessor a surety bond satisfactory to Lessor in an amount equal to one and one-half times the amount of such contested lien, claim or demand, indemnifying Lessor against liability for the same, as required by law for the holding of the Premises free from the effect of such lien or claim. In addition, Lessor may required Lessee to pay Lessor's attorney's fees and costs in participating in such action if Lessor shall decide it is in its best interest to do so. 7.4 OWNERSHIP; REMOVAL; SURRENDER; AND RESTORATION. (a) OWNERSHIP. Subject to Lessor's right to require their removal or become the owner thereof as hereinafter provided in this Paragraph 7.4, all Alterations and Utility Additions made to the Premises by Lessee shall be the property of and owned by Lessee, but considered a part of the Premises. Lessor may, at any time and at its option, elect in writing to Lessee to be the owner of all or any specified part of the Lessee Owned Alterations and Utility Installations. Unless otherwise instructed per subparagraph 7.4(b) hereof, all Lessee Owned Alterations and Utility Installations shall, at the expiration or earlier termination of this Lease, become the property of Lessor and remain upon and be surrendered by Lessee with the Premises. (b) REMOVAL. Unless otherwise agreed in writing, Lessor may require that any or all Lessee Owned Alterations or Utility Installations be removed by the expiration or earlier termination of this Lease, notwithstanding their installation may have been consented to by Lessor. Lessor may require the removal at any time of all or any part of any Lessee Owned Alterations or Utility Installations made without the required consent of Lessor. (c) SURRENDER/RESTORATION. Lessee shall surrender the Premises by the end of the last day of the Lease term or any earlier termination date, with all of the improvements, parts and surfaces thereof clean and free of debris and in good operating order, -9- condition and state of repair, ordinary wear and tear excepted. "ORDINARY WEAR AND TEAR" shall not include any damage or deterioration that would have been prevented by good maintenance practice or by Lessee performing all of its obligations under this Lease. Except as otherwise agreed or specified in writing by Lessor, the Premises, as surrendered, shall include the Utility Installations. The obligation of Lessee shall include the repair of any damage occasioned by the installation, maintenance or removal of Lessee's Trade Fixtures, furnishings, equipment, and Alterations and/or Utility Installations, as well as the removal of any storage tank installed by or for Lessee, and the removal, replacement, or remediation of any soil, material or ground water contaminated by Lessee, all as may then be required by Applicable Law and/or good service practice. Lessee's Trade Fixtures shall remain the property of Lessee and shall be removed by Lessee subject to its obligation to repair and restore the Premises per this Lease. 8. INSURANCE; INDEMNITY. 8.1 PAYMENT OF PREMIUM INCREASES. (a) Lessee shall pay to Lessor any insurance cost increase ("INSURANCE COST INCREASE") occurring during the term of this Lease. "INSURANCE COST INCREASE" is defined as any increase in the actual cost of the insurance required under Paragraph 8.2(b), 8.3(a) and 8.3(b). ("REQUIRED INSURANCE"), over and above the Base Premium, as hereinafter defined, calculated on an annual basis. "INSURANCE COST INCREASE" shall include, but not be limited to, increases resulting from the nature of Lessee's occupancy, any act or omission of Lessee, requirements of the holder of a mortgage or deed of trust covering the Premises, increased valuation of the Premises, and/or a premium rate increase. If the parties insert a dollar amount in Paragraph 1.9, such amount shall be considered the "BASE PREMIUM." In lieu thereof, if the Premises have been previously occupied, the "BASE PREMIUM" shall be the annual premium applicable to the most recent occupancy. If the Premises have never been occupied, the "BASE PREMIUM" shall be the lowest annual premium reasonably obtainable for the Required Insurance as of the commencement of the Original Term, assuming the most nominal use possible of the Premises. In no event, however, shall Lessee be responsible for any portion of the premium cost attributable to liability insurance coverage in excess of $1,000,000 procured under Paragraph 8.2(b) (Liability Insurance Carried By Lessor). (b) Lessee shall pay any such Insurance Cost Increase to Lessor within thirty (30) days after receipt by Lessee of a copy of the premium statement or other reasonable evidence of the amount due. If the insurance policies maintained hereunder cover other property besides the Premises, Lessor shall also deliver to Lessee a statement of the amount of such Insurance Cost Increase attributable only to the Premises showing in reasonable detail the manner in which such amount was computed. Premiums for policy periods commencing prior to, or extending the term of this Lease shall be prorated to coincide with the corresponding Commencement or Expiration of the Lease term. 8.2 LIABILITY INSURANCE. -10- (a) CARRIED BY LESSEE. Lessee shall obtain and keep in force during the term of this Lease a Commercial General Liability policy of insurance protecting Lessee and Lessor (as an additional insured) against claims for bodily injury, personal injury and property damage based upon, involving or arising out of the ownership, use, occupancy or maintenance of the Premises and all areas appurtenant thereto. Such insurance shall be on an occurrence basis providing single limit coverage in an amount not less than $1,000,000 per occurrence with an "Additional Insured-Managers or Lessors of Premises" Endorsement and contain the "Amendment of the Pollution Exclusion" for damage caused by heat, smoke or fumes from a hostile fire. The policy shall not contain any intra-insured exclusions as between insured persons or organizations, but shall include coverage for liability assumed under this Lease as an "insured contract" for the performance of Lessee's indemnity obligation under this Lease. The limits of said insurance required by this Lease or as carried by Lessee shall not, however, limit the liability of Lessee nor relieve Lessee of any obligation hereunder. All insurance to be carried by Lessee shall be primary to and not contributory with any similar insurance carried by Lessor, whose insurance shall be considered excess insurance only. (b) CARRIED BY LESSOR. In the event Lessor is the Insuring Party, Lessor shall also maintain liability insurance described in Paragraph 8.2(a), above, in addition to, and not in lieu of, the insurance required to be maintained by Lessee. Lessee shall not be named as additional insured therein. 8.3 PROPERTY INSURANCE - BUILDING, IMPROVEMENTS AND RENTAL VALUE. (a) BUILDING AND IMPROVEMENTS. The Insuring Party shall obtain and keep in force during the term of this Lease a policy or policies in the name of Lessor, with loss payable to Lessor and to the holders of any mortgages, deeds of trust or ground leases on the Premises ("LENDER(S)"), insuring loss or damage to the Premises. The amount of such insurance shall be equal to the full replacement cost of the Premises, as the same shall exist from time to time, or the amount required by Lenders, but in no event more than the commercially reasonable and available insurable value thereof if, by reason of the unique nature or age of the improvements involved, such latter amount is less than full replacement cost. Lessee Owned Alterations and Utility Installations shall be insured by Lessee under Paragraph 8.4. If such coverage is available and commercially appropriate, such policy or policies shall insure against all risks of direct physical loss or damage (except the perils of flood and/or earthquake unless required by a Lender), including coverage for any additional costs resulting from debris removal and reasonable amounts of coverage for the enforcement of any ordinance or law regulating the reconstruction or replacement of any undamaged sections of the Premises required to be demolished or removed by reason of the enforcement of any building, zoning, safety or land use laws as the result of a covered cause of loss, but not including plate glass insurance. Said policy or policies shall also contain an agreed valuation provision in lieu of any coinsurance clause, waiver of subrogation, and inflation guard protection causing an increase in the annual property insurance coverage amount by a factor of not less than the adjusted U.S. Department of Labor Consumer Price Index for All Urban Consumers for the city nearest to where the Premises are located. -11- (b) RENTAL VALUE. Lessor shall, in addition, obtain and keep in force during the term of this Lease a policy or policies in the name of Lessor, with loss payable to Lessor and Lender(s), insuring the loss of the full rental and other charges payable by Lessee to Lessor under this Lease for one (1) year (including all real estate taxes, insurance costs, and any scheduled rental increases). Said insurance shall provide that in the event the Lease is terminated by reason of an insured loss, the period of indemnity for such coverage shall be extended beyond the date of the completion of repairs or replacement of the Premises, to provide for one full year's loss of rental revenues from the date of any such loss. Said insurance shall contain an agreed valuation provision in lieu of any coinsurance clause, and the amount of coverage shall be adjusted annually to reflect the projected rental income, property taxes, insurance premium costs and other expenses, if any, otherwise payable by Lessee, for the next twelve (12) month period. (c) ADJACENT PREMISES. If the Premises are part of a larger building, or if the Premises are part of a group of buildings owned by Lessor which are adjacent to the Premises, the Lessee shall pay for any increase in the premiums for the property insurance of such building or buildings if said increase is caused by Lessee's acts, omissions, use or occupancy of the Premises. (d) TENANT'S IMPROVEMENTS. Since Lessor is the Insuring Party, the Lessor shall not be required to insure Lessee Owned Alterations and Utility Installations unless the item in question has become the property of Lessor under the terms of this Lease. 8.4 LESSEE'S PROPERTY INSURANCE. Subject to the requirements of Paragraph 8.5, Lessee at its cost shall either by separate policy, or, at Lessor's option, by endorsement to a policy already carried, maintain insurance coverage on all of Lessee's personal property, Lessee Owned Alterations and Utility Installations in, on, or about the Premises similar in coverage to that carried by the Insuring Party under the Paragraph 8.3. Such insurance shall be full replacement cost coverage with a deductible of not to exceed $1,000 per occurrence. The proceeds from any such insurance shall be used by Lessee for the replacement of personal property or the restoration of Lessee Owned Alterations and Utility Installations. Lessee shall be the Insuring Party with respect to the insurance required by this Paragraph 8.4 and shall provide Lessor with written evidence that such insurance is in force. 8.5 INSURANCE POLICIES. Insurance required hereunder shall be in companies duly licensed to transact business in the state where the Premises are located, and maintaining during the policy term and "General Policyholders Rating" of at least B+, V, or such other rating as may be required by a Lender having a lien on the Premises, as set forth in the most current issue of "Best's Insurance Guide." Lessee shall not do or permit to be done anything which shall invalidate the insurance policies referred to in this Paragraph 8. Lessee shall cause to be delivered to Lessor certified copies of, or certificates evidencing the existence and amounts of, the insurance, and with the additional insureds, required under Paragraph 8.2(a) and 8.4. No such policy shall be cancelable or subject to modification except after thirty (30) days prior written notice to Lessor. Lessee shall at least thirty (30) days prior to the expiration of such policies, furnish Lessor with evidence of renewals or "insurance binders" evidencing renewal -12- thereof, or Lessor may order such insurance and charge the cost thereof to Lessee, which amount shall be payable by Lessee to Lessor upon demand. 8.6 WAIVER OF SUBROGATION. Without affecting any other rights or remedies, Lessee and Lessor ("WAIVING PARTY") each hereby release and relieve the other, and waive their entire right to recover damages (whether in contract or in tort) against the other, for loss of or damage to the Waiving Party's property arising out of or incident to the perils required to be insured against under Paragraph 8. The effect of such releases and waivers of the right to recover damages shall not be limited by the amount of insurance carried or required, or by any deductibles applicable thereto. 8.7 INDEMNITY. Except for Lessor's negligence and/or breach of express warranties, Lessee shall indemnify, protect, defend and hold harmless the Premises, Lessor and its agents, Lessor's master or ground lessor, partners and Lenders, from and against any and all claims, loss of rents and/or damages, costs, liens, judgments, penalties, permits, attorney's and consultant's fees, expenses and/or liabilities arising out of, involving, or in dealing with, the occupancy of the Premises by Lessee, the conduct of Lessee's business, any act, omission or neglect of Lessee, its agents, contractors, employees or invitees, and out of any Default or Breach by Lessee in the performance in a timely manner of any obligation on Lessee's part to be performed under this Lease. The foregoing shall include, but not be limited to, the defense or pursuit of any claim or any action or proceeding involved therein, and whether or not (in the case of claims made against Lessor) litigated and/or reduced to judgment, and whether well founded or not. In case any action or proceeding be brought against Lessor by reason of any of the foregoing matters, Lessee upon notice from Lessor shall defend the same at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not have first paid any such claim in order to be so indemnified. 8.8 EXEMPTION OF LESSOR FROM LIABILITY. Lessor shall not be liable for injury or damage to the person or goods, wares, merchandise or other property of Lessee, Lessee's employees, contractors, invitees, customers, or any other person in or about the Premises, whether such damage or injury is caused by or results from fire, steam, electricity, gas, water or rain, or from the breakage, leakage, obstruction or other defects of pipes, fire sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures, or from any other cause, whether the said injury or damage results from conditions arising upon the Premises or upon other portions of the building of which the Premises are a part, or from other sources or places, and regardless of whether the cause of such damage or injury or the means of repairing the same is accessible or not. Lessor shall not be liable for any damages arising from any act or neglect of any other tenant of Lessor. Notwithstanding Lessor's negligence or breach of this Lease, Lessor shall under no circumstances be liable for injury to Lessee's business or for any loss of income or profit therefrom. -13- 9. DAMAGE OR DESTRUCTION. 9.1 DEFINITIONS. (a) "PREMISES PARTIAL DAMAGE" shall mean damage or destruction to the improvements on the Premises, other than Lessee Owned Alterations and Utility Installations, the repair cost of which damage or destruction is less than 50% of the then Replacement Cost of the Premises immediately prior to such damage or destruction, excluding from such calculation the value of the land and Lessee Owned Alterations and Utility Installations. (b) "PREMISES TOTAL DESTRUCTION" shall mean damage or destruction to the Premises, other than Lessee Owned Alterations and Utility Installations the repair cost of which damage or destruction is 50% or more of the then Replacement Cost of the Premises immediately prior to such damage or destruction, excluding from such calculation the value of the land and Lessee Owned Alterations and Utility Installations. (c) "INSURED LOSS" shall mean damage or destruction to improvements on the Premises, other than Lessee Owned Alterations and Utility Installations, which was caused by an event required to be covered by the insurance described in Paragraph 8.3(a), irrespective of any deductible amounts or coverage limits involved. (d) "REPLACEMENT COST" shall mean the cost to repair or rebuild the improvements owned by Lessor at the time of the occurrence to their condition existing immediately prior thereto, including demolition, debris removal and upgrading required by the operation of applicable building codes, ordinances or laws, and without deduction for depreciation. (e) "HAZARDOUS SUBSTANCE CONDITION" shall mean the occurrence or discovery of a condition involving the presence of, or a contamination by, a Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the Premises. 9.2 PARTIAL DAMAGE-INSURED LOSS. If a Premises Partial Damage that is an Insured Loss occurs, then Lessor shall, at Lessor's expense, repair such damage (but not Lessee's Trade Fixtures or Lessee Owned Alterations and Utility Installations) as soon as reasonably possible and this Lease shall continue in full force and effect. Notwithstanding the foregoing, if the required insurance was not in force or the insurance proceeds are not sufficient to effect such repair, the Insuring Party shall promptly contribute the shortage in proceeds as and when required to complete said repairs. In the event, however, the shortage in proceeds was due to the fact that, by reason of the unique nature of the improvements, full replacement cost insurance coverage was not commercially reasonable and available, Lessor shall have no obligation to pay for the shortage in insurance proceeds or to fully restore the unique aspects of the Premises unless Lessee provides Lessor with the funds to cover same, or adequate assurance thereof, within ten (10) days following receipt of written notice of such shortage and request therefor. If Lessor receives said funds or adequate assurance thereof within said ten (10) day period, the party responsible for making the repairs shall complete them as soon as reasonably possible and this Lease shall remain in full force and effect. If Lessor does not receive such funds or assurance -14- within said period, Lessor may nevertheless elect by written notice to Lessee within ten (10) days thereafter to make such restoration and repair as is commercially reasonable with Lessor paying any shortage in proceeds, in which case this Lease shall remain in full force and effect. If in such case Lessor does not so elect, then this Lease shall terminate sixty (60) days following the occurrence of the damage or destruction. Unless otherwise agreed, Lessee shall in no event have any right to reimbursement from Lessor for any funds contributed by Lessee to repair any such damage or destruction. Premises Partial Damage due to flood or earthquake shall be subject to Paragraph 9.3 rather than Paragraph 9.2, notwithstanding that there may be some insurance coverage, but the net proceeds of any such insurance shall be made available for the repairs if made by either Party. 9.3 PARTIAL DAMAGE - UNINSURED LOSS. If a Premises Partial Damage that is not an Insured Loss occurs, unless caused by a negligent or willful act of Lessee (in which event Lessee shall make the repairs at Lessee's expense and this Lease shall continue in full force and effect, but subject to Lessor's rights under Paragraph 13), Lessor may at Lessor's option, either: (i) repair such damage as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) give written notice to Lessee within thirty (30) days after receipt by Lessor of knowledge of the occurrence of such damage of Lessor's desire to terminate this Lease as of the date sixty (60) days following the giving of such notice. In the event Lessor elects to give such notice of Lessor's intention of terminate this Lease, Lessee shall have the right within ten (10) days after the receipt of such notice to give written notice to Lessor of Lessee's commitment to pay for the repair of such damage totally at Lessee's expense and without reimbursement from Lessor. Lessee shall provide Lessor with the required funds or satisfactory assurance thereof within thirty (30) days following Lessee's said commitment. In such event this Lease shall continue in full force and effect, and Lessor shall proceed to make such repairs as soon as reasonably possible and the required funds are available. If Lessee does not give such notice and provide the funds or assurance thereof within the times specified above, this Lease shall terminate as of the date specified in Lessor's notice of termination. 9.4 TOTAL DESTRUCTION. Notwithstanding any other provision hereof, if a Premises Total Destruction occurs (including any destruction required by any authorized public authority), this Lease shall terminate sixty (60) days following the date of such Premises Total Destruction, whether or not the damage or destruction is an Insured Loss or was caused by a negligent or willful act of Lessee. In the event, however, that the damage or destruction was caused by Lessee, Lessor shall have the right to recover Lessor's damages from Lessee except as released and waived in Paragraph 8.6. 9.5 DAMAGE NEAR END OF TERM. If at any time during the last six (6) months of the term of this Lease there is damage for which the cost to repair exceeds one (1) month's Base Rent, whether or not an Insured Loss, Lessor may, at Lessor's option, terminate this Lease effective sixty (60) days following the date of occurrence of such damage by giving written notice to Lessee of Lessor's election to do so within thirty (30) days after the date of occurrence of such damage. Provided, however, if Lessee at that time has an exercisable option to extend this Lease or to purchase the Premises, then Lessee may preserve this Lease by, within twenty (20) days following the occurrence of the damage, or before the expiration of the time provided -15- in such option for its exercise, whichever is earlier ("EXERCISE PERIOD"), (i) exercising such option and (ii) providing Lessor with any shortage in insurance proceeds (or adequate assurance thereof) needed to make the repairs. If Lessee duly exercises such option during said Exercise Period and provides Lessor with funds (or adequate assurance thereof) to cover any shortage in insurance proceeds, Lessor shall, at Lessor's expense repair such damage as soon as reasonably possible and this Lease shall continue in full force and effect. If Lessee fails to exercise such option and provide such funds or assurance during said Exercise Period, then Lessor may at Lessor's option terminate this Lease as of the expiration of said sixty (60) day period following the occurrence of such damage by giving written notice to Lessee of Lessor's election to do so within ten (10) days after the expiration of the Exercise Period, notwithstanding any term or provision in the grant of option to the contrary. 9.6 ABATEMENT OF RENT; LESSEE'S REMEDIES. (a) In the event of damage described in Paragraph 9.2 (Partial Damage- Insured), whether or not Lessor or Lessee repairs or restores the Premises, the Base Rent, Real Property Taxes, insurance premiums, and other charges, if any, payable by Lessee hereunder for the period during which such damage, its repair or the restoration continues (not to exceed the period for which rental value insurance is required under Paragraph 8.3(b), shall be abated in proportion to the degree to which Lessee's use of the Premises is impaired. Except for abatement of Base Rent, Real Property Taxes, insurance premiums, and other charges, if any, as aforesaid, all other obligations of Lessee hereunder shall be performed by Lessee, and Lessee shall have no claim against Lessor for any damage suffered by reason of any such repair or restoration. (b) If Lessor shall be obligated to repair or restore the Premises under the provisions of this Paragraph 9 and shall not commence, in a substantial and meaningful way, the repair or restoration of the Premises within ninety (90) days after such obligation shall accrue, Lessee may, at any time prior to the commencement of such repair or restoration, give written notice to Lessor and to any Lenders of which Lessee has actual notice of Lessee's election to terminate this Lease on a date not less than sixty (60) days following the giving of such notice. If Lessee gives such notice to Lessor and such Lenders and such repair or restoration is not commenced within thirty (30) days after receipt of such notice, this Lease shall terminate as of the date specified in said notice. If Lessor or a Lender commences the repair or restoration of the Premises within thirty (30) days after receipt of such notice, this Lease shall continue in full force and effect. "COMMENCE" as used in this Paragraph shall mean either the unconditional authorization of the preparation of the required plans, or the beginning of the actual work on the Premises, whichever first occurs. 9.7 HAZARDOUS SUBSTANCE CONDITIONS. If a Hazardous Substance Condition occurs, unless Lessee is legally responsible therefor (in which case Lessee shall make the investigation and remediation thereof required by Applicable Law and this Lease shall continue in full force and effect, but subject to Lessor's rights under Paragraph 13), Lessor may at Lessor's option either: (i) investigate and remediate such Hazardous Substance Condition, if required, as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) if the estimated cost to investigate and remediate such condition exceeds -16- twelve (12) times the then monthly Base Rent or $100,000, whichever is greater, give written notice to Lessee within thirty (30) days after receipt by Lessor of knowledge of the occurrence of such Hazardous Substance Condition of Lessor's desire to terminate this Lease as of the date sixty (60) days following the giving of such notice. In the event Lessor elects to give such notice of Lessor's intention to terminate this Lease, Lessee shall have the right within ten (10) days after the receipt of such notice to give written notice to Lessor of Lessee's commitment to pay for the investigation and remediation of such Hazardous Substance Condition totally at Lessee's expense and without reimbursement from Lessor except to the extent of an amount equal to twelve (12) times the then monthly Base Rent or $100,000, which ever is greater. Lessee shall provide Lessor with the funds required of Lessee or satisfactory assurance thereof within thirty (30) days following Lessee's said commitment. In such event this Lease shall continue in full force and effect, and Lessor shall proceed to make such investigation and remediation as soon as reasonably possible and the required funds are available. If Lessee does not give such notice and provide the required funds or assurance thereof within the times specified above, this Lease shall terminate as of the date specified in Lessor's notice of termination. If a Hazardous Substance Condition occurs for which Lessee is not legally responsible, there shall be abatement of Lessee's obligations under this Lease to the same extent as provided in Paragraph 9.6(a) for a period of not the exceed twelve (12) months. 9.8. TERMINATION - ADVANCE PAYMENTS. Upon termination of this Lease pursuant to this Paragraph 9, an equitable adjustment shall be made concerning advance Base Rent and any other advance payments made by Lessee to Lessor. Lessor shall, in addition, return to Lessee so much of Lessee's Security Deposit as has not been, or is not then required to be, used by Lessor under the terms of this Lease. 9.9 WAIVE STATUTES. Lessor and Lessee agree that the terms of this Lease shall govern the effect of any damage to or destruction of the Premises with respect to the termination of this Lease and hereby waive the provisions of any present or future statute to the extent inconsistent herewith. 10. REAL PROPERTY TAXES. 10.1 (a) PAYMENT OF TAXES. Lessor shall pay the Real Property Taxes, as defined in Paragraph 10.2, applicable to the Premises; provided, however, that Lessee shall pay, in addition to rent, the amount, if any, by which Real Property Taxes applicable to the Premises increase over the fiscal tax year during which the Commencement Date occurs ("TAX INCREASE"). Subject to Paragraph 10.1(b), payment of any such Tax Increase shall be made by Lessee within thirty (30) days after receipt of Lessor's written statement setting forth the amount due and the computation thereof. Lessee shall promptly furnish Lessor with satisfactory evidence that such taxes have been paid. If any such taxes to be paid by Lessee shall cover any period of time prior to or after the expiration or earlier termination of the term hereof, Lessee's share of such taxes shall be equitably prorated to cover only the period of time within the tax fiscal year this Lease is in effect, and Lessor shall reimburse Lessee for any overpayment after such proration. -17- (b) ADVANCE PAYMENT. In order to insure payment when due and before delinquency of any or all Real Property Taxes, Lessor reserves the right, at Lessor's option, to estimate the current Real Property Taxes applicable to the Premises, and to require such current year's Tax Increase to be paid in advance to Lessor by Lessee, either: (i) in a lump sum amount equal to the amount due, at least twenty (20) days prior to the applicable delinquency date, or (ii) monthly in advance with the payment of the Base Rent. If Lessor elects to require payment monthly in advance, the monthly payment shall be that equal monthly amount which, over the number of months remaining before the month in which the applicable tax installment would become delinquent (and without interest thereon), would provide a fund large enough to fully discharge before delinquency the estimated Tax Increase to be paid. When the actual amount of the applicable Tax Increase is known, the amount of such equal monthly advance payment shall be adjusted as required to provide the fund needed to pay the applicable Tax Increase before delinquency. If the amounts paid to Lessor by Lessee under the provisions of this Paragraph are insufficient to discharge the obligations of Lessee to pay such Tax Increase as the same becomes due, Lessee shall pay to Lessor, upon Lessor's demand, such additional sums as are necessary to pay such obligation. All moneys paid to Lessor under this Paragraph may be intermingled with other moneys of Lessor and shall not bear interest. In the event of a Breach by Lessee in the performance of the obligations of Lessee under this Lease, then any balance of funds paid to Lessor under the provisions of this Paragraph may, subject to proration as provided in Paragraph 10.1(a), at the option of Lessor, be treated as an additional Security Deposit under Paragraph 5. (c) ADDITIONAL IMPROVEMENTS. Notwithstanding Paragraph 10.1(a) hereof, Lessee shall pay to Lessor upon demand therefor the entirety of any increase in Real Property Taxes assessed by reason of Alterations or Utility Installations placed upon the Premises by Lessee or at Lessee's request. 10.2 DEFINITION OF "REAL PROPERTY TAXES." As used herein, the term "REAL PROPERTY TAXES" shall include any form of real estate tax or assessment, general, special, ordinary or extraordinary, and any license fee, commercial rental tax, improvement bond or bonds, levy or tax (other than inheritance, personal income or estate taxes) imposed upon the Premises by any authority having the direct or indirect power to tax, including any city, state or federal government, or any school, agricultural, sanitary, fire, street, drainage or other improvement district thereof, levied against any legal or equitable interest of Lessor in the Premises or in the real property of which the Premises are a part, Lessor's right to rent or other income therefrom, and/or Lessor's business of leasing the Premises. The term "REAL PROPERTY TAXES" shall also include any tax, fee, levy, assessment or charge, or any increase therein, imposed by reason of events occurring, or changes in applicable law taking effect, during the term of this Lease, including but not limited to a change in the ownership of the Premises or in the improvements thereon, the execution of this Lease, or any modification, amendment or transfer thereof, and whether or not contemplated by the Parties. 10.3 JOINT ASSESSMENT. If the Premises are not separately assessed, Lessee's liability shall be an equitable proportion of the Real Property Taxes for all of the land and improvements included within the tax parcel assessed, such proportion to be determined by -18- Lessor from the respective valuations assigned in the assessor's work sheets or such other information as may be reasonably available. Lessor's reasonable determination thereof, in good faith, shall be conclusive. 10.4 PERSONAL PROPERTY TAXES. Lessee shall pay prior to delinquency all taxes assessed against and levied upon Lessee Owned Alterations, Utility Installations, Trade Fixtures, furnishings, equipment and all personal property of Lessee contained in the Premises or elsewhere. When possible, Lessee shall cause its Trade Fixtures, furnishings, equipment and all other personal property to be assessed and billed separately from the real property of Lessor. If any of Lessee's said personal property shall be assessed with Lessor's real property, Lessee shall pay Lessor the taxes attributable to Lessee within ten (10) days after receipt of a written statement setting forth the taxes applicable to Lessee's property or, at Lessor's option, as provided in Paragraph 10.1(b). 11. UTILITIES. Lessee shall pay for all water, gas, heat, light, power, telephone, trash disposal and other utilities and services supplied to the Premises, together with any taxes thereon. If any such services are not separately metered to Lessee, Lessee shall pay a reasonable proportion, to be determined by Lessor of all charges jointly metered with other premises. 12. ASSIGNMENT AND SUBLETTING. 12.1 LESSOR'S CONSENT REQUIRED. (a) Lessee shall not voluntarily or by operation of law assign, transfer, mortgage or otherwise transfer or encumber (collectively, "ASSIGNMENT") or sublet all or any part of Lessee's interest in this Lease or in the Premises without Lessor's prior written consent given under and subject to the terms of Paragraph 36. (b) A change in the control of Lessee shall constitute an assignment requiring Lessor's consent. The transfer, on a cumulative basis, of twenty-five percent (25%) or more of the voting control of Lessee shall constitute a change in control for this purpose. (c) The involvement of Lessee or its assets in any transaction, or series of transactions (by way of merger, sale, acquisition, financing, refinancing, transfer, leveraged buy-out or otherwise), whether or not a formal assignment or hypothecation of this Lease or Lessee's assets occurs, which results or will result in a reduction of the Net Worth of Lessee, as hereinafter defined, by an amount equal to or greater than twenty-five percent (25%) of such Net Worth of Lessee as it was represented to Lessor at the time of the execution by Lessor of this Lease or at the time of the most recent assignment to which Lessor has consented, or as it exists immediately prior to said transaction or transactions constituting such reduction, at whichever time said Net Worth of Lessee was or is greater, shall be considered an assignment of this Lease by Lessee to which Lessor may reasonably withhold its consent. "NET WORTH OF LESSEE" for purposes of this Lease shall be the net worth of Lessee (excluding any guarantors) established under generally accepted accounting principles consistently applied. -19- (d) An assignment or subletting of Lessee's interest in this Lease without Lessor's specific prior written consent shall, at Lessor's option, be a Default curable after notice per Paragraph 13.1(c), or a noncurable Breach without the necessity of any notice and grace period. If Lessor elects to treat such unconsented to assignment or subletting as a noncurable Breach, Lessor shall have the right to either: (i) terminate this Lease, or (ii) upon thirty (30) days written notice ("Lessor's Notice"), increase the monthly Base Rent to fair market value of one hundred ten percent (110%) of the Base Rent then in effect, whichever is greater. Pending determination of the new fair market rental value, if disputed by Lessee, Lessee shall pay the amount set forth in Lessor's Notice, with any overpayment credited against the next installment(s) of Base Rent coming due, and any underpayment for the period retroactively to the effective date of the adjustment being due and payable immediately upon the determination thereof. Further, in the event of such Breach and market value adjustment, (i) the purchase price of any option to purchase the Premises held by Lessee shall be subject to similar adjustment to the then fair market value (without the Lease being considered an encumbrance or any deduction for depreciation or obsolescence, and considering the Premises at its highest and best use and in good condition), or one hundred ten percent (110%) of the price previously in effect, whichever is greater, (ii) any index-oriented rental or price adjustment formulas contained in this Lease shall be adjusted to require that the base index be determined with reference to the index applicable to the time of such adjustment, and (iii) any fixed rental adjustments scheduled during the remainder of the Lease term shall be increased in the same ratio as the new market rental bears to the Base Rent in effect immediately prior to the market value adjustment. (e) Lessee's remedy for any breach of this Paragraph 12.1 by Lessor shall be limited to compensatory damages and injunctive relief. 12.2 TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING. (a) Regardless of Lessor's consent, any assignment or subletting shall not: (i) be effective without the express written assumption by such assignee or sublessee of the obligations of Lessee under the Lease, (ii) release Lessee of any obligations hereunder, or (iii) after the primary liability of Lessee for the payment of Base Rent and other sums due Lessor hereunder or for the performance of any other obligations to be performed by Lessee under this Lease. (b) Lessor may accept any rent or performance of Lessee's obligations from any person other than Lessee pending approval or disapproval of an assignment. Neither a delay in the approval or disapproval of such assignment nor the acceptance of any rent or performance shall constitute a waiver or estoppel of Lessor's right to exercise its remedies for the Default or Breach by Lessee of any of the terms, covenants or conditions of this Lease. (c) The consent of Lessor to any assignment or subletting shall not constitute a consent to any subsequent assignment or subletting by Lessee or to any subsequent or successive assignment or subletting by the sublessee. However, Lessor may consent to subsequent sublettings and assignments of the sublease or any amendments or modifications thereto without notifying Lessee or anyone else liable on the Lease or sublease and without -20- obtaining their consent, and such action shall not relieve such persons from liability under this Lease or sublease. (d) In the event of any Default or Breach of Lessee's obligations under this Lease, Lessor may proceed directly against Lessee, any Guarantors or any one else responsible for the performance of the Lessee's obligations under this Lease, including the sublessee, without first exhausting Lessor's remedies against any other person or entity responsible therefor to Lessor, or any security held by Lessor or Lessee. (e) Each request for consent to an assignment or subletting shall be in writing, accompanied by information relevant to Lessor's determination as to the financial and operational responsibility and appropriateness of the proposed assignee or sublessee, including but not limited to the intended use and/or required modification of the Premises, if any, together with a non-refundable deposit of $1,000 or ten percent (10%) of the current monthly Base Rent, whichever is greater, as reasonable consideration for Lessor's considering and processing the request for consent. Lessee agrees to provide Lessor with such other or additional information and/or documentation as may be reasonably requested by Lessor. (f) Any assignee of, or sublessee under, this Lease shall, by reason of accepting such assignment or entering into such sublease, be deemed, for the benefit of Lessee, to have assumed and agreed to conform and comply with each and every term, covenant, condition and obligation herein to be observed or performed by Lessee during the term of said assignment or sublease, other than such obligations as are contrary to or inconsistent with provisions of an assignment or sublease to which Lessor has specifically consented in writing. (g) The occurrence of a transaction described in Paragraph 12.1(c) shall give Lessor the right (but not the obligation) to require that the Security Deposit be increased to an amount equal to six (6) times the then monthly Base Rent, and Lessor may make the actual receipt by Lessor of the amount required to establish such Security Deposit a condition to Lessor's consent to such transaction. (h) Lessor, as a condition to giving its consent to any assignment or subletting, may require that the amount and adjustment structure of the rent payable under this Lease be adjusted to what is then the market value and/or adjustment structure for property similar to the Premises as then constituted. 12.3 ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO SUBLETTING. The following terms and conditions shall apply to any subletting by Lessee of all or any part of the Premises and shall be deemed included in all subleases under this Lease whether or not expressly incorporated therein: (a) Lessee hereby assigns and transfers to Lessor all of Lessee's interest in all rentals and income arising from any sublease of all or a portion of the Premises heretofore or hereafter made by Lessee, and Lessor may collect such rent and income and apply same toward Lessee's obligations under this Lease; provided, however, that until a Breach (as defined in Paragraph 13.1) shall occur in the performance of Lessee's obligations under this -21- Lease, Lessee may, except as otherwise provided in this Lease, receive, collect and enjoy the rents accruing under such sublease. Lessor shall not, by reason of this or any other assignment of such sublease to Lessor, nor by reason of the collection of the rents from a sublessee, be deemed liable to the sublessee for any failure of Lessee to perform and comply with any of Lessee's obligations to such sublessee under such sublease. Lessee hereby irrevocably authorizes and directs any such sublessee, upon receipt of a written notice from Lessor stating that a Breach exists in the performance of Lessee's obligations under this Lease, to pay to Lessor the rents and other charges due and to become due under the sublease. Sublessee shall rely upon any such statement and request from Lessor and shall pay such rents and other charges to Lessor without any obligation or right to inquire as to whether such Breach exists and notwithstanding any notice from or claim from Lessee to the contrary. Lessee shall have no right or claim against said sublessee, or, until the Breach has been cured, against Lessor, for any such rents and other charges so paid by said sublessee to Lessor. (b) In the event of a Breach by Lessee in the performance of its obligations under this Lease, Lessor, at its option and without any obligation to do so, may require any sublessee to attorn to Lessor, in which event Lessor shall undertake the obligations of the sublessor under such sublease from the time of the exercise of said option to the expiration of such sublease; provided, however, Lessor shall not be liable for any prepaid rents or security deposit paid by such sublessee to such sublessor or for any other prior Defaults or Breaches of such sublessor under such sublease. (c) Any matter or thing requiring the consent of the sublessor under a sublease shall also require the consent of Lessor herein. (d) No sublessee shall further assign or sublet all or any part of the Premises without Lessor's prior written consent. (e) Lessor shall deliver a copy of any notice of Default or Breach by Lessee to the sublessee, who shall have the right to cure the Default of Lessee within the grace period, if any, specified in such notice. The sublessee shall have a right of reimbursement and offset from and against Lessee for any such Defaults cured by the sublessee. 13. DEFAULT; BREACH; REMEDIES. 13.1 DEFAULT; BREACH. Lessor and Lessee agree that if an attorney is consulted by Lessor in connection with a Lessee Default or Breach (as hereinafter defined), $350.00 is a reasonable minimum sum per such occurrence for legal services and costs in the preparation and service of a notice of Default, and that Lessor may include the cost of such services and costs in said notice as rent due and payable to cure said Default. A "DEFAULT" is defined as a failure by the Lessee to observe, comply with or perform any of the terms, covenants, conditions or rules applicable to Lessee under this Lease. A "BREACH" is defined as the occurrence of any one or more of the following Defaults, and, where a grace period for cure after notice is specified herein, the failure by Lessee to cure such Default prior to the expiration of the applicable grace period, shall entitle Lessor to pursue the remedies set forth in Paragraphs 13.2 and/or 13.3: -22- (a) The vacating of the Premises without the intention to reoccupy same, or the abandonment of the Premises. (b) Except as expressly otherwise provided in this Lease, the failure by Lessee to make any payment of Base Rent or any other monetary payment required to be made by Lessee hereunder, whether to Lessor or to a third party, as and when due, the failure by Lessee to provide Lessor with reasonable evidence of insurance or surety bond required under this Lease, or the failure of Lessee to fulfill any obligation under this Lease which endangers or threatens life or property, where such failure continues for a period of three (3) days following written notice thereof, by or on behalf of Lessor to Lessee. (c) Except as expressly otherwise provided in this Lease, the failure by Lessee to provide Lessor with reasonable written evidence (in duly executed original form, if applicable) of: (i) compliance with applicable law per Paragraph 6.3, (ii) the inspection, maintenance and service contracts required under Paragraph 7.1(b), (iii) the rescission of an unauthorized assignment or subletting per Paragraph 12.1(b), (iv) a Tenancy Statement per Paragraphs 16 or 37, (v) the subordination or non-subordination of this Lease per Paragraph 30, (vi) the guaranty of the performance of Lessee's obligations under this Lease if required under Paragraphs 1.11 and 37, (vii) the execution of any document requested under Paragraph 42 (easements), or (viii) any other documentation or information which Lessor may reasonably require of Lessee under the terms of this Lease, where any such failure continues for a period of ten (10) days following written notice by or on behalf of Lessor to Lessee. (d) A Default by Lessee as to the terms, covenants, conditions or provisions of this Lease, or of the rules adopted under Paragraph 40 hereof, that are to be observed, complied with or performed by Lessee, other than those described in subparagraphs (a), (b) or (c), above, where such Default continues for a period of thirty (30) days after written notice thereof by or on behalf of Lessor to Lessee; provided, however, that if the nature of Lessee's Default is such that more than thirty (30) days are reasonably required for its cure, then it shall not be deemed to be a Breach of this Lease by Lessee if Lessee commences such cure within said thirty (30) day period and thereafter diligently prosecutes such cure to completion. (e) The occurrence of any of the following events: (i) the making by Lessee of any general arrangement or assignment for the benefit of creditors; (ii) Lessee's becoming a "debtor" as defined in 11 U.S.C. (S) 101 or any successor statute thereto (unless, in the case of a petition filed against Lessee, the same is dismissed within sixty (60) days); (iii) the appointment of a trustee or receiver to take possession of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where possession is not restored to Lessee within thirty (30) days; or (iv) the attachment, execution or other judicial seizure of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where such seizure is not discharged within thirty (30) days; provided, however, in the event that any provision of this subparagraph (e) is contrary to any applicable law, such provision shall be of no force or effect, and not effect the validity of the remaining provisions. (f) The discovery by Lessor that any financial statement given to Lessor by Lessee or any Guarantor of Lessee's obligations hereunder was materially false. -23- (g) If the performance of Lessee's obligations under this Lease is guaranteed: (i) the death of a Guarantor, (ii) the termination of a Guarantor's liability with respect to this Lease other than in accordance with the terms of such guaranty, (iii) a Guarantor's becoming insolvent or the subject of a bankruptcy filing, (iv) a Guarantor's refusal to honor the guaranty, or (v) a Guarantor's breach of its guaranty obligation on an anticipatory breach basis, and Lessee's failure, within sixty (60) days following written notice by or on behalf of Lessor to Lessee of any such event, to provide Lessor with written alternative assurance or security, which, when coupled with the then existing resources of Lessee, equals or exceeds the combined financial resources of Lessee and the guarantors that existed at the time of execution of this Lease. 13.2 REMEDIES. If Lessee fails to perform any affirmative duty or obligation of Lessee under this Lease, within ten (10) days after written notice to Lessee (or in case of an emergency, without notice), Lessor may at its option (but without obligation to do so), perform such duty or obligation on Lessee's behalf, including but not limited to the obtaining of reasonably required bonds, insurance policies, or governmental licenses, permits or approvals. The costs and expenses of any such performance by Lessor shall be due and payable by Lessee to Lessor upon invoice therefor. If any check given to Lessor by Lessee shall not be honored by the bank upon which it is drawn, Lessor, at its option, may require all future payments to be made under this Lease by Lessee to be made only by cashier's check. In the event of a Breach of this Lease by Lessee, as defined in Paragraph 13.1, with or without further notice or demand, and without limiting Lessor in the exercise of any right or remedy which Lessor may have by reason of such Breach, Lessor may: (a) Terminate Lessee's right to possession of the Premises by any lawful means, in which case this Lease and the term hereof shall terminate and Lessee shall immediately surrender possession of the Premises to Lessor. In such event, Lessor shall be entitled to recover from Lessee: (i) the worth at the time of the award of the unpaid rent which had been earned at the time of termination; (ii) the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that the Lessee proves could have been reasonably avoided; (iii) the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that the Lessee proves could be reasonably avoided; and (iv) any other amount necessary to compensate Lessor for all the detriment proximately caused by the Lessee's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom, including but not limited to the cost of recovering possession of the Premises, expenses of reletting, including necessary renovation and alteration of the Premises, reasonable attorneys' fees, and that portion of the leasing commission paid by Lessor applicable to the unexpired term of this Lease. The worth at the time of award of the amount referred to in provision (iii) of the prior sentence shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent (1%). Efforts by Lessor to mitigate damages caused by Lessee's Default or Breach of this Lease shall not waive Lessor's right to recover damages under this Paragraph. If termination of this Lease is obtained through the provisional remedy of unlawful detainer, Lessor shall have the right to recover in such -24- proceeding the unpaid rent and damages as are recoverable therein, or Lessor may reserve therein the right to recover all or any part thereof in a separate suit for such rent and/or damages. If a notice and grace period required under subparagraphs 13.1(b), (c) or (d) was not previously given, a notice to pay rent or quit, or to perform or quit, as the case may be, given to Lessee under any statute authorizing the forfeiture of leases for unlawful detainer shall also constitute the applicable notice for grace period purposes required by subparagraphs 13.1(b), (c) or (d). In such case, the applicable grace period under subparagraphs 13.1(b), (c) or (d) and under the unlawful detainer statute shall run concurrently after the one such statutory notice, and the failure of Lessee to cure the Default within the greater of the two such grace periods shall constitute both an unlawful detainer and a Breach of this Lease entitling Lessor to the remedies provided for in this Lease and/or by said statute. (b) Continue the Lease and Lessee's right to possession in effect (in California under California Civil Code Section 1951.4) after Lessee's Breach and abandonment and recover the rent as it becomes due, provided Lessee has the right to sublet or assign, subject only to reasonable limitations. See Paragraphs 12 and 36 for the limitations on assignment and subletting which limitations Lessee and Lessor agree are reasonable. Acts of maintenance or preservation, efforts to relet the Premises, or the appointment of a receiver to protect the Lessor's interest under the Lease, shall not constitute a termination of the Lessee's right to possession. (c) Pursue any other remedy now or hereafter available to Lessor under the laws or judicial decisions of the state wherein the Premises are located. (d) The expiration or termination of this Lease and/or the termination of Lessee's right to possession shall not relieve Lessee from liability under any indemnity provisions of this Lease as to matters occurring or accruing during the term hereof or by reason of Lessee's occupancy of the Premises. 13.3 INDUCEMENT RECAPTURE IN EVENT OF BREACH. Any agreement by Lessor for free or abated rent or other charges applicable to the Premises, or for the giving or paying by Lessor to or for Lessee of any cash or other bonus, inducement or consideration for Lessee's entering into this Lease, all of which concessions are hereinafter referred to as "INDUCEMENT PROVISIONS," shall be deemed conditioned upon Lessee's full and faithful performance of all of the terms, covenants and conditions of this Lease to be performed or observed by Lessee during the term hereof as the same may be extended. Upon the occurrence of a Breach of this Lease by Lessee, as defined in Paragraph 13.1, any such inducement Provision shall automatically be deemed deleted from this Lease and of no further force or effect, and any rent, other charge, bonus, inducement or consideration theretofore abated, given or paid by Lessor under such an Inducement Provision shall be immediately due and payable by Lessee to Lessor, and recoverable by Lessor as additional rent due under this Lease, notwithstanding any subsequent cure of said Breach by Lessee. The acceptance by Lessor of rent or the cure of the Breach which initiated the operation of this Paragraph shall not be deemed a waiver by Lessor of the provisions of this Paragraph unless specifically so stated in writing by Lessor at the time of such acceptance. -25- 13.4 LATE CHARGES. Lessee hereby acknowledges that late payment by Lessee to Lessor of rent and other sums due hereunder will cause Lessor to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed upon Lessor by the terms of any ground lease, mortgage or trust deed covering the Premises. Accordingly, if any installment of rent or any other sum due from Lessee shall not be received by Lessor or Lessor's designee within five (5) days after such amount shall be due, then, without any requirement for notice to Lessee, Lessee shall pay to Lessor a late charge equal to six percent (6%) of such overdue amount. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Lessor will incur by reason of late payment by Lessee. Acceptance of such late charge by Lessor shall in no event constitute a waiver of Lessee's Default or Breach with respect to such overdue amount, nor prevent Lessor from exercising any of the other rights and remedies granted hereunder. In the event that a late charge is payable hereunder, whether or not collected, for three (3) consecutive installments of Base Rent, then notwithstanding Paragraph 4.1 or any other provision of this Lease to the contrary, Base Rent shall, at Lessor's option, become due and payable quarterly in advance. 13.5 BREACH BY LESSOR. Lessor shall not be deemed in breach of this Lease unless Lessor fails within a reasonable time to perform an obligation required to be performed by Lessor. For purposes of this Paragraph 13.5, a reasonable time shall in no event be less than thirty (30) days after receipt by Lessor, and by the holders of any ground lease, mortgage or deed of trust covering the Premises whose name and address shall have been furnished Lessee in writing for such purpose, of written notice specifying wherein such obligation of Lessor has not been performed; provided, however, that if the nature of Lessor's obligation is such that more than thirty (30) days after such notice are reasonably required for its performance, then Lessor shall not be in breach of this Lease if performance is commenced within such thirty (30) day period and thereafter diligently pursued to completion. 14. CONDEMNATION. If the Premises or any portion thereof are taken under the power of eminent domain or sold under the threat of the exercise of said power (all of which are herein called "CONDEMNATION"), this Lease shall terminate as to the part so taken as of the date the condemning authority takes title or possession, whichever first occurs. If more than ten percent (10%) of the floor area of the Premises, or more than twenty-five percent (25%) of the land area not occupied by any building, is taken by condemnation, Lessee may, at Lessee's option, to be exercised in writing within ten (10) days after Lessor shall have given Lessee written notice of such taking (or in the absence of such notice, within ten (10) days after the condemning authority shall have taken possession) terminate this Lease as of the date the condemning authority takes such possession. If Lessee does not terminate this Lease in accordance with the foregoing, this Lease shall remain in full force and effect as to the portion of the Premises remaining, except that the Base Rent shall be reduced in the same proportion as the rentable floor area of the Premises taken bears to the total rentable floor area of the building located on the Premises. No reduction of Base Rent shall occur if the only portion of the Premises taken is land on which there is no building. Any award for the taking of all or any part of the Premises under the power of eminent domain or any payment made under threat of the exercise of such power shall be the property of Lessor, whether such award shall be made as compensation for diminution in value of the -26- leasehold or for the taking of the fee, or as severance damages; provided, however, that Lessee shall be entitled to any compensation separately awarded to Lessee for Lessee's relocation expenses and/or loss of Lessee's Trade Fixtures. In the event that this Lease is not terminated by reason of such condemnation, Lessor shall to the extent of its net severance damages received, over and above the legal and other expenses incurred by Lessor in the condemnation matter, repair any damage to the Premises caused by such condemnation, except to the extent that Lessee has been reimbursed therefor by the condemning authority. Lessee shall be responsible for the payment of any amount in excess of such net severance damages required to complete such repair. 15. BROKER'S FEE. 15.1 The Brokers named in Paragraph 1.10 are procuring causes of this Lease. 15.2 Upon execution of this Lease by both Parties, Lessor shall pay to said Brokers jointly, or in such separate shares as they may mutually designate in writing, a fee as set forth in a separate written agreement between Lessor and said Brokers for brokerage services rendered by said Brokers to Lessor in this transaction. 15.3 Unless Lessor and Brokers have otherwise agreed in writing, Lessor further agrees that: Lessor shall pay said Brokers a fee in accordance with the schedule of said Brokers in effect at the time of the execution of this Lease. 15.4 DELETED 15.5 Lessee and Lessor each represent and warrant to the other that it has had no dealings with any person, firm, broker or finder (other than the Brokers, if any named in Paragraph 1.10) in connection with the negotiation of this Lease and/or the consummation of the transaction contemplated hereby, and that no broker or other person, firm or entity other than said named Brokers is entitled to any commission or finder's fee in connection with said transaction. Lessee and Lessor do each hereby agree to indemnify, protect, defend and hold the other harmless from and against liability for compensation or charges which may be claimed by any such unnamed broker, finder or other similar party by reason of any dealings or actions of the indemnifying Party, including any costs, expenses, attorneys' fees reasonably incurred with respect thereto. 15.6 Lessor and Lessee hereby consent to and approve all agency relationships, including any dual agencies, indicated in Paragraph 1.10. 16. TENANCY STATEMENT. 16.1 Each Party (as "RESPONDING PARTY") shall within ten (10) days after written notice from the other Party (the "REQUESTING PARTY") execute, acknowledge and deliver to the Requesting Party a statement in writing in form similar to the then most current "TENANCY STATEMENT" form published by the American Industrial Real Estate Association, plus such -27- additional information, confirmation and/or statements as may be reasonably requested by the Requesting Party. 16.2 If Lessor desires to finance, refinance, or sell the Premises, any part thereof, or the building of which the Premises are a part, Lessee and all Guarantors of Lessee's performance hereunder shall deliver to any potential lender or purchaser designated by Lessor such financial statements of Lessee and such Guarantors as may be reasonably required by such lender or purchaser, including but not limited to Lessee's financial statements for the past three (3) years. All such financial statements shall be received by Lessor and such lender or purchaser in confidence and shall be used only for the purposes herein set forth. 17. LESSOR'S LIABILITY. The term "LESSOR" as used herein shall mean the owner or owners at the time in question of the fee title to the Premises, or, if this is a sublease, of the Lessee's interest in the prior lease. In the event of a transfer of Lessor's title or interest in the Premises or in this Lease, Lessor shall deliver to the transferee or assignee (in cash or by credit) any unused Security Deposit held by Lessor at the time of such transfer or assignment. Except as provided in Paragraph 15, upon such transfer or assignment and delivery of the Security Deposit, as aforesaid, the prior lessor shall be relieved of all liability with respect to the obligations and/or covenants under this Lease thereafter to be performed by the Lessor. Subject to the foregoing, the obligations and/or covenants in this Lease to be performed by the Lessor shall be binding only upon the Lessor as hereinabove defined. 18. SEVERABILITY. The invalidity of any provision of this Lease, as determined by a court of competent jurisdiction, shall in no way affect the validity of any other provision hereof. 19. INTEREST ON PAST-DUE OBLIGATIONS. Any monetary payment due Lessor hereunder, other than the late charges, not received by Lessor within thirty (30) days following the date on which it was due, shall bear interest from the thirty-first (31st) day after it was due at the rate of twelve percent (12%) per annum, but not exceeding the maximum rate allowed by law, in addition to the late charge provided for in Paragraph 13.4. 20. TIME OF ESSENCE. Time is of the essence with respect to the performance of all obligations to be performed or observed by the Parties under this Lease. 21. RENT DEFINED. All monetary obligations of Lessee to Lessor under the terms of this Lease are deemed to be rent. 22. NO PRIOR OR OTHER AGREEMENTS; BROKER DISCLAIMER. This Lease contains all agreements between the Parties with respect to any matter mentioned herein, and no other prior or contemporaneous agreement or understanding shall be effective. Lessor and Lessee each represents and warrants to the Brokers that it has made, and is relying solely upon, its own investigation as to the nature, quality, character and financial responsibility of the other Party to this Lease and as to the nature, quality and character of the Premises. Brokers have no responsibility with respect thereto or with respect to any default or breach hereof by either Party. -28- 23. NOTICES. 23.1 All notices required or permitted by this Lease shall be in writing and may be delivered in person (by hand or by messenger or courier service) or may be sent by regular, certified or registered mail or U.S. Postal Service Express Mail, with postage prepaid, or by facsimile transmission, and shall be deemed sufficiently given if served in a manner specified in this Paragraph 23. The addresses noted adjacent to a Party's signature on this Lease shall be that Party's address for delivery or mailing of notice purposes. Either Party may by written notice to the other specify a different address for notice purposes, except that upon Lessee's taking possession of the Premises, the Premises shall constitute Lessee's address for the purpose of mailing or delivering notices to Lessee. A copy of all notices required or permitted to be given to Lessor hereunder shall be concurrently transmitted to such party or parties at such addresses as Lessor may from time to time hereafter designate by written notice to Lessee. 23.2 Any notice sent by registered or certified mail, return receipt requested, shall be deemed given on the date of delivery shown on the receipt card, or if no delivery date is shown, the postmark thereon. If sent by regular mail the notice shall be deemed given forty-eight (48) hours after the same is addressed as required herein and mailed with postage prepaid. Notices delivered by United States Express Mail or overnight courier that guarantees next day delivery shall be deemed given twenty-four (24) hours after delivery of the same to the United States Postal Service or courier. If any notice is transmitted by facsimile transmission or similar means, the same shall be deemed served or delivered upon telephone confirmation of receipt of the transmission thereof, provided a copy is also delivered via delivery or mail. If notice is received on a Sunday or legal holiday, it shall be deemed received on the next business day. 24. WAIVERS. No waiver by Lessor of the Default or Breach of any term, covenant or condition hereof by Lessee, shall be deemed a waiver of any other term, covenant or condition hereof, or of any subsequent Default or Breach by Lessee of the same or of any other term, covenant or condition hereof. Lessor's consent to, or approval of, any act shall not be deemed to render unnecessary the obtaining of Lessor's consent to, or approval of, any subsequent or similar act by Lessee, or be construed as the basis of an estoppel to enforce the provision or provisions of this Lease requiring such consent. Regardless of Lessor's knowledge of a Default or Breach at the time of accepting rent, the acceptance of rent by Lessor shall not be a waiver of any preceding Default or Breach by Lessee of any provision hereof, other than the failure of Lessee to pay the particular rent so accepted. Any payment given Lessor by Lessee may be accepted by Lessor on account of moneys or damages due Lessor, notwithstanding any qualifying statements or conditions made by Lessee in connection therewith, which such statements and/or conditions shall be of no force or effect whatsoever unless specifically agreed to in writing by Lessor at or before the time of deposit of such payment. 25. RECORDING. Either Lessor or Lessee shall, upon request of the other, execute, acknowledge and deliver to the other a short form memorandum of this Lease for recording purposes. The Party requesting recordation shall be responsible for payment of any fees or taxes applicable thereto. -29- 26. NO RIGHT TO HOLDOVER. Lessee has no right to retain possession of the Premises or any part thereof beyond the expiration or earlier termination of this Lease. 27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed exclusive but shall, wherever possible, be cumulative with all other remedies at law or in equity. 28. COVENANTS AND CONDITIONS. All provisions of this Lease to be observed or performed by Lessee are both covenants and conditions. 29. BINDING EFFECT; CHOICE OF LAW. This Lease shall be binding upon the parties, their personal representatives, successors and assigns and be governed by the laws of the State in which the Premises are located. Any litigation between the Parties hereto concerning this Lease shall be initiated in the county in which the Premises are located. 30. SUBORDINATION; ATTORNMENT; NON-DISTURBANCE. 30.1 SUBORDINATION. This Lease and any Option granted hereby shall be subject and subordinate to any ground lease, mortgage, deed of trust, or other hypothecation or security device (collectively, "SECURITY DEVICE"), now or hereafter placed by Lessor upon the real property of which the Premises are a part, to any and all advances made on the security thereof, and to all renewals, modifications, consolidations, replacements and extensions thereof. Lessee agrees that the Lenders holding any such Security Device shall have no duty, liability or obligation to perform any of the obligations of Lessor under this Lease, but that in the event of Lessor's default with respect to any such obligation, Lessee will give any Lender whose name and address have been furnished Lessee in writing for such purpose notice of Lessor's default and allow such Lender thirty (30) days following receipt of such notice for the cure of said default before invoking any remedies Lessee may have by reason thereof. If any Lender shall elect to have this Lease and/or any Option granted hereby superior to the lien of its Security Device and shall give written notice thereof to Lessee, this Lease and such Options shall be deemed prior to such Security Device, notwithstanding the relative dates of the documentation or recordation thereof. 30.2 ATTORNMENT. Subject to the non-disturbance provisions of Paragraph 30.3, Lessee agrees to attorn to a Lender or any other party who acquires ownership of the Premises by reason of a foreclosure of a Security Device, and that in the event of such foreclosure, such new owner shall not: (i) be liable for any act or omission of any prior lessor or with respect to events occurring prior to acquisition of ownership, (ii) be subject to any offsets or defenses which Lessee might have against any prior lessor, or (iii) be bound by prepayment of more than one (1) month's rent. 30.3 NON-DISTURBANCE. With respect to Security Devices entered into by Lessor after the execution of this Lease, Lessee's subordination of this Lease shall be subject to receiving assurance (a "NON-DISTURBANCE AGREEMENT") from the Lender that Lessee's possession and this Lease, including any options to extend the term hereof, will not be disturbed so long as Lessee is not in Breach hereof and attorns to the record owner of the Premises. -30- 30.4 SELF-EXECUTING. The agreements contained in this Paragraph 30 shall be effective without the execution of any further documents; provided, however, that, upon written request from Lessor or a Lender in connection with a sale, financing or refinancing of the Premises, Lessee and Lessor shall execute such further writings as may be reasonably required to separately document any such subordination or non-subordination, attornment and/or non-disturbance agreement as is provided for herein. 31. ATTORNEY'S FEES. If any Party or Broker brings an action or proceeding to enforce the terms hereof or declare rights hereunder, the Prevailing Party (as hereafter defined) or Broker in any such proceeding, action, or appeal thereon, shall be entitled to reasonable attorney's fees. Such fees may be awarded in the same suit or recovered in a separate suit, whether or not such action or proceeding is pursued to decision or judgment. The term, "PREVAILING PARTY" shall include, without limitation, a Party or Broker who substantially obtains or defeats the relief sought, as the case may be, whether by compromise, settlement, judgment, or the abandonment by the other Party or Broker of its claim or defense. The attorney's fee award shall not be computed in accordance with any court fee schedule, but shall be such as to fully reimburse all attorney's fees reasonably incurred. Lessor shall be entitled to attorney's fees, costs and expenses incurred in the preparation and service of notices of Default and consultations in connection therewith, whether or not a legal action is subsequently commenced in connection with such Default or resulting Breach. 32. LESSOR'S ACCESS; SHOWING PREMISES; REPAIRS. Lessor and Lessor's agents shall have the right to enter the Premises at any time, in the case of an emergency, and otherwise at reasonable times for the purpose of showing the same to prospective purchasers, lenders, or lessees, and making such alterations, repairs, improvements or additions to the Premises or to the building of which they are a part, as Lessor may reasonably deem necessary. Lessor may at any time place on or about the Premises or building any ordinary "For Sale" signs and Lessor may at any time during the last one hundred twenty (120) days of the term hereof place on or about the Premises any ordinary "For Lease" signs. All such activities of Lessor shall be without abatement of rent or liability to Lessee. 33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, either voluntarily or involuntarily, any auction upon the Premises without first having obtained Lessor's prior written consent. Notwithstanding anything to the contrary in this Lease, Lessor shall not be obligated to exercise any standard of reasonableness in determining whether to grant such consent. 34. SIGNS. Lessee shall not place any sign upon the Premises, except that Lessee may, with Lessor's prior written consent, install (but not on the roof) such signs as are reasonably required to advertise Lessee's own business. The installation of any sign on the Premises by or for Lessee shall be subject to the provisions of Paragraph 7 (Maintenance, Repairs, Utility Installations, Trade Fixtures and Alterations). Unless otherwise expressly agreed herein, Lessor reserves all rights to the use of the roof and the right to install, and all revenues from the installation of, such advertising signs on the Premises, including the roof, as do not unreasonably interfere with the conduct of Lessee's business. -31- 35. TERMINATION; MERGER. Unless specifically stated otherwise in writing by Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual termination or cancellation hereof, or a termination hereof by Lessor for Breach by Lessee, shall automatically terminate any sublease or lesser estate in the Premises; provided, however, Lessor shall, in the event of any such surrender, termination or cancellation, have the option to continue any one or all of any existing subtenancies. Lessor's failure within ten (10) days following any such event to make a written election to the contrary by written notice to the holder of any such lesser interest, shall constitute Lessor's election to have such event constitute the termination of such interest. 36. CONSENTS. (a) Except for Paragraph 33 hereof (Auctions) or as otherwise provided herein, wherever in this Lease the consent of a Party is required to an act by or for the other Party, such consent shall not be unreasonably withheld or delayed. Lessor's actual reasonable costs and expenses (including but not limited to architects', attorneys', engineers' or other consultants' fees) incurred in the consideration of, or response to, a request by Lessee for any Lessor consent pertaining to this Lease or the Premises, including but not limited to consents to an assignment, a subletting or the presence or use of a Hazardous Substance, practice or storage tank, shall be paid by Lessee to Lessor upon receipt of an invoice and supporting documentation therefor. Subject to Paragraph 12.2(e) (applicable to Assignment or Subletting), Lessor may, as a condition to considering any such request by Lessee, require that Lessee deposit with Lessor an amount of money (in addition to the Security Deposit held under Paragraph 5) reasonably calculated by Lessor to represent the cost Lessor will incur in considering and responding to Lessee's request. Except as otherwise provided, any unused portion of said deposit shall be refunded to Lessee without interest. Lessor's consent to any act, assignment of this Lease or subletting of the Premises by Lessee shall not constitute an acknowledgment that no Default or Breach by Lessee of this Lease exists, nor shall such consent be deemed a waiver of any then existing Default or Breach, except as may be otherwise specifically stated in writing by Lessor at the time of such consent. (b) All conditions to Lessor's consent authorized by this Lease are acknowledged by Lessee as being reasonable. The failure to specify herein any particular condition to Lessor's consent shall not preclude the imposition by Lessor at the time of consent of such further or other conditions as are then reasonable with reference to the particular matter for which consent is being given. 37. GUARANTOR. 37.1 If there are to be any Guarantors of this Lease per Paragraph 1.11, the form of the guaranty to be executed by each such Guarantor shall be in the form most recently published by the American Industrial Real Estate Association, and each said Guarantor shall have the same obligations as Lessee under this Lease, including but not limited to the obligation to provide the Tenancy Statement and information called for by Paragraph 16. 37.2 It shall constitute a Default of the Lessee under this Lease if any such Guarantor fails or refuses, upon reasonable request by Lessor to give: (a) evidence of the due -32- execution of the guaranty called for by this Lease, including the authority of the Guarantor (and of the party signing on Guarantor's behalf) to obligate such Guarantor on said guaranty, and including in the case of a corporate Guarantor, a certified copy of a resolution of its board of directors authorizing the making of such guaranty, together with a certificate of incumbency showing the signature of the persons authorized to sign on its behalf, (b) current financial statements of Guarantor as may from time to time be requested by Lessor, (c) a Tenancy Statement, or (d) written confirmation that the guaranty is still in effect. 38. QUIET POSSESSION. Upon payment by Lessee of the rent for the Premises and the observance and performance of all of the covenants, conditions and provisions on Lessee's part to be observed and performed under this Lease, Lessee shall have quiet possession of the Premises for the entire term hereof subject to all of the provisions of this Lease. 39. OPTIONS. 39.1 DEFINITION. As used in this Paragraph 39 the word "OPTION" has the following meaning: (a) the right to extend the term of this Lease or to renew this Lease or to extend or renew any lease that Lessee has on other property of Lessor; (b) the right of first refusal to lease the Premises or the right of first offer to lease the Premises or the right of first refusal to lease other property of Lessor or the right of first offer to lease other property of Lessor; (c) the right to purchase the Premises, or the right of first refusal to purchase the Premises, or the right of first offer to purchase the Premises, or the right to purchase other property of Lessor, or the right of first refusal to purchase other property of Lessor, or the right of first offer to purchase other property of Lessor. 39.2 OPTIONS PERSONAL TO ORIGINAL LESSEE. Each Option granted to Lessee in this Lease is personal to the original Lessee named in Paragraph 1.1 hereof, and cannot be voluntarily or involuntarily assigned or exercised by any person or entity other than said original Lessee while the original Lessee is in full and actual possession of the Premises and without the intention of thereafter assigning or subletting. The Options, if any, herein granted to Lessee are not assignable, either as a part of an assignment of this Lease or separately or apart therefrom, and no Option may be separated from this Lease in any manner, by reservation or otherwise. 39.3 MULTIPLE OPTIONS. In the event that Lessee has any Multiple Options to extend or renew this Lease, a later Option cannot be exercised unless the prior Options to extend or renew this Lease have been validly exercised. 39.4 EFFECT OF DEFAULT ON OPTIONS. (a) Lessee shall have no right to exercise an Option, notwithstanding any provision in the grant of Option to the contrary: (i) during the period commencing with the giving of any notice of Default under Paragraph 13.1 and continuing until the noticed Default is cured, or (ii) during the period of time any monetary obligation due Lessor from Lessee is unpaid (without regard to whether notice thereof is given Lessee), or (iii) during the time Lessee is in Breach of this Lease, or (iv) in the event that Lessor has given to Lessee three (3) or more notices -33- of Default under Paragraph 13.1, whether or not the Defaults are cured, during the twelve (12) month period immediately preceding the exercise of the Option. (b) The period of time within which an Option may be exercised shall not be extended or enlarged by reason of Lessee's inability to exercise an Option because of the provisions of Paragraph 39.4(a). (c) All rights of Lessee under the provisions of an Option shall terminate and be of no further force or effect, notwithstanding Lessee's due and timely exercise of the Option, if, after such exercise and during the term of this Lease, (i) Lessee fails to pay to Lessor a monetary obligation of Lessee for a period of thirty (30) days after such obligation becomes due (without any necessity of Lessor to give notice thereof to Lessee), or (ii) Lessor gives to Lessee three (3) or more notices of Default under Paragraph 13.1 during any twelve (12) month period, whether or not the Defaults are cured, or (iii) if Lessee commits a Breach of this Lease. 40. MULTIPLE BUILDINGS. If the Premises are part of a group of buildings controlled by Lessor, Lessee agrees that it will abide by, keep and observe all reasonable rules and regulations which Lessor may make from time to time for the management, safety, care, and cleanliness of the grounds, the parking and unloading of vehicles and the preservation of good order, as well as for the convenience of other occupants or tenants of such other buildings and their invitees, and that Lessee will pay its fair share of common expenses incurred in connection therewith. 41. SECURITY MEASURES. Lessee hereby acknowledges that the rental payable to Lessor hereunder does not include the cost of guard service or other security measures, and that Lessor shall have no obligation whatsoever to provide same. Lessee assumes all responsibility for the protection of the Premises, Lessee, its agents and invitees and their property from the acts of third parties. 42. RESERVATIONS. Lessor reserves to itself the right, from time to time, to grant, without the consent or joinder of Lessee, such easements, rights and dedications that Lessor deems necessary, and to cause the recordation of parcel maps and restrictions, so long as such easements, rights, dedications, maps and restrictions do not unreasonably interfere with the use of the Premises by Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to effectuate any such easement rights, dedication, map or restrictions. 43. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to any amount or sum of money to be paid by one Party to the other under the provisions hereof, the Party against whom the obligation to pay the money is asserted shall have the right to make payment "under protest" and such payment shall not be regarded as a voluntary payment and there shall survive the right on the part of said Party to institute suit for recovery of such sum. If it shall be adjudged that there was no legal obligation on the part of said Party to pay such sum or any part thereof, said Party shall be entitled to recover such sum or so much thereof as it was not legally required to pay under the provisions of this Lease. -34- 44. AUTHORITY. If either Party hereto is a corporation, trust, or general or limited partnership, each individual executing this Lease on behalf of such entity represents and warrants that he or she is duly authorized to execute and deliver this Lease on its behalf. If Lessee is a corporation, trust or partnership, Lessee shall, within thirty (30) days after request by Lessor, deliver to Lessor evidence satisfactory to Lessor of such authority. 45. CONFLICT. Any conflict between the printed provisions of this Lease and the typewritten or handwritten provisions shall be controlled by the typewritten or handwritten provisions. 46. OFFER. Preparation of this Lease by Lessor or Lessor's agent and submission of same to Lessee shall not be deemed an offer to lease to Lessee. This Lease is not intended to be binding until executed by all Parties hereto. 47. AMENDMENTS. This Lease may be modified only in writing, signed by the parties in interest at the time of the modification. The parties shall amend this Lease from time to time to reflect any adjustments that are made to the Base Rent or other rent payable under this Lease. As long as they do not materially change Lessee's obligations hereunder, Lessee agrees to make such reasonable non-monetary modifications to this Lease as may be reasonably required by an institutional, insurance company, or pension plan Lender in connection with the obtaining of normal financing or refinancing of the property of which the Premises are a part. 48. MULTIPLE PARTIES. Except as otherwise expressly provided herein, if more than one person or entity is named herein as either Lessor or Lessee, the obligations of such Multiple Parties shall be the joint and several responsibility of all persons or entities named herein as such Lessor or Lessee. LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE PREMISES. IF THIS LEASE HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR SUBMISSION TO YOUR ATTORNEY FOR HIS APPROVAL. FURTHER, EXPERTS SHOULD BE CONSULTED TO EVALUATE THE CONDITION OF THE PROPERTY AS TO THE POSSIBLE PRESENCE OF ASBESTOS, STORAGE TANKS OR HAZARDOUS SUBSTANCES. NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY THE REAL ESTATE BROKER(S) OR THEIR AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANS ACTION TO WHICH IT RELATES; THE PARTIES -35- SHALL RELY SOLELY UPON THE ADVICE OF THEIR OWN COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE. IF THE SUBJECT PROPERTY IS LOCATED IN A STATE OTHER THAN CALIFORNIA, AN ATTORNEY FROM THE STATE WHERE THE PROPERTY IS LOCATED SHOULD BE CONSULTED. The parties hereto have executed this Lease at the place on the dates specified above to their respective signatures. Executed at NEWPORT BEACH, CA Executed at IRVINE, CA ----------------- ---------- on 10/24/95 on 10/23/95 -------- -------- by LESSOR: by LESSEE: ROBERT P. PEEBLES TRUST, DATED SUNWOOD RESEARCH, INC., a Delaware ---------------------------------- 4/11/79 corporation - ------- ----------- By: /s/ Robert P. Peebles By: /s/ Richard P. Stack -------------------------------- ------------------------------- Name Printed: Mr. Robert P. Peebles Name Printed: Mr. Richard P. Stack --------------------- -------------------- Title: Trustee Title: President --------------------- --------- By:________________________________ By:_______________________________ Name Printed:______________________ Name Printed:_____________________ Title:_____________________________ Title:____________________________ Address: Post Office Box 369 Address: 2882-C Walnut Avenue ------------------- -------------------- Tustin, CA 92680 Tustin, CA 92680 ------------------ ---------------- Tel. No. (714) 505-1754 Tel. No. (714) 251-0927 -------------- -------------- Fax No. (714) 573-9843 Fax No. ( ) ________ -------------- NOTICE: These forms are often modified to meet changing requirements of law and industry needs. Always write or call to make sure you are utilizing the most current form: American Industrial Real Estate Association, 345 South Figueroa Street, Suite M-1, Los Angeles, California 90071. (213) 687-8777, Fax. No. (213) 687-8616. -36- EX-10.17 20 LOAN AND SECURITY AGREEMENT Exhibit 10.17 LOAN AND SECURITY AGREEMENT --------------------------- THIS LOAN AND SECURITY AGREEMENT ("Loan Agreement") is entered into at Los Angeles, California, between MAIN CREDIT CORP. ("Lender"), a California ----------------- corporation, with offices at 1055 Wilshire Blvd., Suite 1501, Los Angeles, California 90017, and SUNWOOD RESEARCH, INC., A DELAWARE CORPORATION ---------------------------------------------- [Borrower's absolutely true and correct name --- not d/b/a] ("Borrower"), a _____________[Proprietorship], a XX [Corporation], DELAWARE [State of -------- -------- Incorporation], whose sole place of business (if Borrower has only one), or chief executive office (if Borrower has more than one place of business) or residence (if Borrower is an individual and does not have a separate place of business) is located at: 2882C WALNUT AVENUE [Street Address], TUSTIN [City], CALIFORNIA [State], 92680 - ------------------- ------ ---------- ----- [Zip Code], (714) 734-1390 [Area Code & Tel. No.] (such location referred to -------------- herein as "Borrower's Address"). 1. Loans. ----- 1.1 Loans; Collateral Agreements. Borrower has requested and may ----------------------------- hereafter request that Lender lend money, advance funds or otherwise extend credit to or for the benefit of Borrower ("Loan(s)") in accordance with the terms and provisions of this Loan Agreement and other written agreements ("Collateral Agreement(s)") including, but not limited to, any one or more of the following described security agreements now or hereafter entered into between Borrower and Lender: (a) Accounts Collateral Security Agreement; (b) Inventory Collateral Security Agreement; (c) Equipment Collateral Security Agreement; and (d) Factoring Agreement. The amount and terms of payment of any Loans by Lender to Borrower shall be determined in accordance with the terms and provisions of this Loan Agreement and of any executed Collateral Agreements. 1.2 Interest. Unless specifically provided to the contrary in any -------- Collateral Agreement, all Loans shall bear interest at a rate equal to 3% per -- MONTH, calculated on the basis of a 360-day year. Said interest rate shall be - ----- adjusted monthly, as of the first day of each month, based upon 120% of the increase or decrease in the Prime Rate in effect of the last day of the preceding month, but in no event shall rate of interest in any month be less than 3% per MONTH. As used herein, "Prime Rate" shall mean the announced (but -- ----- not necessarily the actual) prime rate of interest of Bank of America National Trust and Savings Association in California and as of 11-29-95 is 8.75%. -------- ----- 1.3 Notes; Authorization. To evidence all or any portion of the --------------------- Loans, Borrower shall, if and when requested by Lender, execute and deliver to Lender one or more promissory notes that are in form and substance acceptable to Lender. The execution and delivery of any such note shall not constitute partial or total payment or satisfaction of the Loans, and no failure to execute any such note shall relieve Borrower of its obligation to pay all Loans and all interest thereon when due. Lender is authorized to make Loans based upon telephone or other instructions received from anyone purporting to be an officer, partner, employee or representative of Borrower, and all Loans so made shall be valid and included in the term "Obligations" (as hereinafter defined). -1- 2. Definitions of Obligations and Collateral; Grant of Security Interest. --------------------------------------------------------------------- The term "Obligations" as used within this Loan Agreement, and any and all Collateral Agreements, shall mean and include each and all of the following: the obligation to pay all Loans and all interest thereon when due and to pay and perform when due all other debts and all obligations, liabilities, covenants, agreements, guarantees, warranties and representations of Borrower to Lender, of any and every kind and nature, whether heretofore, now or hereafter owing, arising, due or payable from Borrower to Lender; howsoever created, incurred, acquired, arising or evidenced; whether primary, secondary, direct, absolute, contingent, fixed, secured, unsecured or otherwise; whether as principal or guarantor; liquidated or unliquidated; certain or uncertain; determined or undetermined; due or to become due; as a result of present or future advances, or otherwise; joint or individual; pursuant to, or caused by Borrower's breach of, this Loan Agreement, a Collateral Agreement or any other present or future agreement or instrument, or created by operation of law or otherwise; evidenced by a written instrument or oral; created directly between Lender and Borrower or owed by Borrower to a third party and acquired by Lender from such third party; monetary or none-monetary. As security and collateral for the Obligations, Borrower hereby grants Lender a continuing security interest in, and assigns to Lender, all of Borrower's interest in the types of property described below, whether now owned or hereafter acquired and wherever located (collectively called "Collateral"): (a) Accounts. [Delete if inapplicable.] All accounts, contract -------- rights, chattel paper, and instruments, and all other obligations now or hereafter owing to Borrower (hereinafter sometimes collectively called "Accounts") including, but not limited to, those described in any Accounts Collateral Security Agreement executed by Borrower, and all right, title and interest of Borrower in, and all of Borrower's rights and remedies with respect to, all goods, the sale or other disposition of which gives rise to any Account, including without limitation all returned, rejected, rerouted, reclaimed and repossessed goods and all rights of stoppage in transit, replevin, reclamation, and all rights as an unpaid vendor; and (b) Inventory. [Delete if inapplicable.] All inventory, goods, --------- merchandise, materials, raw materials, goods in process, finished goods, advertising, packaging and shipping materials, supplies, and all other tangible personal property which is held for sale or lease or furnished under contracts of service or consumed in Borrower's business, including without limitation any and all of the foregoing which are returned, repossessed, reclaimed or stopped in transit, and including, but not limited to, those described in any Inventory Collateral Security Agreement executed by Borrower, and all warehouse receipts and other documents now or hereafter issued with respect to any of the foregoing; and (c) Equipment. [Delete if inapplicable.] All equipment, goods --------- (other than inventory), machinery, fixtures, trade fixtures, vehicles, furnishings, furniture, supplies, materials, tools, machine tools, office equipment, appliances, apparatus, parts, dies, jigs, and chattels, including, but not limited to, those described in any Equipment Collateral Security Agreement executed by Borrower; -2- and all deposit accounts and general intangibles (including, but not limited to, tax refunds, goodwill, name, drawings, trademarks, blueprints, trade names, trade secrets, compilations, customer lists, patents, patent applications, copyrights, security deposits, loan commitment fees, royalties, licenses, processes, and all other rights, privileges and franchises); and all personal property of Borrower which comes into Lender's possession, custody or control; and all tangible and intangible personal property in which Lender now has or hereafter acquires a security interest to secure any or all of the Obligations; and all proceeds, insurance proceeds and products of, and additions and accessions to any and all of the foregoing; and all guarantees of and security for any and all of the foregoing; and all books and records relating to any and all of the foregoing and the equipment containing said books and records. 3. Representations, Warranties and Covenants of Borrower. ------------------------------------------------------ To induce Lender to enter into this Loan Agreement and now and hereafter to enter into any Collateral Agreement, Borrower represents and warrants that each of the following representations and warranties now is and hereafter will continue to be true and correct in all respects and Borrower has and will timely perform each of the following covenants: 3.1. Corporate Existence and Power. Borrower, if a corporation, is ----------------------------- and will continue to be, duly authorized, validly existing and in good standing under the laws of the jurisdiction of its incorporation. Borrower is and will continue to be qualified and licensed in all jurisdictions in which the nature of the business transacted by it, or the ownership or leasing of its property, make such qualification or licensing necessary, and Borrower has and will continue to have all requisite power and authority to carry on its business as it is now, or may hereafter be, conducted. 3.2. Authority. Borrower is, and will continue to be, duly --------- empowered and authorized to enter into, and grant security interests in its property, and perform its obligations under, this Loan Agreement, any Collateral Agreement and all other instruments and transactions contemplated hereby or relating hereto. The execution, delivery and performance by Borrower of this Loan Agreement, any Collateral Agreement and all other instruments and transaction contemplated hereby or relating hereto, have been duly and validly authorized, are enforceable against the Borrower in accordance with their terms, and do not and will not violate any law or any provision of, nor be grounds for acceleration under, any agreement, indenture, note or instrument which is binding upon Borrower, or any of its property, including without limitation, Borrower's Articles of Incorporation, By-Laws and any Shareholder Agreements (if Borrower is a corporation). 3.3. Name; Trade Names and Styles. Borrower has set forth above ----------------------------- its absolutely true and correct name. Listed below is each prior true name of Borrower and each fictitious name, trade name and trade style by which Borrower has been, or is now, known, or has previously transacted, or now, transacts business: NONE ---- Borrower shall provide Lender with fifteen (15) days' advance written notice before doing business under any other name, fictitious name, trade name or trade style. Borrower has complied, and will -3- hereafter comply, with all laws relating to the conduct of business under, the ownership of property in, and the renewal or continuation of the right to use, a corporate, fictitious or trade name or trade style. 3.4. Place of Business; Location of Collateral. Borrower's sole ------------------------------------------ place of business; or, if Borrower has more than one place of business, Borrower's chief executive office; or, if Borrower is an individual and does not have a separate place of business, Borrower's residence, is, and will continue to be, located at Borrower's Address and all of Borrower's books and records including, but not limited to, the books and records relating to the Borrower's Accounts are and will be kept and maintained at Borrower's Address unless and until Lender shall otherwise consent in writing. In addition to Borrower's Address, Borrower has places of business and Collateral is located only at the following locations: NONE ---- Borrower will provide Lender with at least ten (10) days' advance written notice by registered or certified mail in the event Borrower moves the Collateral, or obtains, opens or maintains any new or additional place(s) for the conduct of Borrower's business or the location of any Collateral, or closes any existing place of business. 3.5. Title to Collateral; Liens. Borrower is now, and will at all --------------------------- times hereafter be, the true, lawful and sole owner of all the Collateral. With the exception of the security interest granted Lender, the Collateral now is and will hereafter remain, free and clear of any and all liens, charges, security interest, encumbrances and adverse claims except as follows: NONE ---- Without limiting any of Lender's other rights and remedies, in the event Borrower grants any third party a lien or encumbrance on or security interest in any of the Collateral, Lender, in its sole discretion, shall, at any time thereafter, have the right to treat the same as a notice of termination by Borrower to Lender under Paragraph 9(d) hereof, as of any date subsequent to such grant selected by Lender, in its sole discretion, and to charge Borrower the termination fee therein provided. Except as expressly provided to the contrary in this Paragraph, Lender now has, and will hereafter continue to have, a fully perfected and enforceable choate first priority security interest in all of the Collateral, and Borrower will at all times defend Lender and the Collateral against all claims and demands of others. None of the Collateral now is, or will hereafter be, affixed to any real property is such a manner, or with such intent, as to constitute a fixture thereto or to otherwise become a part thereof. Borrower is not and will not hereafter become a lessee under any real property lease pursuant to which the lessor has obtained or may obtain any rights in or to any of the Collateral and no such lease now prohibits, restrains, impairs or will hereafter prohibit, restrain, or impair Borrower's right to remove any Collateral from the leased premises, whether such removal is to be accomplished prior or subsequent to any default by Borrower under any such real property lease or any termination, cancellation or forfeiture thereof. Whenever any Collateral is located upon premises in which any third party has an interest (whether as owner, mortgagee, beneficiary under a deed of trust, lienor or otherwise), Borrower shall, whenever requested by Lender, cause such third party to execute and deliver to Lender, in form and substance acceptable to Lender, whatever waivers and subordinations that Lender in its sole discretion requires, so as to ensure that Lender's rights in and to the Collateral are, and will continue to be, prior and superior to the rights of any such third party. -4- Borrower will keep in full force and effect, and will comply with all the terms of, any lease of real property where any of the Collateral now is or hereafter may be located. 3.6. Maintenance of Collateral. Borrower has maintained and will ------------------------- hereafter maintain the Collateral and all of Borrower's assets useful or necessary in the conduct of Borrower's business in good working order and condition, at Borrower's sole cost and expense. Borrower will not use the Collateral or any of Borrower's other properties, or any part thereof, in any unlawful business or for any unlawful purpose and will not secrete or abandon the Collateral, such properties, or any part thereof. Borrower will immediately advise Lender in writing of any event causing loss or depreciation and of any material adverse change in the condition of the Collateral or of any of Borrower's other properties. 3.7. Governmental Contracts. Borrower is not now, and will not ---------------------- hereafter become, a party to any agreement with the United States of America, or any department, agency or instrumentality thereof, or any state, county or local governmental agency whereby any such governmental unit has obtained or may obtain any rights, whether by way of title, security interest, lien, or encumbrance, in or to any of the Collateral (including, but not limited to, any right of title obtained as a result of such governmental unit making any progress payment(s) that are or may be superior to, or in conflict with, the rights of Lender in and to the Collateral. 3.8. Books and Records. Borrower has maintained and will continue ----------------- to maintain at Borrower's Address complete and accurate books and records comprising a standard and modern accounting system in accordance with generally accepted accounting principles that accurately and correctly record and reflect Borrower's income, expenses, liabilities, operations, accounts, and ownership and location of the Collateral and any other asset now or hereafter belonging to Borrower. Borrower has not entered into any agreement with any accounting firm or third party to prepare or store Borrower's books and records or any part thereof at any location other than Borrower's Address, and Borrower shall not enter into any such agreement without first obtaining Lender's written consent; any consent that Lender may give shall be conditioned upon such accounting firm or other third party first agreeing to give Lender the same rights with respect to access to books and records and related rights as Lender has under Paragraph 4.3 of this Loan Agreement, regardless of where such books and records are kept or in what form they are maintained. In the event that at the time of execution of this Loan Agreement, Borrower's books and records are presently in the possession of an accounting firm or third party, Borrower will, concurrently with the execution of this Loan Agreement, or at any time thereafter, upon request by Lender, provide Lender with such written agreement from such accounting firm or third party, and Borrower will not hereafter transfer the books and records to any other accounting firm or other third party without first obtaining Lender's written consent and providing Lender with such agreement. All reserves (including without limitation, reserves for bad debts, depreciation and taxes) provided for upon Borrower's books and records are now, and will hereafter be, maintained in sufficient amounts in accordance with generally accepted accounting principles consistently applied. All such books and records and all documents relating to any of the Collateral are and will continue to be genuine and in all respects what they purport to be and will contain such information as may be requested by Lender. -5- 3.9. Financial Condition and Statements. All financial statements ---------------------------------- (including, but not limited to, balance sheets, profit and loss figures, and accountants' comments) now or hereafter delivered to Lender have been, and will be, prepared in conformity with generally accepted accounting principles and now and hereafter will completely and accurately reflect the financial condition, contingent liabilities and results of Borrower and Borrower's operations at the times and for the periods therein stated. Since the last date covered by any such statement, there has been no material adverse change in the financial condition, operations or any other status of the Borrower. Borrower is now, and at all times hereafter will continue to be, solvent. The covenant set forth in the preceding sentence shall be deemed breached if at any time Lender estimates that the value of all Borrower's assets, if sold in bulk for liquidation purposes, would not be sufficient to pay the total of Borrower's liabilities (whether or not such liabilities are then due) or if Lender has determined that Borrower has failed to pay promptly when due all loans and all debts to trade and other creditors (unless Lender is satisfied that the reason for such non- payment is a bona fide dispute between Borrower and any of its creditors concerning the amount due). Borrower will hereafter deliver to Lender a copy of all financial statements prepared with respect to Borrower no later than thirty (30) days after the preparation or receipt thereof by Borrower. Borrower will cause to be prepared, and will provide Lender within sixty (60) days following the end of Borrower's fiscal year, complete financial statements (including, but not limited to, balance sheets, profit and loss figures and accountants' comments) for that year and, at Lender's request, will provide Lender with such financial statements for each monthly by the fifteenth day of the following month. At Lender's request, all such annual financial statements shall be prepared and certified by independent certified public accountants acceptable to Lender. All costs, expenses and fees pertaining to the foregoing shall be borne solely and exclusively by Borrower. 3.10. Tax Returns and Payments; Pension Contributions. Borrower ------------------------------------------------ has timely filed, and will hereafter timely file, all tax returns and reports required by foreign, federal, state or local law. Borrower has timely paid, and will hereafter timely pay, all foreign, federal, state and local taxes, assessments, deposits and contributions now or hereafter owed by Borrower (including, but not limited to, income, franchise, personal property, real property, FICA, excise, withholding, sales and use taxes). Borrower may defer payment of any contested taxes provided that Borrower (i) in good faith contests Borrower's obligation to pay such taxes by appropriate proceedings promptly and diligently instituted and conducted, (ii) notifies Lender in writing of the commencement and of any material development in such proceedings, and (iii) posts bonds or takes any other steps required to keep such contested taxes from becoming a lien against or charge upon any of the Collateral or other properties of Borrower. Borrower is unaware of any claims or adjustments proposed for any of Borrower's prior tax years which could result in additional taxes becoming due and payable by Borrower. Borrower has paid, and shall continue to pay all amounts necessary to fund all present and future pension, profit sharing and deferred compensation plans in accordance with their terms, and Borrower has not and will not withdraw from participation in, permit partial or complete termination of, or permit the occurrence of any other event with respect to, any such plan which could result in any liability of Borrower, including without limitation any liability to the Pension Benefit Guaranty Corporation or its successors or any other governmental agency. When requested, Borrower will furnish Lender with proof satisfactory to Lender of Borrower's making the payment -6- or deposit of all such taxes and contributions, such proof to be delivered within five (5) days after the due date established by law for each such payment or deposit. In the event Borrower fails or is unable to pay or deposit such taxes and contributions, Lender may, but is not obligated to, pay the same and treat all such advances as additional Loans to Borrower. Such advances shall bear interest at the highest rate of the outstanding Loans to Borrower. 3.11. Compliance With Law. Borrower has complied, and will ------------------- hereafter comply, with all provisions of all foreign, federal, state and local law relating to Borrower including, but not limited to, those relating to Borrower's ownership of real or personal property, conduct and licensing of Borrower's business and employment of Borrower's personnel. 3.12. Litigation. There is no claim, suit, litigation, proceeding ---------- or investigation pending or threatened by or against or affecting Borrower in any court or before any regulatory commission, board or other governmental agency (or any basis thereof known to Borrower) which might result, either separately or in the aggregate, in any adverse change in the business, prospects or condition of Borrower, or in any impairment in the ability or right of Borrower to carry on its business in substantially the same manner as it is now being conducted. Borrower will immediately inform Lender in writing of any claim, proceeding, litigation or investigation hereafter threatened or instituted by or against Debtor. 3.13. Use of Proceeds. Borrower will use all Loan proceeds solely --------------- for working capital and general corporate and business purposes including, without limitation, the acquisition of Collateral. Borrower is not engaged in the business of extending credit for the purpose of purchasing or carrying any "margin stock" (as defined in Regulation G of the Board of Governors of the Federal Reserve System) and no part of the proceeds of any Loan will be used to purchase or carry any "margin stock" or to extend credit to others for the purpose of purchasing or carrying any "margin stock". 3.14. Complete Disclosure. There is no fact which Borrower has not ------------------- disclosed to Lender in writing which could materially adversely affect the properties, business or financial condition of Borrower or any of the Collateral or which it is necessary to disclose in order to keep the foregoing representations and warranties from being misleading. 3.15. Continuing Effect. All representations, warranties and ----------------- covenants of Borrower contained in this Loan Agreement and any Collateral Agreement and any other agreement with Lender shall be true and correct at the time of the effective date of each such agreement and shall be deemed continuing and shall remain true, correct and in full force and effect until payment and satisfaction in full of all of the Obligations, and Borrower acknowledges that Lender is and will be expressly relying on all such representations, warranties and covenants in making Loans to Borrower. -7- 4. Additional Continuing Duties of Borrower. Borrower shall, at ---------------------------------------- all times, and for such periods of time as Lender may require, at Borrower's expense, insure all of the insurable Collateral, and all of Borrower's books and records, by financially sound and reputable insurers acceptable to Lender, if the form of extended coverage policies against loss or damage by theft, embezzlement, fire, explosion, flood, sprinkler, or any other insurable event or risk that Lender may require, to the fullest extent of the insurable value thereof. All such insurance policies shall name Lender as the exclusive loss payee, shall provide that proceeds payable thereunder shall be payable directly to Lender unless notarized written authority to the contrary is obtained from Lender, and shall also provide that no act or default of Borrower or any other person shall affect the right of Lender to recover thereunder (and wherever obtainable shall contain a loss payee endorsement on Lender's standard form, or at Lender's option, a Board of Fire Underwriters Endorsement No. 438 in favor of Lender). Upon receipt of the proceeds of any such insurance, Lender shall apply such proceeds in reduction of the Obligations, whether or not then due, in such order and manner as Lender shall determine in its sole discretion. Borrower shall provide Lender with the original or a certificate of each such policy of insurance which shall contain a provision requiring the insurer to give not less than twenty (20) days advance written notice to Lender in the event of cancellation or termination of the policy for any reason whatsoever. If Borrower fails to provide or pay for any such insurance, Lender is authorized (but not obligated) to procure the same at Borrower's expense. Borrower agrees to deliver to Lender, promptly as rendered, true and correct copies of all reports made to all insurance companies. 4.2. Reports; Certificates. At its sole cost and expense, Borrower ---------------------- shall report, in form satisfactory to Lender, such information as Lender may request regarding the Collateral; such reports shall be for such periods, shall reflect Borrower's records at such time and shall be rendered with such frequency as Lender may designate. At its sole cost and expense, Borrower shall promptly provide Lender with all such other information concerning its affairs as Lender may request from time to time hereafter, and shall immediately notify Lender of any adverse change in Borrower's financial condition and of any condition or event which constitutes a breach or an Event of Default under this Loan Agreement or any Collateral Agreement. All reports furnished Lender shall be complete, accurate and correct in all respects at the time furnished. Whenever requested, Borrower shall deliver to Lender a certificate signed by Borrower (or, if Borrower is a corporation, by Borrower's president and chief financial officer, in their individual capacities, or by all of Borrower's general partners if Borrower is a partnership) warranting and representing that all reports, financial statements and other documents delivered or caused to be delivered to Lender under the terms of this Loan Agreement or any Collateral Agreement are complete and correct, and accurately present the financial condition of Borrower, and that there exists on the date of delivery of said certificate to Lender no condition or event which constitutes a breach or Event of Default under this Loan Agreement or any Collateral Agreement. -8- 4.3. Access to Collateral, Books and Records. At any and all times --------------------------------------- Lender, and any person designated by Lender, shall have free access to, and the right without hindrance or delay to inspect, audit, examine and test, the Collateral and any other property of Borrower, wherever located, and to inspect, audit, check, copy and make extracts from Borrower's and Borrower's accountant's books, records and accounts (hereinafter collectively the "records") including, but not limited to, all computer programs or other devices or programs related thereto, printouts, computer runs or discs, minute books, journals, ledgers, work papers, financial statements, balance sheets, profit and loss statement, orders, receipts and any correspondence and other data relating to Borrower's business or to any transactions Borrower has entered into, no matter how or where such records may be maintained, generated or stored and for such purposes may enter into and at no charge remain upon the Borrower's premises as often and for so long as Lender may desire, and may use all computers and other equipment and devices which Borrower owns or leases or otherwise has available to it. Borrower hereby irrevocably authorizes and directs any person including, but not limited to, any of Borrower's directors, officers, employees, agents, accountants and attorneys having possession or control of any of the records to physically deliver them to Lender upon Lender's request or, at the option of Lender, make them available to Lender wherever the records may be located. Borrower waives the benefit of any accountant-client privilege or other evidentiary privilege precluding or limiting the disclosure, divulgence or delivery of any of the records. Lender, at all times, by or through any of its officers, agents, employees, attorneys, and accountants, shall have the right to possession of, or move to the premises of Lender or any agent of Lender, for so long as Lender may desire, all or any part of the records, to make full use thereof in aid of Lender's rights under this Loan Agreement and any Collateral Agreement. 4.4. Prohibited Transactions. Borrower shall not hereafter, without ----------------------- Lender's prior written consent: merge, consolidate, dissolve, acquire any other corporation, enter into any transaction not in the usual course of business, make any investment in any securities other than securities of the United States of America; guarantee or otherwise become in any way liable with respect to the obligations of another party or entity (except by endorsements of instruments or items of payment for deposit to the general account of Borrower or which are transmitted or turned over to Lender on account of the Obligations); pay or declare any dividends upon Borrower's stock, redeem, retire, purchase or otherwise acquire, directly or indirectly, any of Borrower's stock; make any change in Borrower's name, identity, corporate or capital structure; alter any of Borrower's business objectives, purposes, or operations or financial structure in such a manner as to adversely affect the ability of Borrower to pay or perform any of the Obligations; lend or distribute any of Borrower's property or assets, or incur any debts, outside of the ordinary course of Borrower's business, except extensions of existing debts and interest thereon; sell, lease, transfer, assign or otherwise dispose of any of the Collateral or any other assets except for the sale or lease of finished inventory in the ordinary course of business. 4.5. Notification of Changes. Borrower will promptly notify Lender ----------------------- in writing of any change of its officers, directors, or key employees, a death of any partner or joint venturer (if Borrower is a partnership or joint venture), any purchase out of the regular course of Borrower's business and any adverse or material change in the business or financial affairs of Borrower. -9- 4.6. Charges. Borrower shall pay all charges assessed by Lender, ------- in accordance with Lender's schedule of charges in effect from time to time, with respect to Lender's forwarding the proceeds of Loans to Borrower through a bank or similar institution, and such charges shall be part of the Obligations and shall be payable on demand. 4.7. Litigation Cooperation. Should any suit or proceeding be ---------------------- instituted by or against Lender with respect to any Collateral or for the collection or enforcement of any Account, or in any manner relating to Borrower, Borrower shall, without expense to Lender, and wherever and whenever designated by Lender, make available Borrower and its officers, employees and agents and Borrower's books, records and accounts to the extent that Lender may deem necessary in order to prosecute or defend any such suit or proceeding. 4.8. Remittance of Proceeds. All cash and non-cash proceeds ---------------------- arising from the voluntary or involuntary disposition of the Collateral shall be delivered, in kind, by Borrower to Lender in the original form in which received by Borrower, either by mailing or delivering the same to Lender not later than one (1) day after receipt thereof by Borrower. All checks, drafts and other instruments constituting such proceeds shall be endorsed, with recourse, by Borrower to Lender. Borrower agrees that it will not commingle proceeds of Collateral with any of Borrower's other funds or property, but will hold such proceeds separate and apart from such other funds and property and in an express trust for Lender. Borrower agrees to furnish Lender, promptly upon request, an aged accounts receivable trial balance in such form and as often as Lender requests and agrees that Lender may from time to time verify directly with the respective account debtors the validity, amount and any other matters relating to the Accounts by means of mail, telephone or otherwise, either in the name of Borrower or Lender or such other name as Lender may choose. 4.9. Execute Additional Documentation. Borrower agrees, at its sole -------------------------------- cost and expense, on demand by Lender, to do all things and to execute all such financing statements, continuation financing statements, financing statement amendments, security agreements, deeds of trust, mortgages, assignments, certificates of title, applications for vehicle titles, affidavits, reports, notices, schedules of Accounts and all other documents, in form satisfactory to Lender, as Lender, in its sole and absolute discretion, may deem necessary or useful in order to perfect and maintain Lender's perfected first-priority security interest in the Collateral, and in order to fully consummate all of the transactions contemplated under this Loan Agreement and under any Collateral Agreement. 5. Application of Payments. ----------------------- Checks, instruments and all other non-cash payments delivered to Lender in payment or on account of the Obligations constitute conditional payment only until such items are actually paid in cash to Lender; solely for the purpose of computing interest earned by Lender, credit therefor and for bank wire transfers shall be given as of the seventh day after receipt in order to allow for clearance and bookkeeping and computer entries. All payments made by or on behalf of, and all credits due to, Borrower may be applied and reapplied in whole or in part to any of the Obligations to such extent and in such manner as Lender shall determine in its sole discretion. Lender shall have -10- the continuing exclusive right to apply and re-apply any and all such payments in such manner as Lender shall determine in its sole discretion, notwithstanding any entry by Lender upon any of its books and records. 6. Events of Default and Remedies. ------------------------------ 6.1. Events of Default. If any one or more of the following events ----------------- shall occur, any such event shall constitute an "Event of Default" and Borrower shall provide Lender with immediate written notice thereof: (a) Any warranty, representation, statement, report or certificate made or delivered to Lender by Borrower or any of Borrower's officers, employees or agents now or hereafter is incorrect, false, untrue or misleading in any respect whatever; or (b) Borrower shall fail to repay when due part or all of any Loan or to pay any interest thereon when due; or (c) Borrower shall fail to perform or comply with, or otherwise shall breach, any other term or condition contained in this Loan Agreement or in any Collateral Agreement, or any other agreement whether now or hereafter existing between Lender and Borrower; or (d) Borrower shall fail to pay or perform any other Obligation when due; or (e) Any sale, lease (except the voluntary sale or lease of finished inventory in the ordinary course of Borrower's business), or other disposition of or encumbrance upon any or all of the Collateral; or (f) Any loss, theft, or substantial damage to, or destruction of, any or all of the Collateral (unless within five (5) days after the occurrence of any such event Borrower furnishes Lender with evidence satisfactory to Lender that the amount of any such loss, theft, damage to or destruction of the Collateral is fully insured under policies designating Lender as the exclusive additional named insured); or (g) A material impairment of the prospect of payment or performance of the Obligations or a material impairment of the value of the Collateral or any impairment in the priority of Lender's security interests; or (h) Any event shall arise which may result or actually results in the acceleration of the maturity of the indebtedness of Borrower to others under any loan or other agreement or undertaking now or hereafter existing; or -11- (i) Borrower shall fail promptly to perform or comply with any term or condition of any agreement now or hereafter existing with any third party resulting in an actual or potential material adverse effect on Borrower's business; (j) Any levy, assessment, attachment, seizure, lien or encumbrance for any cause or reason whatsoever, upon all or any part of the Collateral or any other asset of Borrower (unless discharged by payment, release or fully bonded against not more than ten (10) days after such event has occurred); or (k) Dissolution, termination of existence, insolvency or business failure of Borrower; or appointment of a receiver, trustee or custodian, for all or any part of the property of, assignment for the benefit of creditors by, or the commencement of any proceeding by or against Borrower under any reorganization, bankruptcy, insolvency, arrangement, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction, now or hereafter in effect; or entry of a court order which enjoins, restrains or in any way prevents Borrower from conducting all or any part of its business; or failure to pay any foreign, federal, state or local tax or other debt of Borrower unless, with respect to any such tax, Borrower complies with the provisions of Paragraphs 3.10(i), (ii), and (iii); or (l) A notice of lien, levy or assessment is filed of record with respect to any of Borrower's assets by the United States or any department, agency or instrumentality thereof, or by any state, county, municipal or other governmental agency, or if any taxes or debts now or hereafter owing to any one or more of them becomes a lien, whether choate or otherwise, upon all or any of the Collateral or any other assets of Borrower (other than a lien for real property taxes which are not yet due and payable); or (m) Death or insolvency or incompetency of any guarantor of any or all of the Obligations; appointment of a conservator or guardian of the person of any such guarantor; appointment of a conservator, guardian, trustee, custodian or receiver of all or any part of the assets, property or estate of, any such guarantor; revocation or termination of, or limitation of liability upon, any guaranty of any or all of the Obligations; or commencement of proceedings by or against any guarantor or surety for Borrower under any bankruptcy or insolvency law; or (n) Borrower makes any payment on account of any indebtedness or obligation which has been subordinated to the Obligations or if any person who has subordinated such indebtedness or obligation terminates or in any way limits his subordination agreement; or (o) Borrower shall generally not pay its debts as they become due or shall enter into any agreement (whether written or oral), or offer to enter into any such agreement, with all or a significant number of its creditors regarding any moratorium or other indulgence with respect to its debts or the participation of such creditors or their representatives in the supervision, management or control of the business of Borrower; or Borrower shall conceal, remove or -12- permit to be concealed or removed any part of its property, with intent to hinder, delay or defraud its creditors, or make or suffer any transfer of any of its property which may be fraudulent under any bankruptcy, fraudulent conveyance or similar law, or shall make any transfer of its property to or for the benefit of any creditor at a time when other creditors similarly situated have not been paid; or (p) Lender at any time, acting in good faith and in a commercially reasonable manner, deems itself insecure because of (i) the occurrence of an event prior to the effective date hereof of which Lender had no knowledge on the effective date or (ii) the occurrence of an event on or subsequent to the effective date. 6.2. Remedies. Upon the occurrence of any Event of Default, and at -------- any time thereafter, Lender, at its option, and without notice or demand of any kind (all of which are hereby expressly waived by Borrower) may do any one or more of the following: (a) Cease advancing money or extending credit to or for the benefit of Borrower under this Loan Agreement, any Collateral Agreement, and any other document or agreement; (b) Accelerate and declare all or any part of the Obligations to be immediately due, payable, and performable, notwithstanding any deferred or installment payments allowed by any instrument evidencing or relating to any Obligation; (c) Take possession of any or all of the Collateral wherever it may be found, and for that purpose Borrower hereby authorizes Lender without judicial process to enter onto any of the Borrower's premises without hindrance to search for, take possession of, keep, store, or remove any of the Collateral and remain on such premises or cause a custodian to remain thereon in exclusive control thereof without charge for so long as Lender deems necessary in order to complete the enforcement of its rights under this Loan Agreement or any Collateral Agreement, or any other agreement; provided, however, that should Lender seek to take possession of any or all of the Collateral by Court process, Borrower hereby irrevocably waives: (i) any bond and any surety or security relating thereto required by an statute, court rule or otherwise as an incident to such possession; (ii) any demand for possession prior to the commencement of any suit or action to recover possession thereof; and (iii) any requirement that Lender retain possession of and not dispose of any such Collateral until after trial or final judgment; (d) Require Borrower to assemble any or all of the Collateral and make it available to Lender at a place or places to be designated by Lender which is reasonably convenient to Lender and Borrower, and to remove the Collateral to such locations as Lender may deem advisable; (e) Complete processing, manufacturing or repair of all or any portion of the Collateral prior to a disposition thereof and, for such purpose and for the purpose of removal, Lender shall have the right to use Borrower's premises, vehicles, hoists, lifts, cranes, equipment and all other -13- property without charge. Without limiting any security interest granted Lender in other provisions of this Loan Agreement or in any Collateral Agreement or other agreement, for the purpose of completing manufacturing, processing or repair of Collateral and the disposition thereof, Lender is hereby granted a security interest in, and Lender and any purchaser from Lender, may use without charge, all of Borrower's plant, machinery, equipment, labels, licenses, processes, patents, patent applications, copyrights, names, trade names, trademarks, trade secrets, logos, advertising material and all other assets, and may also utilize all of Borrower's rights under any license or franchise agreement; (f) Sell, ship, reclaim, lease or otherwise dispose of all or any portion of the Collateral in its condition at the time Lender obtains possession or after further manufacturing, processing or repair; at any one or more public and/or private sale(s) (including execution sales); in lots or in bulk; for cash, exchange for other property or on credit; and to adjourn any such sale from time to time without notice other than oral announcement at the time scheduled for sale. Lender shall have the right to conduct such disposition on Borrower's premises without charge for such time or times as Lender deems fit, or on Lender's premises, or elsewhere and the Collateral need not be located at the place of disposition. Lender may directly or through any affiliated company purchase or lease any Collateral at any such public disposition and, if permissible under applicable law, at any private disposition. Any sale or other disposition of Collateral shall not relieve Borrower of any liability Borrower may have if any Collateral is defective as to title or physical condition at the time of sale; (g) Demand payment of, and collect any Accounts and general intangibles comprising part or all of the Collateral and in connection therewith Borrower irrevocably authorizes Lender to endorse or sign Borrower's name on all collections, receipts, instruments and other documents, to take possession of and open mail addressed to Borrower and remove therefrom payments made with respect to any item of the Collateral or proceeds thereof, and, in Lender's sole discretion, to grant extensions of time to pay, compromise claims and settle Accounts and the like for less than face value; (h) Demand and receive possession of any of Borrower's federal and state income tax returns and the books, records and accounts utilized in the preparation thereof or referring thereto. Any and all attorneys' fees, expenses, costs, liabilities and obligations incurred by Lender with respect to the foregoing shall be added to and become part of the Obligations, shall be due on demand, and shall bear interest at a rate equal to the highest interest rate applicable to any of the Obligations. 6.3. Standards for Determining Commercial Reasonableness. Borrower --------------------------------------------------- and Lender agree that the following conduct by Lender with respect to any disposition of Collateral shall conclusively be deemed commercially reasonable (but other conduct by Lender including, but not limited to, Lender's use in its sole discretion of other or different times, places and manners of noticing and conducting any disposition of Collateral shall not be deemed unreasonable): Any public -14- or private disposition as to which on no later than the fifth calendar day prior thereto written notice thereof is mailed or personally delivered to Borrower and, with respect to any public disposition, on no later than the fifth calendar day prior thereto notice thereof describing in general, non-specific terms the Collateral to be disposed of is published in the Los Angeles Daily Journal, the Metropolitan News or the Los Angeles Times; and which is held in Los Angeles County at any place designated by Lender, with or without the Collateral being present; and which commences at any time between 8:00 A.M. and 5:00 P.M. Without limiting the generality of the foregoing, Borrower expressly agrees that, with respect to any disposition of Accounts, instruments and general intangibles (collectively "Receivables") it shall be commercially reasonable for Lender to direct any prospective acquirer thereof to ascertain directly from Borrower any and all information (and Lender shall not be required to maintain records of, or answer any inquiries) concerning the Receivables offered for disposition including, but not limited to, the terms of payment, aging and delinquency, if any, of the Receivables, the financial condition of any obligor or account debtor thereon or guarantor thereof, any collateral therefor and the condition and location of the goods, if any, that are the subject of any of the Receivables. 6.4. Application of Proceeds. All proceeds realized as the result ----------------------- of any disposition of the Collateral shall be applied by Lender first to the costs, expenses, liabilities, obligations and reasonable attorneys' fees incurred by Lender in the exercise of its rights under this Loan Agreement and any Collateral Agreement, second to the interest due upon any of the Obligations and third to the principal of the Obligations in any order determined by Lender in its sole discretion. The surplus, if any, shall be paid to Borrower; if any deficiency shall arise, Borrower shall remain liable to Lender therefor. In the event that, as a result of the disposition of any of the Collateral, Lender directly or indirectly enters into a credit transaction with any third party, Lender shall have the option, exercisable at any time, in its sole discretion, of either reducing the Obligations by the principal amount of such credit transaction or deferring the reduction thereof until the actual receipt by Lender of cash therefor from such third party. 6.5. Remedies Cumulative. In addition to the rights and remedies ------------------- set forth in this Loan Agreement and any Collateral Agreement, Lender shall have all the other rights and remedies accorded a secured party under the California Uniform Commercial Code and under any and all other applicable laws and in any other instrument or agreement now or hereafter entered into between Lender and Borrower and all of such rights and remedies are cumulative and none is exclusive. Exercise or partial exercise by Lender of one or more of its rights or remedies shall not be deemed an election, nor bar Lender from subsequent exercise or partial exercise of any other rights or remedies. The failure or delay of Lender to exercise any rights or remedies shall not operate as a waiver thereof, but all rights and remedies shall continue in full force and effect until all of the Obligations have been fully paid and performed. 7. Cross-Collateralization. ----------------------- Payment and performance of the Obligations are collaterized by the Collateral and by any security interests created in any other agreement now or hereafter existing between Lender and -15- Borrower unless such other agreement is a deed of trust or other security instrument having real property or rents from real property as its subject matter and expressly provides to the contrary. 8. Power of Attorney. ----------------- Borrower grants to Lender an irrevocable power of attorney coupled with an interest, authorizing and permitting Lender (acting through any of its employees, attorneys or agents) at any time, at its option but without obligation, with or without notice to Borrower, and at Borrower's sole expense, to do any or all of the following, in Borrower's name or otherwise: (a) Execute on behalf of Borrower any financing statement, continuation financing statement, financing statement amendment, security agreement, deed of trust, mortgage, assignment of personal or real property lease, assignment of rentals from real or personal property, assignment, certificate of title, application for vehicle title, affidavit, report, notice, schedule of Account, and all other documents that Lender may, in its sole and absolute discretion, deem advisable in order to perfect, maintain or improve Lender's security interests in the Collateral or other real or personal property intended to constitute Collateral, or in order to exercise a right of Borrower to Lender, or in order to fully consummate all the transactions contemplated under this Loan Agreement, any Collateral Agreement and all other present and future agreements; (b) At any time after the occurrence of an Event of Default, to execute on behalf of Borrower any document exercising, transferring or assigning any option to purchase, sell or otherwise dispose of or to lease (as lessor or lessee) any real or personal property; (c) Execute on behalf of Borrower, any invoices relating to any Account, any draft against any Account debtor and any notice to any Account debtor, any proof of claim in bankruptcy, any Notice of Lien, claim of mechanic's, materialman's or other lien, or assignment or satisfaction of mechanic's, materialman's or other lien; (d) Take control in any manner of any cash or non-cash items of payment or proceeds of Collateral; endorse the name of Borrower upon any instruments, notes, acceptances, checks, drafts, money orders, bills of lading, freight bills, chattel paper or other documents, evidence of payment or Collateral that may come into Lender's possession; (e) Upon the occurrence of any Event of Default, to receive and open all mail addressed to Borrower; and, in the exercise of such right, Lender shall have the right, in the name of Borrower, to notify the Post Office authorities to change the address for the delivery of mail addressed to Borrower to such other address as Lender may designate including, but not limited to, Lender's own address; Lender shall turn over to Borrower all of such mail not relating to the Collateral; -16- (f) Upon the occurrence of any Event of Default, to direct any financial institution which is a participant with Lender in extensions of credit to or for the benefit of Borrower, or which is the institution with which any deposit account is maintained, to pay to Lender all monies on deposit by Borrower with said financial institution which are payable by said financial institution to Borrower, regardless of any loss of interest, charge or penalty as a result of payment before maturity; (g) Endorse all checks and other forms of remittances received by Lender "Pay to the Order of Main Credit Corp.", or in such other manner as Lender may designate; Borrower's signature or name may be inserted by Lender in longhand, in writing or by rubber stamp, and each such endorsement, however signed or made, shall be deemed to be the valid endorsement of Borrower; (h) Pay, contest or settle any lien, charge, encumbrance, security interest and adverse claim in or to any of the Collateral, or any judgment based thereon, or otherwise take any action to terminate or discharge the same; (i) Grant extensions of time to pay, compromise claims and settle Accounts and the like for less than face value and execute all releases and other documents in connection therewith; (j) Pay any sums required on account of Borrower's taxes or to secure the release of any liens therefor, or both; (k) Settle and adjust, and give releases of, any insurance claim that relates to any of the Collateral and obtain payment therefor, and make all determinations and decisions with respect to any such policy of insurance and endorse Borrower's name on any check, draft, instrument or other item of payment or the proceeds of such policies of insurance; (l) Instruct any accountant or other third party having custody or control of any books or records belonging to, or relating to, Borrower to give Lender the same rights of access and other rights with respect thereto as Lender has under Paragraph 4.3 of this Loan Agreement; and (m) Take any action or pay any sum required of Borrower pursuant to this Loan Agreement, any Collateral Agreement and any other present or future agreements. Any and all sums paid and any and all costs, expenses, liabilities, obligations and attorneys' fees incurred by Lender with respect to the foregoing shall be added to and become part of the Obligations and shall be payable on demand and shall bear interest at a rate equal to the highest interest rate applicable to any of the Obligations. In no event shall Lender's rights under the foregoing power of attorney or any of Lender's other rights under this Loan Agreement or any Collateral Agreement be deemed to indicate that Lender is in control of the business, management or properties of Borrower. -17- 9. Termination. ----------- This Loan Agreement and all Collateral Agreement(s) shall continue in effect until MAY 31, 1996 (the "initial renewal date") and shall thereafter ------------- automatically and continuously renew for successive additional terms of ONE-HALF -------- year(s) each unless terminated as to future transactions as hereinafter provided. (The initial renewal date and each subsequent date on which the terms of this Loan Agreement and the Collateral Agreement(s) automatically renew are hereinafter referred to as "renewal dates".) This Loan Agreement and any Collateral Agreement may be terminated, as to future transactions only, as follows: (a) By written notice from either Lender or Borrower to the other, by certified or registered mail, return receipt requested, not less than sixty (60) days prior to the next renewal date, in which event termination shall be effective on the next renewal date; or (b) By Lender at any time after the occurrence of an Event of Default, without notice, in which event termination shall be effective immediately; or (c) By sixty (60) days prior written notice from Borrower to Lender, by certified or registered mail, return receipt requested, in which event termination shall be effective on the sixtieth day after such notice is given; or (d) By the grant by Borrower to any third party of a lien or encumbrance on, or security interest in, any of the Collateral, as provided in Paragraph 3.5, in which event termination shall be effective on the date selected by Lender pursuant to Paragraph 3.5. On the effective date of termination, Borrower shall pay and perform in full all Obligations, whether evidenced by installment notes or otherwise, and whether or not all or any part of such Obligations are otherwise then due and payable. In the event Borrower terminates this Loan Agreement under subparagraph (a) or (c) above, but does not pay and perform all Obligations in full on the effective date of termination, then this Loan Agreement and all Collateral Agreement(s) shall not be terminated and shall continue in full force and effect until the next renewal date and shall automatically renew thereafter as provided above. If termination occurs under subparagraph (b), (c) or (d) above, Borrower shall pay to Lender a termination fee in an amount equal to the greater of (i) and amount equal to all interest due and payable during the six (6) months immediately preceding the effective date of termination, or (ii) $500.00 for ------ each month (or portion thereof) from the effective date of termination to the date which would have been the next renewal date had this Loan Agreement not been terminated. Said termination fee shall be included in the Obligations, shall be payable on the effective date of termination, and shall bear interest at a rate equal to the highest interest rate applicable to any of the Obligations. Notwithstanding any termination of this Loan Agreement or any Collateral Agreement, all of Lender's security interests in all of the Collateral and all of the terms and provisions of this Loan Agreement and all Collateral Agreement(s) shall continue in full force and effect until all Obligations have been paid and performed in full, and no termination shall in any way affect or impair any right or remedy of Lender, nor shall any such termination relieve -18- Borrower of any Obligation to Lender until all of the Obligations have been paid and performed in full. Lender shall not be required to deliver a Termination Statement until (i) payment and performance in full of all of the Obligations and (ii) Borrower has executed and delivered to Lender a General Release, in form acceptable to Lender, whereby Borrower releases any and all known and unknown claims of Borrower against Lender. 10. Notices. ------- All notices to be given hereunder shall be in writing and shall be served either personally or by depositing the same in the United States mail, first- class postage prepaid, by ordinary, registered or certified mail (except that the notices required by Paragraphs 3.4 and 9 hereof shall be given in the manner therein set forth) addressed to Lender or Borrower at the addresses shown above, or at any other address as shall be designated by one party in a written notice to the other party. Any such notice shall be deemed to have been given upon delivery in the case of notices personally delivered to Borrower or to and officer of Lender, or at the expiration of two (2) business days following the deposit thereof in the United States mail, with first-class postage prepaid (except that any notice of disposition referred to in Paragraph 6.3 hereof that is mailed shall be deemed given at the time of deposit thereof in the United States mail, with first-class postage prepaid). If there is more than one Borrower, notice to any shall constitute notice to all; if Borrower is a corporation, the service upon any member of the Board of Directors, officer, employee or agent shall constitute service upon the corporation. 11. Indemnity. --------- Borrower shall indemnify and hold Lender harmless from and against any and all claims, debts, losses, demands, actions, causes of action, lawsuits, damages, penalties, judgments, liabilities, costs and expenses (including without limitation attorneys' fees), of any kind or nature which Lender may sustain or incur in connection with, or arising from, this Loan Agreement, any Collateral Agreement, any other present or future agreement, or the breach by Borrower of any representation, warranty, covenant or provision contained herein or therein, or any other transaction contemplated hereby or thereby or relating hereto or thereto, or any other matter, cause or thing whatsoever, occurred, done, omitted or suffered to be done by Lender relating in any way to Borrower. Notwithstanding any other provision of this Loan Agreement to the contrary, the indemnity agreement set forth in this Paragraph 11 shall survive termination of this Loan Agreement. 12. Attorneys' Fees and Costs. ------------------------- Borrower shall forthwith pay to Lender the amount of all attorneys' fees and all filing, recording, publication, search and other costs incurred by Lender under and pursuant to this Loan Agreement, any Collateral Agreement or any other present or future agreement or in connection with any transaction contemplated hereby or thereby, or with respect to the Collateral or the defense or enforcement of its interests (whether or not Lender files a lawsuit against Borrower). Without limiting the generality of the foregoing, Borrower shall, with respect to each and all of the foregoing, -19- pay all attorneys' fees and costs Lender incurs in order to: obtain legal advice; enforce, or seek to enforce, any of its rights; prosecute actions against, or defend actions by, Account debtors; commence, intervene in, respond to, or defend any action or proceeding; initiate any complaint to be relieved of the effect of the automatic stay in bankruptcy in order to commence or continue any foreclosure or other disposition of the Collateral or to commence or continue any action or other proceeding against Borrower or relating to the Collateral; file or prosecute a claim or right in any action or proceeding including, but not limited to, any probate claim, bankruptcy claim, third-party claim, secured creditor claim or reclamation complaint; examine, audit, count, test, copy, or otherwise inspect any of the Collateral or any of Borrower's books and records; or protect, obtain possession of, lease, dispose of, or otherwise enforce any security interest in or lien on, the Collateral or represent Lender in any litigation with respect to Borrower's affairs. In the event either Lender or Borrower files any lawsuit against the other predicated on a breach of this Loan Agreement or any Collateral Agreement the prevailing party in such action shall be entitled to recover its costs and attorneys' fees, including but not limited to attorneys' fees and costs incurred in the enforcement of, execution upon or defense of any order, decree, award or judgment. All attorneys' fees and costs to which Lender may be entitled pursuant to this Paragraph 12 shall immediately become part of Borrower's Obligations, shall be due on demand, and shall bear interest at a rate equal to the highest interest rate applicable to any of the Obligations. 13. Governing Law; Jurisdiction; Venue. ------------------------------------ This Loan Agreement and any Collateral Agreement and all acts and transactions hereunder and thereunder and all rights and obligations of Lender and Borrower shall be governed, construed and interpreted in accordance with the internal laws of the State of California. Any term used in this Loan Agreement and in any Collateral Agreement that is defined in the California Uniform Commercial Code shall have the meaning therein assigned to that term. Borrower (i) agrees that all actions or proceedings relating directly or indirectly hereto shall, at the option of Lender, be litigated in courts located within said State, and that, at the option of Lender, the exclusive venue therefor shall be Los Angeles County; (ii) consents to the jurisdiction and venue of any such court and consents to service of process in any such action or proceeding by personal delivery or any other method permitted by law; and (iii) waives any and all rights Borrower may have to object to the jurisdiction of any such court, or to transfer or change the venue of any such action or proceeding. 14. Severability. ------------ Should any provision, clause or condition of this Loan Agreement or any Collateral Agreement be held by any court of competent jurisdiction to be void, invalid, inoperative, or otherwise unenforceable, such defect shall not affect any other provision, clause or condition, and the remainder of this Loan Agreement and any Collateral Agreement shall be effective as though such defective provision, clause or condition had not been a part hereof or thereof. -20- 15. Integration. ----------- This Loan Agreement and the Collateral Agreement(s) and such other agreements, documents and instruments as may be executed in connection herewith shall be construed together and constitute the entire, only and complete agreement between Borrower and Lender, and all representations, warranties, agreements, and undertakings heretofore or contemporaneously made, which are not set forth herein or therein, are superseded hereby. 16. Amendment. --------- The terms and provisions of this Loan Agreement and any Collateral Agreement may not be waived, altered, modified or amended except in a writing executed by Borrower and a duly authorized officer of Lender. 17. Time of Essence. --------------- Time is of the essence in the performance by Borrower of each and every obligation under this Loan Agreement and any Collateral Agreement. 18. Benefit of Agreement. -------------------- The provision of this Loan Agreement and any Collateral Agreement shall be binding upon and inure to the benefit of the respective successors, assigns, heirs, beneficiaries and representatives of the parties hereto; provided, however, that Borrower may not assign or transfer any of its rights under this Loan Agreement or any Collateral Agreement without the prior written consent of Lender, and any prohibited assignment shall be void. No consent by Lender to any assignment shall relieve Borrower or any guarantor from its liability for the Obligations. 19. Joint and Several Liability. --------------------------- The liability of each Borrower shall be joint and several and the compromise of any claim with, or the release of, any Borrower shall not constitute a compromise with, or a release of, any other Borrower. 20. Attachment Waivers. ------------------ To the extent that Lender, in its sole and absolute discretion, determines, prior to the disposition of all of the Collateral that the amount to be realized by Lender from the disposition of all of the Collateral may be less than the amount of the Obligations, and to the full extent of any such anticipated deficiency, Borrower waives the benefit of Section 483.010(b) of the California Code of Civil Procedure and of any and all other statutes requiring Lender to first resort to and exhaust all of the Collateral before seeking or obtaining any attachment remedy against Borrower, and Borrower expressly agrees that, to the extent of such anticipated deficiency, Lender shall have all of the rights -21- of an unsecured creditor including, but not limited to, the right of Lender, prior to the disposition of all of the Collateral, to obtain a temporary protective order and writ of attachment. Lender shall have no liability to Borrower if the actual deficiency realized by Lender is less than the anticipated deficiency on the basis of which Lender obtained a temporary protective order or writ of attachment. In the event Lender should seek a temporary protective order, or writ of attachment or both, Borrower hereby irrevocably waives any bond and any surety or security relating thereto required by any statute, court rule or otherwise as an incident or condition precedent to the issuance of any temporary protective order or writ of attachment. 21. General Waivers, --------------- The failure of Lender at any time or times hereafter to require Borrower strictly to comply with any of the provisions, warranties, terms or conditions of this Loan Agreement or any Collateral Agreement or any other present or future instrument or agreement between Borrower and Lender shall not waive or diminish any right of Lender thereafter to demand and receive strict compliance therewith and with any other provision, warranty, term and condition; and any waiver of any default shall not waive or affect any other default, whether prior or subsequent thereto and whether of the same or of a different type. None of the provisions, warranties, terms or conditions of this Loan Agreement or any Collateral Agreement or other instrument or agreement now or hereafter executed by Borrower and delivered to Lender shall be deemed to have been waived by any act or knowledge of Lender or its agents or employees, but only by a specific written waiver signed by an officer of Lender and delivered to Borrower. Borrower waives the right to trial by jury and the benefit of all statute(s) of limitations in any action or proceeding based upon or arising out of this Loan Agreement or any Collateral Agreement or any other present or future instrument or agreement between Lender and Borrower. Borrower waives any and all notices or demands which Borrower might be entitled to receive with respect to this Loan Agreement, any Collateral Agreement, or any other agreement by virtue of any applicable law. Borrower hereby waives demand, protest, notice of protest and notice of default or dishonor, notice of payment and non-payment, release, compromise, settlement, extension or renewal of any commercial paper, instrument, Account, general intangible, document or guaranty at any time held by Lender on which Borrower is or may in any way be liable, and notice of any action taken by Lender unless expressly required by this Loan Agreement or any Collateral Agreement. Borrower hereby ratifies and confirms whatever Lender may do pursuant to this Loan Agreement and any Collateral Agreement and agrees that Lender shall not be liable for (a) the safekeeping of the Collateral or any loss or damage thereto, or diminution in value thereof, from any cause whatsoever, or (b) any act or omission of any carrier, warehouseman, bailee, forwarding agent or other person, or (c) any act of commission or any omission by Lender or its officers, employees, agents, or attorneys, or any of its or their errors of judgment or mistakes of fact or of law. 22. Paragraph Headings; Construction. --------------------------------- Paragraph headings are used herein for convenience only. Borrower acknowledges that the same may not describe completely the subject matter of the applicable paragraph, and the same -22- shall not be used in any manner to construe, limit, define or interpret any term or provision hereof. This Loan Agreement and the Collateral Agreement(s) have been fully reviewed and negotiated between the parties and no uncertainty or ambiguity in any term or provision of this Loan Agreement of any Collateral Agreement shall be construed strictly against Lender or Borrower under any rule of construction or otherwise. 23. Destruction of Borrower's Documents; Limitation of Actions. ---------------------------------------------------------- Any documents, schedules, invoices or other papers delivered to Lender may be destroyed or otherwise disposed of by Lender six (6) months after the same are delivered to Lender, unless Borrower makes written request therefor and pays all expenses attendant to their return, in which event Lender shall return same when Lender's actual or anticipated need therefor has terminated. Borrower agrees that any claim or cause of action by Borrower against Lender, its directors, officers, employees, agents, accountants or attorneys, based upon, arising from, or relating to this Loan Agreement, or any Collateral Agreement, or any other present or future agreement, or any other transaction contemplated hereby or thereby or relating hereto or thereto, or any other matter, cause or thing whatsoever, occurred, done, omitted or suffered to be done by Lender, its directors, officers, employees, agents, accountants, or attorneys, relating in any way to Borrower, shall be barred unless asserted by Borrower by the commencement of an action or proceeding in a court of competent jurisdiction by the filing of a complaint within six (6) months after the first act, occurrence or omission upon which such claim or cause of action, or any part thereof, is based, and the service of a summons and complaint on an officer of Lender, or on any other person authorized to accept service on behalf of Lender, within thirty (30) days thereafter. Borrower agrees that such six-month period of time is a reasonable and sufficient time for Borrower to investigate and act upon any such claim or cause of action. The six-month period provided herein shall not be waived, tolled, or extended except by the written consent of Lender in its sole and absolute discretion. This provision shall survive any termination, however arising, of this Loan Agreement, any Collateral Agreement, and any other present or future agreement. 24. Effective Date. -------------- This Loan Agreement and any Collateral Agreement which has been executed and delivered by Borrower to Lender shall not become effective unless and until accepted by Lender. Such acceptance shall be evidenced only by the signature of Lender's duly authorized officer at its address set forth above. IN WITNESS WHEREOF, the undersigned has executed this Loan Agreement of this 4 day of DECEMBER, 1995. - -------- ---- -23- BORROWER: THIS LOAN AGREEMENT is accepted this 4 day of SUNWOOD RESEARCH, INC. - ---------------------- DECEMBER, 1995 at [Absolutely true and correct - -------- - Los Angeles, California. name -- not d/b/a] MAIN CREDIT CORP. By /s/ Richard Stack ---------------------- RICHARD STACK, By /s/ S. C. Legg PRESIDENT - ---------------------- Title PRESIDENT --------- -24- [LETTERHEAD OF MAIN CREDIT CORP.] June 17, 1996 Sunwood Research, Inc. Mr. Richard Stack, CEO, President 2882C Walnut Avenue Tustin, California 92680 Dear Richard, Referring to our Loan and Security Agreement dated December 4, 1995, paragraph --------------------------- 1.2 is changed to read as follows: 1.2. Interest. Unless specifically provided to the contrary in any --------- Collateral Agreement, all Loans shall bear interest at a rate equal to 2.5% per month, calculated on the basis of a 360-day year. Said interest rate shall be adjusted monthly, as of the first day of each month, based upon 120% of the increase or decrease in the Prime Rate in effect on the last day of the preceding month, but in no event shall the rate of interest in any month be less than 2.5% per month. As used herein, "Prime Rate" shall mean the announced (but not necessarily the actual) prime rate of interest of Bank of America National Trust and Savings Association in California and as of 05-31-96 is 8.25%. All other terms and conditions of the agreements between Main Credit Corp. and Sunwood Research, Inc. remain unchanged and in full force and effect. The above change shall be in effect as of June 1, 1996. Please sign the amendment and return one copy to this office. Sincerely, Signed and Agreed To: /s/ Vincent M. Tomkovicz /s/ Richard Stack - ------------------------ ------------------------- Main Credit Corp. Sunwood Research, Inc. by Vincent M. Tomkovicz by Richard Stack Vice-president CEO, President EX-10.18 21 ACCOUNTS COLLATERAL SECURITY AGREEMENT Exhibit 10.18 ACCOUNTS COLLATERAL SECURITY AGREEMENT -------------------------------------- THIS ACCOUNTS COLLATERAL SECURITY AGREEMENT ("Accounts Agreement") dated December 4, 1995, is entered into between MAIN CREDIT CORP. ("Lender") and - ---------------- ---------------- --- SUNWOOD RESEARCH, INC. [Borrower's absolutely true and correct name -- not - ---------------------- d/b/a] ("Borrower"), and is one of the Collateral Agreements referred to in that certain Loan and Security Agreement ("Loan Agreement") between Lender and Borrower dated December 4, 1995. This Accounts Agreement is an integral part of ---------------- the Loan Agreement, and all of the terms and provisions of the Loan Agreement are incorporated herein by this reference. 1. Grant of Security Interest. As collateral and security for the -------------------------- payment and performance of all Obligations (as defined in the Loan Agreement), Borrower hereby grants Lender an immediately effective, continuing security interest in, and assigns to Lender, all of Borrower's interest in the following types of property, whether now owned or held or hereafter acquired and wherever located: all accounts, contract rights, instruments, chattel paper and all other obligations now or hereafter owing to Borrower (collectively "Accounts"); and all right, title and interest of Borrower in, and all of Borrower's rights and remedies with respect to, all goods, the sale or other disposition of which gives rise to any Account, including without limitation all returned, rejected, rerouted, reclaimed and repossessed goods and all rights of stoppage in transit, replevin, reclamation, and all rights as an unpaid vendor; and all collections and proceeds of any of the foregoing; and all guaranties of, security for, and insurance proceeds attributable to any of the foregoing; and all equipment containing said books and records. The term "Collateral" as used in the Loan Agreement shall for all purposes be deemed to include without limitation the Accounts and the other property described above. The term "Account Debtor" as used in this Accounts Agreement shall mean each account debtor, obligor, guarantor and other person in any way liable or obligated on or in connection with any Account. 2. Loans. ----- 2.1 Amount of Loans. Provided no event of Default has occurred, --------------- Lender agrees to make Loans to Borrower, repayable on demand, in amounts up to 80% of the Net Amount of each Account which Lender in its sole and absolute discretion deems eligible for borrowing. [If the word "None" is set forth in the blank space immediately above, or if said space is left blank, Lender shall be under no obligation to make any such Loans and this Section 2 shall be deemed not in effect, but the security interest granted pursuant to Paragraph 1 of this Accounts Agreement shall remain in full force and effect to additionally secure all of the Obligations, and all other provisions of this Accounts Agreement shall remain in full force and effect.] The term "Net Amount" of an Account, as used herein, shall mean the gross amount of the Account, minus all applicable sales, use, excise and other similar taxes and minus all discounts, credits and allowances of any nature at any time issued, owing, granted, outstanding, available or claimed. -1- 2.2 Borrower's Accounts Loan Balance. The aggregate amount of -------------------------------- Borrower's outstanding indebtedness to Lender on account of Loans made pursuant to Paragraph 2.1 of this Accounts Agreement shall be referred to herein as "Borrower's Accounts Loan Balance". If Borrower's Accounts Loan Balance shall at any time exceed the percentage set forth in Paragraph 2.1, Lender, in its sole and absolute discretion, may require Borrower to repay such excess to Lender upon demand, or require Borrower to immediately deliver such additional security to Lender as may be satisfactory to Lender. 2.3 Interest. Until Borrower's Accounts Loan Balance is paid in -------- full, Borrower shall pay interest thereon monthly at the rate provided in Paragraph 1.2 of the Loan Agreement, provided that, regardless of the amount of Borrower's Accounts Loan Balance, if any, that may be outstanding from time to time, Borrower shall pay minimum interest during the term of this Accounts Agreement of $500.00 per month. The amount of interest payable hereunder shall ------- be computed as of the close of business on the last day of each calendar month, and shall be added to Borrower's Accounts Loan Balance, and shall thereafter bear like interest as the loans. 2.4 Statement of Account. Each month, Lender shall send Borrower an -------------------- extract or statement of Borrower's Accounts Loan Balance prepared from Lender's records, which will conclusively be deemed to be correct and accepted by Borrower unless Borrower delivers to Lender a written statement of exceptions within thirty (30) days after delivery of such extract or statement. 3. Schedules. Borrower shall deliver to Lender schedules and --------- assignments of all Accounts on Lender's standard form; provided, however, that Borrower's failure to execute and deliver the same shall not affect or limit Lender's security interest and other rights in and to all of Borrower's Accounts, nor shall Lender's failure to advance or lend against a specific Account affect or limit Lender's security interest and other rights therein. Together with each such schedule and assignment, or later if requested by Lender, Borrower shall furnish Lender with copies (or, at Lender's request, originals) of all contracts, orders, invoices, and other similar documents, and all original shipping instructions, delivery receipts, bills of lading, and other evidence of delivery, for any goods the sale or disposition of which give rise to such Accounts, and Borrower warrants the genuineness of all of the foregoing. Borrower shall also furnish to Lender an aged accounts receivable trial balance in such form and as often as Lender requests, and Borrower agrees that Lender may from time to time verify directly with the respective Account Debtors the validity, amount and any other matters relating to the Accounts by means of mail, telephone or otherwise, either in the name of Borrower or Lender or such other name as Lender may choose. In addition, Borrower shall deliver to Lender the originals of all instruments, chattel paper, security agreements, guarantees and other documents and property evidencing or securing any Accounts, immediately upon receipt thereof and in the same form as received, with all necessary endorsements (all of which shall be with recourse). -2- 4. Collection of Accounts. Borrower shall have the privilege of ---------------------- collecting the Accounts in trust for Lender, at Borrower's sole cost and expense, which privilege may be revoked by Lender at any time. All monies, checks, notes, drafts, money orders, acceptances and other things of value and items of payment, together with any and all related vouchers, identifications, communications and other data, documents and instruments, collected or received by Borrower (or by any receiver, trustee, custodian or successor in interest of Borrower, or by any person acting on behalf of Borrower) in payment of, or in reference to, the Accounts shall belong to Lender, and, not later than one (1) day after receipt thereof by Borrower, Borrower shall deliver the same to Lender, at Lender's office (or, if so directed by Lender, Borrower shall deposit the same in Lenders account in a bank designated by Lender) in the original form in which the same are received, together with any necessary endorsements, including without limitation the endorsement of Borrower, all of which endorsements shall be with recourse. Borrower shall have no right, and agrees not to commingle any of the proceeds of any of the collections of the Accounts with Borrower's own funds and Borrower agrees not to use, divert or withhold any such proceeds. Borrower hereby divests itself of all dominion over the Accounts and the proceeds thereof and collections received thereon. Borrower shall make entries on its books and records in form satisfactory to Lender disclosing the absolute and unconditional assignment of all Accounts to Lender and Lender's security interest therein and shall keep a separate account on its record books of all collections received thereon. Borrower agrees that it will, upon request by Lender and in such form and at such times as Lender shall request, give notice to the Account Debtors of the assignment of and the grant of a security interest in the Accounts to Lender and that Lender may itself give such notice at any time and from time to time in Lender's or Borrower's name, without notice to Borrower, requiring such Account Debtors to pay the Accounts directly to Lender, and in any such event Borrower's privilege of collecting the Accounts shall automatically be revoked. Lender may also revoke Borrower's privilege of collecting the Accounts at any time by giving notice thereof to Borrower (orally or in writing). Lender may charge to Borrower's Accounts Loan Balance all costs and expenses incurred by Lender in collecting Accounts, including, without limitation, postage, telephone and telegraph charges, salaries of Lender personnel, and attorneys' fees. 5. Returned Goods. Any goods which are returned by an Account -------------- Debtor or otherwise recovered by or for the benefit of Borrower shall be physically segregated, posted with written notice that they are subject to Lender's security interest, and held in trust for Lender for such disposition as Lender shall direct. Borrower shall promptly notify Lender of all such returns and recoveries. After an Event of Default has occurred, no return of merchandise shall be accepted by Borrower and no sale of returned goods shall be made by Borrower without Lender's prior written consent. Lender shall have the right acting alone to accept the return of any goods directly from an Account Debtor without notice to or consent by Borrower, and neither the delivery by Borrower of returned or recovered goods to Lender, or the acceptance by Lender of returns directly from an Account Debtor shall in any way affect Borrower's liability to Lender on account of the Obligations. -3- 6. Disputed Accounts. Borrower shall promptly notify Lender of all ----------------- disputes and claims with respect to the Accounts. Borrower shall not, without Lender's prior written consent, compromise, adjust, or grant any discount, credit, allowance, or extension of time for payment to any Account Debtor. Lender shall have the right, in its sole and absolute discretion, to settle, accept reduced amounts and adjust disputes and claims directly with, and give releases on behalf of Borrower to, Account Debtors, for cash, credit or otherwise, upon terms which Lender, in its sole and absolute discretion, considers advisable, and in such case Lender will credit Borrower's account with only the net amounts of cash received by Lender in payment of the Accounts, less all costs and expenses (including, without limitation, attorneys' fees) incurred by Lender in connection with the settlement or adjustment of such disputes and the collection of such Accounts. 7. Representations, Warranties and Covenants of Borrower. Borrower ----------------------------------------------------- represents, warrants and covenants that now and throughout the term of this Accounts Agreement: 7.1 Status of Accounts. Each and every Account with respect to ------------------ which Loans are made shall, on the date each Loan is made and thereafter, comply with all of the following representations, warranties and covenants: each Account represents an undisputed bona fide existing unconditional obligation of the Account Debtor created by the sale, delivery, and acceptance of goods or the rendition of services in the ordinary course of Borrower's business; the Account Debtor on each Account has not and will not assert any defense, offset, counterclaim, right of return or cancellation, or other right or claim; each Account will be paid in full at maturity; no petition in bankruptcy or other application for relief under the Bankruptcy Code or any other insolvency law has been or will be filed by or against the Account Debtor on any Account, and no Account Debtor has made or will make an assignment for the benefit of creditors, become insolvent, fail or go out of business, nor does Borrower have notice that any of the foregoing is threatened, or is or may be about to occur; no Account is or will be impaired or reduced in value; no Account Debtor on any Account is a shareholder, director, partner or agent of Borrower, or is a person or entity controlling, controlled by or under common control with Borrower; no Account is owed by an Account Debtor to whom Borrower is or may become liable in connection with goods sold or services rendered by the Account Debtor to Borrower or any other transaction or dealing between the Account Debtor and Borrower. Immediately upon discovery by Borrower that any of the foregoing representations, warranties, or covenants are or have become untrue with respect to any Account, Borrower shall immediately give written notice thereof to Lender. 7.2 Documents Genuine; Legal Compliance. All statements made and ----------------------------------- unpaid balances appearing in all invoices, instruments and other documents evidencing the Accounts are and shall be true and correct and all such invoices, instruments and other documents and all of Borrower's books and records are and shall be genuine and in all respects what they purport to be and all signatories and endorsers have full capacity to contract. All sales and other transactions underlying or giving rise to each Account shall fully comply with all applicable laws and governmental rules and regulations. All signatures and endorsements on all documents, instruments, and agreements relating to all Accounts are and shall be genuine, and all such documents, instruments and agreements are and shall be legally enforceable in accordance with their terms. -4- 7.3 Disposition of Accounts. Borrower has not, and shall not ----------------------- hereafter sell, assign, pledge, encumber, forgive (completely or partially), settle for less than payment in full, or transfer or dispose of any account, or agree to do any of the foregoing. 8. No Liability. Lender shall not under any circumstances be ------------ responsible or liable for any shortage or discrepancy in, damage to, or loss or destruction of, any goods the sale or other disposition of which gives rise to an Account, or for any error, act, omission, or delay of any kind occurring in the settlement, failure to settle, collection or failure to collect any Account (including, without limitation, any of the same which result in the loss of rights against others), or for settling any Account for less than the full amount thereof, nor shall Lender be deemed by any provision herein or any act, omission, or event to be responsible for or to have assumed any of Borrower's obligations under any contract or agreement giving rise to an Account. 9. Relationship to Loan Agreement. Lender's remedies under this ------------------------------ Accounts Agreement and the Loan Agreement are cumulative. If any provision of this Accounts Agreement modifies or conflicts with any provision of the Loan Agreement, that provision in either agreement that gives greater rights and remedies to Lender shall control. All capitalized terms used herein, which are not defined herein, shall have the meanings ascribed to them in the Loan Agreement. 10. Effective Date. This Accounts Agreement, when executed by -------------- Borrower and accepted by a duly authorized officer of Lender, shall be effective on the date first above written. BORROWER: SUNWOOD RESEARCH, INC. --------------------- [Absolutely true and correct name -- not d/b/a] By: /s/ Richard Stack -------------------------------- (President) [indicate actual title] RICHARD STACK By: _______________________________ (Secretary) (Assistant Secretary) [indicate actual title] ACCEPTANCE - ---------- Accepted this 4th day of December, 1995, at Los Angeles, California by MAIN CREDIT CORP. By: /s/ S. C. Legg --------------------- Title PRESIDENT --------- -5- EX-10.19 22 INVENTORY COLLATERAL SECURITY AGREEMENT Exhibit 10.19 INVENTORY COLLATERAL SECURITY AGREEMENT --------------------------------------- THIS INVENTORY COLLATERAL SECURITY AGREEMENT ("Inventory Agreement") dated December 4, 1995, is entered into between MAIN CREDIT CORP. ("Lender") and - ---------------- ---------------- SUNWOOD RESEARCH, INC. [Borrower's absolutely true and correct name -- not - --------------------- d/b/a] ("Borrower"), and is one of the Collateral Agreements referred to in that certain Loan and Security Agreement ("Loan Agreement") between Lender and Borrower dated December 4, 1995. This Inventory Agreement is an integral part ---------------- of the Loan Agreement, and all of the terms and provisions of the Loan Agreement are incorporated herein by this reference. 1. Grant of Security Interest. As collateral and security for the -------------------------- payment and performance of all Obligations (as defined in the Loan Agreement), Borrower hereby grants Lender an immediately effective, continuing security interest in, and assigns to Lender, all of Borrower's interest in the following types of property, whether now owned or held or hereafter acquired and wherever located: all inventory, goods, merchandise, materials, raw materials, goods in process, finished goods, advertising, packaging and shipping materials, supplies, and all other tangible personal property, which is held for sale or lease, furnished under contracts of service, or consumed in Borrower's business, and all replacements, accessions and additions thereto, and all of the foregoing which are returned, repossessed, reclaimed or stopped in transit (collectively "Inventory") whether or not the Inventory be in the constructive or actual possession or custody of Borrower, Lender, or any third party; and all negotiable and non-negotiable warehouse receipts and other documents now or hereafter issued, with respect to any Inventory; and all proceeds, insurance proceeds and products thereof, including without limitation all now owned and hereafter acquired accounts, instruments, documents, and chattel paper arising from the sale or other disposition of the Inventory; and all books and records pertaining to any or all of the foregoing and all equipment containing said books and records. The term "Collateral" as used in the Loan Agreement shall for all purposes be deemed to include without limitation the Inventory and the other property described above. 2. Loans. ----- 2.1 Amount of Loans. Provided no event of Default (as defined in --------------- the Loan Agreement) has occurred, Lender agrees to make Loans to Borrower, repayable on demand, in amounts up to the following percentages of value of the following categories of Borrower's Inventory [if the word "None" is set forth in the blank space immediately below, or if said space is left blank, Lender shall be under no obligation to make any such Loans and this Section 2 shall be deemed not in effect, but the security interest granted pursuant to Paragraph 1 of this Inventory Agreement shall remain in full force and effect to additionally secure all of the Obligations, and all other provisions of this Inventory Agreement shall remain in full force and effect]: NONE - ------------------------------------------------------------------------------- As used in this Inventory Agreement, "value" means "Borrower's cost or wholesale market value, whichever is lower. Borrower shall execute a Designation of Inventory describing the Inventory and setting forth the value thereof, in form and substance satisfactory to Lender, prior to any Loans being made pursuant to this Paragraph 2.1 -1- 2.2 Borrower's Inventory Loan Balance. The aggregate amount of ---------------------------------- Borrower's outstanding indebtedness to Lender on account of Loans made pursuant to Paragraph 2.1 of this Inventory Agreement shall be referred to herein as "Borrower's Inventory Loan Balance". Borrower's Inventory Loan Balance shall not, at any time, exceed the total amount of the percentages of value of Inventory set forth in Paragraph 2.1, unless Lender shall elect to make advances in excess of said amount. Only Inventory acceptable to Lender in its sole and absolute discretion and subject to Lender's first priority, perfected security interest shall be considered in determining compliance with the provisions of this Paragraph. If at any time Lender determines in its sole and absolute discretion that Borrower's Inventory Loan Balance exceeds the total of the percentages of value of Inventory as set forth in Paragraph 2.1, or that the Inventory is not of the value represented by Borrower or that Lender is not adequately secured, then Borrower will repay to Lender upon demand such amount of Borrower's Inventory Loan Balance as will, in Lender's sole judgment, place Lender in an adequately secured position. 2.3 Interest. Until Borrower's Inventory Loan Balance is paid in -------- full, Borrower shall pay interest thereon monthly at the rate provided in Paragraph 1.2 of the Loan Agreement. The amount of such interest shall be added to Borrower's Inventory Loan Balance as of the close of business on the last day of each calendar month and shall thereafter bear like interest as the loans. 2.4 Statement of Account. Each month Lender shall send Borrower an -------------------- extract or statement of Borrower's account pertaining to Borrower's Inventory Loan Balance prepared from Lender's records which will be conclusively deemed correct and accepted by Borrower unless Borrower delivers to Lender a written statement of exceptions within thirty (30) days after delivery of such extract or statement. 3. Representations, Warranties and Covenants of Borrower. Borrower ----------------------------------------------------- represents, warrants and covenants that now and throughout the term of this Inventory Agreement: 3.1 Condition of Inventory. All of the Inventory is, and will ---------------------- continue to be, new, in good condition, of merchantable quality, free from latent and patent defects, and not obsolete. 3.2 Possession and Use of Inventory. Borrower shall not sell, ------------------------------- lease or otherwise transfer or dispose of any of the Inventory, other than sales in the ordinary course of its business; provided that in no event shall Borrower make any sales of Inventory which could result in a breach of Paragraph 2.2 above or would result in Borrower's Inventory Loan Balance exceeding the percentages of value of the Inventory set forth in Paragraph 2.1. Borrower shall use and deal with the Inventory only in a manner consistent with the terms of the insurance policies relating thereto. None of the Inventory will be sold, leased or otherwise disposed of in partial or complete satisfaction of any debt owed by Borrower. Borrower will keep all the Inventory separate from its other property and assets and capable of identification so far as may be practicable. 3.3 Retail Sales. Borrower's retail sales of Inventory were less ------------ than 25% in dollar volume of Borrower's total sales of Inventory during the 12 months preceding the effective date of this Inventory Agreement. Borrower's retail sales of Inventory shall be less than 25% in dollar volume of Borrower's total sales of Inventory during each consecutive 12-month period during the term of this Inventory Agreement. -2- 3.4 Records. Borrower has kept and shall hereafter keep, at ------- Borrower's Address, true, correct and accurate current stock, cost and sales records of the Inventory, itemizing and describing the kinds, types, qualities and quantities of the Inventory and the cost and selling prices thereof, which records shall also currently reflect the daily withdrawals from, and additions to the Inventory, all of which records shall be continuously available to Lender for inspection and copying. 3.5 No Warehousing of Inventory. None of the Inventory is or will --------------------------- be stored with any warehouseman or other third party without Lender's prior written consent. 4. No Liability. Lender shall not in any way or manner be liable ------------ or responsible for the safekeeping of the Inventory, or any loss or damage thereof occurring or arising in any manner or fashion from any cause, or any diminution in the value of the Inventory, or any act or default of any carrier, warehouseman, bailee or forwarding agent or other person whomsoever. All risk of loss, damage and destruction of the Inventory shall be borne by Borrower. 5. Relationship to Loan Agreement. Lender's remedies under this ------------------------------ Inventory Agreement and the Loan Agreement are cumulative. If any provision of this Inventory Agreement modifies or conflicts with any provision of the Loan Agreement, those provisions in either agreement that give greater rights and remedies to Lender shall control. All capitalized terms used herein, which are not defined herein, shall have the meanings ascribed to them in the Loan Agreement. 6. Effective Date. This Inventory Agreement, when executed by -------------- Borrower and accepted by a duly authorized officer of Lender, shall be effective on the date first above written. BORROWER: SUNWOOD RESEARCH, INC. --------------------- [Absolutely true and correct name -- not d/b/a] By: /s/ Richard Stack -------------------------------------- (President) [indicate actual title] RICHARD STACK By: -------------------------------------- (Secretary) (Assistant Secretary) [indicate actual title] ACCEPTANCE - ---------- Accepted this 4th day of December, 1995, at Los Angeles, California by MAIN CREDIT CORP. By: /s/ S. C. Legg ------------------------ Title PRESIDENT --------- EX-10.20 23 EQUIPMENT COLLATERAL SECURITY AGREEMENT EXHIBIT 10.20 EQUIPMENT COLLATERAL SECURITY AGREEMENT --------------------------------------- THIS EQUIPMENT COLLATERAL SECURITY AGREEMENT ("Equipment Agreement") dated December 4, 1995, is entered into between MAIN CREDIT CORP. ("Lender") and - ---------------- ---------------- SUNWOOD RESEARCH, INC. [Borrower's absolutely true and correct name -- not - --------------------- d/b/a] ("Borrower"), and is one of the Collateral Agreements referred to in that certain Loan and Security Agreement ("Loan Agreement") between Lender and Borrower, dated December 4, 1995. This Equipment Agreement is an integral part ---------------- of the Loan Agreement, and all of the terms and provisions of the Loan Agreement are incorporated herein by this reference. 1. Grant of Security Interest. As collateral and security for the -------------------------- payment and performance of all Obligations (as defined in the Loan Agreement), Borrower hereby grants Lender an immediately effective, continuing security interest in, and assigns to Lender, all of Borrower's interest in the following types of property, whether now owned or held or hereafter acquired and wherever located: all equipment, goods (other than inventory), machinery, fixtures, trade fixtures, vehicles, furnishings, furniture, supplies, materials, tools, machine tools, office equipment, appliances, apparatus, parts, dies, jigs, and chattels, together with all attachments, replacements, substitutions, accessions, additions and improvements to any of the foregoing (collectively, "Equipment"), whether or not the same be in the constructive or actual possession or custody of Borrower, Lender or any third party; and all products, proceeds and insurance proceeds thereof, including without limitation all accounts, instruments, documents and chattel paper which may arise from the sale or disposition of the Equipment; and all books and records pertaining to any or all of the foregoing. The term "Collateral" as used in the Loan Agreement shall for all purposes be deemed to include without limitation the Equipment and all of the other property described above. The Equipment includes without limitation all Equipment identified in any one or more Schedules of Equipment which may be attached hereto, but no failure to attach any Schedule of Equipment shall affect or limit Lender's security interest in all of the Equipment and all of the other property described above. Borrower has no authority or right to, and shall not, exchange, trade in, sell, lease or otherwise dispose of any Equipment without Lender's prior written consent. 2. Loans. Lender has made, or is concurrently making, a Loan to ----- Borrower in the original principal amount of $NONE, which Loan is evidenced by ---- that certain promissory note made by Borrower to the order of Lender dated NONE. ---- [If the word "None" is set forth in the spaces immediately above, or if said spaces are left blank, no Loan is being made pursuant to this Paragraph 2, and this Paragraph 2 shall be deemed not in effect, but the security interest granted pursuant to Paragraph 1 of this Equipment Agreement shall remain in full force and effect to additionally secure all of the Obligations, and all other provisions of this Equipment Agreement shall remain in full force and effect.] If at any time Lender in its sole discretion determines that the Equipment then owned by Borrower is worth less than its value as represented by Borrower, or that any Loan pursuant to this Paragraph 2 is not adequately secured by Borrower's Equipment (without regard to any other Collateral that may be held by Lender), Borrower will promptly upon demand repay to Lender such portion of the Loan as will, in Lender's sole judgment, place Lender in an adequately secured position. -1- 3. Representations, Warranties and Covenants of Borrower. Borrower ----------------------------------------------------- represents, warrants and covenants that now and throughout the term of this Equipment Agreement: 3.1 Condition of Equipment. The Equipment is, and will continue to ---------------------- be, at Borrower's sole expense, in good and operational condition, free from latent and patent defects, and not obsolete. 3.2 Use of Equipment. Borrower shall not permit or cause the ---------------- Equipment to be misused, used for any purpose other than for which it was designed, altered or utilized in any illegal or negligent manner. Borrower shall use the Equipment only in the ordinary course of its business as heretofore conducted, in a legal manner, and in a manner not inconsistent with the terms of any insurance policy relating thereto. 3.3 Records and Schedules. Borrower has kept, and shall hereafter --------------------- keep accurate and complete records regarding the Equipment, including, without limitation, records describing in full the dates of acquisition, acquisition costs, and serial numbers thereof, all of which records shall be continuously available to Lender for inspection and copying. Borrower shall, from time to time, upon request by Lender, provide Lender with updated and complete schedules identifying each item of Equipment, and setting forth the serial numbers thereof and all such other information as Lender shall specify, and Borrower shall immediately give Lender written notice of all Equipment which it hereafter purchases, leases, or otherwise acquires; provided that no failure to provide such schedules or give such notice shall affect or limit Lender's security interest in all of the Equipment. 3.4 Certificate of Title. Upon request by Lender, Borrower shall -------------------- immediately deliver to Lender the originals of all certificates of title, certificates of ownership, evidences of ownership, and applications therefor, and all other similar documents and instruments, relating to any or all of the Equipment. 4. Statement of Account. If Lender shall send Borrower an extract or -------------------- statement prepared from Lender's records regarding any Loan made pursuant to Paragraph 2, the same shall conclusively be deemed correct and accepted by Borrower, unless Borrower delivers to Lender a written statement of exceptions within thirty (30) days after delivery of such extract or statement. 5. Relationship to Loan Agreement. Lender's remedies under this ------------------------------ Equipment Agreement and the Loan Agreement are cumulative. If any provision of this Equipment Agreement modifies or conflicts with any provision of the Loan Agreement, those provisions in either agreement that give greater rights and remedies to Lender shall govern. All capitalized terms used herein, which are not defined herein, shall have the meanings ascribed to them in the Loan Agreement. 6. Effective Date. This Equipment Agreement, when executed by Borrower -------------- and accepted by a duly authorized officer of Lender, shall be effective on the date first above written. -2- BORROWER: SUNWOOD RESEARCH, INC. --------------------- [Absolutely true and correct name -- not d/b/a] By: /s/ Richard Stack ------------------------------- (President) [indicate actual title] RICHARD STACK By: _______________________________ (Secretary) (Assistant Secretary) [indicate actual title] ACCEPTANCE - ---------- Accepted this 4th day of December, 1995, at Los Angeles, California by MAIN CREDIT CORP. By: /s/ S. C. Legg ----------------------- Title PRESIDENT --------- -3- EX-10.21 24 1-9-96 STOCK PURCHASE AGREEMENT - S.J. GOODMAN Exhibit 10.21 STOCK PURCHASE AGREEMENT This Agreement is made as of the 9th day of January, 1996, by and among SunWood Research, Inc., a Delaware corporation ("the Corporation"), the Steven J. Goodman Revocable Living Trust ("Purchaser"), and Richard Stack ("Founders"). WITNESSETH: ---------- WHEREAS, the Corporation desires to issue, and the Purchaser desires to purchase Common Stock of the Corporation as herein described, on the terms and conditions hereinafter set forth: NOW, THEREFORE, IT IS AGREED among the parties as follows: 1. Purchaser hereby agrees to purchase from the Corporation and the Corporation agrees to sell to Purchaser forty-two (42) shares of the Common Stock (the "Shares") for a purchase price of One Hundred Dollars ($100.00) per share. 2. If the Corporation hereafter registers any of its securities for its own account or the account of any security holder, the Corporation shall include the Shares in such registration at the Corporation's cost and expense on such terms and conditions as are customary in "piggyback registrations." If any one of the Founders hereafter propose to sell or transfer any of their shares of Common Stock, Purchaser shall be given 20-days advance written notice of the terms and conditions of such proposed sale. Purchaser shall have the right, exercisable upon written notice to the Founder(s) during such 20-day period, to sell in such proposed sale the same percentage of its Shares as the Founder(s) are proposing to sell of their shares. 3. Purchaser makes the following representations and warranties to the Corporation, each of which shall survive the closing and consummation of the purchase and sale of the Shares (the "Closing"): (a) Purchaser is purchasing the Shares in Purchaser's own name and for Purchaser's own account and no other person has any interest in or right with respect to the Shares, nor has Purchaser agreed to give any person any such interest or right in the future. (b) Purchaser is acquiring the Shares for investment and not with a view to or for sale in connection with any distribution of the securities. Purchaser recognizes that the shares have not been registered under the Federal Securities Act of 1933, nor qualified under the California Corporate Securities law of 1968, that any disposition of the Shares is subject to restrictions imposed by federal and state law and that the certificates representing the Shares will bear a restrictive legend. Purchaser also recognizes that the certificates representing the Shares will -1- bear a restrictive legend. Purchaser also recognizes that the Shares cannot be disposed of by Purchaser absent registration and qualification, or an available exemption from registration and qualification, and that no undertaking has been made with regard to registering or qualifying the Shares in the future. Purchaser understands that the availability of an exemption in the future will depend in part on circumstances outside Purchaser's control and that the Purchaser may be required to hold the Shares for a substantial period. Purchaser recognizes that no public market exists with respect to the Shares and no representation has been made to Purchaser that such a public market will exist at a future date. Purchaser understands that the California Commissioner of Corporation has made no finding or determination relating to the fairness for investment of the Shares offered by the corporation and that the Commissioner has not and will not recommend or endorse the Shares. (c) Purchaser has not seen or received any advertisement or general solicitation with respect to the sale of the Shares. (d) Purchaser believes, by reason of Purchaser's business or financial experience that Purchaser is capable of evaluating the merits and risks of this investment and of protecting Purchaser's own interests in connection with this investment. (e) During the course of this transaction and prior to purchasing the Shares, Purchaser has been provided with financial and other written information about the Corporation and the terms and conditions of the offering. Purchaser has been given the opportunity by the Corporation to obtain such information and ask such questions concerning the Corporation, the Shares, and Purchaser's investment as Purchaser felt necessary, and to the extent Purchaser availed himself of such opportunity, Purchaser received satisfactory information and answers. If Purchaser requested any additional information which the Corporation possessed or could acquire without unreasonable effort or expense which was necessary to verify the accuracy of the financial and other written information about the Corporation furnished to Purchaser by the Corporation, such additional information was provided Purchaser and was satisfactory. In reaching the conclusion to invest in the Shares, Purchaser has carefully evaluated his financial resources and investment position and the risks associated with this investment, and acknowledges that he is able to bear the economic risks of this investment. By electing to participate in this investment Purchaser realizes he may lose his entire investment. Purchaser further acknowledges that his financial condition is such that he is not under any present necessity or constraint to dispose of the Shares to satisfy any existing or contemplated debt or undertaking. (f) This agreement has been duly authorized, executed and delivered by Purchaser and is valid and binding on Purchaser and enforceable against Purchaser in accordance with its terms. -2- 4. The Corporation makes the following representations and warranties to Purchaser, each of which shall survive the Closing: (a) The Corporation is a corporation duly organized, validly existing and in good standing under the laws of the State of California. (b) The authorized capital stock of the Corporation consists of 3,000 shares of Common Stock. (c) This Agreement has been duly authorized, executed and delivered by the Corporation and is valid and binding on the Corporation and enforceable against the Corporation in accordance with its terms. (d) The financial statements of the Corporation made available to Purchaser accurately reflect the financial condition and the results of operations of the Corporation as of the dates indicated therein. Since the date of the most recent financial statements provided to Purchaser, there has been no materially adverse change in the condition (financial or otherwise) of the Corporation or in its assets, liabilities, properties, business operations or prospects that has not been specifically disclosed to Purchaser in writing. (e) Neither the execution and delivery of, nor the consummation of the transactions contemplated hereby will result in or constitute an event that, with notice or lapse of time, or both, would be a default under any material agreement to which the corporation is a party or by which its assets are bound. 5. The Closing shall take place concurrently with the execution of this Agreement at the offices of the Corporation. Upon tender of the purchase price for the Shares, the Corporation shall deliver to Purchaser a properly executed share certificate representing the Shares. The Corporation shall take such other actions as may be reasonably necessary to close the transactions contemplated hereby. 6. The certificate issued to Purchaser by the Corporation representing the Shares shall have endorsed thereon the following legend. "THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR REGISTERED OR QUALIFIED WITH THE CALIFORNIA DEPARTMENT OF CORPORATIONS UNDER THE CORPORATE SECURITIES LAW OF 1968. THE SHARES MAY NOT BE PLEDGED, SOLD OR TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND THE CALIFORNIA CORPORATE SECURITIES LAW OF 1968 AND OTHER APPLICABLE STATE SECURITIES LAWS COVERING THE SHARES OR AN OPINION OF QUALIFIED COUNSEL OR OTHER EVIDENCE SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED." -3- 7. The parties agree to execute such further instruments and to take such further action as may reasonably be necessary to carry out the intent of this Agreement. 8. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or delivery by express courier, or 4 days after the deposit in the United States Post Office, by registered or certified mail with postage and fees prepaid, addressed to the party to whom notice is being given at this reference or at such other address as such party may designate by ten days' advance written notice to the other parties hereto. 9. This Agreement shall be governed by the laws of the State of California and interpreted and determined in accordance with the laws of the State of California, as such laws are applied by California courts to contracts made and to be performed entirely in California by residents of that state. 10. This Agreement shall inure to the benefit of the successors and assigns of the Corporation and Purchaser. 11. In the event of a dispute concerning the subject matter hereof, the prevailing party shall be entitled to recover its costs and reasonable attorneys' fees in resolving the dispute. 12. This Agreement constitutes the entire agreement of the parties with respect to the subject matter hereof and supersedes all prior and contemporaneous agreements and understanding with respect to such subject matter. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. "CORPORATION" SunWood Research, Inc. By: /s/ Richard Stack -------------------------------- Richard Stack, President "PURCHASER" Steven J. Goodman Revocable Living Trust By: /s/ Steven J. Goodman -------------------------------- Steven J. Goodman, Trustee -4- "FOUNDERS" ______________________________________ ______________________________________ ______________________________________ -5- EXHIBIT A ADDRESSES --------- Richard Stack, CEO, President SunWood Research, Inc. 2882C Walnut Avenue Tustin, CA 92780 (714) 734-1390 Steven J. Goodman Steven J. Goodman Revocable Living Trust 24843 Del Prado, Suite 536 Dana Point, CA 92629 (714) 496-6515 -6- EX-10.22 25 STOCK PURCHASE AGREEMENT - GAK LIMITED EXHIBIT 10.22 STOCK PURCHASE AGREEMENT This Agreement is made as of the 9th day of January, 1996, by and among SunWood Research, Inc., a Delaware corporation ("the Corporation"), GAK Limited, and Richard Stack ("Founders"). WITNESSETH: ---------- WHEREAS, the Corporation desires to issue, and the Purchaser desires to purchase Common Stock of the Corporation as herein described, on the terms and conditions hereinafter set forth: NOW, THEREFORE, IT IS AGREED among the parties as follows: 1. Purchaser hereby agrees to purchase from the Corporation and the Corporation agrees to sell to Purchaser six (6) shares of the Common Stock (the "Shares") for a purchase price of One Hundred Dollars ($100.00) per share. 2. If the Corporation hereafter registers any of its securities for its own account or the account of any security holder, the Corporation shall include the Shares in such registration at the Corporation's cost and expense on such terms and conditions as are customary in "piggyback registrations." If any one of the Founders hereafter propose to sell or transfer any of their shares of Common Stock, Purchaser shall be given 20-days advance written notice of the terms and conditions of such proposed sale. Purchaser shall have the right, exercisable upon written notice to the Founder(s) during such 20-day period, to sell in such proposed sale the same percentage of its Shares as the Founder(s) are proposing to sell of their shares. 3. Purchaser makes the following representations and warranties to the Corporation, each of which shall survive the closing and consummation of the purchase and sale of the Shares (the "Closing"): (a) Purchaser is purchasing the Shares in Purchaser's own name and for Purchaser's own account and no other person has any interest in or right with respect to the Shares, nor has Purchaser agreed to give any person any such interest or right in the future. (b) Purchaser is acquiring the Shares for investment and not with a view to or for sale in connection with any distribution of the securities. Purchaser recognizes that the shares have not been registered under the Federal Securities Act of 1933, nor qualified under the California Corporate Securities law of 1968, that any disposition of the Shares is subject to restrictions imposed by federal and state law and that the certificates representing the Shares will bear a restrictive legend. Purchaser also recognizes that the certificates representing the Shares will bear a restrictive legend. Purchaser also recognizes that the Shares cannot be disposed of by Purchaser absent registration and qualification, or an available exemption from registration and qualification, and that no undertaking has been made with regard to registering or qualifying the Shares in the future. Purchaser understands that the availability of an exemption in the future will depend in part on circumstances outside Purchaser's control and that the Purchaser may be required to hold the Shares for a substantial period. Purchaser recognizes that no public market exists with respect to the Shares and no representation has been made to Purchaser that such a public market will exist at a future date. Purchaser understands that the California Commissioner of Corporation has made no finding or determination relating to the fairness for investment of the Shares offered by the corporation and that the Commissioner has not and will not recommend or endorse the Shares. (c) Purchaser has not seen or received any advertisement or general solicitation with respect to the sale of the Shares. (d) Purchaser believes, by reason of Purchaser' s business or financial experience that Purchaser is capable of evaluating the merits and risks of this investment and of protecting Purchaser's own interests in connection with this investment. (e) During the course of this transaction and prior to purchasing the Shares, Purchaser has been provided with financial and other written information about the Corporation and the terms and conditions of the offering. Purchaser has been given the opportunity by the Corporation to obtain such information and ask such questions concerning the Corporation, the Shares, and Purchaser's investment as Purchaser felt necessary, and to the extent Purchaser availed himself of such opportunity, Purchaser received satisfactory information and answers. If Purchaser requested any additional information which the Corporation possessed or could acquire without unreasonable effort or expense which was necessary to verify the accuracy of the financial and other written information about the Corporation furnished to Purchaser by the Corporation, such additional information was provided Purchaser and was satisfactory. In reaching the conclusion to invest in the Shares, Purchaser has carefully evaluated his financial resources and investment position and the risks associated with this investment, and acknowledges that he is able to bear the economic risks of this investment. By electing to participate in this investment Purchaser realizes he may lose his entire investment. Purchaser further acknowledges that his financial condition is such that he is not under any present necessity or constraint to dispose of the Shares to satisfy any existing or contemplated debt or undertaking. (f) This agreement has been duly authorized, executed and delivered by Purchaser and is valid and binding on Purchaser and enforceable against Purchaser in accordance with its terms. -2- 4. The Corporation makes the following representations and warranties to Purchaser, each of which shall survive the Closing: (a) The Corporation is a corporation duly organized, validly existing and in good standing under the laws of the State of California. (b) The authorized capital stock of the Corporation consists of 3,000 shares of Common Stock. (c) This Agreement has been duly authorized, executed and delivered by the Corporation and is valid and binding on the Corporation and enforceable against the Corporation in accordance with its terms. (d) The financial statements of the Corporation made available to Purchaser accurately reflect the financial condition and the results of operations of the Corporation as of the dates indicated therein. Since the date of the most recent financial statements provided to Purchaser, there has been no materially adverse change in the condition (financial or otherwise) of the Corporation or in its assets, liabilities, properties, business operations or prospects that has not been specifically disclosed to Purchaser in writing. (e) Neither the execution and delivery of, nor the consummation of the transactions contemplated hereby will result in or constitute an event that, with notice or lapse of time, or both, would be a default under any material agreement to which the corporation is a party or by which its assets are bound. 5. The Closing shall take place concurrently with the execution of this Agreement at the offices of the Corporation. Upon tender of the purchase price for the Shares, the Corporation shall deliver to Purchaser a properly executed share certificate representing the Shares. The Corporation shall take such other actions as may be reasonably necessary to close the transactions contemplated hereby. 6. The certificate issued to Purchaser by the Corporation representing the Shares shall have endorsed thereon the following legend. "THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR REGISTERED OR QUALIFIED WITH THE CALIFORNIA DEPARTMENT OF CORPORATIONS UNDER THE CORPORATE SECURITIES LAW OF 1968. THE SHARES MAY NOT BE PLEDGED, SOLD OR TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND THE CALIFORNIA CORPORATE SECURITIES LAW OF 1968 AND OTHER APPLICABLE STATE SECURITIES LAWS COVERING THE SHARES OR AN OPINION OF QUALIFIED COUNSEL OR OTHER EVIDENCE SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED." -3- 7. The parties agree to execute such further instruments and to take such further action as may reasonably be necessary to carry out the intent of this Agreement. 8. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or delivery by express courier, or 4 days after the deposit in the United States Post Office, by registered or certified mail with postage and fees prepaid, addressed to the party to whom notice is being given at this reference or at such other address as such party may designate by ten days advance written notice to the other parties hereto. 9. This Agreement shall be governed by the laws of the State of California and interpreted and determined in accordance with the laws of the State of California, as such laws are applied by California courts to contracts made and to be performed entirely in California by residents of that state. 10. This Agreement shall inure to the benefit of the successors and assigns of the Corporation and Purchaser. 11. In the event of a dispute concerning the subject matter hereof, the prevailing party shall be entitled to recover its costs and reasonable attorneys' fees in resolving the dispute. 12. This Agreement constitutes the entire agreement of the parties with respect to the subject matter hereof and supersedes all prior and contemporaneous agreements and understanding with respect to such subject matter. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. "CORPORATION" SunWood Research, Inc. By: /s/ Richard Stack ------------------------------- Richard Stack, President "PURCHASER" GAK Limited By: /s/ Horace Hertz ------------------------------- Horace Hertz, General Partner -4- "FOUNDERS" ______________________________________ ______________________________________ ______________________________________ -5- EXHIBIT A ADDRESSES --------- Richard Stack, CEO, President SunWood Research, Inc. 2882C Walnut Avenue Tustin, CA 92780 (714) 734-1390 Horace Hertz GAK Limited 26132 Red Corral Laguna Hills, CA 92653 -6- EX-10.23 26 LETTER AGREEMENT 02-15-96 W/ JIM COX EXHIBIT 10.23 February 15, 1996 Attention: Mr. Jim Cox Dear Jim, This is to confirm that I accept your offer to purchase $20,000 worth of shares in Sunwood Research, Inc. The exact number of shares will be determined by our underwriters or if we do not go public, by the directors of Sunwood Research. In the meantime we will accept the $20,000 in the form of a loan on which we will pay the prime rate of interest. If for any reason you do not agree with the valuation of the company, you may not be obligated to purchase the shares. The $20,000 will then be returned to you within 60 days. Our target valuation, according to our underwriters, will be $12,500,000. Regards /s/ Richard Stack Richard Stack President EX-10.24 27 6/30/96 LETTER AGREEMENT WITH JIM COX EXHIBIT 10.24 As of June 30, 1996 Sunwood Research, Inc. 2882C Walnut Avenue Tustin, CA 92680 Re: Conversion Notice Gentlemen: The purpose of this letter is to confirm that the undersigned is exercising the undersigned's right to convert the loan referenced in that certain letter dated February 15, 1996 from Sunwood Research, Inc., a Delaware corporation ("Sunwood"), to the undersigned at the agreed upon per share exercise price of $10,750 per share. The conversion of the undersigned's loan shall be deemed to be made effective as of June 30, 1996 and any and all accrued and unpaid interest with respect to such loan is hereby forgiven. Please provide for the delivery of the stock certificates representing my ownership in Sunwood at your earliest convenience. Sincerely, /s/ Jim Cox ------------------------ Jim Cox ACCEPTED AND AGREED TO: SUNWOOD RESEARCH, INC. By: /s/ Richard P. Stack ----------------------------- Richard P. Stack, President Please register shares in the name of James E. and Lois A. Cox as joint tenants with rights of survivorship. EX-10.25 28 LETTER AGREEMENT 02-16-96 W/ PETER AIELLO EXHIBIT 10.25 February 16, 1996 AGREEMENT BETWEEN MR. PETER AIELLO AND SUNWOOD RESEARCH, INC. Peter Aiello agrees to loan Sunwood Research Inc. the sum of $20,000 to be repaid on May 1, 1996. By mutual agreement this loan may be paid back sooner or may be rolled over a further 60 days. Interest at 8% per year will accrue to Mr. Aiello. I agree to the above provisions: /s/ Richard Stack - ----------------------- Richard Stack President EX-10.26 29 4-3-96 STOCK PURCHASE AGREEMENT - S.J. GOODMAN EXHIBIT 10.26 STOCK PURCHASE AGREEMENT This Agreement is made as of the 3rd day of April, 1996, by and among SunWood Research, Inc., a Delaware corporation ("the Corporation"), the Steven J. Goodman Revocable Living Trust ("Purchaser"), and Richard Stack ("Founders"). WITNESSETH: ---------- WHEREAS, the Corporation desires to issue, and the Purchaser desires to purchase Common Stock of the Corporation as herein described, on the terms and conditions hereinafter set forth: NOW, THEREFORE, IT IS AGREED among the parties as follows: 1. Purchaser hereby agrees to purchase from the Corporation and the Corporation agrees to sell to Purchaser twenty-seven (27) shares of the Common Stock (the "Shares") for a purchase price of Nine Hundred and Twenty-Six Dollars (926.00) per share. 2. If the Corporation hereafter registers any of its securities for its own account or the account of any security holder, the Corporation shall include the Shares in such registration at the Corporation's cost and expense on such terms and conditions as are customary in "piggyback registrations." If any one of the Founders hereafter propose to sell or transfer any of their shares of Common Stock, Purchaser shall be given 20-days advance written notice of the terms and conditions of such proposed sale. Purchaser shall have the right, exercisable upon written notice to the Founder(s) during such 20-day period, to sell in such proposed sale the same percentage of its Shares as the Founder(s) are proposing to sell of their shares. 3. Purchaser makes the following representations and warranties to the Corporation, each of which shall survive the closing and consummation of the purchase and sale of the Shares (the "Closing"): (a) Purchaser is purchasing the Shares in Purchaser's own name and for Purchaser's own account and no other person has any interest in or right with respect to the Shares, nor has Purchaser agreed to give any person any such interest or right in the future. (b) Purchaser is acquiring the Shares for investment and not with a view to or for sale in connection with any distribution of the securities. Purchaser recognizes that the shares have not been registered under the Federal Securities Act of 1933, nor qualified under the California Corporate Securities law of 1968, that any disposition of the Shares is subject to restrictions imposed by federal and state law and that the certificates representing the Shares will bear a restrictive legend. Purchaser also recognizes that the certificates representing the Shares will -1- bear a restrictive legend. Purchaser also recognizes that the Shares cannot be disposed of by Purchaser absent registration and qualification, or an available exemption from registration and qualification, and that no undertaking has been made with regard to registering or qualifying the Shares in the future. Purchaser understands that the availability of an exemption in the future will depend in part on circumstances outside Purchaser's control and that the Purchaser may be required to hold the Shares for a substantial period. Purchaser recognizes that no public market exists with respect to the Shares and no representation has been made to Purchaser that such a public market will exist at a future date. Purchaser understands that the California Commissioner of Corporation has made no finding or determination relating to the fairness for investment of the Shares offered by the corporation and that the Commissioner has not and will not recommend or endorse the Shares. (c) Purchaser has not seen or received any advertisement or general solicitation with respect to the sale of the Shares. (d) Purchaser believes, by reason of Purchaser's business or financial experience that Purchaser is capable of evaluating the merits and risks of this investment and of protecting Purchaser's own interests in connection with this investment. (e) During the course of this transaction and prior to purchasing the Shares, Purchaser has been provided with financial and other written information about the Corporation and the terms and conditions of the offering. Purchaser has been given the opportunity by the Corporation to obtain such information and ask such questions concerning the Corporation, the Shares, and Purchaser's investment as Purchaser felt necessary, and to the extent Purchaser availed himself of such opportunity, Purchaser received satisfactory information and answers. If Purchaser requested any additional information which the Corporation possessed or could acquire without unreasonable effort or expense which was necessary to verify the accuracy of the financial and other written information about the Corporation furnished to Purchaser by the Corporation, such additional information was provided Purchaser and was satisfactory. In reaching the conclusion to invest in the Shares, Purchaser has carefully evaluated his financial resources and investment position and the risks associated with this investment, and acknowledges that he is able to bear the economic risks of this investment. By electing to participate in this investment Purchaser realizes he may lose his entire investment. Purchaser further acknowledges that his financial condition is such that he is not under any present necessity or constraint to dispose of the Shares to satisfy any existing or contemplated debt or undertaking. (f) This agreement has been duly authorized, executed and delivered by Purchaser and is valid and binding on Purchaser and enforceable against Purchaser in accordance with its terms. -2- 4. The Corporation makes the following representations and warranties to Purchaser, each of which shall survive the Closing: (a) The Corporation is a corporation duly organized, validly existing and in good standing under the laws of the State of California. (b) The authorized capital stock of the Corporation consists of 3,000 shares of Common Stock. (c) This Agreement has been duly authorized, executed and delivered by the Corporation and is valid and binding on the Corporation and enforceable against the Corporation in accordance with its terms. (d) The financial statements of the Corporation made available to Purchaser accurately reflect the financial condition and the results of operations of the Corporation as of the dates indicated therein. Since the date of the most recent financial statements provided to Purchaser, there has been no materially adverse change in the condition (financial or otherwise) of the Corporation or in its assets, liabilities, properties, business operations or prospects that has not been specifically disclosed to Purchaser in writing. (e) Neither the execution and delivery of, nor the consummation of the transactions contemplated hereby will result in or constitute an event that, with notice or lapse of time, or both, would be a default under any material agreement to which the corporation is a party or by which its assets are bound. 5. The Closing shall take place concurrently with the execution of this Agreement at the offices of the Corporation. Upon tender of the purchase price for the Shares, the Corporation shall deliver to Purchaser a properly executed share certificate representing the Shares. The Corporation shall take such other actions as may be reasonably necessary to close the transactions contemplated hereby. 6. The certificate issued to Purchaser by the Corporation representing the Shares shall have endorsed thereon the following legend. "THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR REGISTERED OR QUALIFIED WITH THE CALIFORNIA DEPARTMENT OF CORPORATIONS UNDER THE CORPORATE SECURITIES LAW OF 1968. THE SHARES MAY NOT BE PLEDGED, SOLD OR TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND THE CALIFORNIA CORPORATE SECURITIES LAW OF 1968 AND OTHER APPLICABLE STATE SECURITIES LAWS COVERING THE SHARES OR AN OPINION OF QUALIFIED COUNSEL OR OTHER EVIDENCE SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED." -3- 7. The parties agree to execute such further instruments and to take such further action as may reasonably be necessary to carry out the intent of this Agreement. 8. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or delivery by express courier, or 4 days after the deposit in the United States Post Office, by registered or certified mail with postage and fees prepaid, addressed to the party to whom notice is being given at this reference or at such other address as such party may designate by ten days' advance written notice to the other parties hereto. 9. This Agreement shall be governed by the laws of the State of California and interpreted and determined in accordance with the laws of the State of California, as such laws are applied by California courts to contracts made and to be performed entirely in California by residents of that state. 10. This Agreement shall inure to the benefit of the successors and assigns of the Corporation and Purchaser. 11. In the event of a dispute concerning the subject matter hereof, the prevailing party shall be entitled to recover its costs and reasonable attorneys' fees in resolving the dispute. 12. This Agreement constitutes the entire agreement of the parties with respect to the subject matter hereof and supersedes all prior and contemporaneous agreements and understanding with respect to such subject matter. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. "CORPORATION" SunWood Research, Inc. By: /s/ Richard Stack ------------------------------- Richard Stack, President "PURCHASER" Steven J. Goodman Revocable Living Trust By: /s/ Steven J. Goodman ------------------------------- Steven J. Goodman, Trustee -4- "FOUNDERS" ______________________________________ ______________________________________ ______________________________________ -5- EXHIBIT A ADDRESSES --------- Richard Stack, CEO, President SunWood Research, Inc. 2882C Walnut Avenue Tustin, CA 92780 (714) 734-1390 Steven J. Goodman Steven J. Goodman Revocable Living Trust 24843 Del Prado, Suite 536 Dana Point, CA 92629 (714) 496-6515 EX-10.27 30 5-17-96 SECURITIES PURCHASE AGREEMENT - JOHN AMOS Exhibit 10.27 SECURITIES PURCHASE AGREEMENT THIS SECURITIES PURCHASE AGREEMENT ("Agreement"), dated and effective as of May 17, 1996, by and between SUNWOOD RESEARCH, INC., a Delaware corporation - ------ ("COMPANY") and JOHN AMOS ("PURCHASER"). --------- WITNESSETH WHEREAS, PURCHASER desires to invest certain funds in COMPANY on the terms and conditions set forth herein; and WHEREAS, COMPANY desires to issue and sell to PURCHASER securities consisting of (i) a promissory note (the "Note") to evidence the repayment of the PURCHASER's investment and (ii) a warrant (the "Warrant") which is exercisable for shares of common stock of COMPANY (the "Shares") on the terms and conditions set forth herein; NOW THEREFORE, in consideration of the promises and respective mutual agreements herein contained, it is agreed by and between the parties hereto as follows: ARTICLE 1 ISSUANCE OF SECURITIES 1.1 Delivery of Note. At the date of the signing of this Agreement as ---------------- provided in Section 4.1 hereto (the "Closing"), subject to the terms and conditions herein set forth, and on the basis of the representations, warranties and agreements herein contained, COMPANY shall execute a promissory note all due and payable together with interest on the date which is one year from the date of execution hereof, in the form of EXHIBIT "A" attached hereto and incorporated herein by reference (the "Note"). The Note shall be issued in favor of PURCHASER or its designee. 1.2 Delivery of Warrant. At the Closing, subject to the terms and ------------------- conditions herein set forth, and on the basis of the representations, warranties and agreements herein contained, COMPANY shall execute and deliver a warrant (the "Warrant"), and, together with the Note, the "Securities) exercisable for a total of $1.00 for that number of common shares as set forth in Section 2.1 hereto. The Warrant shall be issued in favor of PURCHASER or its designee. 1.3 Consideration and Payment for the Securities. In consideration for -------------------------------------------- the Securities, PURCHASER shall deliver the purchase price of $25,000 dollars (United States funds)("Purchase Price"), which shall be payable to the COMPANY upon the execution of this Agreement. ARTICLE 2 THE WARRANT 2.1 Exercise Ratio. The COMPANY contemplates undertaking an underwriting -------------- public offering of its Common Stock (the "Proposed Public Offering"). PURCHASER may, at its option, within 90 days after effectiveness of the Proposed Public Offering, exercise the Warrant for the total purchase price of $1.00 into shares of the COMPANY's Common Stock at a conversion rate equal to 100% (the "Conversion Factor") of the offering price of the COMPANY's Common Stock in the Proposed Public Offering divided into $25,000.00 (e.g., if the public offering price is $5.00, the holder would receive 5,000 shares of Common Stock). 2.2 Registration. If and at the time the COMPANY proposes to register ------------ any of its securities under the Act in connection with the Proposed Public Offering, it will each such time give written notice to PURCHASER of its intention so to do. Upon the written request of PURCHASER given within 30 days after receipt of any such notice, the COMPANY will use its best efforts to cause the shares issuable upon exercise of the Warrant to be registered under the Act (with the securities which the COMPANY at the time proposes to register), all to the extent requisite to permit the sale or other disposition by the PURCHASER of the Shares so registered; provided, however, that the COMPANY may, as a condition precedent to its effective such registration, require PURCHASER to agree with the COMPANY and the managing underwriter or underwriters of the offering to be made by the COMPANY in connection with such registration that such Seller will not sell any securities of the same class or convertible into the same class as those registered by the COMPANY (including any class into which the securities registered by the COMPANY are convertible) for such reasonable period after such registration becomes effective as shall then be specified in writing by such underwriter or underwriters if in the opinion of such underwriter or underwriters the COMPANY's offering would be materially adversely affected in the absence of such an agreement. All expenses incurred by the COMPANY in complying with this Section, including without limitation all registration and filing fees, listing fees, printing, expenses, fees and disbursements of all independent accounts, or counsel for the COMPANY and or counsel for PURCHASER and the expense of any special audits incident to or required by any such registration and the expenses of complying with the securities or blue sky laws of any jurisdiction shall be paid by the COMPANY. Notwithstanding the foregoing, PURCHASER shall pay all underwriting discounts or commissions with respect to shares sold by PURCHASER. ARTICLE 3 REPRESENTATIONS AND COVENANTS OF COMPANY AND PURCHASER 3.1 The COMPANY hereby represents and warrants that: 2 (a) The Notes, the Warrants, and the Shares usable upon exercise of the Warrants have been duly authorized and upon payment of the Purchase Price, will be fully paid and non-assessable. (b) It shall issue the Note and the Warrant to PURCHASER free and clear of all liens, security interests, pledges, encumbrances, charges, demands and claims, of any kind and nature whatsoever, whether direct or indirect or contingent. (c) The COMPANY will at all times reserve and keep available, free from preemptive rights, out of the aggregate of its authorized but unissued Common Stock or its authorized and issued Common Stock held in its treasury for the purpose of enabling it to satisfy any obligation to issue Shares upon exercise of the Warrant, the full number of Shares deliverable upon the exercise of the Warrant. The COMPANY covenants that all Shares which may be issued upon exercise of the Warrant will be validly issued, fully paid and nonassessable outstanding Shares of the COMPANY. (d) If the COMPANY shall be subject to the reporting requirements of Section 13 of the 1934 Act, the COMPANY will use its best efforts timely to file all reports required to be filed from time to time with the SEC (including but not limited to the reports under Section 13 and 15(d) of the 1934 Act referred to in subparagraph (c)(1) of Rule 144). If there is a public market for any Common Stock of the COMPANY at any time that the COMPANY is not subject to the reporting requirements of either of said Section 13 or 15(d), the COMPANY will, upon the request of PURCHASER, use its best efforts to make publicly available the information concerning the COMPANY referred to in subparagraph (c)(2) of said Rule 144. The COMPANY will furnish to PURCHASER, promptly upon request, (i) a written statement of the COMPANY's compliance with the requirements of subparagraphs (c)(1) or (c)(2), as the case may be, of said Rule 144, and (ii) written information concerning the COMPANY sufficient to enable PURCHASER to complete any Form 144 required to be filed with the SEC pursuant to said Rule 144. 3.2 The PURCHASER hereby represents and warrants that: (a) By reason of the PURCHASER's knowledge and experience in financial and business matters in general, and investments in particular, the PURCHASER is able to evaluate the merits and risks of an investment in the COMPANY. (b) The PURCHASER is purchasing the Securities as principal, solely for the PURCHASER's own account, for investment, and not with an intent to sell, or for sale in connection with any distribution of the Note, the Warrant or the 3 Shares issuable upon exercise of the Warrant, and no other person has any interest in or right with respect to the Note, the Warrant, or the Shares issuable upon exercise of the Warrant. (c) The PURCHASER is an "accredited investor" as that term is defined in Section 501 of Regulation D of the Act. (d) The person executing this Agreement on behalf of the PURCHASER has all right, power and authority to so execute and deliver this Agreement. (e) The PURCHASER has been advised that none of the Note, the Warrant or the Shares issuable upon exercise of the Warrant have been registered under the Act, or under the securities laws of any state; that no federal or state agency, including the Securities and Exchange Commission, the California Department of Corporations, or the securities commission or authorities of any other state or regulatory jurisdiction has approved or disapproved the issuance of the Note, the Warrant or the Shares or passed upon or endorsed the merits of the Offering or made any finding or determination as to the fairness of the issuance of the Note, the Warrant the Shares; that the Securities the PURCHASER will be acquiring are "restricted securities" as that term is defined in Rule 144 promulgated under the Act; that the Note and the Warrant will include a restrictive legend; and that the Note and the Warrant cannot be sold, transferred, assigned or otherwise hypothecated without compliance with applicable Federal and state securities laws. (f) PURCHASER acknowledges it has received all the information it considers necessary or appropriate for deciding whether to purchase the Securities. PURCHASER further represents that it has had an opportunity to ask questions and receive answers from the COMPANY regarding the terms and conditions of the offering of the Securities and the business, properties, prospects, and financial condition of the COMPANY and to obtain additional information (to the extent the COMPANY possessed such information or could acquire it without unreasonable effort or expense) necessary to verify the accuracy of any information furnished to it or which it had access. (g) To the extent applicable, the Securities shall be endorsed with the legend set forth below, and PURCHASER covenants that, except to the extent such restrictions are waived by the COMPANY, PURCHASER shall not transfer the Note, the Warrant or the Shares issuable upon exercise of the Warrant without complying with the restrictions on transfer described in the following legend endorsed on the Note, the Warrant or the certificate representing the Shares: 4 "THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED, OR HYPOTHECATED ABSENT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OF COMPLIANCE WITH RULE 144 PROMULGATED UNDER SUCH ACT, OR UNLESS THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED." 3.3 On the Closing Date as defined herein in Section 4.1, the COMPANY shall deliver to the PURCHASER an executed Note evidencing the obligation of the COMPANY to repay the Purchase Price. In addition on the Closing Date, the COMPANY shall deliver to the PURCHASER an executed Warrant evidencing the right of PURCHASER to obtain the Shares upon exercise of the Warrant. The Note and the Warrant shall be subject to no liens, security interests, pledges, encumbrances, charges, restrictions, demands or claims in any other party whatsoever, except as set forth in the legend on the Note and the Warrant. ARTICLE 4 CLOSING AND DELIVERY OF DOCUMENTS 4.1 Closing. The Closing shall be deemed to have occurred as of the ------- date of signing of this Agreement. Subsequent to the signing, the following shall occur as a single integrated transaction: 4.1.1 Delivery by COMPANY. ------------------- (a) COMPANY shall deliver, or cause to be delivered, to the PURCHASER a fully executed Note and a fully executed Warrant as is required to be delivered by COMPANY or its representatives pursuant to the provisions of this Agreement. 4.1.2 Delivery by PURCHASER. --------------------- (a) The PURCHASER shall deliver the Purchase Price as required by Section 1.3. (b) The PURCHASER shall deliver, or cause to be delivered, to COMPANY such instruments, documents and certificates as are required to be delivered by the PURCHASER or its representatives pursuant to the provisions of this Agreement. 5 MISCELLANEOUS 5.1 Entire Agreement. This Agreement sets forth the entire agreement ---------------- and understanding of the parties hereto with respect to the transactions contemplated hereby, and supersedes all prior agreements, arrangements and understandings related to the subject matter hereof. No understanding, promise, inducement, statement of intention, representation, warranty, covenant or condition, written or oral, express or implied, whether by statute or otherwise, has been made by any party hereto which is not embodied in this Agreement or the written statements, certificates, or other documents delivered pursuant hereto or in connection with the transaction contemplated hereby, and no party hereto shall be bound by or liable for any alleged understanding, promise, inducement, statement, representation, warranty, covenant or condition not so set forth. 5.2 Notices. All notices provided for in this Agreement shall be in ------- writing signed by the party giving such notice, and delivered personally or sent by overnight courier or messenger or sent by registered or certified mail (air mail if overseas), return receipt requested, or by telex, facsimile transmission, telegram or similar means of communication. Notices shall be deemed to have been received on the date of personal delivery, telex, facsimile transmission, telegram or similar means of communication, or if sent by overnight courier or messenger, shall be deemed to have been received on the next delivery day after deposit with the courier or messenger, or if sent by certified or registered mail, return receipt requested, shall be deemed to have been received on the third business day after the date of mailing. Notices shall be sent to the addresses set forth below: If to COMPANY: ------------- SunWood Research, Inc. 2882C Walnut Avenue Tustin, California 92780 Attention: Richard Stack If to PURCHASER: --------------- John Amos GPO Box 357 Hong Kong 6 5.3 Waiver and Amendment. Any term, provision, covenant, -------------------- representation, warranty, or condition of this Agreement may be waived, but only by a written instrument signed by the party entitled to the benefits thereof. The failure or delay of any party at any time or times to require performance of any provision hereof or to exercise its rights with respect to any provision hereof shall in no manner operate as a waiver of or affect such party's right at a later time to enforce the same. No waiver by any party of any condition, or of the breach of any term, provision, covenant, representation or warrant contained in this Agreement, in any one or more instances, shall be deemed to be or construed as a further or continuing waiver of any such condition or breach or waiver of any other condition or of the breach of any other term, provision, covenant, representation or warranty. No modification or amendment of this Agreement shall be valid and binding unless it be in writing and signed by all parties hereto. 5.4 Arbitration. If a dispute or claim shall arise with respect to ----------- any of the terms or provisions of this Agreement, or with respect to the performance by either of the parties under this Agreement, then either party may, by notice as herein provided, require that the dispute be submitted under the Commercial Arbitration Rules of the American Arbitration Association to an arbitrator in good standing with the American Arbitration Association within fifteen (15) days after such notice is given. The written decision of the single arbitrator ultimately appointed by or for both parties shall be binding and conclusive on the parties. Judgment may be entered on such written decision by the single arbitrator in any court having jurisdiction and the parties consent to the jurisdiction of the Municipal and Superior Court of Orange County, California for this purpose. Any arbitration undertaken pursuant to the terms of this section shall occur in Orange County, California. 5.5 Choice of Law. This Agreement and the rights of the parties ------------- hereunder shall be governed by and construed in accordance with the laws of the State of California including all matters of construction, validity, performance, and enforcement and without giving effect to the principles of conflict of laws. 5.6 Jurisdiction. The parties submit to the jurisdiction of the ------------ Courts of the State of California or a Federal Court empaneled in the State of California for the resolution of all legal disputes arising under the terms of this Agreement, including, but not limited to, enforcement of any arbitration award. 5.7 Counterparts. This Agreement may be executed in one or more ------------ counterparts, each of which shall be deemed an original, but all of which shall together constitute one and the same instrument. 5.8 Attorneys' Fees. Except as otherwise provided herein, if a --------------- dispute should arise between the parties including, but not limited to arbitration, the prevailing party shall be reimbursed by the nonprevailing party for all reasonable expenses incurred in resolving such dispute, including reasonable attorneys' fees exclusive of such amount of attorneys' fees as shall be a premium for result or for risk of loss under a contingency fee arrangement. 7 5.9 Taxes. Any income taxes required to be paid in connection with ----- the payments due hereunder, shall be borne by the party required to make such payment. Any withholding taxes in the nature of a tax on income shall be deducted from payments due, and the party required to withhold such tax shall furnish to the party receiving such payment all documentation necessary to prove the proper amount to withhold of such taxes and to prove payment to the tax authority of such required withholding. 5.10 Facsimile Signatures. Notwithstanding the execution of this -------------------- Agreement by the use of facsimile signatures, this Agreement shall be effective upon its execution by both parties. The parties hereto agree that original signatures will be exchanged within ten (10) business days after the date of execution. IN WITNESS WHEREOF, the parties hereto have executed this Agreement, as of the date first written hereinabove. "COMPANY" SUNWOOD RESEARCH, INC., a Delaware corporation. By: /s/ Richard Stack ----------------------------- Richard Stack, President "PURCHASER" /s/ John Amos ---------------------------- John Amos 8 EX-10.28 31 $25,000 PROMISSORY NOTE TO JOHN R. AMOS EXHIBIT 10.28 EXHIBIT "A" PROMISSORY NOTE $25,000.00 Orange County, California May 31, 1996 THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED, OR HYPOTHECATED ABSENT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OF COMPLIANCE WITH RULE 144 PROMULGATED UNDER SUCH ACT, OR UNLESS THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED. FOR VALUE RECEIVED, the undersigned SunWood Research, Inc., a Delaware corporation, with offices at 2882C Walnut Avenue, Tustin, California 92780 ("SunWood") hereby promises to pay to the order of John R. Amos ("Payee") or ------------ order, at Tustin, California, U.S.A. or at such other place as Payee or any holder hereof may from time to time designate, the principal sum of TWENTY FIVE THOUSAND DOLLARS ($25,000.00), and to pay interest from the date hereof on the unpaid principal balance amount hereof at a rate of ten percent (10%) per annum. The principal balance and all accrued interest outstanding under this Note, shall be due and payable at the earlier of (i) two (2) years from the date of this Note, (May 31, 1998) or (ii) the effectiveness of a public offering on ------------ behalf of SunWood. Interest shall not be added to principal. SunWood and all endorsers, guarantors and sureties hereof hereby severally do not waive diligence, demand, presentment, and notice. SunWood may, at its option, at any time and from time to time, prepay all or any part of the principal balance of this Note, provided that concurrently with each such prepayment SunWood shall pay accrued interest on the principal so prepaid to the date of such prepayment. This Note may not be changed, modified or terminated orally, but only by an agreement in writing signed by the party to be charged. Payee also represents and warrants that he/she/they attest to the veracity of the representations and warranties required of them under the terms of that certain Securities Purchase Agreement executed concurrently herewith. The parties hereto hereby irrevocably consent to the jurisdiction of the courts of the State of California in connection with any action or proceeding arising out of or relating to this Note. This Note shall be governed by California law, without reference to any choice law principles thereof. SunWood Research, Inc. By: /s/ Richard Stack -------------------------- Richard Stack, President EX-10.29 32 COMMON STOCK WARRANT FOR JOHN AMOS EXHIBIT 10.29 EXHIBIT "B" WARRANT Orange County, California May 31, 1996 THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED, OR HYPOTHECATED ABSENT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OF COMPLIANCE WITH RULE 144 PROMULGATED UNDER SUCH ACT, OR UNLESS THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED. FOR VALUE RECEIVED, John R. Amos, the registered holder or assigns (the ------------ "Holder"), is entitled to purchase from SunWood Research, Inc., a Delaware corporation, (the"Company") within 90 days after the Company obtains effectiveness of an underwriting public offering of its Common Stock (the "Proposed Public Offering"), for the total purchase price of $1.00, such number of shares of the Company's Common Stock equal to 100% (the Conversion Factor") of the offering price of the Company's Common Stock in the Proposed Public Offering divided into $5,000.00 (e.g., if the public offering price is $5.00, the Holder would receive 5,000 shares of Common Stock). Holders will not have any rights or privileges of shareholders of the Company prior to Exercise of the Warrants. If and at the time the Company proposes to register any of its securities under the Act in connection with the Proposed Public Offering, it will each such time give written notice to Holder of its intention so to do. Upon the written request of Holder given within 30 days after receipt of any such notice, the Company will use its best efforts to cause the shares issuable upon exercise of the Warrant to be registered under the Act (with the securities which the Company at the time proposes to register), all to the extent requisite to permit the sale or other disposition by the Holder of the Shares so registered; provided, however, that the Company may, as a condition precedent to its effective such registration, require Holder to agree with the Company and the managing underwriter or underwriters of the offering to be made by the Company in connection with such registration that such Seller will not sell any securities of the same class or convertible into the same class as those registered by the Company (including any class into which the securities registered by the Company are convertible) for such reasonable period after such registration becomes effective as shall then be specified in writing by such underwriter or underwriters if in the opinion of such underwriter or underwriters the Company's offering would be materially adversely affected in the absence of such an agreement. All expenses incurred by the Company in complying with this Section, including without limitation all registration and filing fees, listing fees, printing expenses, fees and disbursements of all independent accounts, or counsel for the Company and or counsel for Holder and the expense of any special audits incident to or required by any such registration and the expenses of complying with the securities or blue sky laws of any jurisdiction shall be paid by the Company. Notwithstanding the foregoing, Holder shall pay all underwriting discounts or commissions with respect to shares sold by Holder. The Warrant evidenced hereby may be exercised in whole or in part by presentation of this Warrant certificate and simultaneous payment of the Warrant Price at the offices of the Company in Tustin, California. Payment of such price shall be made at the option of the holder in cash or by check. The Warrant evidenced hereby is of a duly authorized issue of Common Stock Purchase Warrants and are issued under and in accordance with the Securities Purchase Agreement, and are subject to the terms and provisions contained in such Securities Purchase Agreement to all of which the Holder of this Warrant Certificate by acceptance hereof consents. This Warrant is exercisable in whole only and not in part. No fractional Shares will be issued upon the exercise of rights to purchase hereunder, but the Company shall pay the cash value of any fraction upon the exercise of one or more Warrants. The Warrants evidenced hereby are transferable at the office of the Company subject to compliance with applicable state and federal securities laws. The Holder hereof may be treated by the Company and all other persons dealing with this Warrant Certificate as the absolute owner hereof for all purposes and as the person entitled to exercise the rights represented hereby, any notice to the contrary notwithstanding, and until such transfer is entered on such books, the Company may treat the Holder as the owner for all purposes. The Warrant Certificate does not entitle the Holder thereof to any of the rights of a shareholder of the Company be valid or obligatory for any purpose until it shall have been countersigned by the Warrant Agent. IN WITNESS WHEREOF, the Company has signed and sealed this Unit Warrant and delivered it in Tustin, California as of May 31, 1996. SUNWOOD RESEARCH, INC. By: /s/ Richard Stack -------------------------- Richard Stack, President EX-10.30 33 5-17-96 SECURITIES PURCHASE AGREEMENT - J. KOMPAN Exhibit 10.30 SECURITIES PURCHASE AGREEMENT THIS SECURITIES PURCHASE AGREEMENT ("Agreement"), dated and effective as of May 17, 1996, by and between SUNWOOD RESEARCH, INC., a Delaware corporation - ------ ("COMPANY") and JACK S. KOMPAN ("PURCHASER"). -------------- WITNESSETH WHEREAS, PURCHASER desires to invest certain funds in COMPANY on the terms and conditions set forth herein; and WHEREAS, COMPANY desires to issue and sell to PURCHASER securities consisting of (i) a promissory note (the "Note") to evidence the repayment of the PURCHASER's investment and (ii) a warrant (the "Warrant") which is exercisable for shares of common stock of COMPANY (the "Shares") on the terms and conditions set forth herein; NOW THEREFORE, in consideration of the promises and respective mutual agreements herein contained, it is agreed by and between the parties hereto as follows: ARTICLE 1 ISSUANCE OF SECURITIES 1.1 Delivery of Note. At the date of the signing of this Agreement as ---------------- provided in Section 4.1 hereto (the "Closing"), subject to the terms and conditions herein set forth, and on the basis of the representations, warranties and agreements herein contained, COMPANY shall execute a promissory note all due and payable together with interest on the date which is one year from the date of execution hereof, in the form of EXHIBIT "A" attached hereto and incorporated herein by reference (the "Note"). The Note shall be issued in favor of PURCHASER or its designee. 1.2 Delivery of Warrant. At the Closing, subject to the terms and ------------------- conditions herein set forth, and on the basis of the representations, warranties and agreements herein contained, COMPANY shall execute and deliver a warrant (the "Warrant"), and, together with the Note, the "Securities) exercisable for a total of $1.00 for that number of common shares as set forth in Section 2.1 hereto. The Warrant shall be issued in favor of PURCHASER or its designee. 1.3 Consideration and Payment for the Securities. In consideration for -------------------------------------------- the Securities, PURCHASER shall deliver the purchase price of $25,000 dollars (United States funds)("Purchase Price"), which shall be payable to the COMPANY upon the execution of this Agreement. ARTICLE 2 THE WARRANT 2.1 Exercise Ratio. The COMPANY contemplates undertaking an -------------- underwriting public offering of its Common Stock (the "Proposed Public Offering"). PURCHASER may, at its option, within 90 days after effectiveness of the Proposed Public Offering, exercise the Warrant for the total purchase price of $1.00 into shares of the COMPANY's Common Stock at a conversion rate equal to 100% (the "Conversion Factor") of the offering price of the COMPANY's Common Stock in the Proposed Public Offering divided into $25,000.00 (e.g., if the public offering price is $5.00, the holder would receive 5,000 shares of Common Stock). 2.2 Registration. If and at the time the COMPANY proposes to register ------------ any of its securities under the Act in connection with the Proposed Public Offering, it will each such time give written notice to PURCHASER of its intention so to do. Upon the written request of PURCHASER given within 30 days after receipt of any such notice, the COMPANY will use its best efforts to cause the shares issuable upon exercise of the Warrant to be registered under the Act (with the securities which the COMPANY at the time proposes to register), all to the extent requisite to permit the sale or other disposition by the PURCHASER of the Shares so registered; provided, however, that the COMPANY may, as a condition precedent to its effective such registration, require PURCHASER to agree with the COMPANY and the managing underwriter or underwriters of the offering to be made by the COMPANY in connection with such registration that such Seller will not sell any securities of the same class or convertible into the same class as those registered by the COMPANY (including any class into which the securities registered by the COMPANY are convertible) for such reasonable period after such registration becomes effective as shall then be specified in writing by such underwriter or underwriters if in the opinion of such underwriter or underwriters the COMPANY's offering would be materially adversely affected in the absence of such an agreement. All expenses incurred by the COMPANY in complying with this Section, including without limitation all registration and filing fees, listing fees, printing, expenses, fees and disbursements of all independent accounts, or counsel for the COMPANY and or counsel for PURCHASER and the expense of any special audits incident to or required by any such registration and the expenses of complying with the securities or blue sky laws of any jurisdiction shall be paid by the COMPANY. Notwithstanding the foregoing, PURCHASER shall pay all underwriting discounts or commissions with respect to shares sold by PURCHASER. ARTICLE 3 REPRESENTATIONS AND COVENANTS OF COMPANY AND PURCHASER 3.1 The COMPANY hereby represents and warrants that: 2 (a) The Notes, the Warrants, and the Shares issuable upon exercise of the Warrants have been duly authorized and upon payment of the Purchase Price, will be fully paid and non-assessable. (b) It shall issue the Note and the Warrant to PURCHASER free and clear of all liens, security interests, pledges, encumbrances, charges, demands and claims, of any kind and nature whatsoever, whether direct or indirect or contingent. (c) The COMPANY will at all times reserve and keep available, free from preemptive rights, out of the aggregate of its authorized but unissued Common Stock or its authorized and issued Common Stock held in its treasury for the purpose of enabling it to satisfy any obligation to issue Shares upon exercise of the Warrant, the full number of Shares deliverable upon the exercise of the Warrant. The COMPANY covenants that all Shares which may be issued upon exercise of the Warrant will be validly issued, fully paid and nonassessable outstanding Shares of the COMPANY. (d) If the COMPANY shall be subject to the reporting requirements of Section 13 of the 1934 Act, the COMPANY will use its best efforts timely to file all reports required to be filed from time to time with the SEC (including but not limited to the reports under Section 13 and 15(d) of the 1934 Act referred to in subparagraph (c)(1) of Rule 144). If there is a public market for any Common Stock of the COMPANY at any time that the COMPANY is not subject to the reporting requirements of either of said Section 13 or 15(d), the COMPANY will, upon the request of PURCHASER, use its best efforts to make publicly available the information concerning the COMPANY referred to in subparagraph (c)(2) of said Rule 144. The COMPANY will furnish to PURCHASER, promptly upon request, (i) a written statement of the COMPANY's compliance with the requirements of subparagraphs (c)(1) or (c)(2), as the case may be, of said Rule 144, and (ii) written information concerning the COMPANY sufficient to enable PURCHASER to complete any Form 144 required to be filed with the SEC pursuant to said Rule 144. 3.2 The PURCHASER hereby represents and warrants that: (a) By reason of the PURCHASER's knowledge and experience in financial and business matters in general, and investments in particular, the PURCHASER is able to evaluate the merits and risks of an investment in the COMPANY. (b) The PURCHASER is purchasing the Securities as principal, solely for the PURCHASER's own account, for investment, and not with an intent to sell, or for sale in connection with any distribution of the Note, the Warrant or the 3 Shares issuable upon exercise of the Warrant, and no other person has any interest in or right with respect to the Note, the Warrant, or the Shares issuable upon exercise of the Warrant. (c) The PURCHASER is an "accredited investor" as that term is defined in Section 501 of Regulation D of the Act. (d) The person executing this Agreement on behalf of the PURCHASER has all right, power and authority to so execute and deliver this Agreement. (e) The PURCHASER has been advised that none of the Note, the Warrant or the Shares issuable upon exercise of the Warrant have been registered under the Act, or under the securities laws of any state; that no federal or state agency, including the Securities and Exchange Commission, the California Department of Corporations, or the securities commission or authorities of any other state or regulatory jurisdiction has approved or disapproved the issuance of the Note, the Warrant or the Shares or passed upon or endorsed the merits of the Offering or made any finding or determination as to the fairness of the issuance of the Note, the Warrant the Shares; that the Securities the PURCHASER will be acquiring are "restricted securities" as that term is defined in Rule 144 promulgated under the Act; that the Note and the Warrant will include a restrictive legend; and that the Note and the Warrant cannot be sold, transferred, assigned or otherwise hypothecated without compliance with applicable Federal and state securities laws. (f) PURCHASER acknowledges it has received all the information it considers necessary or appropriate for deciding whether to purchase the Securities. PURCHASER further represents that it has had an opportunity to ask questions and receive answers from the COMPANY regarding the terms and conditions of the offering of the Securities and the business, properties, prospects, and financial condition of the COMPANY and to obtain additional information (to the extent the COMPANY possessed such information or could acquire it without unreasonable effort or expense) necessary to verify the accuracy of any information furnished to it or which it had access. (g) To the extent applicable, the Securities shall be endorsed with the legend set forth below, and PURCHASER covenants that, except to the extent such restrictions are waived by the COMPANY, PURCHASER shall not transfer the Note, the Warrant or the Shares issuable upon exercise of the Warrant without complying with the restrictions on transfer described in the following legend endorsed on the Note, the Warrant or the certificate representing the Shares: 4 "THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED, OR HYPOTHECATED ABSENT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OF COMPLIANCE WITH RULE 144 PROMULGATED UNDER SUCH ACT, OR UNLESS THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED." 3.3 On the Closing Date as defined herein in Section 4.1, the COMPANY shall deliver to the PURCHASER an executed Note evidencing the obligation of the COMPANY to repay the Purchase Price. In addition on the Closing Date, the COMPANY shall deliver to the PURCHASER an executed Warrant evidencing the right of PURCHASER to obtain the Shares upon exercise of the Warrant. The Note and the Warrant shall be subject to no liens, security interests, pledges, encumbrances, charges, restrictions, demands or claims in any other party whatsoever, except as set forth in the legend on the Note and the Warrant. ARTICLE 4 CLOSING AND DELIVERY OF DOCUMENTS 4.1 Closing. The Closing shall be deemed to have occurred as of the ------- date of signing of this Agreement. Subsequent to the signing, the following shall occur as a single integrated transaction: 4.1.1 Delivery by COMPANY. ------------------- (a) COMPANY shall deliver, or cause to be delivered, to the PURCHASER a fully executed Note and a fully executed Warrant as is required to be delivered by COMPANY or its representatives pursuant to the provisions of this Agreement. 4.1.2 Delivery by PURCHASER. --------------------- (a) The PURCHASER shall deliver the Purchase Price as required by Section 1.3. (b) The PURCHASER shall deliver, or cause to be delivered, to COMPANY such instruments, documents and certificates as are required to be delivered by the PURCHASER or its representatives pursuant to the provisions of this Agreement. 5 MISCELLANEOUS 5.1 Entire Agreement. This Agreement sets forth the entire agreement ---------------- and understanding of the parties hereto with respect to the transactions contemplated hereby, and supersedes all prior agreements, arrangements and understandings related to the subject matter hereof. No understanding, promise, inducement, statement of intention, representation, warranty, covenant or condition, written or oral, express or implied, whether by statute or otherwise, has been made by any party hereto which is not embodied in this Agreement or the written statements, certificates, or other documents delivered pursuant hereto or in connection with the transaction contemplated hereby, and no party hereto shall be bound by or liable for any alleged understanding, promise, inducement, statement, representation, warranty, covenant or condition not so set forth. 5.2 Notices. All notices provided for in this Agreement shall be in ------- writing signed by the party giving such notice, and delivered personally or sent by overnight courier or messenger or sent by registered or certified mail (air mail if overseas), return receipt requested, or by telex, facsimile transmission, telegram or similar means of communication. Notices shall be deemed to have been received on the date of personal delivery, telex, facsimile transmission, telegram or similar means of communication, or if sent by overnight courier or messenger, shall be deemed to have been received on the next delivery day after deposit with the courier or messenger, or if sent by certified or registered mail, return receipt requested, shall be deemed to have been received on the third business day after the date of mailing. Notices shall be sent to the addresses set forth below: If to COMPANY: ------------- SunWood Research, Inc. 2882C Walnut Avenue Tustin, California 92780 Attention: Richard Stack If to PURCHASER: --------------- Jack S. Kompan GPO Box 357 Hong Kong 6 5.3 Waiver and Amendment. Any term, provision, covenant, representation, -------------------- warranty or condition of this Agreement may be waived, but only by a written instrument signed by the party entitled to the benefits thereof. The failure or delay of any party at any time or times to require performance of any provision hereof or to exercise its rights with respect to any provision hereof shall in no manner operate as a waiver of or affect such party's right at a later time to enforce the same. No waiver by any party of any condition, or of the breach of any term, provision, covenant, representation or warrant contained in this Agreement, in any one or more instances, shall be deemed to be or construed as a further or continuing waiver of any such condition or breach or waiver of any other condition or of the breach of any other term, provision, covenant, representation or warranty. No modification or amendment of this Agreement shall be valid and binding unless it be in writing and signed by all parties hereto. 5.4 Arbitration. If a dispute or claim shall arise with respect to ----------- any of the terms or provisions of this Agreement, or with respect to the performance by either of the parties under this Agreement, then either party may, by notice as herein provided, require that the dispute be submitted under the Commercial Arbitration Rules of the American Arbitration Association to an arbitrator in good standing with the American Arbitration Association within fifteen (15) days after such notice is given. The written decision of the single arbitrator ultimately appointed by or for both parties shall be binding and conclusive on the parties. Judgment may be entered on such written decision by the single arbitrator in any court having jurisdiction and the parties consent to the jurisdiction of the Municipal and Superior Court of Orange County, California for this purpose. Any arbitration undertaken pursuant to the terms of this section shall occur in Orange County, California. 5.5 Choice of Law. This Agreement and the rights of the parties ------------- hereunder shall be governed by and construed in accordance with the laws of the State of California including all matters of construction, validity, performance, and enforcement and without giving effect to the principles of conflict of laws. 5.6 Jurisdiction. The parties submit to the jurisdiction of the ------------ Courts of the State of California or a Federal Court empaneled in the State of California for the resolution of all legal disputes arising under the terms of this Agreement, including, but not limited to, enforcement of any arbitration award. 5.7 Counterparts. This Agreement may be executed in one or more ------------ counterparts, each of which shall be deemed an original, but all of which shall together constitute one and the same instrument. 5.8 Attorneys' Fees. Except as otherwise provided herein, if a dispute --------------- should arise between the parties including, but not limited to arbitration, the prevailing party shall be reimbursed by the nonprevailing party for all reasonable expenses incurred in resolving such dispute, including reasonable attorneys' fees exclusive of such amount of attorneys' fees as shall be a premium for result or for risk of loss under a contingency fee arrangement. 7 5.9 Taxes. Any income taxes required to be paid in connection with ----- the payments due hereunder, shall be borne by the party required to make such payment. Any withholding taxes in the nature of a tax on income shall be deducted from payments due, and the party required to withhold such tax shall furnish to the party receiving such payment all documentation necessary to prove the proper amount to withhold of such taxes and to prove payment to the tax authority of such required withholding. 5.10 Facsimile Signatures. Notwithstanding the execution of this -------------------- Agreement by the use of facsimile signatures, this Agreement shall be effective upon its execution by both parties. The parties hereto agree that original signatures will be exchanged within ten (10) business days after the date of execution. IN WITNESS WHEREOF, the parties hereto have executed this Agreement, as of the date first written hereinabove. "COMPANY" SUNWOOD RESEARCH, INC., a Delaware corporation. By: /s/ Richard Stack --------------------------- Richard Stack, President "PURCHASER" /s/ Jack S. Kompan ------------------------- Jack S. Kompan 8 EX-10.31 34 PROMISSORY NOTE TO JACK KOMPAN EXHIBIT 10.31 EXHIBIT "A" PROMISSORY NOTE Orange County, California May 31, 1996 $25,000.00 THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED, OR HYPOTHECATED ABSENT AN EFFECTIVE REGISTRATION THEREFOF UNDER SUCH ACT, OF COMPLIANCE WITH RULE 144 PROMULGATED UNDER SUCH ACT, OR UNLESS THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED. FOR VALUE RECEIVED, the undersigned SunWood Research, Inc., a Delaware corporation, with offices at 2882C Walnut Avenue, Tustin, California 92780 ("SunWood") hereby promises to pay to the order of Jack S. Kompan ("Payee") or -------------- order, at Tustin, California, U.S.A. or at such other place as Payee or any holder hereof may from time to time designate, the principal sum of TWENTY FIVE THOUSAND DOLLARS ($25,000.000), and to pay interest from the date hereof on the unpaid principal balance amount hereof at a rate of ten percent (10%) per annum. The principal balance and all accrued interest outstanding under this Note, shall be due and payable at the earlier of (i) two (2) years from the date of this Note, (May 31, 1998) or (ii) the effectiveness of a public offering on ------------ behalf of SunWood. Interest shall not be added to principal. SunWood and all endorsers, guarantors and sureties hereof hereby severally do not waive diligence, demand, presentment, and notice. SunWood may, at its option, at any time and from time to time, prepay all or any part of the principal balance of this Note, provided that concurrently with each such prepayment SunWood shall pay accrued interest on the principal so prepaid to the date of such prepayment. This Note may not be changed, modified or terminated orally, but only by an agreement in writing signed by the party to be charged. Payee also represents and warrants that he/she/they attest to the veracity of the representations and warranties required of them under the terms of that certain Securities Purchase Agreement executed concurrently herewith. The parties hereto hereby irrevocably consent to the jurisdiction of the courts of the State of California in connection with any action or proceeding arising out of or relating to this Note. This Note shall be governed by California law, without reference to any choice of law principles thereof. SunWood Research, Inc. By: /s/ Richard Stack ------------------------- Richard Stack, President EX-10.32 35 COMMON STOCK WARRANT FOR JACK KOMPAN EXHIBIT 10.32 EXHIBIT "B" WARRANT Orange County, California May 31, 1996 THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED, OR HYPOTHECATED ABSENT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OF COMPLIANCE WITH RULE 144 PROMULGATED UNDER SUCH ACT, OR UNLESS THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED. FOR VALUE RECEIVED, Jack S. Kompan, the registered holder or assigns (the -------------- "Holder"), is entitled to purchase from SunWood Research, Inc., a Delaware corporation, (the"Company") within 90 days after the Company obtains effectiveness of an underwriting public offering of its Common Stock (the "Proposed Public Offering"), for the total purchase price of $1.00, such number of shares of the Company's Common Stock equal to 100% (the Conversion Factor") of the offering price of the Company's Common Stock in the Proposed Public Offering divided into $5,000.00 (e.g., if the public offering price is $5.00, the Holder would receive 5,000 shares of Common Stock). Holders will not have any rights or privileges of shareholders of the Company prior to Exercise of the Warrants. If and at the time the Company proposes to register any of its securities under the Act in connection with the Proposed Public Offering, it will each such time give written notice to Holder of its intention so to do. Upon the written request of Holder given within 30 days after receipt of any such notice, the Company will use its best efforts to cause the shares issuable upon exercise of the Warrant to be registered under the Act (with the securities which the Company at the time proposes to register), all to the extent requisite to permit the sale or other disposition by the Holder of the Shares so registered; provided, however, that the Company may, as a condition precedent to its effective such registration, require Holder to agree with the Company and the managing underwriter or underwriters of the offering to be made by the Company in connection with such registration that such Seller will not sell any securities of the same class or convertible into the same class as those registered by the Company (including any class into which the securities registered by the Company are convertible) for such reasonable period after such registration becomes effective as shall then be specified in writing by such underwriter or underwriters if in the opinion of such underwriter or underwriters the Company's offering would be materially adversely affected in the absence of such an agreement. All expenses incurred by the Company in complying with this Section, including without limitation all registration and filing fees, listing fees, printing expenses, fees and disbursements of all independent accounts, or counsel for the Company and or counsel for Holder and the expense of any special audits incident to or required by any such registration and the expenses of complying with the securities or blue sky laws of any jurisdiction shall be paid by the Company. Notwithstanding the foregoing, Holder shall pay all underwriting discounts or commissions with respect to shares sold by Holder. The Warrant evidenced hereby may be exercised in whole or in part by presentation of this Warrant certificate and simultaneous payment of the Warrant Price at the offices of the Company in Tustin, California. Payment of such price shall be made at the option of the holder in cash or by check. The Warrant evidenced hereby is of a duly authorized issue of Common Stock Purchase Warrants and are issued under and in accordance with the Securities Purchase Agreement, and are subject to the terms and provisions contained in such Securities Purchase Agreement to all of which the Holder of this Warrant Certificate by acceptance hereof consents. This Warrant is exercisable in whole only and not in part. No fractional Shares will be issued upon the exercise of rights to purchase hereunder, but the Company shall pay the cash value of any fraction upon the exercise of one or more Warrants. The Warrants evidenced hereby are transferable at the office of the Company subject to compliance with applicable state and federal securities laws. The Holder hereof may be treated by the Company and all other persons dealing with this Warrant Certificate as the absolute owner hereof for all purposes and as the person entitled to exercise the rights represented hereby, any notice to the contrary notwithstanding, and until such transfer is entered on such books, the Company may treat the Holder as the owner for all purposes. The Warrant Certificate does not entitle the Holder thereof to any of the rights of a shareholder of the Company be valid or obligatory for any purpose until it shall have been countersigned by the Warrant Agent. IN WITNESS WHEREOF, the Company has signed and sealed this Unit Warrant and delivered it in Tustin, California as of May 31, 1996. SUNWOOD RESEARCH, INC. By: /s/ Richard Stack --------------------------- Richard Stack, President EX-10.33 36 5-17-96 SECURITIES PURCHASE AGRMT - K. P. GANGWANI Exhibit 10.33 SECURITIES PURCHASE AGREEMENT THIS SECURITIES PURCHASE AGREEMENT ("Agreement"), dated and effective as of May 17, 1996, by and between SUNWOOD RESEARCH, INC., a Delaware corporation - ------ ("COMPANY") and Kanayo Partabrai Gangwani ("PURCHASER"). ------------------------- WITNESSETH WHEREAS, PURCHASER desires to invest certain funds in COMPANY on the terms and conditions set forth herein; and WHEREAS, COMPANY desires to issue and sell to PURCHASER securities consisting of (i) a promissory note (the "Note") to evidence the repayment of the PURCHASER's investment and (ii) a warrant (the "Warrant") which is exercisable for shares of common stock of COMPANY (the "Shares") on the terms and conditions set forth herein; NOW THEREFORE, in consideration of the promises and respective mutual agreements herein contained, it is agreed by and between the parties hereto as follows: ARTICLE 1 ISSUANCE OF SECURITIES 1.1 Delivery of Note. At the date of the signing of this Agreement as ---------------- provided in Section 4.1 hereto (the "Closing"), subject to the terms and conditions herein set forth, and on the basis of the representations, warranties and agreements herein contained, COMPANY shall execute a promissory note all due and payable together with interest on the date which is one year from the date of execution hereof, in the form of EXHIBIT "A" attached hereto and incorporated herein by reference (the "Note"). The Note shall be issued in favor of PURCHASER or its designee. 1.2 Delivery of Warrant. At the Closing, subject to the terms and ------------------- conditions herein set forth, and on the basis of the representations, warranties and agreements herein contained, COMPANY shall execute and deliver a warrant (the "Warrant"), and, together with the Note, the "Securities) exercisable for a total of $1.00 for that number of common shares as set forth in Section 2.1 hereto. The Warrant shall be issued in favor of PURCHASER or its designee. 1.3 Consideration and Payment for the Securities. In consideration for -------------------------------------------- the Securities, PURCHASER shall deliver the purchase price of $25,000 dollars (United States funds)("Purchase Price"), which shall be payable to the COMPANY upon the execution of this Agreement. ARTICLE 2 THE WARRANT 2.1 Exercise Ratio. The COMPANY contemplates undertaking an underwriting -------------- public offering of its Common Stock (the "Proposed Public Offering"). PURCHASER may, at its option, within 90 days after effectiveness of the Proposed Public Offering, exercise the Warrant for the total purchase price of $1.00 into shares of the COMPANY's offering price of the COMPANY's Common Stock in the Proposed Public Offering divided into $25,000.00 (e.g., if the public offering price is $5.00, the holder would receive 5,000 shares of Common Stock). 2.2 Registration. If and at the time the COMPANY proposes to register ------------ any of its securities under the Act in connection with the Proposed Public Offering, it will each such time give written notice to PURCHASER of its intention so to do. Upon the written request of PURCHASER given within 30 days after receipt of any such notice, the COMPANY will use its best efforts to cause the shares issuable upon exercise of the Warrant to be registered under the Act (with the securities which the COMPANY at the time proposes to register), all to the extent requisite to permit the sale or other disposition by the PURCHASER of the Shares so registered; provided, however, that the COMPANY may, as a condition precedent to its effective such registration, require PURCHASER to agree with the COMPANY and the managing underwriter or underwriters of the offering to be made by the COMPANY in connection with such registration that such Seller will not sell any securities of the same class or convertible into the same class as those registered by the COMPANY (including any class into which the securities registered by the COMPANY are convertible) for such reasonable period after such registration becomes effective as shall then be specified in writing by such underwriter or underwriters if in the opinion of such underwriter or underwriters the COMPANY's offering would be materially adversely affected in the absence of such an agreement. All expenses incurred by the COMPANY in complying with this Section, including without limitation all registration and filing fees, listing fees, printing, expenses, fees and disbursements of all independent accounts, or counsel for the COMPANY and or counsel for PURCHASER and the expense of any special audits incident to or required by any such registration and the expenses of complying with the securities or blue sky laws of any jurisdiction shall be paid by the COMPANY. Notwithstanding the foregoing, PURCHASER shall pay all underwriting discounts or commissions with respect to shares sold by PURCHASER. ARTICLE 3 REPRESENTATIONS AND COVENANTS OF COMPANY AND PURCHASER 3.1 The COMPANY hereby represents and warrants that: 2 (a) The Notes, the Warrants, and the Shares issuable upon exercise of the Warrants have been duly authorized and upon payment of the Purchase Price, will be fully paid and non-assessable. (b) It shall issue the Note and the Warrant to PURCHASER free and clear of all liens, security interests, pledges, encumbrances, charges, demands and claims, of any kind and nature whatsoever, whether direct or indirect or contingent. (c) The COMPANY will at all times reserve and keep available, free from preemptive rights, out of the aggregate of its authorized but unissued Common Stock or its authorized and issued Common Stock held in its treasury for the purpose of enabling it to satisfy any obligation to issue Shares upon exercise of the Warrant, the full number of Shares deliverable upon the exercise of the Warrant. The COMPANY covenants that all Shares which may be issued upon exercise of the Warrant will be validly issued, fully paid and nonassessable outstanding Shares of the COMPANY. (d) If the COMPANY shall be subject to the reporting requirements of Section 13 of the 1934 Act, the COMPANY will use its best efforts timely to file all reports required to be filed from time to time with the SEC (including but not limited to the reports under Section 13 and 15(d) of the 1934 Act referred to in subparagraph (c)(1) of Rule 144). If there is a public market for any Common Stock of the COMPANY at any time that the COMPANY is not subject to the reporting requirements of either of said Section 13 or 15(d), the COMPANY will, upon the request of PURCHASER, use its best efforts to make publicly available the information concerning the COMPANY referred to in subparagraph (c)(2) of said Rule 144. The COMPANY will furnish to PURCHASER, promptly upon request, (i) a written statement of the COMPANY's compliance with the requirements of subparagraphs (c)(1) or (c)(2), as the case may be, of said Rule 144, and (ii) written information concerning the COMPANY sufficient to enable PURCHASER to complete any Form 144 required to be filed with the SEC pursuant to said Rule 144. 3.2 The PURCHASER hereby represents and warrants that: (a) By reason of the PURCHASER's knowledge and experience in financial and business matters in general, and investments in particular, the PURCHASER is able to evaluate the merits and risks of an investment in the COMPANY. (b) The PURCHASER is purchasing the Securities as principal, solely for the PURCHASER's own account, for investment, and not with an intent to sell, or for sale in connection with any distribution of the Note, the Warrant or the 3 Shares issuable upon exercise of the Warrant, and no other person has any interest in or right with respect to the Note, the Warrant, or the Shares issuable upon exercise of the Warrant. (c) The PURCHASER is an "accredited investor" as that term is defined in Section 501 of Regulation D of the Act. (d) The person executing this Agreement on behalf of the PURCHASER has all right, power and authority to so execute and deliver this Agreement. (e) The PURCHASER has been advised that none of the Note, the Warrant or the Shares issuable upon exercise of the Warrant have been registered under the Act, or under the securities laws of any state; that no federal or state agency, including the Securities and Exchange Commission, the California Department of Corporations, or the securities commission or authorities of any other state or regulatory jurisdiction has approved or disapproved the issuance of the Note, the Warrant or the Shares or passed upon or endorsed the merits of the Offering or made any finding or determination as to the fairness of the issuance of the Note, the Warrant the Shares; that the Securities the PURCHASER will be acquiring are "restricted securities" as that term is defined in Rule 144 promulgated under the Act; that the Note and the Warrant will include a restrictive legend; and that the Note and the Warrant cannot be sold, transferred, assigned or otherwise hypothecated without compliance with applicable Federal and state securities laws. (f) PURCHASER acknowledges it has received all the information it considers necessary or appropriate for deciding whether to purchase the Securities. PURCHASER further represents that it has had an opportunity to ask questions and receive answers from the COMPANY regarding the terms and conditions of the offering of the Securities and the business, properties, prospects, and financial condition of the COMPANY and to obtain additional information (to the extent the COMPANY possessed such information or could acquire it without unreasonable effort or expense) necessary to verify the accuracy of any information furnished to it or which it had access. (g) To the extent applicable, the Securities shall be endorsed with the legend set forth below, and PURCHASER covenants that, except to the extent such restrictions are waived by the COMPANY, PURCHASER shall not transfer the Note, the Warrant or the Shares issuable upon exercise of the Warrant without complying with the restrictions on transfer described in the following legend endorsed on the Note, the Warrant or the certificate representing the Shares: 4 "THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED, OR HYPOTHECATED ABSENT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OF COMPLIANCE WITH RULE 144 PROMULGATED UNDER SUCH ACT, OR UNLESS THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED." 3.3 On the Closing Date as defined herein in Section 4.1, the COMPANY shall deliver to the PURCHASER an executed Note evidencing the obligation of the COMPANY to repay the Purchase Price. In addition on the Closing Date, the COMPANY shall deliver to the PURCHASER an executed Warrant evidencing the right of PURCHASER to obtain the Shares upon exercise of the Warrant. The Note and the Warrant shall be subject to no liens, security interests, pledges, encumbrances, charges, restrictions, demands or claims in any other party whatsoever, except as set forth in the legend on the Note and the Warrant. ARTICLE 4 CLOSING AND DELIVERY OF DOCUMENTS 4.1 Closing. The Closing shall be deemed to have occurred as of the ------- date of signing of this Agreement. Subsequent to the signing, the following shall occur as a single integrated transaction: 4.1.1 Delivery by COMPANY. ------------------- (a) COMPANY shall deliver, or cause to be delivered, to the PURCHASER a fully executed Note and a fully executed Warrant as is required to be delivered by COMPANY or its representatives pursuant to the provisions of this Agreement. 4.1.2 Delivery by PURCHASER. --------------------- (a) The PURCHASER shall deliver the Purchase Price as required by Section 1.3. (b) The PURCHASER shall deliver, or cause to be delivered, to COMPANY such instruments, documents and certificates as are required to be delivered by the PURCHASER or its representatives pursuant to the provisions of this Agreement. 5 MISCELLANEOUS 5.1 Entire Agreement. This Agreement sets forth the entire agreement ---------------- and understanding of the parties hereto with respect to the transactions contemplated hereby, and supersedes all prior agreements, arrangements and understandings related to the subject matter hereof. No understanding, promise, inducement, statement of intention, representation, warranty, covenant or condition, written or oral, express or implied, whether by statute or otherwise, has been made by any party hereto which is not embodied in this Agreement or the written statements, certificates, or other documents delivered pursuant hereto or in connection with the transaction contemplated hereby, and no party hereto shall be bound by or liable for any alleged understanding, promise, inducement, statement, representation, warranty, covenant or condition not so set forth. 5.2 Notices. All notices provided for in this Agreement shall be in ------- writing signed by the party giving such notice, and delivered personally or sent by overnight courier or messenger or sent by registered or certified mail (air mail if overseas), return receipt requested, or by telex, facsimile transmission, telegram or similar means of communication. Notices shall be deemed to have been received on the date of personal delivery, telex, facsimile transmission, telegram or similar means of communication, or if sent by overnight courier or messenger, shall be deemed to have been received on the next delivery day after deposit with the courier or messenger, or if sent by certified or registered mail, return receipt requested, shall be deemed to have been received on the third business day after the date of mailing. Notices shall be sent to the addresses set forth below: If to COMPANY: ------------- SunWood Research, Inc. 2882C Walnut Avenue Tustin, California 92780 Attention: Richard Stack If to PURCHASER: --------------- Kanayo Partabrai Gangwani GPO Box 357 Hong Kong 6 5.3 Waiver and Amendment. Any term, provision, covenant, -------------------- representation, warranty, or condition of this Agreement may be waived, but only by a written instrument signed by the party entitled to the benefits thereof. The failure or delay of any party at any time or times to require performance of any provision hereof or to exercise its rights with respect to any provision hereof shall in no manner operate as a waiver of or affect such party's right at a later time to enforce the same. No waiver by any party of any condition, or of the breach of any term, provision, covenant, representation or warrant contained in this Agreement, in any one or more instances, shall be deemed to be or construed as a further or continuing waiver of any such condition or breach or waiver of any other condition or of the breach of any other term, provision, covenant, representation or warranty. No modification or amendment of this Agreement shall be valid and binding unless it be in writing and signed by all parties hereto. 5.4 Arbitration. If a dispute or claim shall arise with respect to ----------- any of the terms or provisions of this Agreement, or with respect to the performance by either of the parties under this Agreement, then either party may, by notice as herein provided, require that the dispute be submitted under the Commercial Arbitration Rules of the American Arbitration Association to an arbitrator in good standing with the American Arbitration Association within fifteen (15) days after such notice is given. The written decision of the single arbitrator ultimately appointed by or for both parties shall be binding and conclusive on the parties. Judgment may be entered on such written decision by the single arbitrator in any court having jurisdiction and the parties consent to the jurisdiction of the Municipal and Superior Court of Orange County, California for this purpose. Any arbitration undertaken pursuant to the terms of this section shall occur in Orange County, California. 5.5 Choice of Law. This Agreement and the rights of the parties ------------- hereunder shall be governed by and construed in accordance with the laws of the State of California including all matters of construction, validity, performance, and enforcement and without giving effect to the principles of conflict of laws. 5.6 Jurisdiction. The parties submit to the jurisdiction of the Courts ------------ of the State of California or a Federal Court empaneled in the State of California for the resolution of all legal disputes arising under the terms of this Agreement, including, but not limited to, enforcement of any arbitration award. 5.7 Counterparts. This Agreement may be executed in one or more ------------ counterparts, each of which shall be deemed an original, but all of which shall together constitute one and the same instrument. 5.8 Attorneys' Fees. Except as otherwise provided herein, if a --------------- dispute should arise between the parties including, but not limited to arbitration, the prevailing party shall be reimbursed by the nonprevailing party for all reasonable expenses incurred in resolving such dispute, including reasonable attorneys' fees exclusive of such amount of attorneys' fees as shall be a premium for result or for risk of loss under a contingency fee arrangement. 7 5.9 Taxes. Any income taxes required to be paid in connection with ----- the payments due hereunder, shall be borne by the party required to make such payment. Any withholding taxes in the nature of a tax on income shall be deducted from payments due, and the party required to withhold such tax shall furnish to the party receiving such payment all documentation necessary to prove the proper amount to withhold of such taxes and to prove payment to the tax authority of such required withholding. 5.10 Facsimile Signatures. Notwithstanding the execution of this -------------------- Agreement by the use of facsimile signatures, this Agreement shall be effective upon its execution by both parties. The parties hereto agree that original signatures will be exchanged within ten (10) business days after the date of execution. IN WITNESS WHEREOF, the parties hereto have executed this Agreement, as of the date first written hereinabove. "COMPANY" SUNWOOD RESEARCH, INC., a Delaware corporation. By: /s/ Richard Stack ------------------------------ Richard Stack, President "PURCHASER" /s/ Kanayo Partabrai Gangwani ---------------------------------- Kanayo Partabrai Gangwani 8 EX-10.34 37 PROMISSORY NOTE TO KANAYO P. GANGWANI EXHIBIT 10.34 EXHIBIT "A" PROMISSORY NOTE $25,000.00 Orange County, California May 31, 1996 THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED, OR HYPOTHECATED ABSENT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OF COMPLIANCE WITH RULE 144 PROMULGATED UNDER SUCH ACT, OR UNLESS THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED. FOR VALUE RECEIVED, the undersigned SunWood Research, Inc., a Delaware corporation, with offices at 2882C Walnut Avenue, Tustin, California 92780 ("SunWood") hereby promises to pay to the order of Kanayo Partabrai Gangwani ------------------------- ("Payee") or order, at Tustin, California, U.S.A. or at such other place as Payee or any holder hereof may from time to time designate, the principal sum of TWENTY FIVE THOUSAND DOLLARS ($25,000.00), and to pay interest from the date hereof on the unpaid principal balance amount hereof at a rate of ten percent (10%) per annum. The principal balance and all accrued interest outstanding under this Note, shall be due and payable at the earlier of (i) two (2) years from the date of this Note, (May 31, 1998) or (ii) the effectiveness of a ------------ public offering on behalf of SunWood. Interest shall not be added to principal. SunWood and all endorsers, guarantors and sureties hereof hereby severally do not waive diligence, demand, presentment, and notice. SunWood may, at its option, at any time and from time to time, prepay all or any part of the principal balance of this Note, provided that concurrently with each such prepayment SunWood shall pay accrued interest on the principal so prepaid to the date of such prepayment. This Note may not be changed, modified or terminated orally, but only by an agreement in writing signed by the party to be charged. Payee also represents and warrants that he/she/they attest to the veracity of the representations and warranties required of them under the terms of that certain Securities Purchase Agreement executed concurrently herewith. The parties hereto hereby irrevocably consent to the jurisdiction of the courts of the State of California in connection with any action or proceeding arising out of or relating to this Note. This Note shall be governed by California law, without reference to any choice of law principles thereof. SunWood Research, Inc. By: /s/ Richard Stack --------------------------- Richard Stack, President EX-10.35 38 COMMON STOCK WARRANT FOR KANAYO P. GANGWANI EXHIBIT 10.35 EXHIBIT "B" WARRANT Orange County, California May 31, 1996 THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED, OR HYPOTHECATED ABSENT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OF COMPLIANCE WITH RULE 144 PROMULGATED UNDER SUCH ACT, OR UNLESS THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED. FOR VALUE RECEIVED, Kanayo Partabrai Gangwani, the registered holder or ------------------------- assigns (the "Holder"), is entitled to purchase from SunWood Research, Inc., a Delaware corporation, (the"Company") within 90 days after the Company obtains effectiveness of an underwriting public offering of its Common Stock (the "Proposed Public Offering"), for the total purchase price of $1.00, such number of shares of the Company's Common Stock equal to 100% (the Conversion Factor") of the offering price of the Company's Common Stock in the Proposed Public Offering divided into $5,000.00 (e.g., if the public offering price is $5.00, the Holder would receive 5,000 shares of Common Stock). Holders will not have any rights or privileges of shareholders of the Company prior to Exercise of the Warrants. If and at the time the Company proposes to register any of its securities under the Act in connection with the Proposed Public Offering, it will each such time give written notice to Holder of its intention so to do. Upon the written request of Holder given within 30 days after receipt of any such notice, the Company will use its best efforts to cause the shares issuable upon exercise of the Warrant to be registered under the Act (with the securities which the Company at the time proposes to register), all to the extent requisite to permit the sale or other disposition by the Holder of the Shares so registered; provided, however, that the Company may, as a condition precedent to its effective such registration, require Holder to agree with the Company and the managing underwriter or underwriters of the offering to be made by the Company in connection with such registration that such Seller will not sell any securities of the same class or convertible into the same class as those registered by the Company (including any class into which the securities registered by the Company are convertible) for such reasonable period after such registration becomes effective as shall then be specified in writing by such underwriter or underwriters if in the opinion of such underwriter or underwriters the Company's offering would be materially adversely affected in the absence of such an agreement. All expenses incurred by the Company in complying with this Section, including without limitation all registration and filing fees, listing fees, printing expenses, fees and disbursements of all independent accounts, or counsel for the Company and or counsel for Holder and the expense of any special audits incident to or required by any such registration and the expenses of complying with the securities or blue sky laws of any jurisdiction shall be paid by the Company. Notwithstanding the foregoing, Holder shall pay all underwriting discounts or commissions with respect to shares sold by Holder. The Warrant evidenced hereby may be exercised in whole or in part by presentation of this Warrant certificate and simultaneous payment of the Warrant Price at the offices of the Company in Tustin, California. Payment of such price shall be made at the option of the holder in cash or by check. The Warrant evidenced hereby is of a duly authorized issue of Common Stock Purchase Warrants and are issued under and in accordance with the Securities Purchase Agreement, and are subject to the terms and provisions contained in such Securities Purchase Agreement to all of which the Holder of this Warrant Certificate by acceptance hereof consents. This Warrant is exercisable in whole only and not in part. No fractional Shares will be issued upon the exercise of rights to purchase hereunder, but the Company shall pay the cash value of any fraction upon the exercise of one or more Warrants. The Warrants evidenced hereby are transferable at the office of the Company subject to compliance with applicable state and federal securities laws. The Holder hereof may be treated by the Company and all other persons dealing with this Warrant Certificate as the absolute owner hereof for all purposes and as the person entitled to exercise the rights represented hereby, any notice to the contrary notwithstanding, and until such transfer is entered on such books, the Company may treat the Holder as the owner for all purposes. The Warrant Certificate does not entitle the Holder thereof to any of the rights of a shareholder of the Company be valid or obligatory for any purpose until it shall have been countersigned by the Warrant Agent. IN WITNESS WHEREOF, the Company has signed and sealed this Unit Warrant and delivered it in Tustin, California as of May 31, 1996. SUNWOOD RESEARCH, INC. By: /s/ Richard Stack ----------------------------- Richard Stack, President EX-10.36 39 5-23-96 STOCK PURCHASE AGREEMENT - GAK LIMITED EXHIBIT 10.36 STOCK PURCHASE AGREEMENT This Agreement is made as of the 23rd day of May, 1996, by and among SunWood Research, Inc., a Delaware corporation ("the Corporation"), GAK Limited ("Purchaser"), and Richard Stack ("Founders"). WITNESSETH: ---------- WHEREAS, the Corporation desires to issue, and the Purchaser desires to purchase Common Stock of the Corporation as herein described, on the terms and conditions hereinafter set forth: NOW, THEREFORE, IT IS AGREED among the parties as follows: 1. Purchaser hereby agrees to purchase from the Corporation and the Corporation agrees to sell to Purchaser nine (9) shares of the Common Stock (the "Shares") for a purchase price of Two Thousand Seven Hundred & Seventy-Eight Dollars ($2,778.00) per share. 2. If the Corporation hereafter registers any of its securities for its own account or the account of any security holder, the Corporation shall include the Shares in such registration at the Corporation's cost and expense on such terms and conditions as are customary in "piggyback registrations." If any one of the Founders hereafter propose to sell or transfer any of their shares of Common Stock, Purchaser shall be given 20-days advance written notice of the terms and conditions of such proposed sale. Purchaser shall have the right, exercisable upon written notice to the Founder(s) during such 20-day period, to sell in such proposed sale the same percentage of its Shares as the Founder(s) are proposing to sell of their shares. 3. Purchaser makes the following representations and warranties to the Corporation, each of which shall survive the closing and consummation of the purchase and sale of the Shares (the "Closing"): (a) Purchaser is purchasing the Shares in Purchaser's own name and for Purchaser's own account and no other person has any interest in or right with respect to the Shares, nor has Purchaser agreed to give any person any such interest or right in the future. (b) Purchaser is acquiring the Shares for investment and not with a view to or for sale in connection with any distribution of the securities. Purchaser recognizes that the shares have not been registered under the Federal Securities Act of 1933, nor qualified under the California Corporate Securities law of 1968, that any disposition of the Shares is subject to restrictions imposed by federal and state law and that the certificates representing the Shares will bear a restrictive legend. Purchaser also recognizes that the certificates representing the Shares will -1- bear a restrictive legend. Purchaser also recognizes that the Shares cannot be disposed of by Purchaser absent registration and qualification, or an available exemption from registration and qualification, and that no undertaking has been made with regard to registering or qualifying the Shares in the future. Purchaser understands that the availability of an exemption in the future will depend in part on circumstances outside Purchaser's control and that the Purchaser may be required to hold the Shares for a substantial period. Purchaser recognizes that no public market exists with respect to the Shares and no representation has been made to Purchaser that such a public market will exist at a future date. Purchaser understands that the California Commissioner of Corporation has made no finding or determination relating to the fairness for investment of the Shares offered by the corporation and that the Commissioner has not and will not recommend or endorse the Shares. (c) Purchaser has not seen or received any advertisement or general solicitation with respect to the sale of the Shares. (d) Purchaser believes, by reason of Purchaser's business or financial experience that Purchaser is capable of evaluating the merits and risks of this investment and of protecting Purchaser's own interests in connection with this investment. (e) During the course of this transaction and prior to purchasing the Shares, Purchaser has been provided with financial and other written information about the Corporation and the terms and conditions of the offering. Purchaser has been given the opportunity by the Corporation to obtain such information and ask such questions concerning the Corporation, the Shares, and Purchaser's investment as Purchaser felt necessary, and to the extent Purchaser availed himself of such opportunity, Purchaser received satisfactory information and answers. If Purchaser requested any additional information which the Corporation possessed or could acquire without unreasonable effort or expense which was necessary to verify the accuracy of the financial and other written information about the Corporation furnished to Purchaser by the Corporation, such additional information was provided Purchaser and was satisfactory. In reaching the conclusion to invest in the Shares, Purchaser has carefully evaluated his financial resources and investment position and the risks associated with this investment, and acknowledges that he is able to bear the economic risks of this investment. By electing to participate in this investment Purchaser realizes he may lose his entire investment. Purchaser further acknowledges that his financial condition is such that he is not under any present necessity or constraint to dispose of the Shares to satisfy any existing or contemplated debt or undertaking. (f) This agreement has been duly authorized, executed and delivered by Purchaser and is valid and binding on Purchaser and enforceable against Purchaser in accordance with its terms. -2- 4. The Corporation makes the following representations and warranties to Purchaser, each of which shall survive the Closing: (a) The Corporation is a corporation duly organized, validly existing and in good standing under the laws of the State of California. (b) The authorized capital stock of the Corporation consists of 3,000 shares of Common Stock. (c) This Agreement has been duly authorized, executed and delivered by the Corporation and is valid and binding on the Corporation and enforceable against the Corporation in accordance with its terms. (d) The financial statements of the Corporation made available to Purchaser accurately reflect the financial condition and the results of operations of the Corporation as of the dates indicated therein. Since the date of the most recent financial statements provided to Purchaser, there has been no materially adverse change in the condition (financial or otherwise) of the Corporation or in its assets, liabilities, properties, business operations or prospects that has not been specifically disclosed to Purchaser in writing. (e) Neither the execution and delivery of, nor the consummation of the transactions contemplated hereby will result in or constitute an event that, with notice or lapse of time, or both, would be a default under any material agreement to which the corporation is a party or by which its assets are bound. 5. The Closing shall take place concurrently with the execution of this Agreement at the offices of the Corporation. Upon tender of the purchase price for the Shares, the Corporation shall deliver to Purchaser a properly executed share certificate representing the Shares. The Corporation shall take such other actions as may be reasonably necessary to close the transactions contemplated hereby. 6. The certificate issued to Purchaser by the Corporation representing the Shares shall have endorsed thereon the following legend. "THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR REGISTERED OR QUALIFIED WITH THE CALIFORNIA DEPARTMENT OF CORPORATIONS UNDER THE CORPORATE SECURITIES LAW OF 1968. THE SHARES MAY NOT BE PLEDGED, SOLD OR TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND THE CALIFORNIA CORPORATE SECURITIES LAW OF 1968 AND OTHER APPLICABLE STATE SECURITIES LAWS COVERING THE SHARES OR AN OPINION OF QUALIFIED COUNSEL OR OTHER EVIDENCE SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED." -3- 7. The parties agree to execute such further instruments and to take such further action as may reasonably be necessary to carry out the intent of this Agreement. 8. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or delivery by express courier, or 4 days after the deposit in the United States Post Office, by registered or certified mail with postage and fees prepaid, addressed to the party to whom notice is being given at this reference or at such other address as such party may designate by ten days' advance written notice to the other parties hereto. 9. This Agreement shall be governed by the laws of the State of California and interpreted and determined in accordance with the laws of the State of California, as such laws are applied by California courts to contracts made and to be performed entirely in California by residents of that state. 10. This Agreement shall inure to the benefit of the successors and assigns of the Corporation and Purchaser. 11. In the event of a dispute concerning the subject matter hereof, the prevailing party shall be entitled to recover its costs and reasonable attorneys' fees in resolving the dispute. 12. This Agreement constitutes the entire agreement of the parties with respect to the subject matter hereof and supersedes all prior and contemporaneous agreements and understanding with respect to such subject matter. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. "CORPORATION" SunWood Research, Inc. By: /s/ Richard Stack ------------------------------- Richard Stack, President "PURCHASER" GAK Limited By: /s/ Horace Hertz ------------------------------- Horace Hertz, General Partner -4- "FOUNDERS" ______________________________________ ______________________________________ ______________________________________ -5- EXHIBIT A ADDRESSES --------- Richard Stack, CEO, President SunWood Research, Inc. 2882C Walnut Avenue Tustin, CA 92780 (714) 734-1390 Horace Hertz GAK Limited 26132 Red Corral Laguna Hills, CA 92653 EX-10.37 40 5-23-96 SECURITIES PURCHASE AGRMT - S.J. GOODMAN Exhibit 10.37 SECURITIES PURCHASE AGREEMENT THIS SECURITIES PURCHASE AGREEMENT ("Agreement"), dated and effective as of May 23, 1996, by and between SUNWOOD RESEARCH, INC., a Delaware corporation - ------ ("COMPANY") and The Steven J. Goodman Charitable Remainder Trust ("PURCHASER"). ------------------------------------------------- WITNESSETH WHEREAS, PURCHASER desires to invest certain funds in COMPANY on the terms and conditions set forth herein; and WHEREAS, COMPANY desires to issue and sell to PURCHASER securities consisting of (i) a promissory note (the "Note") to evidence the repayment of the PURCHASER's investment and (ii) a warrant (the "Warrant") which is exercisable for shares of common stock of COMPANY (the "Shares") on the terms and conditions set forth herein; NOW THEREFORE, in consideration of the promises and respective mutual agreements herein contained, it is agreed by and between the parties hereto as follows: ARTICLE 1 ISSUANCE OF SECURITIES 1.1 Delivery of Note. At the date of the signing of this Agreement as ---------------- provided in Section 4.1 hereto (the "Closing"), subject to the terms and conditions herein set forth, and on the basis of the representations, warranties and agreements herein contained, COMPANY shall execute a promissory note all due and payable together with interest on the date which is one year from the date --- of execution hereof, in the form of EXHIBIT "A" attached hereto and incorporated herein by reference (the "Note"). The Note shall be issued in favor of PURCHASER or its designee. 1.2 Delivery of Warrant. At the Closing, subject to the terms and ------------------- conditions herein set forth, and on the basis of the representations, warranties and agreements herein contained, COMPANY shall execute and deliver a warrant (the "Warrant"), and, together with the Note, the "Securities) exercisable for a total of $1.00 for that number of common shares as set forth in Section 2.1 hereto. The Warrant shall be issued in favor of PURCHASER or its designee. 1.3 Consideration and Payment for the Securities. In consideration for -------------------------------------------- the Securities, PURCHASER shall deliver the purchase price of $50,000 dollars --------------- (United States funds)("Purchase Price"), which shall be payable to the COMPANY upon the execution of this Agreement. ARTICLE 2 THE WARRANT 2.1 Exercise Ratio. The COMPANY contemplates undertaking an underwriting -------------- public offering of its Common Stock (the "Proposed Public Offering"). PURCHASER may, at its option, within 90 days after effectiveness of the Proposed Public Offering, exercise the Warrant for the total purchase price of $1.00 into shares of the COMPANY's Common Stock at a conversion rate equal to 100% (the "Conversion Factor") of the offering price of the COMPANY's Common Stock in the Proposed Public Offering divided into $50,000.00 (e.g., if the public offering price is $5.00, the holder would receive 5,000 shares of Common Stock). 2.2 Registration. If and at the time the COMPANY proposes to register ------------ any of its securities under the Act in connection with the Proposed Public Offering, it will each such time give written notice to PURCHASER of its intention so to do. Upon the written request of PURCHASER given within 30 days after receipt of any such notice, the COMPANY will use its best efforts to cause the shares issuable upon exercise of the Warrant to be registered under the Act (with the securities which the COMPANY at the time proposes to register), all to the extent requisite to permit the sale or other disposition by the PURCHASER of the Shares so registered; provided, however, that the COMPANY may, as a condition precedent to its effective such registration, require PURCHASER to agree with the COMPANY and the managing underwriter or underwriters of the offering to be made by the COMPANY in connection with such registration that such Seller will not sell any securities of the same class or convertible into the same class as those registered by the COMPANY (including any class into which the securities registered by the COMPANY are convertible) for such reasonable period after such registration becomes effective as shall then be specified in writing by such underwriter or underwriters if in the opinion of such underwriter or underwriters the COMPANY's offering would be materially adversely affected in the absence of such an agreement. All expenses incurred by the COMPANY in complying with this Section, including without limitation all registration and filing fees, listing fees, printing, expenses, fees and disbursements of all independent accounts, or counsel for the COMPANY and or counsel for PURCHASER and the expense of any special audits incident to or required by any such registration and the expenses of complying with the securities or blue sky laws of any jurisdiction shall be paid by the COMPANY. Notwithstanding the foregoing, PURCHASER shall pay all underwriting discounts or commissions with respect to shares sold by PURCHASER. ARTICLE 3 REPRESENTATIONS AND COVENANTS OF COMPANY AND PURCHASER 3.1 The COMPANY hereby represents and warrants that: 2 (a) The Notes, the Warrants, and the Shares issuable upon exercise of the Warrants have been duly authorized and upon payment of the Purchase Price, will be fully paid and non-assessable. (b) It shall issue the Note and the Warrant to PURCHASER free and clear of all liens, security interests, pledges, encumbrances, charges, demands and claims, of any kind and nature whatsoever, whether direct or indirect or contingent. (c) The COMPANY will at all times reserve and keep available, free from preemptive rights, out of the aggregate of its authorized but unissued Common Stock or its authorized and issued Common Stock held in its treasury for the purpose of enabling it to satisfy any obligation to issue Shares upon exercise of the Warrant, the full number of Shares deliverable upon the exercise of the Warrant. The COMPANY covenants that all Shares which may be issued upon exercise of the Warrant will be validly issued, fully paid and nonassessable outstanding Shares of the COMPANY. (d) If the COMPANY shall be subject to the reporting requirements of Section 13 of the 1934 Act, the COMPANY will use its best efforts timely to file all reports required to be filed from time to time with the SEC (including but not limited to the reports under Section 13 and 15(d) of the 1934 Act referred to in subparagraph (c)(1) of Rule 144). If there is a public market for any Common Stock of the COMPANY at any time that the COMPANY is not subject to the reporting requirements of either of said Section 13 or 15(d), the COMPANY will, upon the request of PURCHASER, use its best efforts to make publicly available the information concerning the COMPANY referred to in subparagraph (c)(2) of said Rule 144. The COMPANY will furnish to PURCHASER, promptly upon request, (i) a written statement of the COMPANY's compliance with the requirements of subparagraphs (c)(1) or (c)(2), as the case may be, of said Rule 144, and (ii) written information concerning the COMPANY sufficient to enable PURCHASER to complete any Form 144 required to be filed with the SEC pursuant to said Rule 144. 3.2 The PURCHASER hereby represents and warrants that: (a) By reason of the PURCHASER's knowledge and experience in financial and business matters in general, and investments in particular, the PURCHASER is able to evaluate the merits and risks of an investment in the COMPANY. (b) The PURCHASER is purchasing the Securities as principal, solely for the PURCHASER's own account, for investment, and not with an intent to sell, or for sale in connection with any distribution of the Note, the Warrant or the 3 Shares issuable upon exercise of the Warrant, and no other person has any interest in or right with respect to the Note, the Warrant, or the Shares issuable upon exercise of the Warrant. (c) The PURCHASER is an "accredited investor" as that term is defined in Section 501 of Regulation D of the Act. (d) The person executing this Agreement on behalf of the PURCHASER has all right, power and authority to so execute and deliver this Agreement. (e) The PURCHASER has been advised that none of the Note, the Warrant or the Shares issuable upon exercise of the Warrant have been registered under the Act, or under the securities laws of any state; that no federal or state agency, including the Securities and Exchange Commission, the California Department of Corporations, or the securities commission or authorities of any other state or regulatory jurisdiction has approved or disapproved the issuance of the Note, the Warrant or the Shares or passed upon or endorsed the merits of the Offering or made any finding or determination as to the fairness of the issuance of the Note, the Warrant the Shares; that the Securities the PURCHASER will be acquiring are "restricted securities" as that term is defined in Rule 144 promulgated under the Act; that the Note and the Warrant will include a restrictive legend; and that the Note and the Warrant cannot be sold, transferred, assigned or otherwise hypothecated without compliance with applicable Federal and state securities laws. (f) PURCHASER acknowledges it has received all the information it considers necessary or appropriate for deciding whether to purchase the Securities. PURCHASER further represents that it has had an opportunity to ask questions and receive answers from the COMPANY regarding the terms and conditions of the offering of the Securities and the business, properties, prospects, and financial condition of the COMPANY and to obtain additional information (to the extent the COMPANY possessed such information or could acquire it without unreasonable effort or expense) necessary to verify the accuracy of any information furnished to it or which it had access. (g) To the extent applicable, the Securities shall be endorsed with the legend set forth below, and PURCHASER covenants that, except to the extent such restrictions are waived by the COMPANY, PURCHASER shall not transfer the Note, the Warrant or the Shares issuable upon exercise of the Warrant without complying with the restrictions on transfer described in the following legend endorsed on the Note, the Warrant or the certificate representing the Shares: 4 "THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED, OR HYPOTHECATED ABSENT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OF COMPLIANCE WITH RULE 144 PROMULGATED UNDER SUCH ACT, OR UNLESS THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED." 3.3 On the Closing Date as defined herein in Section 4.1, the COMPANY shall deliver to the PURCHASER an executed Note evidencing the obligation of the COMPANY to repay the Purchase Price. In addition on the Closing Date, the COMPANY shall deliver to the PURCHASER an executed Warrant evidencing the right of PURCHASER to obtain the Shares upon exercise of the Warrant. The Note and the Warrant shall be subject to no liens, security interests, pledges, encumbrances, charges, restrictions, demands or claims in any other party whatsoever, except as set forth in the legend on the Note and the Warrant. ARTICLE 4 CLOSING AND DELIVERY OF DOCUMENTS 4.1 Closing. The Closing shall be deemed to have occurred as of the ------- date of signing of this Agreement. Subsequent to the signing, the following shall occur as a single integrated transaction: 4.1.1 Delivery by COMPANY. ------------------- (a) COMPANY shall deliver, or cause to be delivered, to the PURCHASER a fully executed Note and a fully executed Warrant as is required to be delivered by COMPANY or its representatives pursuant to the provisions of this Agreement. 4.1.2 Delivery by PURCHASER. --------------------- (a) The PURCHASER shall deliver the Purchase Price as required by Section 1.3. (b) The PURCHASER shall deliver, or cause to be delivered, to COMPANY such instruments, documents and certificates as are required to be delivered by the PURCHASER or its representatives pursuant to the provisions of this Agreement. 5 MISCELLANEOUS 5.1 Entire Agreement. This Agreement sets forth the entire ---------------- agreement and understanding of the parties hereto with respect to the transactions contemplated hereby, and supersedes all prior agreements, arrangements and understandings related to the subject matter hereof. No understanding, promise, inducement, statement of intention, representation, warranty, covenant or condition, written or oral, express or implied, whether by statute or otherwise, has been made by any party hereto which is not embodied in this Agreement or the written statements, certificates, or other documents delivered pursuant hereto or in connection with the transaction contemplated hereby, and no party hereto shall be bound by or liable for any alleged understanding, promise, inducement, statement, representation, warranty, covenant or condition not so set forth. 5.2 Notices. All notices provided for in this Agreement shall be in ------- writing signed by the party giving such notice, and delivered personally or sent by overnight courier or messenger or sent by registered or certified mail (air mail if overseas), return receipt requested, or by telex, facsimile transmission, telegram or similar means of communication. Notices shall be deemed to have been received on the date of personal delivery, telex, facsimile transmission, telegram or similar means of communication, or if sent by overnight courier or messenger, shall be deemed to have been received on the next delivery day after deposit with the courier or messenger, or if sent by certified or registered mail, return receipt requested, shall be deemed to have been received on the third business day after the date of mailing. Notices shall be sent to the addresses set forth below: If to COMPANY: ------------- SunWood Research, Inc. 2882C Walnut Avenue Tustin, California 92780 Attention: Richard Stack If to PURCHASER: --------------- Steven J. Goodman, Trustee 24843 Del Prado, #536 Dana Point, CA 92629 6 5.3 Waiver and Amendment. Any term, provision, covenant, -------------------- representation, warranty, or condition of this Agreement may be waived, but only by a written instrument signed by the party entitled to the benefits thereof. The failure or delay of any party at any time or times to require performance of any provision hereof or to exercise its rights with respect to any provision hereof shall in no manner operate as a waiver of or affect such party's right at a later time to enforce the same. No waiver by any party of any condition, or of the breach of any term, provision, covenant, representation or warrant contained in this Agreement, in any one or more instances, shall be deemed to be or construed as a further or continuing waiver of any such condition or breach or waiver of any other condition or of the breach of any other term, provision, covenant, representation or warranty. No modification or amendment of this Agreement shall be valid and binding unless it be in writing and signed by all parties hereto. 5.4 Arbitration. If a dispute or claim shall arise with respect to ----------- any of the terms or provisions of this Agreement, or with respect to the performance by either of the parties under this Agreement, then either party may, by notice as herein provided, require that the dispute be submitted under the Commercial Arbitration Rules of the American Arbitration Association to an arbitrator in good standing with the American Arbitration Association within fifteen (15) days after such notice is given. The written decision of the single arbitrator ultimately appointed by or for both parties shall be binding and conclusive on the parties. Judgment may be entered on such written decision by the single arbitrator in any court having jurisdiction and the parties consent to the jurisdiction of the Municipal and Superior Court of Orange County, California for this purpose. Any arbitration undertaken pursuant to the terms of this section shall occur in Orange County, California. 5.5 Choice of Law. This Agreement and the rights of the parties ------------- hereunder shall be governed by and construed in accordance with the laws of the State of California including all matters of construction, validity, performance, and enforcement and without giving effect to the principles of conflict of laws. 5.6 Jurisdiction. The parties submit to the jurisdiction of the ------------ Courts of the State of California or a Federal Court empaneled in the State of California for the resolution of all legal disputes arising under the terms of this Agreement, including, but not limited to, enforcement of any arbitration award. 5.7 Counterparts. This Agreement may be executed in one or more ------------ counterparts, each of which shall be deemed an original, but all of which shall together constitute one and the same instrument. 5.8 Attorneys' Fees. Except as otherwise provided herein, if a --------------- dispute should arise between the parties including, but not limited to arbitration, the prevailing party shall be reimbursed by the nonprevailing party for all reasonable expenses incurred in resolving such dispute, including reasonable attorneys' fees exclusive of such amount of attorneys' fees as shall be a premium for result or for risk of loss under a contingency fee arrangement. 7 5.9 Taxes. Any income taxes required to be paid in connection with ----- the payments due hereunder, shall be borne by the party required to make such payment. Any withholding taxes in the nature of a tax on income shall be deducted from payments due, and the party required to withhold such tax shall furnish to the party receiving such payment all documentation necessary to prove the proper amount to withhold of such taxes and to prove payment to the tax authority of such required withholding. 5.10 Facsimile Signatures. Notwithstanding the execution of this -------------------- Agreement by the use of facsimile signatures, this Agreement shall be effective upon its execution by both parties. The parties hereto agree that original signatures will be exchanged within ten (10) business days after the date of execution. IN WITNESS WHEREOF, the parties hereto have executed this Agreement, as of the date first written hereinabove. "COMPANY" SUNWOOD RESEARCH, INC., a Delaware corporation. By: /s/ Richard Stack ------------------------------ Richard Stack, President "PURCHASER" THE STEVEN J. GOODMAN CHARITABLE REMAINDER TRUST By: /s/ Steven J. Goodman ------------------------------ Steven J. Goodman, Trustee 8 EX-10.38 41 PROMISSORY NOTE TO S.J. GOODMAN TRUST EXHIBIT 10.38 EXHIBIT "A" PROMISSORY NOTE $50,000.00 Orange County, California May 23, 1996 THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED, OR HYPOTHECATED ABSENT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OF COMPLIANCE WITH RULE 144 PROMULGATED UNDER SUCH ACT, OR UNLESS THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED. FOR VALUE RECEIVED, the undersigned SunWood Research, Inc., a Delaware corporation, with offices at 2882C Walnut Avenue, Tustin, California 92780 ("SunWood") hereby promises to pay to the order of Steven J. Goodman Charitable ---------------------------- Remainder Trust ("Payee") or order, at Tustin, California, U.S.A. or at such - --------------- other place as Payee or any holder hereof may from time to time designate, the principal sum of FIFTY THOUSAND DOLLARS ($50,000.00), and to pay interest from the date hereof on the unpaid principal balance amount hereof at a rate of ten percent (10%) per annum. The principal balance and all accrued interest outstanding under this Note, shall be due and payable at the earlier of (i) one --- (1) year from the date of this Note, (May 22, 1997) or (ii) the effectiveness ------------ of a public offering on behalf of SunWood. SunWood and all endorsers, guarantors and sureties hereof hereby severally do not waive diligence, demand, presentment, and notice. SunWood may, at its option, at any time and from time to time, prepay all or any part of the principal balance of this Note, provided that concurrently with each such prepayment SunWood shall pay accrued interest on the principal so prepaid to the date of such prepayment. This Note may not be changed, modified or terminated orally, but only by an agreement in writing signed by the party to be charged. Payee also represents and warrants that he/she/they attest to the veracity of the representations and warranties required of them under the terms of that certain Securities Purchase Agreement executed concurrently herewith. The parties hereto hereby irrevocably consent to the jurisdiction of the courts of the State of California in connection with any action or proceeding arising out of or relating to this Note. This Note shall be governed by California law, without reference to any choice of law principles thereof. SunWood Research, Inc. By: /s/ Richard Stack ----------------------------- Richard Stack, President EX-10.39 42 COMMON STOCK WARRANT FOR S.J. GOODMAN TRUST EXHIBIT 10.39 EXHIBIT "B" WARRANT Orange County, California May 23, 1996 THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED, OR HYPOTHECATED ABSENT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OF COMPLIANCE WITH RULE 144 PROMULGATED UNDER SUCH ACT, OR UNLESS THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED. FOR VALUE RECEIVED, Steven J. Goodman Charitable Remainder Trust, the --------------------------------------------- registered holder or assigns (the "Holder"), is entitled to purchase from SunWood Research, Inc., a Delaware corporation, (the"Company") within 90 days after the Company obtains effectiveness of an underwriting public offering of its Common Stock (the "Proposed Public Offering"), for the total purchase price of $1.00, such number of shares of the Company's Common Stock equal to 100% (the Conversion Factor") of the offering price of the Company's Common Stock in the Proposed Public Offering divided into $50,000.00 (e.g., if the public offering price is $5.00, the Holder would receive 5,000 shares of Common Stock). Holders will not have any rights or privileges of shareholders of the Company prior to Exercise of the Warrants. If and at the time the Company proposes to register any of its securities under the Act in connection with the Proposed Public Offering, it will each such time give written notice to Holder of its intention so to do. Upon the written request of Holder given within 30 days after receipt of any such notice, the Company will use its best efforts to cause the shares issuable upon exercise of the Warrant to be registered under the Act (with the securities which the Company at the time proposes to register), all to the extent requisite to permit the sale or other disposition by the Holder of the Shares so registered; provided, however, that the Company may, as a condition precedent to its effective such registration, require Holder to agree with the Company and the managing underwriter or underwriters of the offering to be made by the Company in connection with such registration that such Seller will not sell any securities of the same class or convertible into the same class as those registered by the Company (including any class into which the securities registered by the Company are convertible) for such reasonable period after such registration becomes effective as shall then be specified in writing by such underwriter or underwriters if in the opinion of such underwriter or underwriters the Company's offering would be materially adversely affected in the absence of such an agreement. All expenses incurred by the Company in complying with this Section, including without limitation all registration and filing fees, listing fees, printing expenses, fees and disbursements of all independent accounts, or counsel for the Company and or counsel for Holder and the expense of any special audits incident to or required by any such registration and the expenses of complying with the securities or blue sky laws of any jurisdiction shall be paid by the Company. Notwithstanding the foregoing, Holder shall pay all underwriting discounts or commissions with respect to shares sold by Holder. The Warrant evidenced hereby may be exercised in whole or in part by presentation of this Warrant certificate and simultaneous payment of the Warrant Price at the offices of the Company in Tustin, California. Payment of such price shall be made at the option of the holder in cash or by check. The Warrant evidenced hereby is of a duly authorized issue of Common Stock Purchase Warrants and are issued under and in accordance with the Securities Purchase Agreement, and are subject to the terms and provisions contained in such Securities Purchase Agreement to all of which the Holder of this Warrant Certificate by acceptance hereof consents. This Warrant is exercisable in whole only and not in part. No fractional Shares will be issued upon the exercise of rights to purchase hereunder, but the Company shall pay the cash value of any fraction upon the exercise of one or more Warrants. The Warrants evidenced hereby are transferable at the office of the Company subject to compliance with applicable state and federal securities laws. The Holder hereof may be treated by the Company and all other persons dealing with this Warrant Certificate as the absolute owner hereof for all purposes and as the person entitled to exercise the rights represented hereby, any notice to the contrary notwithstanding, and until such transfer is entered on such books, the Company may treat the Holder as the owner for all purposes. The Warrant Certificate does not entitle the Holder thereof to any of the rights of a shareholder of the Company be valid or obligatory for any purpose until it shall have been countersigned by the Warrant Agent. IN WITNESS WHEREOF, the Company has signed and sealed this Unit Warrant and delivered it in Tustin, California as of May 23, 1996. SUNWOOD RESEARCH, INC. By: /s/ Richard Stack -------------------------- Richard Stack, President EX-10.40 43 7-2-96 SECURITIES PURCHASE AGREEMENT - J. KOMPAN EXHIBIT 10.40 SECURITIES PURCHASE AGREEMENT THIS SECURITIES PURCHASE AGREEMENT ("Agreement"), dated and effective as of July 2, 1996, by and between SUNWOOD RESEARCH, INC., a Delaware corporation - ------ ("COMPANY") and Jack S. Kompan ("PURCHASER"). -------------- WITNESSETH WHEREAS, PURCHASER desires to invest certain funds in COMPANY on the terms and conditions set forth herein; and WHEREAS, COMPANY desires to issue and sell to PURCHASER securities consisting of (i) a promissory note (the "Note") to evidence the repayment of the PURCHASER's investment and (ii) a warrant (the "Warrant") which is exercisable for shares of common stock of COMPANY (the "Shares") on the terms and conditions set forth herein; NOW THEREFORE, in consideration of the promises and respective mutual agreements herein contained, it is agreed by and between the parties hereto as follows: ARTICLE 1 ISSUANCE OF SECURITIES 1.1 Delivery of Note. At the date of the signing of this Agreement as ---------------- provided in Section 4.1 hereto (the "Closing"), subject to the terms and conditions herein set forth, and on the basis of the representations, warranties and agreements herein contained, COMPANY shall execute a promissory note all due and payable together with interest on the date which is one year from the date of execution hereof, in the form of EXHIBIT "A" attached hereto and incorporated herein by reference (the "Note"). The Note shall be issued in favor of PURCHASER or its designee. 1.2 Delivery of Warrant. At the Closing, subject to the terms and ------------------- conditions herein set forth, and on the basis of the representations, warranties and agreements herein contained, COMPANY shall execute and deliver a warrant (the "Warrant"), and, together with the Note, the "Securities) exercisable for a total of $1.00 for that number of common shares as set forth in Section 2.1 hereto. The Warrant shall be issued in favor of PURCHASER or its designee. 1.3 Consideration and Payment for the Securities. In consideration for -------------------------------------------- the Securities, PURCHASER shall deliver the purchase price of $25,000 dollars (United States funds)("Purchase Price"), which shall be payable to the COMPANY upon the execution of this Agreement. ARTICLE 2 THE WARRANT 2.1 Exercise Ratio. The COMPANY contemplates undertaking an underwriting -------------- public offering of its Common Stock (the "Proposed Public Offering"). PURCHASER may, at its option, within 90 days after effectiveness of the Proposed Public Offering, exercise the Warrant for the total purchase price of $1.00 into shares of the COMPANY's Common Stock at a conversion rate equal to 100% (the "Conversion Factor") of the offering price of the COMPANY's Common Stock in the Proposed Public Offering divided into $25,000.00 (e.g., if the public offering price is $5.00, the holder would receive 5,000 shares of Common Stock). 2.2 Registration. If and at the time the COMPANY proposes to register ------------ any of its securities under the Act in connection with the Proposed Public Offering, it will each such time give written notice to PURCHASER of its intention so to do. Upon the written request of PURCHASER given within 30 days after receipt of any such notice, the COMPANY will use its best efforts to cause the shares issuable upon exercise of the Warrant to be registered under the Act (with the securities which the COMPANY at the time proposes to register), all to the extent requisite to permit the sale or other disposition by the PURCHASER of the Shares so registered; provided, however, that the COMPANY may, as a condition precedent to its effective such registration, require PURCHASER to agree with the COMPANY and the managing underwriter or underwriters of the offering to be made by the COMPANY in connection with such registration that such Seller will not sell any securities of the same class or convertible into the same class as those registered by the COMPANY (including any class into which the securities registered by the COMPANY are convertible) for such reasonable period after such registration becomes effective as shall then be specified in writing by such underwriter or underwriters if in the opinion of such underwriter or underwriters the COMPANY's offering would be materially adversely affected in the absence of such an agreement. All expenses incurred by the COMPANY in complying with this Section, including without limitation all registration and filing fees, listing fees, printing, expenses, fees and disbursements of all independent accounts, or counsel for the COMPANY and or counsel for PURCHASER and the expense of any special audits incident to or required by any such registration and the expenses of complying with the securities or blue sky laws of any jurisdiction shall be paid by the COMPANY. Notwithstanding the foregoing, PURCHASER shall pay all underwriting discounts or commissions with respect to shares sold by PURCHASER. ARTICLE 3 REPRESENTATIONS AND COVENANTS OF COMPANY AND PURCHASER 3.1 The COMPANY hereby represents and warrants that: 2 (a) The Notes, the Warrants, and the Shares issuable upon exercise of the Warrants have been duly authorized and upon payment of the Purchase Price, will be fully paid and non-assessable. (b) It shall issue the Note and the Warrant to PURCHASER free and clear of all liens, security interests, pledges, encumbrances, charges, demands and claims, of any kind and nature whatsoever, whether direct or indirect or contingent. (c) The COMPANY will at all times reserve and keep available, free from preemptive rights, out of the aggregate of its authorized but unissued Common Stock or its authorized and issued Common Stock held in its treasury for the purpose of enabling it to satisfy any obligation to issue Shares upon exercise of the Warrant, the full number of Shares deliverable upon the exercise of the Warrant. The COMPANY covenants that all Shares which may be issued upon exercise of the Warrant will be validly issued, fully paid and nonassessable outstanding Shares of the COMPANY. (d) If the COMPANY shall be subject to the reporting requirements of Section 13 of the 1934 Act, the COMPANY will use its best efforts timely to file all reports required to be filed from time to time with the SEC (including but not limited to the reports under Section 13 and 15(d) of the 1934 Act referred to in subparagraph (c)(1) of Rule 144). If there is a public market for any Common Stock of the COMPANY at any time that the COMPANY is not subject to the reporting requirements of either of said Section 13 or 15(d), the COMPANY will, upon the request of PURCHASER, use its best efforts to make publicly available the information concerning the COMPANY referred to in subparagraph (c)(2) of said Rule 144. The COMPANY will furnish to PURCHASER, promptly upon request, (i) a written statement of the COMPANY's compliance with the requirements of subparagraphs (c)(1) or (c)(2), as the case may be, of said Rule 144, and (ii) written information concerning the COMPANY sufficient to enable PURCHASER to complete any Form 144 required to be filed with the SEC pursuant to said Rule 144. 3.2 The PURCHASER hereby represents and warrants that: (a) By reason of the PURCHASER's knowledge and experience in financial and business matters in general, and investments in particular, the PURCHASER is able to evaluate the merits and risks of an investment in the COMPANY. (b) The PURCHASER is purchasing the Securities as principal, solely for the PURCHASER's own account, for investment, and not with an intent to sell, or for sale in connection with any distribution of the Note, the Warrant or the 3 Shares issuable upon exercise of the Warrant, and no other person has any interest in or right with respect to the Note, the Warrant, or the Shares issuable upon exercise of the Warrant. (c) The PURCHASER is an "accredited investor" as that term is defined in Section 501 of Regulation D of the Act. (d) The person executing this Agreement on behalf of the PURCHASER has all right, power and authority to so execute and deliver this Agreement. (e) The PURCHASER has been advised that none of the Note, the Warrant or the Shares issuable upon exercise of the Warrant have been registered under the Act, or under the securities laws of any state; that no federal or state agency, including the Securities and Exchange Commission, the California Department of Corporations, or the securities commission or authorities of any other state or regulatory jurisdiction has approved or disapproved the issuance of the Note, the Warrant or the Shares or passed upon or endorsed the merits of the Offering or made any finding or determination as to the fairness of the issuance of the Note, the Warrant the Shares; that the Securities the PURCHASER will be acquiring are "restricted securities" as that term is defined in Rule 144 promulgated under the Act; that the Note and the Warrant will include a restrictive legend; and that the Note and the Warrant cannot be sold, transferred, assigned or otherwise hypothecated without compliance with applicable Federal and state securities laws. (f) PURCHASER acknowledges it has received all the information it considers necessary or appropriate for deciding whether to purchase the Securities. PURCHASER further represents that it has had an opportunity to ask questions and receive answers from the COMPANY regarding the terms and conditions of the offering of the Securities and the business, properties, prospects, and financial condition of the COMPANY and to obtain additional information (to the extent the COMPANY possessed such information or could acquire it without unreasonable effort or expense) necessary to verify the accuracy of any information furnished to it or which it had access. (g) To the extent applicable, the Securities shall be endorsed with the legend set forth below, and PURCHASER covenants that, except to the extent such restrictions are waived by the COMPANY, PURCHASER shall not transfer the Note, the Warrant or the Shares issuable upon exercise of the Warrant without complying with the restrictions on transfer described in the following legend endorsed on the Note, the Warrant or the certificate representing the Shares: 4 "THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED, OR HYPOTHECATED ABSENT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OF COMPLIANCE WITH RULE 144 PROMULGATED UNDER SUCH ACT, OR UNLESS THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED." 3.3 On the Closing Date as defined herein in Section 4.1, the COMPANY shall deliver to the PURCHASER an executed Note evidencing the obligation of the COMPANY to repay the Purchase Price. In addition on the Closing Date, the COMPANY shall deliver to the PURCHASER an executed Warrant evidencing the right of PURCHASER to obtain the Shares upon exercise of the Warrant. The Note and the Warrant shall be subject to no liens, security interests, pledges, encumbrances, charges, restrictions, demands or claims in any other party whatsoever, except as set forth in the legend on the Note and the Warrant. ARTICLE 4 CLOSING AND DELIVERY OF DOCUMENTS 4.1 Closing. The Closing shall be deemed to have occurred as of the ------- date of signing of this Agreement. Subsequent to the signing, the following shall occur as a single integrated transaction: 4.1.1 Delivery by COMPANY. ------------------- (a) COMPANY shall deliver, or cause to be delivered, to the PURCHASER a fully executed Note and a fully executed Warrant as is required to be delivered by COMPANY or its representatives pursuant to the provisions of this Agreement. 4.1.2 Delivery by PURCHASER. --------------------- (a) The PURCHASER shall deliver the Purchase Price as required by Section 1.3. (b) The PURCHASER shall deliver, or cause to be delivered, to COMPANY such instruments, documents and certificates as are required to be delivered by the PURCHASER or its representatives pursuant to the provisions of this Agreement. 5 MISCELLANEOUS 5.1 Entire Agreement. This Agreement sets forth the entire agreement and ---------------- understanding of the parties hereto with respect to the transactions contemplated hereby, and supersedes all prior agreements, arrangements and understandings related to the subject matter hereof. No understanding, promise, inducement, statement of intention, representation, warranty, covenant or condition, written or oral, express or implied, whether by statute or otherwise, has been made by any party hereto which is not embodied in this Agreement or the written statements, certificates, or other documents delivered pursuant hereto or in connection with the transaction contemplated hereby, and no party hereto shall be bound by or liable for any alleged understanding, promise, inducement, statement, representation, warranty, covenant or condition not so set forth. 5.2 Notices. All notices provided for in this Agreement shall be in ------- writing signed by the party giving such notice, and delivered personally or sent by overnight courier or messenger or sent by registered or certified mail (air mail if overseas), return receipt requested, or by telex, facsimile transmission, telegram or similar means of communication. Notices shall be deemed to have been received on the date of personal delivery, telex, facsimile transmission, telegram or similar means of communication, or if sent by overnight courier or messenger, shall be deemed to have been received on the next delivery day after deposit with the courier or messenger, or if sent by certified or registered mail, return receipt requested, shall be deemed to have been received on the third business day after the date of mailing. Notices shall be sent to the addresses set forth below: If to COMPANY: ------------- SunWood Research, Inc. 2882C Walnut Avenue Tustin, California 92780 Attention: Richard Stack If to PURCHASER: --------------- Jack S. Kompan GPO Box 357 Hong Kong 6 5.3 Waiver and Amendment. Any term, provision, covenant, -------------------- representation, warranty, or condition of this Agreement may be waived, but only by a written instrument signed by the party entitled to the benefits thereof. The failure or delay of any party at any time or times to require performance of any provision hereof or to exercise its rights with respect to any provision hereof shall in no manner operate as a waiver of or affect such party's right at a later time to enforce the same. No waiver by any party of any condition, or of the breach of any term, provision, covenant, representation or warrant contained in this Agreement, in any one or more instances, shall be deemed to be or construed as a further or continuing waiver of any such condition or breach or waiver of any other condition or of the breach of any other term, provision, covenant, representation or warranty. No modification or amendment of this Agreement shall be valid and binding unless it be in writing and signed by all parties hereto. 5.4 Arbitration. If a dispute or claim shall arise with respect to any ----------- of the terms or provisions of this Agreement, or with respect to the performance by either of the parties under this Agreement, then either party may, by notice as herein provided, require that the dispute be submitted under the Commercial Arbitration Rules of the American Arbitration Association to an arbitrator in good standing with the American Arbitration Association within fifteen (15) days after such notice is given. The written decision of the single arbitrator ultimately appointed by or for both parties shall be binding and conclusive on the parties. Judgment may be entered on such written decision by the single arbitrator in any court having jurisdiction and the parties consent to the jurisdiction of the Municipal and Superior Court of Orange County, California for this purpose. Any arbitration undertaken pursuant to the terms of this section shall occur in Orange County, California. 5.5 Choice of Law. This Agreement and the rights of the parties ------------- hereunder shall be governed by and construed in accordance with the laws of the State of California including all matters of construction, validity, performance, and enforcement and without giving effect to the principles of conflict of laws. 5.6 Jurisdiction. The parties submit to the jurisdiction of the courts ------------ of the State of California or a Federal Court empaneled in the State of California for the resolution of all legal disputes arising under the terms of this Agreement, including, but not limited to, enforcement of any arbitration award. 5.7 Counterparts. This Agreement may be executed in one or more ------------ counterparts, each of which shall be deemed an original, but all of which shall together constitute one and the same instrument. 5.8 Attorneys' Fees. Except as otherwise provided herein, if a dispute --------------- should arise between the parties including, but not limited to arbitration, the prevailing party shall be reimbursed by the nonprevailing party for all reasonable expenses incurred in resolving such dispute, including reasonable attorneys' fees exclusive of such amount of attorneys' fees as shall be a premium for result or for risk of loss under a contingency fee arrangement. 7 5.9 Taxes. Any income taxes required to be paid in connection with the ----- payments due hereunder, shall be borne by the party required to make such payment. Any withholding taxes in the nature of a tax on income shall be deducted from payments due, and the party required to withhold such tax shall furnish to the party receiving such payment all documentation necessary to prove the proper amount to withhold of such taxes and to prove payment to the tax authority of such required withholding. 5.10 Facsimile Signatures. Notwithstanding the execution of this -------------------- Agreement by the use of facsimile signatures, this Agreement shall be effective upon its execution by both parties. The parties hereto agree that original signatures will be exchanged within ten (10) business days after the date of execution. IN WITNESS WHEREOF, the parties hereto have executed this Agreement, as of the date first written hereinabove. "COMPANY" SUNWOOD RESEARCH, INC., a Delaware corporation. By: /s/ Richard Stack ----------------------------- Richard Stack, President "PURCHASER" /s/ Jack S. Kompan -------------------------- Jack S. Kompan 8 EX-10.41 44 PROMISSORY NOTE TO JACK KOMPAN EXHIBIT 10.41 EXHIBIT "A" PROMISSORY NOTE $25,000.00 Orange County, California July 2, 1996 THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED, OR HYPOTHECATED ABSENT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OF COMPLIANCE WITH RULE 144 PROMULGATED UNDER SUCH ACT, OR UNLESS THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED. FOR VALUE RECEIVED, the undersigned SunWood Research, Inc., a Delaware corporation, with offices at 2882C Walnut Avenue, Tustin, California 92780 ("SunWood") hereby promises to pay to the order of Jack S. Kompan ("Payee") or -------------- order, at Tustin, California, U.S.A. or at such other place as Payee or any holder hereof may from time to time designate, the principal sum of TWENTY FIVE THOUSAND DOLLARS ($25,000.00), and to pay interest from the date hereof on the unpaid principal balance amount hereof at a rate of ten percent (10%) per annum. The principal balance and all accrued interest outstanding under this Note, shall be due and payable at the earlier of (i) two (2) years from the date of this Note, (May 31, 1998) or (ii) the effectiveness of a public offering on ------------ behalf of SunWood. Interest shall not be added to principal. SunWood and all endorsers, guarantors and sureties hereof hereby severally do not waive diligence, demand, presentment, and notice. SunWood may, at its option, at any time and from time to time, prepay all or any part of the principal balance of this Note, provided that concurrently with each such prepayment SunWood shall pay accrued interest on the principal so prepaid to the date of such prepayment. This Note may not be changed, modified or terminated orally, but only by an agreement in writing signed by the party to be charged. Payee also represents and warrants that he/she/they attest to the veracity of the representations and warranties required of them under the terms of that certain Securities Purchase Agreement executed concurrently herewith. The parties hereto hereby irrevocably consent to the jurisdiction of the courts of the State of California in connection with any action or proceeding arising out of or relating to this Note. This Note shall be governed by California law, without reference to any choice of law principles thereof. SunWood Research, Inc. By: /s/ Richard Stack -------------------------- Richard Stack, President EX-10.42 45 COMMON STOCK WARRANT FOR JACK KOMPAN EXHIBIT 10.42 EXHIBIT "B" WARRANT Orange County, California July 2, 1996 THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED, OR HYPOTHECATED ABSENT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OF COMPLIANCE WITH RULE 144 PROMULGATED UNDER SUCH ACT, OR UNLESS THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED. FOR VALUE RECEIVED, Jack S. Kompan , the registered holder or assigns (the -------------- "Holder"), is entitled to purchase from SunWood Research, Inc., a Delaware corporation, (the"Company") within 90 days after the Company obtains effectiveness of an underwriting public offering of its Common Stock (the "Proposed Public Offering"), for the total purchase price of $1.00, such number of shares of the Company's Common Stock equal to 100% (the Conversion Factor") of the offering price of the Company's Common Stock in the Proposed Public Offering divided into $25,000.00 (e.g., if the public offering price is $5.00, the Holder would receive 5,000 shares of Common Stock). Holders will not have any rights or privileges of shareholders of the Company prior to Exercise of the Warrants. If and at the time the Company proposes to register any of its securities under the Act in connection with the Proposed Public Offering, it will each such time give written notice to Holder of its intention so to do. Upon the written request of Holder given within 30 days after receipt of any such notice, the Company will use its best efforts to cause the shares issuable upon exercise of the Warrant to be registered under the Act (with the securities which the Company at the time proposes to register), all to the extent requisite to permit the sale or other disposition by the Holder of the Shares so registered; provided, however, that the Company may, as a condition precedent to its effective such registration, require Holder to agree with the Company and the managing underwriter or underwriters of the offering to be made by the Company in connection with such registration that such Seller will not sell any securities of the same class or convertible into the same class as those registered by the Company (including any class into which the securities registered by the Company are convertible) for such reasonable period after such registration becomes effective as shall then be specified in writing by such underwriter or underwriters if in the opinion of such underwriter or underwriters the Company's offering would be materially adversely affected in the absence of such an agreement. All expenses incurred by the Company in complying with this Section, including without limitation all registration and filing fees, listing fees, printing expenses, fees and disbursements of all independent accounts, or counsel for the Company and or counsel for Holder and the expense of any special audits incident to or required by any such registration and the expenses of complying with the securities or blue sky laws of any jurisdiction shall be paid by the Company. Notwithstanding the foregoing, Holder shall pay all underwriting discounts or commissions with respect to shares sold by Holder. The Warrant evidenced hereby may be exercised in whole or in part by presentation of this Warrant certificate and simultaneous payment of the Warrant Price at the offices of the Company in Tustin, California. Payment of such price shall be made at the option of the holder in cash or by check. The Warrant evidenced hereby is of a duly authorized issue of Common Stock Purchase Warrants and are issued under and in accordance with the Securities Purchase Agreement, and are subject to the terms and provisions contained in such Securities Purchase Agreement to all of which the Holder of this Warrant Certificate by acceptance hereof consents. This Warrant is exercisable in whole only and not in part. No fractional Shares will be issued upon the exercise of rights to purchase hereunder, but the Company shall pay the cash value of any fraction upon the exercise of one or more Warrants. The Warrants evidenced hereby are transferable at the office of the Company subject to compliance with applicable state and federal securities laws. The Holder hereof may be treated by the Company and all other persons dealing with this Warrant Certificate as the absolute owner hereof for all purposes and as the person entitled to exercise the rights represented hereby, any notice to the contrary notwithstanding, and until such transfer is entered on such books, the Company may treat the Holder as the owner for all purposes. The Warrant Certificate does not entitle the Holder thereof to any of the rights of a shareholder of the Company be valid or obligatory for any purpose until it shall have been countersigned by the Warrant Agent. IN WITNESS WHEREOF, the Company has signed and sealed this Unit Warrant and delivered it in Tustin, California as of May 31, 1996. SUNWOOD RESEARCH, INC. By: /s/ Richard Stack --------------------------- Richard Stack, President EX-10.43 46 SUBSCRIPTION AGREEMENT 6-3-96 EXHIBIT 10.43 SUBSCRIPTION AGREEMENT THIS SUBSCRIPTION AGREEMENT (the "Agreement") is entered into as of June 3, 1996, by and between Sunwood Research, Inc., a Delaware corporation (the "Company"), and Herbert R. Donica and Janice N. Donica, residents of Tampa, Florida, as joint tenants by the entireties (together, the "Subscribers"). RECITALS 1. The Company's authorized capital stock consists of THREE THOUSAND (3,000) shares of Common Stock (the "Common Stock"). 2. The Company desires to issue and sell to the Subscribers, and the Subscribers desire to purchase and accept from the Company, TWO AND ONE-HALF (2 1/2) shares of the Common Stock (the "Subscription Shares"). AGREEMENT In consideration of the foregoing and of the mutual covenants set forth herein, the parties hereto agree as follows: 1. Purchase and Sale. The Company hereby issues and sells to the ----------------- Subscribers, and the Subscribers hereby purchase and accept from the Company, all of the Subscription Shares. 2. Consideration for the Subscription Shares. As full and complete ----------------------------------------- consideration for the Subscription Shares, the Subscribers have paid to the Company the sum of TWENTY-FIVE THOUSAND DOLLARS ($25,000) in a form acceptable to the Company, receipt of which is hereby acknowledged by the Company. 1 3. Piggy-Back Registration Rights. The Company agrees that the ------------------------------ Subscription Shares will be registered with the Securities and Exchange Commission at the same time as the Company registers any other stock or securities, either previously issued or subsequently issued, with the Securities and Exchange Commission. 4. Representation and Warranty of the Subscribers. The Subscribers ---------------------------------------------- represent and warrant to the Company that they are acquiring the Subscription Shares for investment solely for their own account and not with a view to the distribution or resale thereof. 5. Certificate for the Subscription Shares. The Company has on the --------------------------------------- date hereof delivered to the Subscribers a certificate duly registered in the names of the Subscribers for all of the Subscription Shares, receipt of which certificate is hereby acknowledged by the Subscribers. 6. Representation and Warranty of the Company. The Company represents ------------------------------------------ and warrants that it has the corporate authority and legal power under its Articles of Incorporation, Bylaws, and any other existing agreement, statute, regulation or otherwise, to enter into this Agreement with Subscribers and to sell the Subscription Shares upon the terms contained herein. 7. Miscellaneous. This Agreement embodies the entire agreement among ------------- the parties and there have been and are no other agreements, representations or warranties by or between the Company and the Subscribers other than those set forth herein. This Agreement shall be construed according to the laws of the State of Florida. 2 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. SUNWOOD RESEARCH, INC. (the "Company") By: /s/ Richard Stack ---------------------------- Richard Stack, President ATTEST: ________________________ Secretary [SEAL] /s/ Herbert R. Donica ------------------------------------- Herbert R. Donica ("Subscriber") /s/ Janice N. Donica ------------------------------------- Janice N. Donica ("Subscriber") 3 EX-10.44 47 LETTER AGMT. 7-22-96 W/ REGISTRANT AND J. AMOS EXHIBIT 10.44 July 22,1996 Mr. John R. Amos Sunwood Services Limited GPO Box 357 Hong Kong Re: Technology Transfer Agreement Dear John: The purpose of this letter is to confirm that in consideration of the cancellation of indebtedness owed by you to Sunwood Research, Inc., a Delaware corporation ("Sunwood"), in the amount of $450, you hereby acknowledge, confirm and agree that you have sold and transferred all of your right, title and interest in and to all present or future patents, rights to sue for past infringements of patents, patent applications, rights to obtain patents, know- how, trade secrets, and other proprietary information of every kind or nature, together with any rights at common law arising therefrom, related to or arising out of that certain product commonly known as the 1090 motherboard, which consists of a fully integrated 486 PC compatible computer board with built-in Ethernet, touch screen controller, six external serial ports, two internal serial ports, customer display controller, VGA LCD panel display controller and ISA expansion slot (collectively, the "Intellectual Property"). You acknowledge and agree that the Intellectual Property was jointly developed by you and Sunwood and by executing below you are transferring to Sunwood any and all of your right, title and interest in and to the Intellectual Property, including any and all changes, additions, developments or improvements to the Intellectual Property, whether developed or acquired by you or Sunwood and whether held or developed by you in your individual capacity or through any entity in which you have an ownership interest or by which you were employed; provided, however, -------- ------- that Sunwood acknowledges and agrees that you have the right to license on a nonexclusive basis the right to utilize the Intellectual Property to Soroc Technology ("Soroc") solely for use in Canada. Your right to license the Intellectual Property to Soroc is limited solely to the Intellectual Property as it exists as of the date hereof and does not include any rights to any changes, additions, develops or improvements to the Intellectual Property. You represent and warrant that you have not sold, licensed or otherwise transferred any rights to any of the Intellectual Property to any persons other than Sunwood and Soroc, and acknowledge and agree that you will not attempt to sell, license or otherwise transfer any rights to any of the Intellectual Property to any other party. You hereby agree that you shall indemnify save and hold harmless Sunwood and each of Sunwood's officers, directors, stockholders and affiliates from and against any and all costs, losses, damages, lawsuits, claims and expenses, including, without limitation attorney's fees, Mr. John R. Amos Sunwood Services Limited July 22, 1996 Page 2 incurred in connection with, arising out of or resulting from or incident to any breach by you of any of the foregoing agreements. This letter agreement shall be governed by, and construed in accordance with, the laws of the State of California. This agreement constitutes the entire agreement among the parties hereto pertaining to the subject matter hereof and supersedes all prior or contemporaneous agreements, understandings, negotiations and discussions, whether oral or written. No amendment of this agreement shall be binding unless executed in writing by each of the parties hereto. This agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. A faxed copy of a signature page shall be deemed to be an original for all purposes. Sincerely, SUNWOOD RESEARCH, INC. a Delaware corporation By: /s/ Richard P. Stack ---------------------------------- Richard P. Stack, President and Chief Executive Officer Accepted and Agreed to as of this 22nd day of July, 1996 /s/ John R. Amos - ---------------------------- John R. Amos EX-10.45 48 LETTER 7-29-96 W/ REGISTRANT AND C. CAMPBELL EXHIBIT 10.45 July 29, 1996 Mr. Normal Campbell c/o Sunwood Research, Inc. 2882C Walnut Avenue Tustin, CA 92680 Re: Technology Transfer Agreement Dear Norm: The purpose of this letter is to confirm that in consideration of the issuance to you of shares of common stock of Sunwood Research, Inc., a Delaware corporation ("Sunwood"), you hereby acknowledge, confirm and agree that you have sold and transferred all of your right, title and interest in and to all present or future patents, rights to sue for past infringements of patents, patent proprietary information of every kind or nature, together with any rights at common law arising therefrom, related to or arising out of that certain product commonly known as the 1090 motherboard, which consists of a fully integrated 486 PC compatible computer board with built-in Ethernet, touch screen controller, six external serial ports, two internal serial ports, customer display controller, VGA LCD panel display controller and ISA expansion slot (collectively, the "Intellectual Property"). You acknowledge and agree that by executing below you are transferring to Sunwood any and all of your right, title and interest in and to the Intellectual Property, including any and all changes, additions, developments or improvements to the Intellectual Property, whether developed or acquired by you or Sunwood and whether held or developed by you in your individual capacity or through any entity in which you have an ownership interest or by which you were employed. You represent and warrant that you have not sold, licensed or otherwise transferred any rights to any of the Intellectual Property to any persons other than Sunwood and John Amos of Sunwood Services Limited, and acknowledge and agree that you will not attempt to sell, license or otherwise transfer any rights to any of the Intellectual Property to any other party. You hereby agree that you shall indemnify, save and hold harmless Sunwood and each of Sunwood's officers, directors, stockholders and affiliates from and against any and all costs, losses, damages, lawsuits, claims and expenses, including, without limitation attorney's fees, incurred in connection with, arising out of or resulting from or incident to any breach by you of any of the foregoing agreement. This letter agreement shall be governed by, and construed in accordance with, the laws of the State of California. This agreement constitutes the entire agreement among the parties hereto pertaining to the subject matter hereof and supersedes all prior or contemporaneous Mr. Norman Campbell c/o Sunwood Research, Inc. July 29, 1996 Page 2 agreements, understandings, negotiations and discussions, whether oral or written. No amendment of this agreement shall be binding unless executed in writing by each of the parties hereto. This agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. A faxed copy of a signature page shall be deemed to be an original for all purposes. Sincerely, SUNWOOD RESEARCH, INC. a Delaware corporation By: /s/ Richard P. Stack ----------------------------------- Richard P. Stack, President and Chief Executive Officer Accepted and Agreed to as of this 29th day of July, 1996 /s/ C. Norman Campbell - ------------------------------- C. Norman Campbell EX-10.46 49 PURCHASE ORDER DATED 7-29-96 EXHIBIT 10.46 **PURCHASE ORDER ** PAGE: 1 SUNWOOD RESEARCH, INC. P.O. NUMBER: 0001024 2882 WALNUT AVE, SUITE C ORDER DATE: 07/29/96 (714) 734-1390 VENDOR NO: LGELECT VENDOR: SHIP TO: LG ELECTRONICS SUNWOOD RESEARCH, INC. C/O VARGION, INC. 2882 WALNUT AVE, SUITE C 4333 PARK TERRACE DR., #205 TUSTIN, CA 92680 WESTLAKE VILLAGE, CA 91361 CONFIRM TO: (818) 735-5494 - ------------------------------------------------------------------------------ REQUIRED DATE SHIP VIA F.O.B. TERMS 07/29/96 NET 30 DAYS - ------------------------------------------------------------------------------ UNIT ORDERED RECEIVED BACK ORD UNIT COST AMOUNT - ------------------------------------------------------------------------------ 13-115-006 EACH 5000.00 0.00 0.00 385.00 1,925,000.00 LCD, 10.4", TFT WHSE: 000 (GOLDSTAR) Vendor p/n: DELIVERY SCHEDULE: 10/1/96 300 11/1/96 300 12/1/96 400 445 PER MONTH THEREAFTER SUNWOOD MAY SUBSTITUTE OTHER LG ELECTRONICS PRODUCTS IF 10.4" VGA IS NO LONGER THE INDUSTRY STANDARD. -------------- NET ORDER: 1,925,000.00 SALES TAX: .00 FREIGHT: .00 -------------- AUTHORIZED BY: ______________ ORDER TOTAL: 1,925,000.00 EX-10.47 50 SECURITIES PURCHASE AGREEMENT Exhibit 10.47 SECURITIES PURCHASE AGREEMENT THIS SECURITIES PURCHASE AGREEMENT ("Agreement"), dated and effective as of ____________________, 1996, by and between SUNWOOD RESEARCH, INC., a Delaware corporation ("COMPANY") and ____________________________________("PURCHASER"). WITNESSETH WHEREAS, PURCHASER desires to invest certain funds in COMPANY on the terms and conditions set forth herein; and WHEREAS, COMPANY desires to issue and sell to PURCHASER securities consisting of (i) a promissory note (the "Note") to evidence the repayment of the PURCHASER's investment and (ii) a warrant (the "Warrant") which is exercisable for shares of common stock of COMPANY (the "Shares") on the terms and conditions set forth herein; NOW THEREFORE, in consideration of the promises and respective mutual agreements herein contained, it is agreed by and between the parties hereto as follows: ARTICLE 1 ISSUANCE OF SECURITIES 1.1 Delivery of Note. At the date of the signing of this Agreement as ---------------- provided in Section 4.1 hereto (the "Closing"), subject to the terms and conditions herein set forth, and on the basis of the representations, warranties and agreements herein contained, COMPANY shall execute a promissory note all due and payable together with interest on the date which is one year from the date of execution hereof, in the form of Exhibit "A" attached hereto and incorporated herein by reference (the "Note"). The Note shall be issued in favor of PURCHASER or its designee. 1.2 Delivery of Warrant. At the Closing, subject to the terms and ------------------- conditions herein set forth, and on the basis of the representations, warranties and agreements herein contained, COMPANY shall execute and deliver a warrant (the "Warrant"), and, together with the Note, the "Securities) exercisable for a total of $1.00 for that number of common shares as set forth in Section 2.1 hereto. The Warrant shall be issued in favor of PURCHASER or its designee. 1.3 Consideration and Payment for the Securities. In consideration for -------------------------------------------- the Securities, PURCHASER shall deliver the purchase price of $25,000 dollars (United States funds)("Purchase Price"), which shall be payable to the COMPANY upon the execution of this Agreement. ARTICLE 2 THE WARRANT 2.1 Exercise Ratio. The COMPANY contemplates undertaking an -------------- underwriting public offering of its Common Stock (the "Proposed Public Offering"). PURCHASER may, at its option, within 90 days after effectiveness of the Proposed Public Offering, exercise the Warrant for the total purchase price of $1.00 into shares of the COMPANY's Common Stock at a conversion rate equal to 100% (the "Conversion Factor") of the offering price of the COMPANY's Common Stock in the Proposed Public Offering divided into $25,000.00 (e.g., if the public offering price is $5.00, the holder would receive 5,000 shares of Common Stock). 2.2 Registration. If and at the time the COMPANY proposes to register ------------ any of its securities under the Act in connection with the Proposed Public Offering, it will each such time give written notice to PURCHASER of its intention so to do. Upon the written request of PURCHASER given within 30 days after receipt of any such notice, the COMPANY will use its best efforts to cause the shares issuable upon exercise of the Warrant to be registered under the Act (with the securities which the COMPANY at the time proposes to register), all to the extent requisite to permit the sale or other disposition by the PURCHASER of the Shares so registered; provided, however, that the COMPANY may, as a condition precedent to its effective such registration, require PURCHASER to agree with the COMPANY and the managing underwriter or underwriters of the offering to be made by the COMPANY in connection with such registration that such Seller will not sell any securities of the same class or convertible into the same class as those registered by the COMPANY (including any class into which the securities registered by the COMPANY are convertible) for such reasonable period after such registration becomes effective as shall then be specified in writing by such underwriter or underwriters if in the opinion of such underwriter or underwriters the COMPANY's offering would be materially adversely affected in the absence of such an agreement. All expenses incurred by the COMPANY in complying with this Section, including without limitation all registration and filing fees, listing fees, printing, expenses, fees and disbursements of all independent accounts, or counsel for the COMPANY and or counsel for PURCHASER and the expense of any special audits incident to or required by any such registration and the expenses of complying with the securities or blue sky laws of any jurisdiction shall be paid by the COMPANY. Notwithstanding the foregoing, PURCHASER shall pay all underwriting discounts or commissions with respect to shares sold by PURCHASER. ARTICLE 3 REPRESENTATIONS AND COVENANTS OF COMPANY AND PURCHASER 3.1 The COMPANY hereby represents and warrants that: 2 (a) The Notes, the Warrants, and the Shares issuable upon exercise of the Warrants have been duly authorized and upon payment of the Purchase Price, will be fully paid and non-assessable. (b) It shall issue the Note and the Warrant to PURCHASER free and clear of all liens, security interests, pledges, encumbrances, charges, demands and claims, of any kind and nature whatsoever, whether direct or indirect or contingent. (c) The COMPANY will at all times reserve and keep available, free from preemptive rights, out of the aggregate of its authorized but unissued Common Stock or its authorized and issued Common Stock held in its treasury for the purpose of enabling it to satisfy any obligation to issue Shares upon exercise of the Warrant, the full number of Shares deliverable upon the exercise of the Warrant. The COMPANY covenants that all Shares which may be issued upon exercise of the Warrant will be validly issued, fully paid and nonassessable outstanding Shares of the COMPANY. (d) If the COMPANY shall be subject to the reporting requirements of Section 13 of the 1934 Act, the COMPANY will use its best efforts timely to file all reports required to be filed from time to time with the SEC (including but not limited to the reports under Section 13 and 15(d) of the 1934 Act referred to in subparagraph (c)(1) of Rule 144). If there is a public market for any Common Stock of the COMPANY at any time that the COMPANY is not subject to the reporting requirements of either of said Section 13 or 15(d), the COMPANY will, upon the request of PURCHASER, use its best efforts to make publicly available the information concerning the COMPANY referred to in subparagraph (c)(2) of said Rule 144. The COMPANY will furnish to PURCHASER, promptly upon request, (i) a written statement of the COMPANY's compliance with the requirements of subparagraphs (c)(1) or (c)(2), as the case may be, of said Rule 144, and (ii) written information concerning the COMPANY sufficient to enable PURCHASER to complete any Form 144 required to be filed with the SEC pursuant to said Rule 144. 3.2 The PURCHASER hereby represents and warrants that: (a) By reason of the PURCHASER's knowledge and experience in financial and business matters in general, and investments in particular, the PURCHASER is able to evaluate the merits and risks of an investment in the COMPANY. (b) The PURCHASER is purchasing the Securities as principal, solely for the PURCHASER's own account, for investment, and not with an intent to sell, or for sale in connection with any distribution of the Note, the Warrant or the 3 Shares issuable upon exercise of the Warrant, and no other person has any interest in or right with respect to the Note, the Warrant, or the Shares issuable upon exercise of the Warrant. (c) The PURCHASER is an "accredited investor" as that term is defined in Section 501 of Regulation D of the Act. (d) The person executing this Agreement on behalf of the PURCHASER has all right, power and authority to so execute and deliver this Agreement. (e) The PURCHASER has been advised that none of the Note, the Warrant or the Shares issuable upon exercise of the Warrant have been registered under the Act, or under the securities laws of any state; that no federal or state agency, including the Securities and Exchange Commission, the California Department of Corporations, or the securities commission or authorities of any other state or regulatory jurisdiction has approved or disapproved the issuance of the Note, the Warrant or the Shares or passed upon or endorsed the merits of the Offering or made any finding or determination as to the fairness of the issuance of the Note, the Warrant the Shares; that the Securities the PURCHASER will be acquiring are "restricted securities" as that term is defined in Rule 144 promulgated under the Act; that the Note and the Warrant will include a restrictive legend; and that the Note and the Warrant cannot be sold, transferred, assigned or otherwise hypothecated without compliance with applicable Federal and state securities laws. (f) PURCHASER acknowledges it has received all the information it considers necessary or appropriate for deciding whether to purchase the Securities. PURCHASER further represents that it has had an opportunity to ask questions and receive answers from the COMPANY regarding the terms and conditions of the offering of the Securities and the business, properties, prospects, and financial condition of the COMPANY and to obtain additional information (to the extent the COMPANY possessed such information or could acquire it without unreasonable effort or expense) necessary to verify the accuracy of any information furnished to it or which it had access. (g) To the extent applicable, the Securities shall be endorsed with the legend set forth below, and PURCHASER covenants that, except to the extent such restrictions are waived by the COMPANY, PURCHASER shall not transfer the Note, the Warrant or the Shares issuable upon exercise of the Warrant without complying with the restrictions on transfer described in the following legend endorsed on the Note, the Warrant or the certificate representing the Shares: 4 "THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED, OR HYPOTHECATED ABSENT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OF COMPLIANCE WITH RULE 144 PROMULGATED UNDER SUCH ACT, OR UNLESS THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED." 3.3 On the Closing Date as defined herein in Section 4.1, the COMPANY shall deliver to the PURCHASER an executed Note evidencing the obligation of the COMPANY to repay the Purchase Price. In addition on the Closing Date, the COMPANY shall deliver to the PURCHASER an executed Warrant evidencing the right of PURCHASER to obtain the Shares upon exercise of the Warrant. The Note and the Warrant shall be subject to no liens, security interests, pledges, encumbrances, charges, restrictions, demands or claims in any other party whatsoever, except as set forth in the legend on the Note and the Warrant. ARTICLE 4 CLOSING AND DELIVERY OF DOCUMENTS 4.1 Closing. The Closing shall be deemed to have occurred as of the ------- date of signing of this Agreement. Subsequent to the signing, the following shall occur as a single integrated transaction: 4.1.1 Delivery by COMPANY. ------------------- (a) COMPANY shall deliver, or cause to be delivered, to the PURCHASER a fully executed Note and a fully executed Warrant as is required to be delivered by COMPANY or its representatives pursuant to the provisions of this Agreement. 4.1.2 Delivery by PURCHASER. --------------------- (a) The PURCHASER shall deliver the Purchase Price as required by Section 1.3. (b) The PURCHASER shall deliver, or cause to be delivered, to COMPANY such instruments, documents and certificates as are required to be delivered by the PURCHASER or its representatives pursuant to the provisions of this Agreement. 5 MISCELLANEOUS 5.1 Entire Agreement. This Agreement sets forth the entire ---------------- agreement and understanding of the parties hereto with respect to the transactions contemplated hereby, and supersedes all prior agreements, arrangements and understandings related to the subject matter hereof. No understanding, promise, inducement, statement of intention, representation, warranty, covenant or condition, written or oral, express or implied, whether by statute or otherwise, has been made by any party hereto which is not embodied in this Agreement or the written statements, certificates, or other documents delivered pursuant hereto or in connection with the transaction contemplated hereby, and no party hereto shall be bound by or liable for any alleged understanding, promise, inducement, statement, representation, warranty, covenant or condition not so set forth. 5.2 Notices. All notices provided for in this Agreement shall be ------- in writing signed by the party giving such notice, and delivered personally or sent by overnight courier or messenger or sent by registered or certified mail (air mail if overseas), return receipt requested, or by telex, facsimile transmission, telegram or similar means of communication. Notices shall be deemed to have been received on the date of personal delivery, telex, facsimile transmission, telegram or similar means of communication, or if sent by overnight courier or messenger, shall be deemed to have been received on the next delivery day after deposit with the courier or messenger, or if sent by certified or registered mail, return receipt requested, shall be deemed to have been received on the third business day after the date of mailing. Notices shall be sent to the addresses set forth below: If to COMPANY: ------------- SunWood Research, Inc. 2882C Walnut Avenue Tustin, California 92780 Attention: Richard Stack If to PURCHASER: --------------- _______________________________ _______________________________ _______________________________ Attention: ____________________ 6 5.3 Waiver and Amendment. Any term, provision, covenant, -------------------- representation, warranty, or condition of this Agreement may be waived, but only by a written instrument signed by the party entitled to the benefits thereof. The failure or delay of any party at any time or times to require performance of any provision hereof or to exercise its rights with respect to any provision hereof shall in no manner operate as a waiver of or affect such party's right at a later time to enforce the same. No waiver by any party of any condition, or of the breach of any term, provision, covenant, representation or warrant contained in this Agreement, in any one or more instances, shall be deemed to be or construed as a further or continuing waiver of any such condition or breach or waiver of any other condition or of the breach of any other term, provision, covenant, representation or warranty. No modification or amendment of this Agreement shall be valid and binding unless it be in writing and signed by all parties hereto. 5.4 Arbitration. If a dispute or claim shall arise with respect to ----------- any of the terms or provisions of this Agreement, or with respect to the performance by either of the parties under this Agreement, then either party may, by notice as herein provided, require that the dispute be submitted under the Commercial Arbitration Rules of the American Arbitration Association to an arbitrator in good standing with the American Arbitration Association within fifteen (15) days after such notice is given. The written decision of the single arbitrator ultimately appointed by or for both parties shall be binding and conclusive on the parties. Judgment may be entered on such written decision by the single arbitrator in any court having jurisdiction and the parties consent to the jurisdiction of the Municipal and Superior Court of Orange County, California for this purpose. Any arbitration undertaken pursuant to the terms of this section shall occur in Orange County, California. 5.5 Choice of Law. This Agreement and the rights of the parties ------------- hereunder shall be governed by and construed in accordance with the laws of the State of California including all matters of construction, validity, performance, and enforcement and without giving effect to the principles of conflict of laws. 5.6 Jurisdiction. The parties submit to the jurisdiction of the ------------ Courts of the State of California or a Federal Court empaneled in the State of California for the resolution of all legal disputes arising under the terms of this Agreement, including, but not limited to, enforcement of any arbitration award. 5.7 Counterparts. This Agreement may be executed in one or more ------------ counterparts, each of which shall be deemed an original, but all of which shall together constitute one and the same instrument. 5.8 Attorneys' Fees. Except as otherwise provided herein, if a --------------- dispute should arise between the parties including, but not limited to arbitration, the prevailing party shall be reimbursed by the nonprevailing party for all reasonable expenses incurred in resolving such dispute, including reasonable attorneys' fees exclusive of such amount of attorneys' fees as shall be a premium for result or for risk of loss under a contingency fee arrangement. 7 5.9 Taxes. Any income taxes required to be paid in connection with ----- the payments due hereunder, shall be borne by the party required to make such payment. Any withholding taxes in the nature of a tax on income shall be deducted from payments due, and the party required to withhold such tax shall furnish to the party receiving such payment all documentation necessary to prove the proper amount to withhold of such taxes and to prove payment to the tax authority of such required withholding. 5.10 Facsimile Signatures. Notwithstanding the execution of this -------------------- Agreement by the use of facsimile signatures, this Agreement shall be effective upon its execution by both parties. The parties hereto agree that original signatures will be exchanged within ten (10) business days after the date of execution. IN WITNESS WHEREOF, the parties hereto have executed this Agreement, as of the date first written hereinabove. "COMPANY" SUNWOOD RESEARCH, INC., a Delaware corporation. By: ------------------------------- Richard Stack, President "PURCHASER" ------------------------------------ 8 EXHIBIT "A" PROMISSORY NOTE $25,000.00 Orange County, California ___________________, 1996 THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED, OR HYPOTHECATED ABSENT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OF COMPLIANCE WITH RULE 144 PROMULGATED UNDER SUCH ACT, OR UNLESS THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED. FOR VALUE RECEIVED, the undersigned SunWood Research, Inc., a Delaware corporation, with offices at 2882C Walnut Avenue, Tustin, California 92780 ("SunWood") hereby promises to pay to the order of ________________________________________("Payee") or order, at Tustin, California, U.S.A. or at such other place as Payee or any holder hereof may from time to time designate, the principal sum of TWENTY FIVE THOUSAND DOLLARS ($25,000.00), and to pay interest from the date hereof on the unpaid principal balance amount hereof at a rate of ten percent (10%) per annum. The principal balance and all accrued interest outstanding under this Note, shall be due and payable at the earlier of (i) one (1) year from the date of this Note, (_________________, 1997) or (ii) the effectiveness of a public offering on behalf of SunWood. SunWood and all endorsers, guarantors and sureties hereof hereby severally do not waive diligence, demand, presentment, and notice. SunWood may, at its option, at any time and from time to time, prepay all or any part of the principal balance of this Note, provided that concurrently with each such prepayment SunWood shall pay accrued interest on the principal so prepaid to the date of such prepayment. This Note may not be changed, modified or terminated orally, but only by an agreement in writing signed by the party to be charged. Payee also represents and warrants that he/she/they attest to the veracity of the representations and warranties required of them under the terms of that certain Securities Purchase Agreement executed concurrently herewith. The parties hereto hereby irrevocably consent to the jurisdiction of the courts of the State of California in connection with any action or proceeding arising out of or relating to this Note. This Note shall be governed by California law, without reference to any choice of law principles thereof. SunWood Research, Inc. By: ----------------------------- Richard Stack, President EXHIBIT "B" WARRANT Orange County, California ___________________, 1996 THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED, OR HYPOTHECATED ABSENT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OF COMPLIANCE WITH RULE 144 PROMULGATED UNDER SUCH ACT, OR UNLESS THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED. FOR VALUE RECEIVED, __________________________, the registered holder or assigns (the "Holder"), is entitled to purchase from SunWood Research, Inc., a Delaware corporation, (the"Company") within 90 days after the Company obtains effectiveness of an underwriting public offering of its Common Stock (the "Proposed Public Offering"), for the total purchase price of $1.00, such number of shares of the Company's Common Stock equal to 100% (the Conversion Factor") of the offering price of the Company's Common Stock in the Proposed Public Offering divided into $25,000.00 (e.g., if the public offering price is $5.00, the Holder would receive 5,000 shares of Common Stock). Holders will not have any rights or privileges of shareholders of the Company prior to Exercise of the Warrants. If and at the time the Company proposes to register any of its securities under the Act in connection with the Proposed Public Offering, it will each such time give written notice to Holder of its intention so to do. Upon the written request of Holder given within 30 days after receipt of any such notice, the Company will use its best efforts to cause the shares issuable upon exercise of the Warrant to be registered under the Act (with the securities which the Company at the time proposes to register), all to the extent requisite to permit the sale or other disposition by the Holder of the Shares so registered; provided, however, that the Company may, as a condition precedent to its effective such registration, require Holder to agree with the Company and the managing underwriter or underwriters of the offering to be made by the Company in connection with such registration that such Seller will not sell any securities of the same class or convertible into the same class as those registered by the Company (including any class into which the securities registered by the Company are convertible) for such reasonable period after such registration becomes effective as shall then be specified in writing by such underwriter or underwriters if in the opinion of such underwriter or underwriters the Company's offering would be materially adversely affected in the absence of such an agreement. All expenses incurred by the Company in complying with this Section, including without limitation all registration and filing fees, listing fees, printing expenses, fees and disbursements of all independent accounts, or counsel for the Company and or counsel for Holder and the expense of any special audits incident to or required by any such registration and the expenses of complying with the securities or blue sky laws of any jurisdiction shall be paid by the Company. Notwithstanding the foregoing, Holder shall pay all underwriting discounts or commissions with respect to shares sold by Holder. The Warrant evidenced hereby may be exercised in whole or in part by presentation of this Warrant certificate and simultaneous payment of the Warrant Price at the offices of the Company in Tustin, California. Payment of such price shall be made at the option of the holder in cash or by check. The Warrant evidenced hereby is of a duly authorized issue of Common Stock Purchase Warrants and are issued under and in accordance with the Securities Purchase Agreement, and are subject to the terms and provisions contained in such Securities Purchase Agreement to all of which the Holder of this Warrant Certificate by acceptance hereof consents. This Warrant is exercisable in whole only and not in part. No fractional Shares will be issued upon the exercise of rights to purchase hereunder, but the Company shall pay the cash value of any fraction upon the exercise of one or more Warrants. The Warrants evidenced hereby are transferable at the office of the Company subject to compliance with applicable state and federal securities laws. The Holder hereof may be treated by the Company and all other persons dealing with this Warrant Certificate as the absolute owner hereof for all purposes and as the person entitled to exercise the rights represented hereby, any notice to the contrary notwithstanding, and until such transfer is entered on such books, the Company may treat the Holder as the owner for all purposes. The Warrant Certificate does not entitle the Holder thereof to any of the rights of a shareholder of the Company be valid or obligatory for any purpose until it shall have been countersigned by the Warrant Agent. IN WITNESS WHEREOF, the Company has signed and sealed this Unit Warrant and delivered it in Tustin, California as of _______________, 1996. SUNWOOD RESEARCH, INC. By: ---------------------------- Richard Stack, President Exhibit "B" INVESTOR QUALIFICATION QUESTIONNAIRE ------------------------------------- Instructions - ------------ You are being requested to answer questions in connection with the proposed offer and sale of Promissory Notes and Warrants to purchase Common Stock (individually, a "Security" and collectively, the "Securities") of SUNWOOD RESEARCH, INC., a Delaware corporation (the "Corporation"), to a limited number of "accredited investors" without registration under the Securities Act of 1933, as amended (the "Securities Act"), or qualification under the California Corporate Securities Law of 1968, as amended (the "California Law"), in reliance on the private offering exemptions contained in Section 4(2) of the Securities Act and Regulation D promulgated thereunder and Section 25102(f) of the California Law. The availability of such exemptions depends, in part, on a determination that each purchaser is fully "accredited" and able to evaluate for himself the merits and risks of the proposed investment and does not require the protections afforded by registration or qualification. The information supplied will be used in determining whether proposed investors meet such criteria. The information will be kept confidential and will not be disclosed except to the officers and Board of Directors of the Corporation, the Corporation's counsel and investment bankers and, if required, to governmental and regulatory authorities. Please print your response to each question, and where the answer to any question is "None" or "Not Applicable", please so state. 1. Personal -------- (a) Full Name: ------------------------------------------------------ (b) Residence Address: ---------------------------------------------- City, State, Zip: ----------------------------------------------- Telephone: ( ) ----- ---------------------------------------------- (c) Employer: ------------------------------------------------------- (d) Business Address: ----------------------------------------------- City, State, Zip: ----------------------------------------------- Telephone: ( ) ----- ---------------------------------------------- (e) Position or Title: ---------------------------------------------- (f) Are you (check one) Married Single -------------- --------------- (g) Do you file taxes jointly? Yes No --------- --------- 2. Income ------ (a) Individual income for the most recently ended tax year: ---------- Less than $200,000 More than $200,000 ---------- ---------- OR -- Joint income with spouse for the most recently ended tax year: ----- Less than $300,000 More than $300,000 ---------- ---------- (b) Individual income for the tax year prior to the most recently ended ---------- tax year: Less than $200,000 More than $200,000 ---------- ---------- OR -- Joint income with spouse for the tax year prior to the most recently ----- ended tax year: Less than $300,000 More than $300,000 ---------- ---------- (c) Reasonably anticipated individual income for this year: ---------- Less than $200,000 More than $200,000 ---------- ---------- OR -- Reasonably anticipated joint income with spouse for this year: ----- Less than $300,000 More than $300,000 ---------- ---------- (d) Do you anticipate your individual or joint income over the next five ------------------- (5) years will (check one): Increase Decrease Remain same ---------- ---------- ---------- 2 3. Net Worth --------- (a) Individual net worth (check one): Less Than $250,000 $250,000 - $500,000 ---------- ----------- $500,000 - $750,000 $750,000 - $1,000,000 ---------- ---------- Over $1,000,000 ---------- (b) Combined Net Worth (jointly with spouse) (check one): Less Than $250,000 $250,000 - $500,000 ---------- ----------- $500,000 - $750,000 $750,000 - $1,000,000 ---------- ---------- Over $1,000,000 ---------- 4. Pension Plans ------------- If you are subscribing for Stock to be held in an employee benefit plan under the Employee Retirement Income Security Act of 1974, then (check one): [_] Investment decisions are made by a plan fiduciary (as defined in Section 3(21) of the Employee Retirement Income Security Act of 1974) which is either a bank, savings and loan association, insurance company or a registered investment advisor. [_] The employee benefit plan has total assets in excess of $5 million dollars. [_] The employee benefit plan is a self-directed Plan and all investment decisions are made solely by persons that are accredited investors within the meaning of Regulation D promulgated under the Securities Act. 5. Entities. -------- If you are an entity (corporation, partnership or trust) subscribing for Stock, then (check one or more that apply): [_] The undersigned is an organization described in Section 501(c)(3) of the Internal Revenue Code, corporation, Massachusetts or similar business trust, or partnership, not formed for the specific purpose of acquiring the Stock, with total assets in excess of $5,000,000. ----------------------------------------------------------------------- ----------------------------------------------------------------------- (describe entity) 3 [_] The undersigned is a trust, with total assets in excess of $5,000,000, not formed for the specific purpose of acquiring the Stock, whose purchase is directed by a "Sophisticated Person" as described in Section 230.506(b)(2)(ii) of the Securities Act. ----------------------------------------------------------------------- ----------------------------------------------------------------------- ----------------------------------------------------------------------- (describe entity) [_] The undersigned is an entity in which all of the equity owners are "Accredited Investors" as defined in Section 230.501(a) of the Securities Act. ----------------------------------------------------------------------- ----------------------------------------------------------------------- ----------------------------------------------------------------------- (describe entity) I undersigned the Securities are being offered and sold without registration under the Securities Act of the California Law in reliance upon the private offering exemptions contained in Section 4(2) of the Securities Act and Regulation D promulgated thereunder and Section 25102(f) of the California law, and that such reliance is based in part on the information herein supplied. For the foregoing reasons and to induce the Corporation to issue and deliver the Securities to me, I represent and warrant that the information stated herein is accurate and complete to the best of my knowledge and belief and I agree to supply corrective information promptly if, prior to the consummation of my purchase of the Securities, any of such information becomes inaccurate or incomplete. (NOTE: Signatures should conform with those used on the Securities Purchase Agreement.) - -------------------------------- Signature of Prospective Investor - -------------------------------- Please Print Name - -------------------------------- Date 4 ** TOTAL PAGE .006 ** EX-11.1 51 JAVELIN COMPUTATION OF NET LOSS PER SHARE EXHIBIT 11.1 JAVELIN SYSTEMS, INC. COMPUTATION OF NET LOSS PER SHARE NET LOSS PER SHARE:
Period from September 19, 1995 (inception) to June 30, 1996 ------------------ Net loss...................................................... $ (54,342) ============= Calculation of shares outstanding for computing net loss per share: Weighted average common shares outstanding used in calculating net loss per share in accordance with generally accepted accounting principles................................................. 1,357,146 Adjustments to reflect requirements of the SEC in accordance with SAB 83............................ ------------- Shares used in computing net loss per share................... ------------- Net loss per share............................................ $ (0.03) =============
EX-21.1 52 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21.1 ------------ SUBSIDIARIES OF THE REGISTRANT ------------------------------ NONE. EX-23.2 53 CONSENT OF ERNST & YOUNG EXHIBIT 23.2 Consent of Ernst & Young LLP, Independent Auditors We consent to the reference to our firm under the captions "Experts" and "Selected Financial Data" and to use of report dated August 15, 1996, except as to Note 8, as to which the date is August __, 1996, in the Registration Statement (Form SB-2) and related Prospectus of Javelin Systems, Inc. for the registration of 977,500 shares of its common stock. Ernst & Young LLP Orange County, California August __, 1996 EX-27 54 FINANCIAL DATA SCHEDULE - ARTICLE 5
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL OF JAVELIN SYSTEMS, INC. AS OF JUNE 30, 1996 AND FOR THE PERIOD FROM SEPTEMBER 19, 1995 (DATE OF INCEPTION) TO JUNE 30, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR JUN-30-1996 SEP-19-1995 JUN-30-1996 6,404 0 693,679 0 209,350 913,540 30,996 (3,044) 951,313 681,294 160,000 0 0 369,206 (174,187) 951,313 1,463,627 1,463,627 1,104,171 1,104,171 374,202 0 38,796 (53,542) 800 (54,342) 0 0 0 (54,342) (0.03) (0.03)
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