-----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, O6azVhMrmoopt5dkItF08xIq6BE6D6GInVDWLifU6ZOF3cVGT4EiD0rmQb4f/G94 Y5fT9LldRjPWdUjYSHl38A== 0000944209-99-000180.txt : 19990217 0000944209-99-000180.hdr.sgml : 19990217 ACCESSION NUMBER: 0000944209-99-000180 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990216 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CUMETRIX DATA SYSTEMS CORP CENTRAL INDEX KEY: 0001051067 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-COMPUTER & PERIPHERAL EQUIPMENT & SOFTWARE [5045] IRS NUMBER: 954574138 STATE OF INCORPORATION: CA FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-14001 FILM NUMBER: 99542772 BUSINESS ADDRESS: STREET 1: 957 LAWSON STREET CITY: INDUSTRY STATE: CA ZIP: 91748- BUSINESS PHONE: (626)-968- MAIL ADDRESS: STREET 1: 1304 JOHN REED CT CITY: CITY OF INDUSTRY STATE: CA ZIP: 91745 FORMER COMPANY: FORMER CONFORMED NAME: CUMETRIX INC DATE OF NAME CHANGE: 19971222 FORMER COMPANY: FORMER CONFORMED NAME: DATA NET INTERNATIONAL INC DATE OF NAME CHANGE: 19971217 10-Q 1 FORM 10-Q FOR PERIOD ENDED 12/31 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED December 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER: 001-14001 CUMETRIX DATA SYSTEMS CORP. (Exact Name of Registrant as Specified in its Charter) California 95-4574138 (State or Other Jurisdiction (I.R.S. Employer of Incorporation or Identification No.) Organization) 957 Lawson Street, Industry, California 91748 (Address, Including Zip Code, Of Registrant's Principal Executive Offices) (626) 965-6899 (Registrant's Telephone Number, Including Area Code) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Security Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the last 90 days. Yes [X] No [ ] As of February 16, 1999, the Registrant had 7,452,500 shares of Common Stock, without par value, issued and outstanding. CUMETRIX DATA SYSTEMS CORP. INDEX PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS 1. Condensed Balance Sheets - December 31, 1998 and March 31, 1998 2. Condensed Statements of Operations - Three Months Ended December 31, 1998 and 1997 3. Condensed Statements of Operations - Nine Months Ended December 31, 1998 and 1997 4. Condensed Statements of Cash Flows - Nine Months Ended December 31, 1998 and 1997 5. Notes to Financial Statements ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS ITEM 2. CHANGES IN SECURITIES ITEM 3. DEFAULTS UPON SENIOR SECURITIES ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS ITEM 5. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K SIGNATURES PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CUMETRIX DATA SYSTEMS CORP. CONDENSED BALANCE SHEETS
ASSETS December 31, March 31, 1998 1998 --------------- ------------ (unaudited) CURRENT ASSETS: Cash and cash equivalents........................... $ 9,439,425 $ 4,415,690 Trade receivables, net of allowance for doubtful accounts of $137,000 and $57,000 at December 31, 1998 and March 31, 1998, respectively....................................... 3,951,435 3,885,803 Inventories......................................... 3,580,356 2,001,597 Deferred taxes...................................... 159,525 133,647 Prepaid expenses.................................... 186,172 45,983 ----------- ----------- Total current assets........................... 17,316,913 10,482,720 ----------- ----------- FIXED ASSETS, net........................................ 347,623 87,538 DEFERRED OFFERING COSTS.................................. - 514,927 CAPITALIZED PURCHASED SOFTWARE COSTS..................... 1,100,000 1,100,000 INVESTMENT............................................... 100,000 - ----------- ----------- Total Assets................................... $18,864,536 $12,185,185 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable.................................... $ 6,012,887 $ 7,822,652 Accrued expenses.................................... 115,012 641,844 Income taxes payable................................ 6,102 717,013 Current portion of long-term debt................... 3,962 1,203,707 ----------- ----------- Total current liabilities...................... 6,137,963 10,385,216 ----------- ----------- LONG-TERM DEBT, net of current portion................... 5,860 8,864 ----------- ----------- COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY: Preferred stock, no par value: Authorized, 2,000,000 shares; issued and outstanding, none..... - - Common stock, no par value: Authorized, 20,000,000 shares; issued and outstanding, 7,452,500 and 4,750,000 at December 31, 1998 and March 31, 1998, respectively....................... 11,967,061 1,042,589 Retained earnings................................... 753,652 748,516 ----------- ----------- Total shareholders' equity..................... 12,720,713 1,791,105 ----------- ----------- Total liabilities and shareholders' equity..... $18,864,536 $12,185,185 =========== ===========
The accompanying notes are an integral part of these condensed balance sheets. CUMETRIX DATA SYSTEMS CORP. CONDENSED STATEMENTS OF OPERATIONS
Three Months Ended December 31, 1998 1997 ----------- ----------- (unaudited) NET SALES............................................ $16,251,491 $19,799,736 COST OF PRODUCTS..................................... 15,740,845 18,972,036 ----------- ----------- Gross profit..................................... 510,646 827,700 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES......... 796,548 418,866 ----------- ----------- Income (Loss) from operations.................... (285,902) 408,834 INTEREST EXPENSE..................................... 1,894 12,625 INTEREST INCOME...................................... 101,071 10,082 ----------- ----------- Income (loss) before provision (benefit) for income taxes..................................... (186,725) 406,291 PROVISION (BENEFIT) FOR INCOME TAXES................. (76,719) 162,516 ----------- ----------- NET INCOME (LOSS).................................... (110,006) 243,775 =========== =========== BASIC AND DILUTED EARNINGS PER SHARE................. $ (0.01) $ 0.05 =========== ===========
The accompanying notes are an integral part of these condensed statements. CUMETRIX DATA SYSTEMS CORP. CONDENSED STATEMENTS OF OPERATIONS
Nine Months Ended December 31, 1998 1997 ----------- ----------- (unaudited) NET SALES............................................ $54,084,126 $49,175,291 COST OF PRODUCTS..................................... 52,592,335 47,100,756 ----------- ----------- Gross profit..................................... 1,491,791 2,074,535 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES......... 1,898,243 1,029,504 ----------- ----------- Income (Loss) from operations.................... (406,452) 1,045,031 INTEREST EXPENSE..................................... 4,098 13,908 INTEREST INCOME...................................... 421,738 10,723 ----------- ----------- Income before provision for income taxes......... 11,188 1,041,846 PROVISION FOR INCOME TAXES........................... 6,052 416,738 ----------- ----------- NET INCOME........................................... 5,136 625,108 =========== =========== BASIC AND DILUTED EARNINGS PER SHARE................. $ 0.00 $ 0.13 =========== ===========
The accompanying notes are an integral part of these condensed statements. CUMETRIX DATA SYSTEMS CORP. CONDENSED STATEMENTS OF CASH FLOWS
Nine Months Ended December 31, 1998 1997 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income.............................................. $ 5,136 $ 625,108 Adjustments to reconcile net income to net cash and cash equivalents used in operating activities: Depreciation and amortization...................... 18,900 2,847 Amortization of deferred financing costs........... - 12,100 Provision for doubtful accounts.................... 128,000 56,310 Loss on receivable from director................... - 100,000 Options issued for services........................ 21,000 - Changes in assets and liabilities: Trade receivables.................................. (193,632) (2,284,437) Inventories........................................ (1,578,759) (2,391,716) Deferred taxes..................................... (25,878) (41,788) Prepaid expenses................................... (174,488) (18,830) Other.............................................. 34,299 (129,250) Accounts payable................................... (1,809,765) 5,258,818 Accrued expenses................................... (526,832) 22,450 Income taxes payable............................... (710,911) 393,713 ----------- ----------- Net cash provided(used) by operating activities...................................... (4,812,930) 1,605,325 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of fixed assets............................... (278,985) (8,684) Receivables from related parties........................ - 39,700 Purchase of Capitalized Software Costs.................. - (150,000) Cash paid for investment................................ (100,000) - ----------- ----------- Net cash provided (used) in investing activities...................................... (378,985) (118,984) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from initial public offering, net.............. 11,203,472 - Payments on bank borrowings............................. - (2,516) Proceeds from Note...................................... - 550,000 Payments on long-term debt.............................. (1,202,749) - Payments on Notes....................................... - (300,000) Proceeds from stock issuance............................ - 749,200 Deferred offering costs................................. 514,927 - Purchase of Stock from Shareholder...................... (300,000) - ----------- ----------- Net cash provided by financing activities........ 10,215,650 996,684 ----------- ----------- NET INCREASE IN CASH AND CASH EQUIVALENTS................. 5,023,735 2,483,025 CASH AND CASH EQUIVALENTS, beginning of period............ 4,415,690 479,796 ----------- ----------- CASH AND CASH EQUIVALENTS, end of period.................. $ 9,439,425 $ 2,962,821 =========== =========== CASH PAID FOR INTEREST 1,894 1,808 CASH PAID FOR INCOME TAXES 730,000 13,000
The accompanying notes are an integral part of these condensed statements. CUMETRIX DATA SYSTEMS CORP. NOTES TO FINANCIAL STATEMENTS December 31, 1998 (Unaudited) 1. Basis of Presentation The accompanying unaudited financial statements have been prepared in conformity with generally accepted accounting principles. However, certain information and footnote disclosures normally included in financial statements prepared in conformity with generally accepted accounting principles have been omitted or condensed pursuant to the rules and regulations of the Securities and Exchanges Commission (SEC). These statements should be read in conjunction with the Company's March 31, 1998 audited financial statements and notes thereto included in the Company's Form 10-K dated June 5, 1998, including all amendments thereto. In the opinion of management, these interim financial statements reflect all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the financial position and results of operations for each of the periods presented. The results of operations and cash flows for such periods are not necessarily indicative of results to be expected for the full year. 2. Earnings Per Common Share Earnings per share calculations are in accordance with SFAS No. 128, "Earnings per Share" (SFAS 128). Accordingly, "basic" earnings per share is computed by dividing net income by the weighted average number of shares outstanding for the year. "Diluted" earnings per share is computed by dividing net income by the total of the weighted average number of shares outstanding plus the dilutive effect of outstanding stock options (applying the treasury stock method). Earnings per share amounts for 1997 have been restated to reflect the adoption of SFAS No. 128. A reconciliation of the basic weighted average number of shares outstanding and the diluted weighted average number of shares outstanding for each of the three and nine month periods ended December 31, follows:
Three Months Ended Nine Months Ended December 31, December 31, --------- --------- --------- --------- 1998 1997 1998 1997 --------- --------- --------- --------- Weighted average number of common shares outstanding-Basic 7,432,087 4,499,444 7,355,773 4,477,590 Dilutive effect of outstanding stock options and warrants - 134,348 226,200 78,394 --------- --------- --------- --------- Weighted average number of common shares outstanding-Diluted 7,432,087 4,633,792 7,581,973 4,555,984 ========= ========= ========= =========
3. Reclassifications Certain amounts in the 1997 Financial Statements have been reclassified to conform to the 1998 presentation. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Overview The Company was founded in April 1996, and until December of 1996 operated entirely as a distributor and value added reseller of computer equipment and related hardware components and software peripherals. In December of 1996, the Company entered the system configuration business. This process required certain organizational and operational changes to effectively position the Company as a provider of configuration and integration solutions to various levels within the distribution, integration and end-user markets. In order to enhance its competitive advantage in the systems integration market, the Company has entered into a perpetual non-exclusive licensing agreement with Computer Aided Software Integration, Inc. ("CASI") to license CASI's Configurator software for use in the development and commercialization of the Company's ACSA Solution. The Company paid CASI a one-time license fee of $1.1 million. The payments for the license agreement were capitalized and will be amortized starting when the configurator software is placed in service over the useful life of the software, which, for accounting purposes, is currently estimated to be between three and five years. Although the Company had anticipated implementing the ACSA Solution by December 31, 1998, the Company has experienced significant delays in implementing the ACSA Solution due primarily to a dispute related to the Reseller Agreement dated September 15, 1997, with CASI and CASI's subsequent refusal to provide the Company with the necessary training to operate its Configurator software and related technical support. CASI is obligated to provide such training and technical support to the Company under the terms of the License Agreement, dated September 15, 1997, by and between the Company and CASI, pursuant to which the Company licensed the Configurator software. The Company is attempting to resolve the delays it is experiencing with CASI. The delays in implementing the ACSA Solution also result, in part, from staff turnover. While there can be no assurance, the Company currently anticipates the availability of the ACSA Solution in the fourth quarter of fiscal year 1999. Delays in implementing the ACSA Solution have caused the Company to derive its revenues almost exclusively from the Company's computer products distribution business, which has gross margins significantly lower than those the Company believes to be available in the system configuration business. In light of high legal expenses inherant in litigating the matter, the company opted to negotiate an amicable resolution with CASI. Based on current discussions, the Company believes that it will reach an amicable outcome in this matter with CASI. However, there can be no assurance that the Company will succeed in reaching a solution to the dispute with CASI that is acceptable to the Company. Competitive factors in the Computer Products market include price, service and support, the variety of products offered, and marketing and sales capabilities. While the Company believes that it competes successfully with respect to most, if not all of these factors, there can be no assurance that it will continue to do so in the future. The industry has come to be characterized by aggressive price cutting which intensified in the first quarter of fiscal 1999 as a result of industry wide pricing pressures resulting from excess supplies from major manufacturers and reduced demand in the overall personal computer industry. These factors can in part be traced to the economic slow-down in Asia and excess worldwide build up of personal computers in the first calendar quarter of 1998. The Company expects that these factors may continue to sustain pricing pressures at least until the end of the fourth fiscal quarter and possibly longer. As a result of these pricing pressures, the Company's margins have been pressured and the Company has declined to compete for certain lower margin business. However, the Company will need to continually provide competitive prices, superior product selection and delivery response time in order to remain competitive. If the Company were to fail to compete favorably with respect to any of these factors, the Company's business and operating results may be adversely affected. Also, the Company's business is subject to certain quarterly influences. Historically, net sales and operating profits were generally higher in the third fiscal quarter due to the purchasing patterns of personal computer integrators and resellers and are generally lower in the first and second fiscal quarters due primarily to lower industry shipments. The Company's lower sales in the third fiscal quarter ended December 31, 1998 as compared to December 31, 1997, however, run counter to these quarterly influences, a result the Company attributes to its unwillingness to compete for low margin business in the hardware distribution market. During the third quarter, the Company began the implementation of an internet strategy designed to give the Company e-commerce and internet auction capabilities. The Company has begun to form a wholly-owned subsidiary to focus on the Company's internet initiatives. In December, 1998, the Company purchased Preferred Stock of Online Transactions Technologies, Inc., a California corporation ("OTT"), which develops e-commerce and internet auction websites for $100,000. On February 1, 1999, the Company exercised an option to purchase $900,000 of additional Preferred Stock in OTT for a 27.8% equity stake in OTT on a fully-diluted basis. The Company holds an option to purchase up to an aggregate 50% equity stake in OTT. The Company has begun to work with OTT to develop and implement the Company's internet strategy, which it expects to include e-commerce and internet auction websites. The implementation of the Company's internet strategy will result in the Company incurring significant expenses in the fourth quarter which will not be offset by internet-related revenues. This discussion summarizes the significant factors affecting the operating results, financial condition and liquidity/cash flows of the Company for the quarters ended December 31, 1998 and 1997 and nine months ended December 31, 1998 and 1997. The Company has a limited history of operations. Special Note Regarding Forward-Looking Information This Report contains statements that constitute "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934 and Section 27A of the Securities Act of 1933. The words "expect," "estimate," "anticipate," "predict," "believe," and similar expressions and variations thereof are intended to identify forward-looking statements. Such statements appear in a number of places in this filing and include statements regarding the intent, belief or current expectations of the Company, its Directors or Officers with respect to, among other things (a) trends effecting the financial condition and results of operations of the Company and (b) the business and growth strategies of the Company. The shareholders of the Company are cautioned not to put undue reliance on such forward-looking statements. Such forward-looking statements are not guarantees of future performance and involve risks and uncertainties. Actual results may differ materially from those projected in this Report, for the reasons, among others, discussed in "Future Operating Results" below and under the caption, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Risk Factors" in the Company's Annual Report on Form 10-K for Fiscal 1998, filed with the Securities and Exchange Commission. The Company undertakes no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date hereof. Readers should carefully review the risk factors referred to above and the other documents the Company files from time to time with the Securities and Exchange Commission, including the Company's Annual Report on Form 10-K for the fiscal year 1998, the quarterly reports on Form 10-Q filed by the Company during the remainder of fiscal 1999, and any current reports on Form 8-K filed by the Company. Results of Operations Three Months Ended December 31, 1998 and 1997. Net Sales. Net sales for the quarter ended December 31, 1998 were $16,251,491 compared to $19,799,736 in the previous year. This decrease of $3,548,245 or 17.9% in net sales results from sustained industry oversupply, resulting pricing pressures and the Company's determination to attempt to defend margins, where the Company has increased gross profits as a percentage of net sales from 2.8% in the second quarter to 3.1% in the third quarter, rather than pursue sales growth through low margin sales. Net sales declined from $19,418,109 in the second quarter to $16,251,491 primarily due to the Company's unwillingness to compete for lower margin business in the computer products distribution business. The Company expects that its historical annual growth rate for net sales will not be sustained in fiscal 1999 and that these pricing pressures will continue to affect gross profit. Cost of Products. Cost of products decreased $3,216,562 from $18,957,407 to $15,740,845 for the quarter ended December 31, 1997 and 1998, respectively. This decrease is mainly attributable to the decrease in net sales. Gross Profit. Gross profit for the quarter ended December 31, 1998 was $510,646 compared to $827,700 in the quarter ended December 31, 1997. Gross profit as a percentage of net sales was 3.1% for the quarter ended December 31, 1998 compared to 4.2% for the quarter ended December 31, 1997. This represents a 26.2% decrease in gross profit, and is mainly attributable to industry oversupply and the resulting pricing pressures facing the industry as a whole. As discussed under "Net Sales" above, the Company increased gross profits as a percentage of net sales from 2.8% in the second quarter to 3.1% in the third quarter. Selling, General and Administrative Expenses. Selling, general and administrative expenses for quarter ended December 31, 1998 were $796,548 compared to $418,866 for the quarter ended December 31, 1997. The major components of selling, general and administrative expenses for the periods include the following:
Three Months Ended December 31, 1998 1997 ------- ------- Payroll (including commissions) 395,000 327,000 Rent 18,000 11,000 Insurance 27,000 5,000 Advertising/Brochure 18,000 1,000 Legal, Accounting and other professional services 53,000 1,000 Credit and Collection 100,000 38,000 Public Relations 27,000 - Other (under 5%) 158,548 35,866 ------- ------- Total 796,548 418,866 ======= =======
The increase of $377,682 in selling, general and administrative expenses is attributable to increased staff and overhead to support the higher levels of sales and marketing activity. In addition, the Company hired additional personnel in finance and administration to facilitate growth of the Company's infrastructure and revenue expansion. SG&A costs in the quarter included rent in a larger facility, D&O insurance costs, legal and accounting costs, an additional provision for bad debt expense, and other costs related to being a public company. In addition, in accordance with FAS No. 123, the Company has included in SG&A a non-cash charge of $21,000 to public relations expense and a corresponding credit to Paid in Capital upon issuance of options to outside consultants. Interest Income Interest income of $101,071 for the quarter ended December 31, 1998 is primarily due to interest income earned on the investment of proceeds from the initial public offering. Net Income Net loss for the quarter ended December 31, 1998 was $110,006 compared to net income of $243,775 for the quarter ended December 31, 1997. The decrease of $353,781 is mainly attributable to the decrease in sales, gross profit, higher selling, general and administrative expenses, offset by interest income. Nine Months Ended December 31, 1998 and 1997. Net Sales. Net sales for the nine months ended December 31, 1998 were $54,084,126 compared to $49,175,291 in the previous year. This increase of $4,908,835 or 10% in net sales is attributable to growth of the Company's sales force and an increase in the Company's available combined purchasing credit (including its vendor credit and a new credit facility of $25 million, consisting of a $20 million flooring line of credit and a $5 million revolving line of credit (together, the "Finova Line"), from Finova Capital Corporation which allowed the Company to increase its ability to purchase product to fulfill more sales orders. However, as a result of sustained industry oversupply, resulting pricing pressures and the Company's determination to attempt to defend margins rather than pursue sales growth through low margin sales, the Company expects that its historical annual growth rate for net sales will not be sustained in fiscal 1999 and that these pricing pressures will continue to affect gross profit. Cost of Products. Cost of products increased $5,491,579 from $47,100,756 to $52,592,335 for the nine months ended December 31, 1997 and 1998, respectively. This increase is mainly attributable to the increase in net sales. Gross Profit. Gross profit for the nine months ended December 31, 1998 was $1,491,791 compared to $2,074,535 in the nine months ended December 31, 1997. Gross profit as a percentage of net sales was 2.8% for the nine months ended December 31, 1998 compared to 4.2% for the nine months ended December 31, 1997. This represents a 33% decrease in gross profit, and is mainly attributable to industry oversupply and the resulting pricing pressures facing the industry as a whole. Selling, General and Administrative Expenses. Selling, general and administrative expenses for nine months ended December 31, 1998 were $1,898,243 compared to $1,029,504 for the nine months ended December 31, 1997. The major components of selling, general and administrative expenses for the periods include the following:
Nine Months Ended December 31, 1998 1997 --------- --------- Payroll (including commissions) 1,069,000 707,000 Rent 54,000 36,000 Insurance 72,000 13,000 Advertising/Brochure 24,000 1,000 Legal, Accounting and other professional services 147,000 5,000 Credit and Collection 190,000 99,000 Public Relations 27,000 - Write-off of related party receivable - 100,000 Other (under 5%) 315,243 68,504 --------- --------- Total 1,898,243 1,029,504 ========= =========
The increase of $868,739 in selling, general and administrative expenses is attributable to increased staff and overhead to support the higher levels of sales and marketing activity. The Company's salaries of its executive officers are at levels the Company believes to be commensurate with current market value compared to the nine months ended December 31, 1997. In addition, the Company hired additional personnel in finance and administration to facilitate growth of the Company's infrastructure and revenue expansion. SG&A costs in the period included rent in a larger facility, D&O insurance costs, legal and accounting costs, an additional provision for bad debt expense, and other costs related to being a public company. In addition, in accordance with FAS No. 123, included in SG&A a non-cash charge of $21,000 to public relations expense and a corresponding credit to Paid in Capital upon issuance of options to outside consultants. Interest Income Interest income of $421,738 for the nine months ended December 31, 1998 is primarily due to interest income earned on the investment of proceeds from the initial public offering. Net Income Net income for the nine months ended December 31, 1998 was $5,136 compared to $625,108 for the nine months ended December 31, 1997. The decrease of $619,972 is mainly attributable to the decrease in gross profit, higher selling, general and administrative expenses, offset by interest income. Year 2000 Update General The Company has begun a Year 2000 Project (the "Project"). The Project will address this issue of whether computer programs and imbedded computer chips will be able to distinguish between the years 1900 and 2000. First, the Company will evaluate its Year 2000 readiness for both information technology ("IT") and non-information technology ("non-IT") systems. Non-IT systems typically include embedded technology in electronic equipment, such as microprocessors, and are more difficult to assess and repair than IT systems. Second, for both IT and non-IT systems, the Company will implement any necessary changes it believes will make the Company ready for the year 2000. Third, the Company will evaluate the readiness of its major vendors and customers to determine what impact, if any, their readiness will have on the Company. Project To be Year 2000 Compliant, IT and non-IT systems must (a) consistently handle data information before, during and after January 1, 2000, including accepting date input, providing date output, and performing calculations on dates or portions of dates, (b) function accurately and without interruption before, during and after January 1, 2000, without any change in operations associated with the turn of the century, and (c) store and provide output of date information in a manner that is not ambiguous as to the century. The Company has determined that its present accounting software is not Year 2000 Compliant. The Company has begun the implementation of a new accounting system that will be Year 2000 Compliant, which the Company expects to complete before the end of fiscal year 1999. The Company will assess the computer systems of customers, vendors and other outside parties with whom the Company does business. While the Company expected to begin this assessment during the third quarter, the Company has delayed its assessment until the end of the fourth quarter of fiscal 1999 and the first quarter of fiscal 2000. The Company does not anticipate that such an assessment will reveal significant potential problems or require the Company to incur substantial costs. Costs The total cost associated with required modifications to become Year 2000 Compliant is not expected to be material to the Company's financial position. It is estimated that the cost of implementing the new accounting system will not exceed $150,000. The Company does not expect the costs associated with the project to be material. Risks Associated with the Year 2000 Problem The failure to correct a material Year 2000 problem could result in an interruption in, or a failure of, certain normal business activities or operations. Such failure could materially and adversely effect the Company's results of operations, liquidity and financial condition. Due to the general uncertainty inherent in the Year 2000 problem, resulting in part from the uncertainty of the Year 2000 Compliance of third party suppliers and customers, the Company is unable to determine at this time whether the consequences of any Year 2000 non-Compliance will have a material impact on the Company's results of operations, liquidity or financial condition. The Project is expected to significantly reduce the Company's level of uncertainty about the Year 2000 problem and, in particular, about the Year 2000 Compliance and readiness of its material suppliers, customers and other third parties. The Company believes that, with the implementation of the new accounting system and completion of the Project as scheduled, the possibility of significant interruptions of normal operations should be reduced. The Project will not, however, evaluate the effect of the Year 2000 problem on the computer products industry, the software configuration industry or related industries within which the Company does business, or the domestic or global economy. Any industry-wide or economy-wide effects of the Year 2000 problem may have a material adverse effect on the Company's results of operations, liquidity or financial condition. Readers are cautioned that forward-looking statements contained in this Year 2000 Update should be read in conjunction with the Company's disclosures under the heading, "Special Note on Forward-looking Statements," beginning on page 8 above. Readers should understand that the dates on which the Company believes the Project will be completed are based upon Management's best estimates, which were derived utilizing numerous assumptions of future events, including the availability of certain resources, third-party modification plans and other factors. However, there can be no guarantee that these estimates will be achieved, or that there will not be a delay in, or increased costs associated with, the implementation of the Company's Year 2000 Project. A delay in specific factors that might cause differences between the estimates and actual results include, but are not limited to, the availability and cost of personnel trained in these areas, the ability of locating correct all relevant computer code, timely responses to and corrections by third parties and suppliers, the ability to implement interfaces between the new systems and the systems not being replaced, and similar uncertainties. Due to the general uncertainty inherent in the Year 2000 problem, resulting in part from the uncertainty of the Year 2000 readiness of third parties and the inter- connection of national and international businesses, the Company cannot ensure that its ability to timely and cost effectively resolve problems associated with the Year 2000 issue that may effect its operations and business, or expose it to third party liability. Liquidity and Capital Resources The Company has historically met its working capital and capital expenditure requirements through a combination of cash flows from operations, bank financing, vendor credit lines, the sale of equity and the Bridge Financing. On April 8, 1998, the Company's initial public offering (the "Initial Public Offering") of 2,702,500 shares of Common Stock at $5 per share including overallotment of 352,500 shares provided net proceeds (after deducting issuance costs) of $11,200,000. In the third quarter of fiscal year 1998, the Company completed a financing (the "Bridge Financing") consisting of the sale of 20 units which generated gross proceeds of $1 million (net proceeds of approximately $678,000). Each unit was comprised of: (i) an unsecured promissory note of the Company in the principal amount of $20,000 (ii) 15,000 shares of Common Stock of the Company, and (iii) 5,000 warrants of the Company, each to purchase one share of Common Stock of the Company, at an initial exercise price of $3.00 per share, subject to adjustment, during the 36-month period commencing one year from the date the Bridge Warrants were issued. The Company repaid $250,000 of the principal amount of the CASI Note and $50,000 of the Datatec Note out of the proceeds of the Bridge Financing. The Company paid the remainder of its indebtedness under the CASI note and the Datatec Note from proceeds of the Initial Public Offering. In June 1997, the Company obtained credit for inventory purchases through Finova Capital Corporation ("Finova"). In September 1998, the Company entered into a new credit facility with Finova, which consists of a $20 million flooring line of credit, secured by certain inventory and equipment, as well as an additional $5 million revolving line of credit secured by accounts receivables and inventory. Unless the Company fails to pay Finova within the agreed upon period, all finance costs associated with this line are charged by Finova to the Company's vendors. At December 31, 1998, the Company's Finova line was $20 million and the Company had a payable to Finova Capital Corporation of approximately $762,000 included in accounts payable. Net cash used by operating activities during the nine months ended December 31, 1998 was primarily attributable to an increase in inventories, prepaid expenses, trade receivables, deferred taxes and decreases in accounts payable, accrued expenses and income taxes payable. Net cash provided by financing activities in the nine months ended December 31, 1998 was due primarily to proceeds from the Company's initial public offering, offset by payments on notes and deferred offering costs, and the repurchase of stock from a Shareholder. The Company believes that current funds and cash generated from operations will be sufficient to meet its anticipated cash needs for working capital and capital expenditures for at least the next year. The Company plans to spend approximately $1,800,000 for its implementation of its Automated Custom System Assembly Solutions for marketing, salaries and capital expenditures over the next 12 months. The Company is dependent on the availability of accounts receivable financing on reasonable terms and at levels that are high relative to its equity base in order to maintain and increase its sales. No assurance can be given that additional financing will be available or that, if available, it can be obtained on terms favorable to the Company and its stockholders. Income Taxes The Company provides for income taxes using the liability method in accordance with the Statement of Financial Accounting Standards No. 109 entitled "Accounting for Income Taxes." The Company provides for federal and state income taxes based on statutory rates. The provision for income taxes differ from the amounts computed by applying the statutory federal income tax rate to income before taxes primarily due to the effect of state income taxes net of the related federal tax benefit. Deferred income taxes are provided for income/expense items reported in different periods for income tax and financial statement purposes. Deferred income taxes are primarily attributable to temporary differences resulting from depreciation, state income taxes and various accrued expenses. The Company has no "tax loss carry forwards." Inflation The Company does not believe that inflation has had a material effect on its results of operations. There can be no assurance, however, that the Company's business will not be affected by inflation in the future. Cautionary Statements and Risk Factors Limited Operating History. The Company commenced operations in April 1996; therefore, there is only limited financial information in existence upon which an investment decision may be based. Although the Company has had periods of profitability, the ability of the Company to sustain profitability will depend in part upon the successful and timely introduction and operation of its ACSA Centers, market acceptance of its internet strategy, continuation of the Company's close relationships with its vendors and customers, successful marketing of existing products and the Company's ability to finance inventories and growth and to collect trade receivables in a timely manner. The likelihood of the success of the Company in implementing its ACSA Centers and its internet strategy must be considered in light of the difficulties and risks inherent in a new business. There can be no assurance that revenues will increase significantly in the future or that the Company will ever achieve profitable operations for the ACSA Center or internet related businesses. There can be no assurance that the Company will be able to generate and sustain profitability in the future. Dependence Upon Key Personnel. The Company is highly dependent upon the services of Max Toghraie and James Ung, its Chief Executive Officer and President, respectively. Both James Ung and Max Toghraie are employed pursuant to five year employment agreements. The success of the Company to date has been in part dependent upon their efforts and abilities, and the loss of the services of either of them for any reason could have a material adverse effect upon the Company. In addition, the Company's work force includes executives and employees with significant knowledge and experience in the Computer Products distribution industry. The Company's future success will be strongly influenced by its ability to continue to recruit, train and retain a skilled work force. While the Company believes that it would be able to locate suitable replacements for its executives or other personnel if their services were lost to the Company, there can be no assurance that the Company would be able to do so on terms acceptable to the Company. In particular, the location and hiring of suitable replacements for Mr. Toghraie and Mr. Ung could be very difficult. The Company maintains a key-man life insurance policy on the lives of Messrs. Toghraie and Ung with benefits of $1,000,000 each, payable to the Company in the event of their death. The benefits received under these policies would not be sufficient to compensate the Company for the loss of the services of Mr. Toghraie or Mr. Ung should suitable replacements not be employed. Dependence Upon Relationships with Vendors. A key element of the Company's past success and future business strategy involves the establishment of relationships with certain major distributors and Computer Product manufacturers. Purchases from these vendors account for the majority of the Company's aggregate purchases for fiscal 1997, for the year ended March 31, 1998 and the present nine months ended December 31, 1998. For the year ended March 31, 1998, DSS Technology Distribution Partners, Inc. ("DSS"), a master distributor of hard drives to the Company, accounted for 64% of the Company's purchases. Certain of these vendors provide the Company with substantial incentives in the form of rebates passed through from the manufacturer, discounts, credits and cooperative advertising. There can be no assurance that the Company will continue to receive such incentives in the future. Other than ordinary purchase orders, the Company does not have written supply, distribution or franchise agreements with any of its Computer Product vendors. Although the Company believes that it has established close working relationships with its principal vendors, the Company's success will depend, in large part, on maintaining these relationships and developing new vendor relationships for its existing and future product and service lines. Because the Company does not have written contracts with any of its vendors, there can be no assurance that the Company will be able to maintain these relationships. Periodically, Computer Product suppliers consolidate their distribution networks and otherwise restructure or limit their distribution channels. There can be no assurance that the Company will continue to be selected to resell products by its principal vendors. Termination or interruption of such relationships or modification of the terms the Company receives from these vendors would materially adversely affect the Company's financial position, operating results, and cash flows. Certain of the products offered by the Company are subject to manufacturer allocations, which limit the number of units of such products available to the Company's vendors, which in turn may limit the number of units available to the Company. In order to offer the products of most manufacturers, the Company is required to obtain authorizations from the manufacturers to act as a reseller of such products, which authorizations may be terminated at the discretion of the manufacturers at any time. There can be no assurance that the Company will be able to obtain or maintain authorizations to offer products, directly or indirectly, from new or existing manufacturers. Termination of the Company's rights to act as a reseller of the products of one or more significant manufacturers would have a material adverse effect on the Company's financial position, operating results, and cash flows. Possible Additional Financing Required. The Company's business is capital intensive in that the Company is required to finance the purchase of Computer Products in order to fill sales orders. In order to obtain necessary capital, the Company relies primarily on unsecured vendor credit lines and the Finova Line that is collateralized by equipment, accounts receivable and inventory. As a result, the amount of credit available to the Company may be adversely affected by factors such as delays in collection or deterioration in the quality of the Company's accounts receivable, economic trends in the computer industry, interest rate fluctuations and the lending or credit policies of the Company's lenders and vendors. Many of these factors are beyond the Company's control. Further, the Company must obtain Finova's written permission prior to arranging other financing, and Finova may require certain acknowledgments and undertakings from other lenders. There can be no assurance that Finova will permit additional financing or that other lenders will provide the acknowledgments and undertakings Finova may require. Any decrease or material limitation on the amount of capital available to the Company under its financing arrangements or vendor credit lines will limit the ability of the Company to fill existing sales orders or expand its sales levels and, therefore, would have a material adverse effect on the Company's financial position, operating results, and cash flows. In addition, while the Company does not have significant exposure to interest rate fluctuations under its current financing, any significant increases in interest rates will increase the cost of possible future financing to the Company which would have a material adverse effect on the Company's financial position, operating results, and cash flows. The Company is dependent on the availability of accounts receivable financing on reasonable terms and at levels that are high relative to its equity base in order to maintain and increase its sales. There can be no assurance that such financing will be available to the Company in the future. The inability of the Company to have continuous access to such financing at reasonable costs would severely and adversely impact the Company's financial position, operating results, and cash flows. Risk of Product Returns. As is typical of the computer industry, the Company incurs expenses as a result of the return of products by customers. Such returns may result from defective goods, inadequate performance relative to customer expectations, distributor shipping errors and other causes which are outside the Company's control. Although the Company's distributors and manufacturers have specific return policies that enable the Company to return certain types of goods for credit, to the extent that the Company's customers return products which are not accepted for return by the distributor or manufacturer of such products, the Company will be forced to bear the cost of such returns. Any significant increase in the rate of product returns coupled with the unwillingness by the Company's distributors or manufacturers to accept goods for return could have a material adverse effect on the Company's financial position, operating results, and cash flows. Product Mix; Risk of Declining Product Margins. As a result of sustained industry oversupply and resulting pricing pressures, the Company's gross profit percentage decreased from 4.2% for the nine months ended December 31, 1997 to 2.8% for the nine months ended December 31, 1998. Given the significant levels of competition that characterize the Computer Products market especially desktop hard drive market and recent pricing pressures and oversupply conditions, there can be no assurance that the Company will maintain the current gross profit margins or be able to achieve increases in profit margins. From time to time, product margins will also be reduced as a result of marketing strategies implemented by the Company. For instance, introductory pricing implemented by the Company to develop market awareness of product lines, particularly disk drives, of vendors new to the Company will have an adverse effect upon gross profit margins and, potentially, earnings during the period promotional pricing is offered. Moreover, in order to attract and retain many of its larger customers, the Company frequently must agree to volume discounts and maximum allowable mark-ups that serve to limit the profitability of sales to such customers. Accordingly, to the extent that the Company's sales to such customers increase, the Company's gross profit margins may be reduced, and therefore any future increases in net income will have to be derived from continued sales growth or effective expansion into higher margin business segments, neither of which can be assured. Furthermore, low margins increase the sensitivity of the business to increases in costs of financing, because financing costs to carry a receivable can be very high compared to the low amount of gross profit on the sale underlying the receivable itself. Any failure by the Company to maintain or increase its profit margins and sales levels could have a material adverse effect on the Company's results of operations and prospects for future growth. Uncertainty of Commercialization of the ACSA Solution; Importance of ACSA to Growth. The Company's ability to successfully implement, market and introduce the ACSA Solution services on a timely basis will be a significant factor in the Company's ability to improve its operating margins and remain competitive. The Company's ability to market the ACSA Solution successfully will depend on the Company convincing potential customers of the benefits of the ACSA Solution. The Company has only recently commenced marketing the ACSA Solution. The Company recently completed construction of its first ACSA Center located in Industry, California. No ACSA Center is currently in operation and the Company currently has no sales revenue attributable to the ACSA Solution or an ACSA Center. The first ACSA Center will not be operational until the dispute with CASI is resolved, testing is completed and ACSA dedicated staff are in place. Although the Company is engaged in negotiations and discussions with a number of potential customers, there can be no assurance that any such discussions will lead to significant sales of the ACSA Solution, or that the ACSA Solution will attain market acceptance. There can be no assurance that the Company will be successful in the implementation, marketing and sale of ACSA Solution services. Any failure by the Company to anticipate or respond in a cost-effective and timely manner to market trends or customer requirements, or any significant delays in introduction of ACSA services, could have a material adverse effect on the Company's business, operating results and financial condition. Lengthy Sales and Implementation Cycles for ACSA. The Company believes that the purchase of the Company's ACSA Solution services will entail an enterprise- wide decision by prospective customers and require the Company to engage in a lengthy sales cycle, estimated at between three and twelve months, as the Company will be required to provide a significant level of education to prospective customers regarding the use and benefits of the Company's ACSA Solution services and products. Also, the purchase of ACSA Solution services will often depend upon the successful coordination of marketing, system design and installation efforts by the Company, end-user customers and others with influence over the purchase decisions of the Company's customers such as consultants, VARs and SIs. Purchase decisions will generally occur only after significant internal analysis by each customer and will be subject to competition with other capital spending priorities of certain customers. As a result, the sales and customer implementation cycles will be subject to a number of significant delays over which the Company has little or no control. Delay in the sale or customer implementation of a limited number of transactions could have a material adverse effect on the Company's business and results of operations and could cause the Company's operating results to vary significantly from quarter to quarter. Dependence on CASI for Development and Enhancement of Configuration Software. Under the Company's License Agreement with Computer-Aided Software Integration, Inc. ("CASI"), CASI retains the source code of the Configurator software required to operate the automated software configuration functions of the Company's planned ACSA Solution and ACSA Centers, and retains all rights to modify and enhance the Configurator software. CASI has agreed to provide the Company with all enhancements and upgrades to the Configurator software used internally or distributed by CASI to its customers, and to develop additional enhancements requested by the Company at the Company's sole expense. Any enhancements requested by the Company and implemented by CASI at CASI's expense may be incorporated in the generally distributed version of CASI's software. If CASI determines not to fund development of an enhancement then CASI must prepare the enhancement at pre-agreed rates and ownership of the requested enhancement will belong to the Company. Although the Company had anticipated implementing the ACSA Solution by December 31, 1998, the Company has experienced significant delays in implementing the ACSA Solution due primarily to a dispute related to the Reseller Agreement dated September 15, 1997, with CASI and CASI's subsequent refusal to provide the Company with the necessary training to operate its Configurator software and related technical support. CASI is obligated to provide such training and technical support to the Company under the terms of the License Agreement, dated September 15, 1997, by and between the Company and CASI, pursuant to which the Company licensed the Configurator software. The Company is attempting to resolve the delays it is experiencing with CASI. The delays in implementing the ACSA Solution also result, in part, from staff turnover. While there can be no assurance, the Company currently anticipates the availability of the ACSA Solution in the fourth quarter of fiscal year 1999. Delays in implementing the ACSA Solution have caused the Company to derive its revenues almost exclusively from the Company's computer products distribution business, which has gross margins significantly lower than those the Company believes to be available in the system configuration business. In light of high legal expenses inherant in litigating the matter, the company opted to negotiate an amicable resolution with CASI. Based on current discussions, the Company believes that it will reach an amicable outcome in this matter with CASI. However, there can be no assurance that the Company will succeed in reaching a solution to the dispute with CASI that is acceptable to the Company. Further failure by CASI to promptly and adequately perform its obligations under its license agreement with the Company would have a material adverse effect on the Company. Furthermore, there can be no assurance that CASI will fully comply with its contractual obligations to the Company, that CASI will dedicate sufficient software development capacity to satisfy the Company's requirements, or that the Company's remedies in the event CASI does not perform its obligations will be adequate. The Company has no capability to internally develop any enhancements or upgrades. Failure or delay by CASI to fulfill the Company's anticipated needs for enhancement and upgrading of the Configurator software would adversely affect the Company's ability to market ACSA services and to become and remain competitive in the software configuration market. In the event that CASI fails to meet its obligations under the license, the Company has, among other rights, the contractual right to the source code underlying the software, but there can be no assurance that the Company will be able to obtain the source code in a timely manner, if at all, because CASI is in possession of the only copies of the source code. Even if the Company is able to obtain the source code under such circumstances, internal maintenance and enhancement of the source code could place a significant financial burden on the Company. See "Legal Proceedings." Limited Marketing Capabilities. The Company's operating results will depend to a large extent on its ability to successfully market the ACSA Solution services to personal computer manufacturers and multi-user system buyers. The Company currently has limited marketing capability. The Company intends to use a portion of the proceeds of the Offering to hire additional sales and marketing personnel and outside consultants to market the ACSA Solution. There can be no assurance that any marketing efforts undertaken by the Company will be successful or will result in any significant sales of the ACSA Solution. Management of Growth. Implementation of the Company's business plan, including implementation of ACSA Solution services and the Company's internet strategy and the general strains of the Company's growth will require that the Company significantly expand its operations in all areas. This growth in the Company's operations and activities will place a significant strain on the Company's management, operational, financial and accounting resources. Successful management of the Company's operations will require the Company to continue to implement and improve its financial and management information systems. The Company's ability to manage its future growth, if any, will also require it to hire and train new employees, including management and technical personnel, and motivate and manage its new employees and integrate them into its overall operations and culture. The Company's failure to manage implementation of its business plan would have a material adverse effect on the Company's business, operating results and financial condition. Risk of Potential Joint Ventures or Acquisitions. In the future, the Company may acquire complementary companies, products or technologies and, although no specific acquisitions currently are pending the Company has been negotiating possible joint ventures to further its internet strategy. Acquisitions and joint ventures involve numerous risks, including adverse short-term effects on the combined business' reported operating results, impairments of goodwill and other intangible assets, the diversion of management's attention, the dependence on retention, hiring and training of key personnel, the amortization of intangible assets and risks associated with unanticipated problems or legal liabilities. A portion of the net proceeds of the Initial Public Offering may be used to fund such acquisitions at the broad discretion of the Board of Directors. The Board of Directors may consummate such acquisitions or joint ventures, if any, without permitting shareholders to review or vote on such transactions, unless required under applicable law. Construction of First ACSA Center. The Company has used approximately $200,000 of the net proceeds from the Initial Public Offering to complete construction of and to equip its first ACSA Center. It is expected that the construction will require a substantial time commitment of certain members of management. Although the first ACSA Center has been constructed, it is not expected to be operational until the end of the fourth quarter 1999. Any delay in completion of the first ACSA Center could result in delays in the commencement of sales of assembly and custom software configuration services and adversely affect the Company's business, operating results and financial condition. There can be no assurance that the Company will be able to complete the ACSA Center at the budgeted price. Additionally, there can be no assurance that the ACSA Center will be available on time or that the Company will be successful in timely hiring and training engineers and technicians necessary to commence operations of the ACSA Center. Any such delay would delay the Company's ability to commence offering the ACSA Solution and have a material adverse effect upon the Company's business, operating results and financial condition. Rapid Technological Change; New Product Introductions. The markets for the Company's ACSA technology and its internet strategy are characterized by rapidly changing technology and frequent new product introductions. Even if the Company's ACSA Solution services using its licensed Configurator software and its internet strategy gain initial market acceptance, the Company's success will depend, among other things, upon its ability to enhance the ACSA Solution services and its internet strategy and to develop and introduce new products and services that keep pace with technological developments, respond to evolving customer requirements and achieve continued market acceptance. There can be no assurance that the Company will be able to identify, develop, manufacture, market or support new products or offer new services successfully, that such new products or services will gain market acceptance, or that the Company will be able to respond effectively to technological changes or product announcements by competitors. Any failure by the Company to anticipate or respond adequately to technological developments and customer requirements or any significant delays in product development or introductions could result in a loss of market share or revenues. Uncertainty of Commercial Acceptance of Internet Strategy. The Company has developed, and is in the early stages of implementing, an internet strategy that is intended to give the Company, among other things, e-commerce and internet auction capabilities. The Company's ability to market its internet strategy will depend on the Company convincing potential customers of the benefits of transacting business with the Company using its internet capabilities. To date, the Company's e-commerce and internet auction websites are not operational, and the Company has not begun to market an e-commerce or internet auction capability to its existing and potential customers. There can be no assurance that the Company will be able to convince existing and potential customers to transact business with the Company over its e-commerce and internet auction websites. Failure by the Company to convince existing and potential customers to utilize e-commerce and internet auction websites to transact business with the Company will have a material adverse effect on the Company's internet strategy. Reliance On Third Parties To Develop And Service E-commerce and Internet Auction Websites. The Company depends on OTT to develop and service the e- commerce and internet auction websites which the Company expects to develop in connection with its internet strategy and, therefore, is only partially able to control the development of and implementation of its internet strategy. The ability of the Company to timely develop an internet capability is dependent, to a significant degree, on OTT. If the Company's relationship with OTT is terminated, the Company would be forced to either enter into a relationship with another third party provider or undertake to develop and service its internet strategy internally. This would likely require the Company to incur additional expenses in connection with such conversion and result in a significant delay in the implementation of the Company's internet strategy. Success of Internet Strategy Dependent Upon The Continued Growth Of Online Commerce. The long-term viability of the Company's internet strategy depends upon widespread consumer acceptance and use of the Internet as a medium of commerce. Use of the Internet e-commerce is at an early stage of development, and demand and market acceptance for recently introduced services and products over the Internet is very uncertain. The Company cannot predict the extent to which consumers will be willing to shift their purchasing habits to the online medium. The Internet may not become a viable commercial marketplace for a number of reasons, including potentially inadequate development of the necessary network infrastructure, delayed development of enabling technologies and inadequate performance improvements. In addition, the Internet's viability as a commercial marketplace could be adversely affected by increased government regulation. Changes in or insufficient availability of telecommunications services or other services to support the Internet also could result in slower response times and adversely affect usage of the Internet generally. Also, negative publicity and consumer concern about the security of transactions conducted on the Internet and the privacy of users may also inhibit the growth of commerce on the Internet. Industry Evolution and Price Reductions; Changing Methods of Distribution. The personal computer industry is undergoing significant change. The industry has become more accepting of large volume, cost-effective channels of distribution such as computer superstores, consumer electronics and office supply superstores, national direct marketers and mass merchants. In addition, many traditional computer resellers are consolidating operations and acquiring or merging with other resellers to increase efficiency. This current industry reconfiguration has resulted in increased pricing pressures. Decreasing prices of computer products require the Company to sell a greater number of products to achieve the same level of net sales and gross profit. The continuation of such trend would make it more difficult for the Company to maintain or to increase its net sales and net income. In addition, it is possible that the historically high rate of growth of the personal computer industry may slow at some point in the future. If the growth rate of the personal computer industry were to decrease, the Company's financial position, operating results, and cash flows could be materially adversely affected. Furthermore, new methods of distribution and sales of Computer Products, such as on-line shopping services and catalogs published on CD-ROM, may emerge in the future. Computer Products and software manufacturers have sold, and may in the future intensify their efforts to sell, their products directly to end users. From time to time, certain vendors have instituted programs for the direct sale of large orders of Computer Products and software to certain major corporate accounts. These types of programs may continue to be developed and used by various vendors. While the Company attempts to anticipate future distribution trends, any of these distribution methods or competitive programs, if expanded, could have a material adverse effect on the Company's financial position, operating results, and cash flows. Availability of Components. The computer component and computer assembly businesses have from time to time experienced periods of extreme shortages in product supply, generally as the result of demand exceeding available supply. When these shortages occur, suppliers tend either to slow down shipments or place their customers "on allocation," reducing the number of units sold to each customer. While the Company believes that it has well-established relationships with vendors and that it has not been adversely affected by recent shortages in certain storage and other computer components, no assurance can be given that future shortages will not adversely impact the Company. Competition. The Company faces intense competition, both in its selling efforts and purchasing efforts, from the significant number of companies that configure and/or assemble personal computers, manufacture or distribute disk drives and offer software configuration services. Many of these companies, such as CompuCom Systems, Inc., CDW Computer Centers, Inc., Vanstar Corp. and Inacom, Inc. in the Computer Products distribution market, large computer manufacturers such as IBM Corp. and Compaq Computer Corporation, which provide custom configuration and automated software configuration for standardized systems, large distributors such as Ingram Micro Inc., Vanstar Corp., En Point Technologies, Inc., Microwarehouse, Inc. and CompuCom Systems, Inc. in the systems integration and network services market, have substantially greater assets and possess substantially greater financial and personnel resources than those of the Company and may develop software, or services or products which are comparable to the ACSA Solution. Many competing distributors also carry or offer brands or product lines which the Company does not carry. Generally, large disk drive and personal computer component manufacturers and large distributors do not focus their direct selling efforts on small to medium sized OEMs and distributors, which constitute the vast majority of the Company's customers; however, as the Company's customers increase in size, disk drive and component manufacturers may find it cost effective to focus direct selling efforts on those customers, which could result in the loss of customers or pressure on margins. In addition, CASI and/or Datatec Systems Inc. ("Datatec"), formerly known as Glasgal Communications, Inc., the parent corporation of CASI, may directly enter into the Company's integration and configuration markets using the software the Company has licensed from CASI. While no operating division or subsidiary of Datatec is currently competing in the Company's markets, there can be no assurance that Datatec will not decide to directly compete with the Company in the future. Further, the terms of the Company's license agreement with CASI allows CASI to license the software used in the ACSA Solution and the ACSA Centers to new or existing direct competitors of the Company. There can be no assurance that the Company will be able to continue to compete effectively with existing or potential competitors. Industry Cyclicality. The personal computer component distribution industry has been affected historically by general economic downturns, which have had an adverse economic effect upon manufacturers and corporate end users of personal computers, as well as component distributors such as the Company. In addition, the life cycle of existing personal computer products and the timing of new product development and introduction can affect demand for disk drives and other personal computer components. Any downturns in the personal computer component distribution industry, or the personal computer industry in general, could adversely affect the Company's business and results of operations. Asian Market Instability. Economies and financial markets in Asia have recently experienced significant turmoil. A non-material portion of the Company's revenues are derived from sales to businesses which primarily export Computer Products to Asian customers. Also certain of the Company's vendors are based in Korea, Japan and other Asian countries. Asian financial market instability may adversely impact customer orders or the Company's ability to obtain products from its Asian vendors. The financial instability in these regions has had an adverse impact on the financial position of end-users in the region which has been a contributing factor to the oversupply condition and pricing pressures currently impacting the Company (because Asian vendors have channeled excess inventory into the North American market at reduced prices and have reduced component demand from domestic manufacturers who export to Asia) and could also impact future orders from the Company's customers and/or the ability of such end users to pay the Company's customers, which could also impact the ability of such customers to pay the Company. If the Company's customers who export into Asia are unable to maintain export sales or current margins on such export sales, the Company's sales and/or sales margins may be adversely affected. Additionally, if the Company's vendors in these regions are unable to continue to supply the Company, the Company may be adversely impacted. Foreign Trade Regulation. A significant number of the products distributed by the Company are manufactured in Taiwan, China, Korea, Japan and the Philippines. The purchase of goods manufactured in foreign countries is subject to a number of risks, including economic disruptions, transportation delays and interruptions, foreign exchange rate fluctuations, imposition of tariffs and import and export controls and changes in governmental policies, any of which could have a material adverse effect on the Company's business and results of operations. The ability to remain competitive with respect to the pricing of imported components could be adversely affected by increases in tariffs or duties, changes in trade treaties, strikes in air or sea transportation, fluctuation in currency and possible future United States legislation with respect to pricing and import quotas on products from foreign countries. For example, it is possible that political or economic developments in China, or with respect to the United States' relationship with China, could have an adverse effect on the Company's business. The Company's ability to remain competitive could also be affected by other governmental actions related to, among other things, anti-dumping legislation and international currency fluctuations. While the Company does not believe that any of these factors adversely impact its business at present, there can be no assurance that these factors will not materially adversely affect the Company in the future. Any significant disruption in the delivery of merchandise from the Company's suppliers, substantially all of whom are foreign, would also have a material adverse impact on the Company's business and results of operations. Possible Issuance of Preferred Stock; Barriers to Takeover. The Company's Articles of Incorporation authorize the issuance of up to 2,000,000 shares of Preferred Stock. Following the Offering, no shares of Preferred Stock of the Company will be outstanding, and the Company has no present intention to issue any shares of Preferred Stock. However, because the rights and preferences for any series of Preferred Stock may be set by the Company's Board of Directors in its sole discretion, the rights and preferences of any such Preferred Stock are likely to be superior to those of the Common Stock and thus could adversely affect the rights of the holders of Common Stock. The Company currently has no commitments or contracts to issue any additional securities. Any securities issuances might result in a reduction in the book value or market price of the outstanding shares. Further, any new issuances could be used for anti-takeover purposes or might be used as a method of discouraging, delaying or preventing a change of control of the Company. Additionally, certain provisions of the Company's Articles of Incorporation and Bylaws could delay or make more difficult a merger, tender offer or proxy contest involving the Company. No Dividends Anticipated. The Company has never declared or paid dividends on its Common Stock. After the consummation of this Offering, the Company does not intend for the foreseeable future to declare or pay any cash dividends and intends to retain earnings, if any, for the future operation and expansion of the Company's business. Delisting from The Nasdaq SmallCap Market; Potential Penny Stock Classification. The Company's Common Stock is quoted on The Nasdaq SmallCap Market and listed on the Boston Stock Exchange. However, there can be no assurance that a trading market for the Common Stock will develop, or if developed, that it will be maintained. No assurance can be given that the Company will be able to satisfy the criteria for continued quotation on The Nasdaq SmallCap Market or the criteria for continued listing on the Boston Stock Exchange following this Offering. Failure to meet the maintenance criteria in the future may result in the Common Stock not being eligible for quotation or listing. If the Company were removed from The Nasdaq SmallCap Market and the Boston Stock Exchange, trading, if any, in the Common Stock would thereafter have to be conducted in the over-the-counter market in so-called "pink sheets" or, if then available, the OTC Bulletin Board. As a result, holders of the Common Stock would find it more difficult to dispose of, or to obtain accurate quotations as to the market value of, the Common Stock. In addition, if the Common Stock is delisted from trading on Nasdaq and the Boston Stock Exchange and the trading price of the Common Stock is less than $5.00 per share, trading in the Common Stock would also be subject to the requirements of Rule 15g-9 promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Under such rule, broker/dealers who recommend such low-priced securities to persons other than established customers and accredited investors must satisfy special sales practice requirements, including a requirement that they make an individualized written suitability determination for the purchaser and receive the purchaser's written consent prior to the transaction. The Securities Enforcement Remedies and Penny Stock Reform Act of 1990 also requires additional disclosure in connection with any trades involving a stock defined as a penny stock (generally, according to regulations adopted by the Securities Exchange Commission (the "Commission"), any equity security not traded on an exchange or quoted on Nasdaq that has a market price of less than $5.00 per share, subject to certain exceptions), including the delivery, prior to any penny stock transaction, of a disclosure schedule explaining the penny stock market and the risks associated therewith. Such requirements could severely limit the market liquidity of the Common Stock and the ability of purchasers in this Offering to sell their securities in the secondary market. There can be no assurance that the Common Stock will not be delisted or treated as a penny stock. Elimination of Cumulative Voting. The Articles of Incorporation of the Company provide that at such time as the Company has (i) shares listed on the New York Stock Exchange or the American Stock Exchange, or (ii) securities designated for trading as a national market security on the National Association of Securities Dealers Automatic Quotation System (or any successor national market system) if the Company has at least 800 or more holders of its Common Stock as of the record date of the Company's most recent annual meeting of shareholders, the cumulative voting rights of shareholders will cease. The Company believes that it has more than 800 holders. If the Company has shares listed on the New York Stock Exchange or the American Stock Exchange, or designated for trading as national market securities on The Nasdaq National Market System, cumulative voting rights of shareholders will cease. Elimination of cumulative voting will have the effect of making it more difficult for minority shareholders to obtain representation on the Board of Directors. Limitation of Liability and Indemnification. The Company's Articles of Incorporation, as amended, (the "Articles") include a provision that eliminates the personal liability of its directors to the Company for monetary damages for breach of their fiduciary duties (subject to certain limitations) as a director to the fullest extent permissible under California law. The Company's Articles and Bylaws allow the Company to provide for indemnification of its Directors the fullest extent permitted by law. The Bylaws allow the Company to enter into indemnity agreements with individual directors, officers, employees and other agents. The Company has entered into indemnification agreements designed to provide the maximum indemnification permitted by law with all the directors of the Company. These agreements, together with the Company's Bylaws and Articles, may require the Company, among other things, to indemnify these directors against certain liabilities that may arise by reason of their status or service as directors (other than liabilities resulting from willful misconduct of a culpable nature), to advance expenses to them as they are incurred, provided that they undertake to repay the amount advanced if it is ultimately determined by a court that they are not entitled to indemnification, and to obtain directors' and officers' insurance if available on reasonable terms. The Company has purchased and does maintain directors' and officers' liability insurance. As a result of the provisions in the Company's Articles and in the indemnification agreements, it may be more difficult for shareholders to obtain relief against a director for breaches of such director's fiduciary duty than if these provisions were not included in the Company's Articles and Bylaws. No Earthquake Insurance. The Company's executive office, warehouse and assembly facility is located in a Company-leased facility in Industry, California, an area which experienced damage in the 1994 Northridge, California earthquake. The Company does not currently carry insurance against earthquake- related risks. Disclosure Regarding Forward-Looking Statements. This Report contains statements that constitute "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934 and Section 27A of the Securities Act of 1933. The words "expect," "estimate," "anticipate," "predict," "believe," and similar expressions and variations thereof are intended to identify forward-looking statements. Such statements appear in a number of places in this filing and include statements regarding the intent, belief or current expectations of the Company, its Directors or Officers with respect to, among other things (a) trends effecting the financial condition of results of operations of the Company and (b) the business and growth strategies of the Company. The shareholders of the Company are cautioned not to put undue reliance on such forward-looking statements. Such forward-looking statements are not guarantees of future performance and involve risks and uncertainties. Actual results may differ materially from those projected in this Report, for the reasons, among others, discussed in "Future Operating Results" below and under the caption, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Risk Factors" in the Company's Annual Report on Form 10-K for Fiscal 1998, filed with the Securities and Exchange Commission. The Company undertakes no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date hereof. Readers should carefully review the risk factors referred to above and the other documents the Company files from time to time with the Securities and Exchange Commission, including the Company's Annual Report on Form 10-K for the fiscal year 1998, the quarterly reports on Form 10-Q filed by the Company during the remainder of fiscal 1999, and any current reports on Form 8-K filed by the Company. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is periodically subject to legal actions which arise in the ordinary course of its business. The Company does not believe that any such action is material to its results of operation or financial condition. The Company has been involved in a disagreement with CASI concerning the interpretation of certain provisions of the Reseller Agreement, dated September 15, 1997, between CASI and the Company (the "Reseller Agreement"). By letter dated November 9, 1998, attorneys for CASI purported to terminate the Reseller Agreement on behalf of CASI. The Company strongly disagrees with CASI's right to terminate the Reseller Agreement and is currently evaluating its legal options. CASI is obligated to provide training and technical support to the Company under the terms of the License Agreement, dated September 15, 1997, by and between the Company and CASI, pursuant to which the Company licensed the Configurator software. To date, CASI has failed to provide such training and technical support to the Company, which has resulted in the delays of the implementation of the ACSA Solution. The Company has opted to resolve the CASI matter amicably and is attempting to reach an agreement with CASI. However, the Company will keep it's legal options open pending final resolution of this matter. However, there can be no assurance that the Company will succeed in reaching a solution to the dispute with CASI that is acceptable to the Company. ITEM 2. CHANGES IN SECURITIES Recent Sales of Unregistered Securities In October, 1998, the Company issued to 8607 Colonial Group, Inc. ("Colonial") an option (the "Colonial Option") to purchase up to 50,000 shares of the Company's Common Stock at an initial exercise price of $5.00 per share. Colonial provides public relations consulting services to the Company. The Colonial Option vested as to 5,000 shares immediately upon issuance and vests, as to the remaining 45,000 shares, monthly beginning October 1998 and ending June 1999. Use of Proceeds The Company's Registration Statement on Form S-1 (File No. 333-43151) relating to the offer and sale (the "Offering") of an aggregate of 2,350,000 shares (the "Firm Shares") of Common Stock, without par value (the "Common Stock"), of the Company was declared effective by the Securities and Exchange Commission (the "Commission") on April 7, 1998. The managing underwriter for the Offering was Joseph Stevens & Company, Inc. (the "Managing Underwriter"). The Offering commenced on April 8, 1998 and the sale of 2,350,000 shares closed on April 14, 1998, with the sale of an additional 352,500 shares (the "Option Shares" and, together with the Firm Shares, the "Shares") closing on April 23, 1998 (which were sold by the Company upon the exercise of the over- allotment option granted to the underwriters). All the Shares were sold in the Offering at an aggregate price of $5.00 per share, for aggregate proceeds of $13,512,500. After deducting underwriting discounts and commissions of $0.4625 per share, and other issuance costs, the Company received net proceeds of approximately $11,200,000. On April 14, 1998, the Company also received $0.001 per warrant, for an aggregate of $23.50, in consideration of unregistered 5-year warrants to purchase 235,000 shares of Common Stock at an initial exercise price of 165% of the Offering price, exercisable one year after the effective date of the Registration Statement, granted to the Managing Underwriter in connection with the Offering. See "Recent Sales of Unregistered Securities." As of December 31, 1998, the Company had used the proceeds as follows: (i) payments on notes payable of $1,200,000, (ii) purchases of fixed assets - $279,000, (iii) repurchase of stock from shareholder for $300,000 and (iv) investment in OTT of $100,000. The remaining proceeds of $9,321,000 are available to fund the construction of the First ACSA Center, payment to OTT for $900,000, and for working capital. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS The Annual Meeting of Shareholders of Cumetrix Data Systems Corp. (the "Annual Meeting") took place on Monday, October 5, 1998, at the offices of the Company. The Company's six directors, namely Max Toghraie, James Ung, Mei Yang, Nancy Hundt, David Tobey and Philip Alford were re-elected and will continue to act in their same capacities in the ensuing year. Actual votes cast at the meeting were as follows: Max Toghraie 7,044,866 votes for and 16,100 withheld. James Ung 7,044,866 votes for and 16,100 withheld Mei Yang 7,043,866 votes for and 17,100 withheld Nancy Hundt 7,044,866 votes for and 16,100 withheld David Tobey 7,044,866 votes for and 16,100 withheld Philip Alford 7,044,866 votes for and 16,100 withheld
Also approved at the Annual Meeting was the increase of the maximum number of shares of Common Stock that may be issued pursuant to awards granted under the Company's 1997 Stock Plan from 500,000 shares to 1,000,000 shares. Actual votes cast at the meeting were as follows: 4,777,166 votes for, 139,650 against and 10,250 abstaining. 2,133,900 shares did not vote on the proposal. No other matters were voted on by the shareholders of the Company at the Annual Meeting. ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 10.1 Loan and Security Agreement, dated as of October 22, 1998, by and between the Company and Finova Capital Corporation 10.2 Schedule to Loan and Security Agreement, dated October 22, 1998 10.3 Secured Revolving Credit Note, dated as of October 22, 1998, by the Company in favor of Finova Capital Corporation 10.4 Preferred Stock Purchase Agreement, dated as of December 15, 1998, by and between the Company and Online Transaction Technologies, Inc. 10.5 First Stock Option Agreement, dated as of December 30, 1998, by and between the Company and Online Transaction Technologies, Inc. Exhibit 27 Financial Data Schedule SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized. CUMETRIX DATA SYSTEMS CORP. Date: February 16, 1999 /s/ Carl L Wood Chief Financial Officer Exhibit Index ------------- 10.1 Loan and Security Agreement, dated as of October 22, 1998, by and between the Company and Finova Capital Corporation 10.2 Schedule to Loan and Security Agreement, dated October 22, 1998 10.3 Secured Revolving Credit Note, dated as of October 22, 1998, by the Company in favor of Finova Capital Corporation 10.4 Preferred Stock Purchase Agreement, dated as of December 15, 1998, by and between the Company and Online Transaction Technologies, Inc. 10.5 First Stock Option Agreement, dated as of December 30, 1998, by and between the Company and Online Transaction Technologies, Inc. 27 Financial Data Schedule. EX-10.1 2 LOAN AND SECURITY AGREEMENT EXHIBIT 10.1 [LETTERHEAD OF FINOVA FINANCIAL INNOVATORS] LOAN AND SECURITY AGREEMENT Cumetrix Data Systems Corp. -------------------------- Borrower 957 Lawson Street City of Industry, California 91748 ---------------------------------- Address 95-4574138 ---------- Borrower Fed ID Tax No. $25,000,000 Amount of Credit Facility 10/22/98 ------------------------- Date ================================================================================ INVENTORY FINANCE ================================================================================ THIS LOAN AND SECURITY AGREEMENT ("Agreement") dated the date set forth above, is entered into by and between the borrower named above (the "Borrower"), whose address is set forth above and FINOVA Capital Corporation ("FINOVA"), whose address is 1060 First Avenue, King of Prussia, Pennsylvania 19406. 1. DEFINITIONS. 1.1 Defined Terms. As used in this Agreement, the following terms have the ------------- definitions set forth below: "Affiliate" means any Person controlling, controlled by or under common control - ---------- with Borrower. For purposes of this definition, "control" means the possession, directly or indirectly, of the power to direct or cause direction of the management and policies of any Person, whether through ownership of common or preferred stock or other equity interests, by contract or otherwise. Without limiting the generality of the foregoing, each of the following shall be an Affiliate: any officer, director, employee or other agent of Borrower, any shareholder or subsidiary of Borrower, and any other Person with whom or which Borrower has common shareholders, officers or directors. "Business Day" means any day on which commercial banks in both King of Prussia, - ------------- Pennsylvania and Phoenix, Arizona are open for business. "Capital Expenditures" means all expenditures made and liabilities incurred for - --------------------- the acquisition of any fixed asset or improvement, replacement, substitution or addition thereto which has a useful life of more than one year and including, without limitation, those arising in connection with Capital Leases. "Capital Lease" means any lease of property by Borrower that, in accordance with - -------------- generally accepted accounting principles, should be capitalized for financial reporting purposes and reflected as a liability on the balance sheet of Borrower. "Code" means the Uniform Commercial Code as adopted and in effect in the State ---- of Arizona from time to time. "Collateral" has the meaning set forth in Section 3.1 hereof. ---------- "Current Assets" at any date means the amount at which the current assets of -------------- Borrower would be shown on a balance sheet of Borrower as at such date, prepared in accordance with generally accepted accounting principles provided -------- that amounts due from Affiliates and investments in Affiliates shall be excluded therefrom. "Current Liabilities" at any date means the amount at which the current - --------------------- liabilities of Borrower would be shown on a balance sheet of Borrower, including the Revolving Credit as at such date, prepared in accordance with generally accepted accounting principles. "Deposit Accounts" has the meaning set forth in Section 9105 of the Code. ---------------- "Earnings Before Interest and Taxes" for any fiscal period of Borrower means the ---------------------------------- net income of Borrower for such fiscal period, plus interest expense and provision for income taxes for such fiscal period, and minus non-recurring miscellaneous income and expenses, all calculated in accordance with generally accepted accounting principles, consistently applied. "Eligible Inventory" is defined as set forth in the Schedule. ------------------ "Eligible Receivables" is defined as set forth in the Schedule. -------------------- "Equipment" means all of Borrower's present and hereafter acquired machinery, --------- molds, machine tools, motors, furniture, equipment, furnishings, fixtures, trade fixtures, motor vehicles, tools, parts, dyes, jigs, goods and other tangible personal property (other than Inventory) of every kind and description used in Borrower's operations or owned by Borrower and any interest in any of the foregoing, and all attachments, accessories, accessions, replacements, substitutions, additions or improvements to any of the foregoing, wherever located. "ERISA" means the Employment Retirement Income Security Act of 1974, as amended, ----- and the regulations thereunder. "ERISA Affiliate" means each trade or business (whether or not incorporated and --------------- whether or not foreign) which is or may hereafter become a member of a group of which Borrower is a member and which is treated as a single employer under ERISA Section 4001(b)(1), or IRC Section 414. "Event of Default" means any of the events set forth in Section 7.1 of this ---------------- Agreement. "Floorplanned Inventory" means all Inventory from such manufacturer or vendors ---------------------- acceptable to FINOVA from time to time, financed by FINOVA pursuant to Section 2.4 of this Agreement. "Floorplan Loans" has the meanings set forth in the Schedule. --------------- "Floorplan Loans Borrowing Base" has the meaning set forth in the Schedule. ------------------------------ "General Intangibles" means all general intangibles of Borrower, whether now ------------------- owned or hereafter created or acquired by Borrower, including, without limitation, all choses in action, causes of action, corporate or other business records, Deposit Accounts, inventions, designs, drawings, blueprints, patents, patent applications, trademarks and the goodwill of the business symbolized thereby, names, trade names, trade secrets, goodwill, copyrights, registrations, licenses, franchises, customer lists, security and other deposits, rights in all litigation presently or hereafter pending for any cause or claim (whether in contract, tort or otherwise), and all judgments now or hereafter arising therefrom, all claims of Borrower against FINOVA, rights to purchase or sell real or personal property, rights as a licensor or licensee of any kind, royalties, telephone numbers, proprietary information, purchase orders, and all insurance policies and claims (including without limitation credit, liability, property and other insurance) tax refunds and claims, computer programs, discs, tapes and tape files, claims under guaranties, security interests or other security held by or granted to Borrower to secure payment of any of the Receivables by an account debtor, all rights to indemnification and all other intangible property of every kind and nature (other than Receivables). "Guarantors" means the persons set forth on the Schedule. ---------- "Indebtedness" means all of Borrower's present and future obligations, ------------ liabilities, debts, claims and indebtedness, contingent, fixed or otherwise, however evidenced, created, incurred, acquired, owing or arising, whether under written or oral agreement, operation of law or otherwise, and includes, without limiting the foregoing (i) the Obligations, (ii) obligations and liabilities of any Person secured by a lien, claim, encumbrance or security interest upon property owned by Borrower, even though Borrower has not assumed or become liable therefor, (iii) obligations and liabilities created or arising under any lease (including Capital Leases) or conditional sales contract or other -1- title retention agreement with respect to property used or acquired by Borrower, even though the rights and remedies of the lessor, seller or lender are limited to repossession, (iv) all unfunded pension fund obligations and liabilities and (v) deferred taxes. "Initial Term" has the meaning set forth on the Schedule. ------------ "Inventory" means all of Borrower's now owned and hereafter acquired goods, --------- merchandise or other personal property, wherever located, to be furnished under any contract of service or held for sale or lease, all raw materials, work in process, finished goods and materials and supplies of any kind, nature or description which are or might be used or consumed in Borrower's business or used in connection with the manufacture, packing, shipping, advertising, selling or finishing of such goods, merchandise or other personal property, and all documents of title or other documents representing them. "IRC" means the Internal Revenue Code of 1986, as amended, and the regulations --- thereunder. "Loan Documents" means, collectively, this Agreement, any note or notes executed -------------- by Borrower and payable to FINOVA, and any other agreement entered into in connection with this Agreement, together with all alterations, amendments, changes, extensions, modifications, refinancings, refundings, renewals, replacements, restatements, or supplements, of or to any of the foregoing. "Loan Party" means Borrower, each Subordinating Creditor and each other party ---------- (other than FINOVA) to any Loan Document. "Maximum Floorplan Amount" has the meaning set forth in the Schedule. ------------------------ "Minimum Working Capital" at any date means an amount equal to (i) the sum of ----------------------- the amount at which Borrower's cash, Receivables and Inventory (calculated at the lower of cost or market and determined on a first-in, first-out basis) would be shown on a balance sheet of Borrower at such date prepared in accordance with generally accepted accounting principles, provided that amounts due from -------- Affiliates shall be excluded therefrom, minus (ii) Current Liabilities of ----- Borrower at such date. The balance of any revolving credit line will be considered as a Current Liability for the purpose of this calculation. "Multiemployer Plan" means a "multiemployer plan" as defined in ERISA Sections ------------------ 3(37) or 4001(a)(3) or IRC Section 414(f) which covers employees of Borrower or any ERISA Affiliate. "Net Worth" at any date means the Borrower's net worth as determined in --------- accordance with generally accepted accounting principles, consistently applied. "Obligations" means all present and future loans, advances, debts, liabilities, ----------- obligations, covenants, duties and indebtedness at any time owing by Borrower to FINOVA, whether evidenced by this Agreement, any note or other instrument or document, whether arising from an extension of credit, opening of a letter of credit, banker's acceptance, loan, guaranty, indemnification or otherwise, whether direct or indirect (including, without limitation, those acquired by assignment and any participation by FINOVA in Borrower's debts owing to others), absolute or contingent, due or to become due, including, without limitation, all interest, charges, expenses, fees, attorney's fees, expert witness fees, examination fees, letter of credit fees, collateral monitoring fees, closing fees, facility fees, anniversary fees, Termination Fees, Minimum Interest Charges and any other sums chargeable to Borrower hereunder or under any other agreement with FINOVA. "PBGC" means the Pension Benefit Guarantee Corporation. ---- "Permitted Encumbrance" means each of the liens, mortgages and other security --------------------- interests set forth on the Schedule and incorporated herein by this reference. "Person" means any individual, sole proprietorship, partnership, joint venture, ------ trust, unincorporated organization, association, corporation, government, or any agency or political division thereof, or any other entity. "Plan" means any plan described in ERISA Section 3(2) maintained for employees ---- of Borrower or any ERISA Affiliate, other than a Multiemployer Plan. "Prepared Financials" means the balance sheets of Borrower as of the date set ------------------- forth in the Schedule, and as of each subsequent date on which audited balance sheets are delivered to FINOVA from time to time hereunder, and the related statements of operations, changes in stockholder's equity and changes in cash flow for the periods ended on such dates. "Prohibited Transaction" means any transaction described in Section 406 of ERISA ---------------------- which is not exempt by reason of Section 408 of ERISA, and any transaction described in Section 4975(c) of the IRC which is not exempt by reason of Section 4975(c)(2) of the IRC. "Receivables" means all of Borrower's now owned and hereafter acquired accounts ----------- (whether or not earned by performance), proceeds of any letters of credit naming Borrower as beneficiary, contract rights, chattel paper, instruments, documents and all other forms of obligations at any time owing to Borrower, all guaranties and other security therefor, whether secured or unsecured, all merchandise returned to or repossessed by Borrower, and all rights of stoppage in transit and all other rights or remedies of an unpaid manufacturer or vendor, lienor or secured party. "Renewal Term" has the meaning set forth on the Schedule. ------------ "Reportable Event" means a reportable event described in Section 4043 of ERISA ---------------- or the regulations thereunder, a withdrawal from a Plan described in Section 4063 of ERISA, or a cessation of operations described in Section 4068(f) of ERISA. "Revolving Credit Line Interest Rate" has the meaning set forth on the Schedule. ----------------------------------- "Revolving Loans" has the meaning set forth on the Schedule. --------------- "Revolving Loans Borrowing Base" has the meaning set forth on the Schedule. ------------------------------ "RMA Credits" means credit memoranda for return merchandise authorizations ----------- issued by manufacturer or vendors of Floorplanned Inventory which are within forty-five (45) days of their issuance date. "Subordinated Debt" means liabilities of Borrower for which the repayment is ----------------- subordinated to the payment and performance of the Obligations, pursuant to a subordination agreement of FINOVA's standard form. "Tangible Capital Funds" at any date means an amount equal to, (i) the sum of ---------------------- the amounts at which Borrower's cash, Receivables, Inventory (calculated at the lower of cost or market and determined on a first-in, -2- first-out basis) and net fixed assets would be shown on a balance sheet of Borrower at such date prepared in accordance with generally accepted accounting principles, provided that amounts due from Affiliates shall be executed therefrom, minus (ii) Total Liabilities of Borrower at such date (excluding ----- Subordinated Debt of Borrower from such Total Liabilities). "Tangible Net Worth" at any time means Tangible Capital Funds minus Subordinated ------------------ Debt. "Term Loan" has the meaning set forth on the Schedule. --------- "Total Facility" has the meaning set forth on the Schedule. -------------- "Valid Price Protection" means any credit memorandum issued by any manufacturer ---------------------- or vendor of Floorplanned Inventory to reimburse Borrower for a decrease in the value of Borrower's Floorplanned Inventory supplied by such manufacturer or vendor caused by such manufacturer or vendor's reduction of the purchase price from the manufacturer or vendor of such Floorplanned Inventory. 1.2 Other Terms. All accounting terms used in this Agreement, unless otherwise ----------- indicated, shall have the meanings given to such terms in accordance with generally accepted accounting principles, consistently applied. All other terms contained in this Agreement, unless otherwise indicated, shall have the meanings provided by the Code, to the extent such terms are defined therein. 2. LOANS; INTEREST RATE AND OTHER CHARGES. 2.1 Total Facility. Upon the terms and conditions set forth herein and provided -------------- that no Event of Default or event which, with the giving of notice or the passage of time, or both, would constitute an Event of Default, may have occurred and be continuing, FINOVA may, upon Borrower's request, make advances to Borrower from time to time in an aggregate outstanding principal amount not to exceed the Total Facility amount (the "Total Facility") set forth on the schedule hereto (the "Schedule"), subject to deduction of reserves for accrued interest and such other reserves as FINOVA deems proper from time to time, and less unreimbursed amounts FINOVA may be obligated to pay in the future on behalf of Borrower. The Schedule is an integral part of this Agreement and all references to "herein", "herewith" and words of similar import shall for all purposes be deemed to include the Schedule. 2.2 Loans. Advances under the Total Facility ("Loans") shall be comprised of ----- the amounts and at the advance rates shown on the Schedule. FINOVA may, in its sole discretion, adjust the advance rates set forth on the Schedule. 2.3 Reconciliation Payments. If at any time or for any reason (i) the ----------------------- outstanding principal amount of Revolving Loans exceeds any of the applicable dollar or percentage limitations contained in the Schedule (any such excess, a "Revolver Overloan"): (ii) the sum of (a) the aggregate outstanding principal amount of Floorplan Loans plus (b) approvals given by FINOVA to a manufacturer or vendor of Floorplanned Inventory exceeds the Maximum Floorplan Amount (any such excess a "Floorplan Overloan"); or (iii) the aggregate outstanding principal amount of Floorplan Loans exceeds the sum of (x) the amount of Floorplanned Inventory plus (y) the Valid Price Protection plus (z) the RMA Credits (any such excess, a "Floorplan Collateral Coverage Reconciliation"), then Borrower shall, upon FINOVA's demand, immediately pay to FINOVA, in cash, the full amount of such Revolver Overloan or Floorplan Collateral Coverage Reconciliation (each, an "Overloan"). As long as no event of default shall have occurred, FINOVA may consent to reserve Floorplan Collateral Coverage Reconciliation amounts against Revolving Loan excess availability, in lieu of a cash payment. Without limiting Borrower's obligation to repay to FINOVA on demand the amount of any such Overloan, (a) on the date on which any inventory report is required to be delivered to FINOVA hereunder Borrower shall repay in full any Floorplan Collateral Coverage Reconciliation described therein to the extent such Floorplan Collateral Coverage Reconciliation is not reserved against and deducted from availability under the Revolving Loans, and (b) Borrower shall pay FINOVA interest on the outstanding principal amount of any Revolver Overloan or Floorplan Collateral Coverage Reconciliation, on demand, at the rate set forth on the Schedule. 2.4. Floorplan Credit Line. At the request of Borrower and as part of the Total --------------------- Facility, FINOVA may, in its sole discretion, make Floorplan Loans to or for the account of Borrower for the purpose of financing Floorplanned Inventory proposed by Borrower to be financed pursuant to this Section 2.4 (the "Floorplan Credit Line"). At no time shall the sum of Borrower's Obligations to FINOVA in respect of the Floorplan Credit Line exceed the amount specified in the Schedule. Upon receipt by FINOVA of an invoice for Floorplanned Inventory from Borrower or the manufacturer or vendor of such Floorplanned Inventory, which invoice is acceptable to FINOVA in its sole discretion, FINOVA shall, if it elects to finance such Floorplanned Inventory, make a Floorplan Loan to Borrower in an amount not to exceed (subject to the other limitations set forth in this Agreement) the cost, as reflected on the manufacturer or vendor's invoice, of such Floorplanned Inventory, including freight. FINOVA may, in its sole discretion, refuse to make a Floorplan Loan against any invoice. If FINOVA elects to make a Floorplan Loan, FINOVA may disburse the proceeds of such Floorplan Loan, less the amount of any discount agreed to between FINOVA and the manufacturer or vendor of the Floorplanned Inventory, directly to such manufacturer or vendor on Borrower's behalf in accordance with the payment arrangement then in effect between FINOVA and such manufacturer or vendor. FINOVA will charge Borrower's loan account for the full amount of the Floorplan Loan without regard to any discount that FINOVA may be entitled to receive pursuant to any payment arrangement referred to in the immediately preceding sentence. The Floorplan Credit Line is an uncommitted line of credit, may be terminated in whole or in part by FINOVA, in its sole discretion, at any time and, upon such termination, no further Floorplan Loans shall be available from FINOVA. 2.5 Loan Account. All advances made hereunder shall be added to and deemed part ------------ of the Obligations when made. FINOVA may from time to time charge all Obligations of Borrower when due to Borrower's loan account with FINOVA. 2.6 Revolving Credit Line and Term Loan Interest; Fees. Borrower shall pay -------------------------------------------------- FINOVA interest on the daily outstanding balance of the Revolving Credit Line and on the Term Loan, if any, at the per annum rates set forth on the Schedule and as applicable. Borrower shall also pay FINOVA the fees set forth on the Schedule. 2.7 Floorplan Credit Line Interest. In the event that Borrower fails to make ------------------------------ any payment to FINOVA when due with respect to the Floorplan Credit Line, Borrower shall pay FINOVA interest on the daily amount past due at the applicable per annum rate set forth on the Schedule. In addition, in the event that FINOVA elects to make advances under the Floorplan Credit Line which are not subsidized by the manufacturer or vendor, such advances will bear interest from the invoice date until the due date at the applicable rate set forth in the Schedule. All such interest shall be payable upon demand of FINOVA. 2.8 Revolving Credit Line and Term Loan Default Interest Rate. Upon the --------------------------------------------------------- occurrence and during the continuation of an Event of Default, -3- Borrower shall pay FINOVA interest on the daily outstanding balance of the Revolving Credit Line and the Term Loan at a rate per annum which is three percentage points (3.0%) in excess of the rate which would otherwise be applicable thereto pursuant to the Schedule. All such default interest shall be payable upon demand of FINOVA. 2.9 Examination Fees. Borrower agrees to pay to FINOVA an examination fee in ---------------- the amount set forth on the Schedule in connection with each audit or examination of Borrower performed by FINOVA prior to or after the date hereof. 2.10 Excess Interest. The contracted for rate of interest of the loan --------------- contemplated hereby, without limitation, shall consist of the following: (i) the interest rate set forth on the Schedule, calculated and applied to the principal balance of the Obligations in accordance with the provisions of this Agreement; (ii) interest after an Event of Default, calculated and applied to the amount of the Obligations in accordance with the provisions hereof; and (iii) all Additional Sums (as herein defined), if any. Borrower agrees to pay an effective contracted for rate of interest which is the sum of the above-referenced elements. The examination fees, attorneys fees, expert witness fees, letter of credit fees, collateral monitoring fees, closing fees, facility fees, other charges, goods, things in action or any other sums or things of value paid or payable by Borrower (collectively, the "Additional Sums"), whether pursuant to this Agreement or any other documents or instruments in any way pertaining to this lending transaction, or otherwise with respect to this lending transaction, that under any applicable law may be deemed to be interest with respect to this lending transaction, for the purpose of any applicable law that may limit the maximum amount of interest to be charged with respect to this lending transaction, shall be payable by Borrower as, and shall be deemed to be, additional interest and for such purposes only, the agreed upon and "contracted for rate of interest" of this lending transaction shall be deemed to be increased by the rate of interest resulting from the inclusion of the Additional Sums. It is the intent of the parties to comply with the usury laws of the State of Arizona (the "Applicable Usury Law"). Accordingly, it is agreed that notwithstanding any provisions to the contrary in this Agreement, or in any of the documents securing payment hereof or otherwise relating hereto, in no event shall this Agreement or such documents require the payment or permit the collection of interest in excess of the maximum contract rate permitted by the Applicable Usury Law (the "Maximum Interest Rate"). In the event (a) any such excess of interest otherwise would be contracted for, charged or received from Borrower or otherwise in connection with the loan evidenced hereby, (b) the maturity of the Obligations is accelerated in whole or in part, or (c) all or part of the Obligations shall be prepaid, so that under any of such circumstances the amount of interest contracted for, shared or received in connection with the loan evidenced hereby, would exceed the Maximum Interest Rate, then in any such event (1) the provisions of this paragraph shall govern and control, (2) neither Borrower nor any other person or entity now or hereafter liable for the payment of the Obligations shall be obligated to pay the amount of such interest to the extent that it is in excess of the Maximum Interest Rate, (3) any such excess which may have been collected shall be either applied as a credit against the then unpaid principal amount of the Obligations or refunded to Borrower, at FINOVA's option, and (4) the effective rate of interest shall be automatically reduced to the Maximum Interest Rate. It is further agreed, without limiting the generality of the foregoing, that to the extent permitted by the Applicable Usury Law; (x) all calculations of interest which are made for the purpose of determining whether such rate would exceed the Maximum Interest Rate shall be made by amortizing, prorating, allocating and spreading during the period of the full stated term of the loan evidenced hereby, all interest at any time contracted for, charged or received from Borrower or otherwise in connection with such loan; and (y) in the event that the effective rate of interest on the loan should at any time exceed the Maximum Interest Rate, such excess interest that would otherwise have been collected had there been no ceiling imposed by the Applicable Usury Law shall be paid to FINOVA from time to time, if and when the effective interest rate on the loan otherwise falls below the Maximum Interest Rate, to the extent that interest paid to the date of calculation does not exceed the Maximum Interest Rate, until the entire amount of interest which would otherwise have been collected had there been no ceiling imposed by the Applicable Usury Law has been paid in full. Borrower further agrees that should the Maximum Interest Rate be increased at any time hereafter because of a change in the Applicable Usury Law, then to the extent not prohibited by the Applicable Usury Law, such increases, if applicable, shall apply to all indebtedness evidenced hereby regardless of when incurred; but, again to the extent not prohibited by the Applicable Usury Law, should the Maximum Interest Rate be decreased because of a change in the Applicable Usury Law, such decreases shall not apply to the indebtedness evidenced hereby regardless of when incurred. 2.11 Principal Payments; Proceeds of Collateral ------------------------------------------ (a) Principal Payments. Except where evidenced by notes or other instruments ----------------- issued or made by Borrower to FINOVA specifically containing payment provisions which are in conflict with this Section 2.11(a) (in which event the conflicting provisions of said notes or other instruments shall govern and control), that portion of the Obligations consisting of principal payable on account of Revolving Loans and Floorplan Loans shall be payable by Borrower to FINOVA immediately upon the earliest of (i) the receipt by FINOVA or Borrower of any proceeds of any of the Collateral, to the extent of said proceeds, (ii) the occurrence of an Event of Default in consequence of which FINOVA elects to accelerate the maturity and payment of such loans, (iii) any termination of this Agreement pursuant to Section 9.2 hereof, or (iv) in the case of any Floorplan Loan, the date that is the number of days set forth in Exhibit A to this Agreement after the invoice date for the Floorplanned Inventory purchased with the proceeds of such Floorplan Loan, which number of days are specified opposite the name of the manufacturer or vendor of such Floorplanned Inventory in such Exhibit A (each a "Due Date") (and FINOVA shall have the right, in its sole discretion, to amend or supplement such Exhibit A in whole or in part by delivery from time to time of a new such Exhibit A to Borrower), provided, -------- however, that any Revolver Overloan or Floorplan Collateral Coverage - ------- Reconciliation shall be payable on demand pursuant to the provisions of Section 2.3 hereof. Provided that there is sufficient Eligible Inventory, as determined by FINOVA in its sole discretion, to cover a specific invoice, Borrower and FINOVA may agree to extend the due date of such specific invoice, on such terms and conditions as are established by FINOVA in its sole discretion, and consented to by Borrower. (b) Collections. To the extent Borrower receives any collection of Receivables, ----------- it shall receive all payments as trustee of FINOVA and immediately deliver all payments to FINOVA in their original form as set forth below, duly endorsed in blank, provided, however, that any checks that come into Borrower's possession may only be accepted by Borrower for payment by deposit into the lockbox account. FINOVA or its designee may, at any time, notify account debtors that the Receivables have been assigned to FINOVA and of FINOVA's security interest therein, and may collect the Receivables directly and charge the collection costs and expenses to Borrower's loan account. Borrower agrees that, in computing the charges under this Agreement, all items of payment shall be deemed applied by FINOVA on account of the Obligations the number of Business Days referenced in the Schedule after receipt by FINOVA of good funds which have been finally credited to FINOVA's account, whether such funds are received directly -4- from Borrower or from the Blocked Account (as herein defined) bank or the Dominion Account (as herein defined) bank, pursuant to Section 2.11(c) hereof. The above calculation shall apply as a charge against collections regardless of Borrower's obligations to FINOVA, if any. FINOVA is not, however, required to credit Borrower's account for the amount of any item of payment which is reasonably unsatisfactory to FINOVA in its sole discretion and FINOVA may charge Borrower's loan account for the amount of any item of payment which is returned to FINOVA unpaid. In this Agreement or in any Loan Document, whenever there is a reference to "receipt by FINOVA of funds," or language of similar effect regarding the receipt of funds by FINOVA, in order to be credited to the applicable account on the date that good funds were received by FINOVA (either directly or through a bank account, lockbox or similar arrangement) the funds must reach FINOVA no later than 10:00 a.m., Eastern time, on that date. Any Funds reaching FINOVA after 10:00 a.m., Eastern time, will be credited to the applicable account on the next immediately following Business Day. (c) Establishment of a Lockbox Account or Dominion Account. All proceeds of ------------------------------------------------------ Collateral shall, at the direction of FINOVA, be deposited by Borrower into a lockbox account, or such other "blocked account" as FINOVA may require (each, a "Blocked Account") pursuant to an arrangement with such bank as may be selected by Borrower and be acceptable to FINOVA. As long as no Event of Default shall have occurred, and Borrower outstandings under the Revolving Credit Facility do not average in excess of One Million Five Hundred Thousand ($1,500,000) dollars for over 90 days, a lockbox and blocked account will not be required. If Borrower's average outstandings under the Revolving Credit Facility exceed One Million Five Hundred Thousand ($1,500,000) for over 90 days, Borrower agrees immediately upon FINOVA's request, in FINOVA's sole discretion, to implement a lockbox and Blocked Account. As long as no Event of Default shall have occurred, FINOVA will direct the bank to transfer available funds in the Blocked Account to Borrower's operating checking account. If any Event of Default shall have occurred under this agreement, FINOVA reserves the right in its sole discretion and by its sole authorization, to direct said bank to transfer such funds to FINOVA, either to any account maintained by FINOVA at said bank or by wire transfer to appropriate account(s) of FINOVA. All funds deposited into the lockbox and Blocked Account shall immediately become the sole property of FINOVA and Borrower shall obtain the agreement by such bank to waive any offset rights against the funds so deposited. Until such time as FINOVA receives all funds via wire transfer from the Blocked Account, Borrower will arrange for the bank to send FINOVA a duplicate copy of the monthly statement for each operating checking account. FINOVA will compute the charges under this Agreement regarding collections based on the deposits exhibited on the bank checking account statements. FINOVA assumes no responsibility for any Blocked Account arrangement, including without limitation, any claim of accord and satisfaction or release with respect to deposits accepted by any bank thereunder. Alternatively, FINOVA may establish depository accounts in the name of FINOVA at a bank or banks for the deposit of such funds (each, a "Dominion Account") and Borrower shall deposit all proceeds of Receivables and all cash proceeds of any Collateral or cause same to be deposited, in kind, in such Dominion Accounts of FINOVA in lieu of depositing same to Blocked Accounts. (d) Payments Without Deductions. Borrower shall pay principal, interest, and --------------------------- all other amounts payable hereunder, or under any relating agreement, without any deduction whatsoever, including, but not limited to, any deduction for any setoff or counterclaim. (e) Collection Days Upon Repayment. In the event Borrower repays the ------------------------------ Obligations in full at any time hereafter, such payment in full shall be credited (conditioned upon final collection) to Borrower's loan account two (2) Business Days after FINOVA's receipt thereof. (f) Monthly Accountings. FINOVA shall provide Borrower monthly with an account ------------------- of advances, charges, expenses and payments made pursuant to this Agreement. Such account shall be deemed correct, accurate and binding on Borrower and FINOVA and an account stated (except for reverses and reapplications of payments made and corrections of errors discovered by FINOVA), unless Borrower notifies FINOVA in writing to the contrary within thirty (30) days after each account is rendered, describing the nature of any alleged errors or omissions. (g) Collections and Administration. FINOVA may, at any time, whether or not an ------------------------------ Event of Default has occurred, without notice to or assent of Borrower, (i) notify any account debtor of the fact that the Accounts and other Collateral have been assigned to FINOVA by Borrower and that payment thereof is to be made to the order of and directly to FINOVA, and (ii) after the occurrence of an Event of Default, or an event which, with the giving of notice, passage of time, or both, would become an Event of Default, demand, collect or enforce payment of any Accounts or such other Collateral, but without any duty to do so, and FINOVA shall not be liable for any failure to collect or enforce payment thereof. At FINOVA's request, all invoices, or bills and statements sent to any account debtor, other obligor or bailee, shall state that the Accounts and such Collateral shall have been assigned to FINOVA and are payable directly and only to FINOVA. FINOVA shall have the right, at any time, in FINOVA's name or in the name of a nominee of FINOVA, to verify the validity, amount or any other matter relating to the Accounts or the other Collateral, by mail, telephone or otherwise. 2.12 Application of Collateral. FINOVA shall have the continuing and exclusive ------------------------- right to apply or reverse and re-apply any and all payments to any portion of the Obligations, and such application or re-application can be in any order or manner that FINOVA deems necessary and appropriate. To the extent that Borrower makes a payment or FINOVA receives any payment or proceeds of the Collateral for Borrower's benefit which is subsequently invalidated, declared to be fraudulent or preferential, set aside or required to be repaid to a trustee, debtor in possession, receiver or any other party under any bankruptcy law, common law or equitable cause, then, to such extent, the Obligations or part thereof intended to be satisfied shall be revived and continue as if such payment or proceeds had not been received by FINOVA. 3. COLLATERAL 3.1 Security Interest in the Collateral. To secure the payment and performance ----------------------------------- of the Obligations when due, Borrower hereby grants to FINOVA a security interest in all of Borrower's now owned or hereafter acquired or arising Inventory, Equipment, Receivables, tax refunds, investments, Investment Property (as defined in Section 9-115 of the Code), leasehold rights and General Intangibles, including, without limitation, all of Borrower's Deposit Accounts, money, proceeds of any keyman life insurance policy, any and all property now or at any time hereafter in FINOVA's possession (including claims and credit balances) any amounts owed to mutual customers of Borrower and FINOVA which are floorplanned by FINOVA, and all proceeds (including proceeds of any insurance policies, proceeds of proceeds and claims against third parties), all products and all books and records related to any of the foregoing (all of the foregoing, together with all other property in which FINOVA may be granted a lien or security interest, is referred to herein, collectively, as the "Collateral"). -5- 3.2. Perfection and Protection of Security Interests. Borrower shall, at its ----------------------------------------------- expense, take all actions requested by FINOVA at any time to perfect, maintain, protect and enforce FINOVA's security interest and other rights in the Collateral and the priority thereof from time to time, including, without limitation, (i) executing and filing financing or continuation statements and amendments therof and executing and delivering such documents and titles in connection with motor vehicles as FINOVA shall require, all in form and substance satisfactory to FINOVA, (ii) maintaining a perpetual inventory and complete and accurate stock record, (iii) delivering to FINOVA warehouse receipts covering any portion of the Collateral located in warehouses and for which warehouse receipts are issued, and transferring Inventory to warehouses designated by FINOVA, (iv) placing notations on Borrower's books of account to disclose FINOVA's security interest therein, and (v) delivering to FINOVA all letters of credit on which Borrower is named beneficiary. FINOVA may file, without Borrower's signature, one or more financing statements disclosing FINOVA's security interest under this Agreement. Borrower agrees that a carbon, photographic, Photostate or other reproduction of this Agreement or of a financing statement is sufficient as a financing statement. If any Collateral is at any time in the possession or control of any warehouseman, bailee or any of Borrower's agents or processors, Borrower shall notify such Person of FINOVA's security interest in such Collateral and, upon FINOVA's request, instruct them to hold all such Collateral for FINOVA's account subject to FINOVA's instructions. From time to time, Borrower shall, upon FINOVA's request, execute and deliver confirmatory written instruments pledging the Collateral to FINOVA, but Borrower's failure to do so shall not affect or limit FINOVA's security interest or other rights in and to the Collateral. Until the Obligations have been fully satisfied and FINOVA's obligation to make further advances hereunder has terminated, FINOVA's security interest in the Collateral shall continue in full force and effect. 3.3 Preservation of Collateral. FINOVA may, in its sole discretion, at any time -------------------------- after FINOVA has requested the Borrower take any of the following action(s) and Borrower has failed to do so, discharge any lien or encumbrance on the Collateral or bond the same, pay any insurance, maintain guards, pay any service bureau, obtain any record or take in any other action to preserve the Collateral and charge the cost thereof to Borrower's loan account as an Obligation. 3.4 Insurance. Borrower will maintain and deliver evidence to FINOVA of such --------- insurance as is required by FINOVA, written by insurers, in amounts, and with Lender's Loss Payee and other endorsements, reasonably satisfactory to FINOVA. All premiums shall be paid by Borrower as and when due. Accurate and complete copies of all policies shall be delivered by Borrower to FINOVA. If Borrower fails to comply with the section, FINOVA may (but shall not be required to) procure such insurance at Borrower's loan account as an Obligation. 3.5 Collateral Reporting; Inventory. ------------------------------- (a) Invoices. Borrower shall not re-date any invoice or sale from the original -------- date thereof or make sales on extended terms beyond those customary in Borrower's industry, or otherwise extend or modify the term of any Receivable. If Borrower becomes aware of any matter affecting any Receivable, including information affecting the credit of the account debtor thereon, Borrower shall promptly notify FINOVA in writing. Without limiting the generality of the foregoing, Borrower shall immediately issue and deliver to FINOVA credit memoranda for any Receivable in excess of the amount set forth in the schedule which becomes and ineligible account. (b) Instruments. In the event any Receivable is or becomes evidenced by a ----------- promissory note, trade acceptance or any other instrument for the payment of money, Borrower shall immediately deliver such instrument to FINOVA appropriately endorsed to FINOVA and, regardless of the form of any presentment, demand, notice of dishonor, protest or notice of protest with respect thereto. Borrower shall remain liable thereon until such instrument is paid in full. (c) Physical Inventory. Borrower shall maintain its computerized perpetual ------------------ inventory system and shall conduct a physical count of the Inventory at such reasonable intervals as FINOVA shall request and promptly supply FINOVA with a copy of such accounts accompanied by a report of the quantity and value (calculated at the lower of cost or market value on a first in, first out basis) of the Inventory and such additional information with respect to the Inventory as FINOVA may reasonably request from time to time. (d) Returns. For so long as no Event of Default has occurred and is continuing ------- and subject to the provisions of Section 3.6(c), if any account debtor returns any Inventory to Borrower in the ordinary course of its business, Borrower shall promptly determine the reason for such return and promptly issue a credit memorandum to the account debtor (sending a copy to FINOVA) in the appropriate amount. In the event any attempted return occurs after the occurrence of any Event of Default, Borrower shall (i) hold the returned Inventory in trust for FINOVA, (ii) segregate all returned Inventory from all of Borrower's other property, (iii) conspicuously label the returned Inventory as FINOVA's property, and (iv) immediately notify FINOVA of the return of any Inventory, specifying the reason for such return, the location and condition of the returned Inventory, and on FINOVA's request deliver such returned Inventory to FINOVA. Borrower shall not consign any Inventory. Borrower shall dispose of the Returned Inventory solely according to FINOVA's written instructions and will not issue and credits or allowances with respect to Returned Inventory without FINOVA's prior written consent. All Returned Inventory shall remain subject to FINOVA's liens. Whenever any Inventory is returned, the related Receivable shall be deemed ineligible in the amount of the Returned Inventory and the Revolving Credit Line shall be adjusted accordingly. 3.6 Receivables. ----------- (a) Eligibility. Borrower hereby represents and warrants to FINOVA that: (1) ----------- each existing Receivable represents, and each future Receivable will represent, a bona fide sale or lease and delivery of goods by Borrower, in the ordinary ---- ---- course of Borrower's business; (ii) each existing Receivable is, and each future Receivable will be, for a liquidated amount payable by the account debtor thereon on the terms set forth in the invoice therefor or in the schedule therof delivered to FINOVA, without offset, deduction, defense, or counterclaim; (iii) no payment will be received with respect to any Receivable, and no credit, discount (other than those discounts given in the ordinary course of business), or extension, or agreement therefor will be granted on any Receivable, except as reported to FINOVA in accordance with this Agreement; (iv) each copy of an invoice delivered to FINOVA by Borrower will be a genuine copy of the original invoice sent to the account debtor named therein; and (v) all goods described in each invoice will have been delivered to the account debtor and all services of Borrower described in each invoice will have been performed. (b) Invoice. Borrower shall not re-date any invoice or sale or make sales on ------- extended dating beyond that customary in Borrower's business or otherwise extend or modify any Receivable. If Borrower becomes aware of any matter adversely affecting the collectability or enforceability of any Receivable, including, without limitation, information regarding an account debtor's creditworthiness, Borrower will immediately so advice FINOVA in writing. -6- (c) Inventory Returns. If an account debtor returns any Inventory to Borrower ----------------- when no Event of Default exists hereunder. Borrower shall promptly determine the reason for such return, shall immediately advise FINOVA of any returned Inventory involving an amount in excess of the amount provided in the Schedule from any single return or multiple returns within a three (3) Business Day time frame, and may issue a credit memorandum to the account debtor in the appropriate amount. Each such report shall indicate the reasons for the returns and the locations and condition of the returned Inventory. In the event any account debtor returns Inventory to Borrower during the existence of an Event of Default hereunder, unless FINOVA otherwise agrees to the contrary, Borrower shall: (i) hold the returned Inventory in trust for FINOVA; (ii) segregate all returned Inventory from all of its other Property; (iii) dispose of the returned Inventory solely according to FINOVA's written instructions; and (iv) not issue any credits or allowances with respect thereto without FINOVA's prior written consent. All returned Inventory shall remain subject to FINOVA's Liens. Whenever any Inventory is returned, the related Receivable shall be deemed ineligible in the amount of the returned Inventory and the Revolving Loans Borrowing Base shall be adjusted accordingly. If any representation or warranty herein or in any report submitted to FINOVA is breached as to any Receivable or any Receivable ceases to be an Eligible Receivable for any reason other than payment thereof, then FINOVA may, in addition to its other rights hereunder, designate any and all Receivables owing by that account debtor as not Eligible Receivables; provided, that FINOVA -------- shall in any such event retain its security interest in all Receivables, whether or not Eligible Receivables, until the Obligations have been fully satisfied and FINOVA's obligations to provide loans hereunder has terminated. (d) Disputes. Borrower shall notify FINOVA promptly of all disputes or claims -------- and settle or adjust such disputes or claims at no expense to FINOVA, but no discount, credit or allowance shall be granted to any account debtor and no returns of merchandise shall be accepted by Borrower without FINOVA's consent, except for discounts, credits and allowances made or given in the ordinary course of Borrower's business in the absence of an Event of Default. Borrower shall send FINOVA a copy of each credit memorandum in excess of the amount provided in the Schedule as soon as issued or as soon as known by Borrower. FINOVA may, at any time after the occurrence of any Event of Default, settle or adjust disputes or claims directly with account debtors for amounts and upon terms which FINOVA considers advisable in its reasonable credit judgement and, in all cases. FINOVA shall credit Borrower's loan account with only the net amounts received by FINOVA in payment of any Receivables. 3.7 Equipment. --------- Borrower shall keep and maintain the Equipment in good operating condition and repair and make all necessary replacements thereto to maintain and preserve the value and operating efficiency thereof at all times consistent with Borrower's past practice, ordinary wear and tear excepted. Borrower shall not permit any item of Equipment to become a fixture (other than a trade fixture) to real estate or an accession to other property. 3.8 Other License; No Disposition of Collateral. ------------------------------------------- Borrower represents, warrants and covenants that (a) all Collateral is and shall continue to be owned by its free and clear of all liens, claims and encumbrances whatsoever (except for FINOVA's security interest, Permit Encumbrances, and such other liens, claims and encumbrances as may be permitted by FINOVA in its sole discretion from time to time in writing), and (b) Borrower shall not, without FINOVA's prior written approval, sell, encumber or dispose of or permit the sale, encumbrance or disposal of any Collateral or any interest of Borrower therein, except for the sale of Inventory in the ordinary course of Borrower's business, Equipment which is obsolete and non-material assets other than Receivables and Inventory. The proceeds of any such sales shall be remitted to FINOVA pursuant to this Agreement for application to the Obligations. 3.9 Collateral Security. The Obligations shall constitute one loan secured by ------------------- the Collateral. FINOVA may, in its sole discretion, (i) exchange, enforce, waive or release any of the Collateral, (ii) apply Collateral and direct the order or manner of sale thereof as it may determine, and (iii) Upon the occurrence and confirmation of an Event of Default, settle, compromise, collect or otherwise liquidate any Collateral in any manner without affecting its right to take any other action with respect to any other Collateral. 4. CONDITIONS OF CLOSING. 4.1 Initial Advance. The obligation of FINOVA to make the initial advance --------------- hereunder is subject to the fulfillment, to the satisfaction of FINOVA and its counsel, of each of the following conditions and any additional conditions specified in the Schedule on or prior to the date set forth on the Schedule (the date of fulfillment of all such conditions, the "Closing Date"): (a) Loan Documents. FINOVA shall have received each of the following Loan -------------- Documents: (i) such loan and security agreements, notes, intellectual property assignments and deeds of trust as FINOVA may require with respect to this Agreement, executed by each of the parties thereto and, if applicable, duly acknowledged for recording or filing in the appropriate governmental offices; (ii) such Blocked Account or Dominion Account agreements as FINOVA shall determine; (iii) such other documents, instruments and agreements in connection herewith as FINOVA shall require, executed, certified and/or acknowledged by such parties as FINOVA shall designate; (b) Terminations by Existing Lender. Borrower's existing lender(s) shall have ------------------------------- executed and delivered UCC termination statements and other documentation evidencing the termination of its liens and security interest in the assets of Borrower or a subordination agreement in form and substance satisfactory to FINOVA in its sole discretion; and FINOVA shall have approved in its sole discretion; and FINOVA shall have approved in its sole discretion any outstanding payoff arrangements with the foregoing creditors; (c) Charter Documents. FINOVA shall have received copies of Borrower's By-laws ----------------- and Articles or Certificate of Incorporation, as amended, modified, or supplemented to the Closing Date, certified by the Secretary of Borrower; (d) Good Standing. FINOVA shall have received a certificate of corporate status ------------- with respect to Borrower, and each other Loan Party, dated within thirty (30) days of the Closing Date, by the Secretary of State of the state of incorporation of Borrower or such Loan Party, which certificate shall indicated that Borrower or such Loan Party is in good standing in such state; (e) Foreign Qualification. FINOVA shall have received certificates of corporate --------------------- status with respect to Borrower and each other Loan Party, each dated within ten (10) days of the Closing Date, issued by the Secretary of State of each state in which such party's failure to be duly qualified or licensed would have a material adverse effect on its financial condition or assets, indicating that such party is in good standing; -7- (f) Authorizing Resolutions and Incumbency. FINOVA shall have received a -------------------------------------- certificate from the Secretary of Borrower and each other Loan Party attesting to (i) the adoption of resolutions of Borrower's Board of Director authorizing the execution and delivery of this Agreement and the other Loan Documents to which such Loan Party is a party, and authorizing specific officers of such Loan Party to execute same, and (ii) the authenticity of original specimen signature of such officers; (g) Insurance. FINOVA shall have received the insurance certificates and --------- certified copies of policies required by Section 3.4 hereof, in form and substance satisfactory to FINOVA and its counsel; (h) Compensation. Intentionally left blank; ------------ (i) Searches; Certificates of Title. FINOVA shall have received search ------------------------------- reflecting the filing of it financing statements and fixture flings in such jurisdictions as it shall determine, and shall have received certificates of title with respect to the Collateral which shall have been duly executed in a manner sufficient to perfect all of the security interests granted to FINOVA; (j) Intentionally left blank. (k) Fees. Borrower shall have paid all fees payable by it on the Closing Date ---- pursuant to this Agreement; (l) Opinion of Counsel. FINOVA shall have received an opinion of Borrower's ------------------ counsel covering such matters as FINOVA shallreasonably request; (m) Officer Certificate. FINOVA shall have received a certificate of the ------------------- President and the Chief Financial Officer or similar official of Borrower, attesting to the accuracy of each of the representations and warranties of Borrower set forth in this Agreement and the fulfillment of all conditions precedent to the initial advance hereunder; (n) Solvency Certificate. FINOVA shall have received a signed certificate of -------------------- the Borrower's duly elected Chief Financial Officer or such other officer of Borrower acceptable to FINOVA, concerning the solvency and financial condition of Borrower, on FINOVA's standard form; (o) Lockbox. Borrower and its legal counsel have reviewed FINOVA's standard ------- Lockbox Agreement and agree to execute this Agreement at such time as described in Section 2.11 (c) herein without any changes except such changes as may be required by the bank and which are acceptable to FINOVA. (p) Environmental Assessment. If required by FINOVA, Borrower shall have caused ------------------------ a Phase I Environmental Assessment to be conducted on the property or properties owned or occupied by Borrower, all at Borrower's own expense and the results of such assessment(s) shall have been in form and substance satisfactory to FINOVA in its sole discretion. Such assessment(s) shall have included, in FINOVA's discretion, core samplings, and shall have been conducted by an environmental engineer acceptable to FINOVA; (q) Environmental Certificate. FINOVA shall have received an Environmental ------------------------- Certificate from Borrower, in form and substance satisfactory to FINOVA in its discretion, with respect to all locations of Collateral; and (r) Other Matters. All other documents and legal matters in connection with the ------------- transaction contemplated by this Agreement shall have been delivered, executed or recorded and shall be in form and substance satisfactory to FINOVA and its counsel. 4.2 Subsequent Advances. The obligation of FINOVA to make any advance hereunder ------------------- (including the initial advance) shall be subject to the further conditions precedent that, on and as of the date of such advance. (a) the representations and warranties of Borrower set forth in this Agreement shall be accurate, before and after giving effect to such advance or issuance and to the application of any proceeds thereof; (b) no Event of Default and no event which, with notice or passage of time or both, would constitute an Event of Default has occurred and is continuing, or would result from such advance or issuance or from the application of any proceeds thereof; (c) no material adverse change has occurred in the Borrower's business, operations, financial condition, or assets or in the Borrower's ability to repay the Obligation; and (d) FINOVA shall have received such other approvals, opinions or documents as FINOVA shall reasonably request. 5. REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants that: 5.1 Due Organization. It is a corporation duly organized, validly existing and ---------------- in good standing under the laws of the State set forth on the Schedule, is qualified and authorized to do business and is in good standing in all states in which such qualification and good standing are necessary in order for it to conduct its business and own its property, and has all requisite power and authority to conduct its business as presently conducted, to own its property and to execute and deliver each of the Loan Documents to which it is a party and perform all of its Obligations thereunder and has not taken any steps to wind up, dissolve or otherwise liquidate its assets; 5.2 Other Names. Borrower has not, during the preceding five (5) years, been ----------- known by or used any other corporate or fictitious name except as set forth on the Schedule, nor has Borrower been the surviving corporation of a merger or consolidation or acquired all or substantially all of the assets of any person during such time, except as set forth on the Schedule; 5.3 Due Authorization. The execution, delivery and performance by Borrower of ----------------- the Loan Documents to which it is a party have been authorized by all necessary corporate action and do not and shall not constitute a violation of any applicable law or of Borrower's Articles or Certificate of Incorporation or By-Laws or any other document, agreement or instrument to which Borrower is a party or by which Borrower or its assets are bound; 5.4 Binding Obligation. Each of the Loan Documents to which Borrower is a party ------------------ is the legal, valid and binding obligation of Borrower enforceable against Borrower in accordance with its terms; 5.5 Intangible Property. Borrower possesses adequate assets, licenses, patents, ------------------- patent applications, copyrights, trademarks, trademark applications and trade names for the present and planned future conduct of its business without any known conflict with the rights of others, and each is valid and has been duly registered or filed with the appropriate governmental authorities; -8- 5.6 Capital. Borrower has capital sufficient to conduct its business, is able to ------- pay its debts as they mature and owns property having a fair salable value greater than the amount required to pay all of its debts (including contingent debts); 5.7 Material Litigation. Borrower has no pending or overtly threatened ------------------- litigation, actions or proceedings which would materially and adversely affect its business, assets, operations, prospects or condition, financial or otherwise, or the Collateral or any of FINOVA's interests therein; 5.8 Title: Security Interests of FINOVA. Borrower has good, indefeasible and ----------------------------------- merchantable title to the Collateral and, upon the filing of UCC-1 Financing Statements and the recording of any mortgages or deeds of trust with respect to real property, in each case in the appropriate offices, this Agreement and such documents shall create valid and perfected first priority liens in and to the Collateral, subject only to Permitted Encumbrances; 5.9 Restrictive Agreements: Labor Contracts. Borrower is not a party or subject --------------------------------------- to any contract or subject to any charge, corporate restriction, judgment, decree or order materially and adversely affecting its business, assets, operations, prospects or condition, financial or otherwise, or which restricts its right or ability to incur Indebtedness, and it is not party to any labor dispute. In addition, no labor contract is scheduled to expire during the Initial Term of this Agreement, except as disclosed to FINOVA in writing prior to the date hereof. 5.10 Laws. Borrower is not in violation of any applicable statute, regulation, ---- ordinance or any order of any court, tribunal or governmental agency, in any respect materially and adversely affecting the Collateral or its business, assets, operations, prospects or condition, financial or otherwise; 5.11 Consents. Borrower has obtained or caused to be obtained or issued any -------- required consent of a governmental agency or other Person in connection with the financing contemplated hereby; 5.12 Defaults. Borrower is not in default with respect to any note, indenture, -------- loan agreement, mortgage, lease, deed or other agreement to which it is a party or by which it or its assets are bound, nor has any event occurred which, with the giving of notice or the lapse of time, or both, would cause such a default; 5.13 Financial Condition. The Prepared Financials fairly present Borrower's ------------------- financial condition and results of operations and those of such other Persons described therein as of the date thereof; there are no material omissions from the Prepared Financials or other facts or circumstances not reflected in the Prepared Financials; and there has been no material and adverse change in such financial condition or operations since the date of the initial Prepared Financials delivered to FINOVA hereunder; 5.14 ERISA. None of Borrower, any ERISA Affiliate, or any Plan is or has been in ----- violation of any of the provisions of ERISA, any of the qualification requirements of IRC Section 401(a) or any of the published interpretations thereunder, nor has Borrower or any ERISA Affiliate received any notice to such effect. No notice of intent to terminate a Plan has been filed under Section 4041 of ERISA, nor has any Plan been terminated under ERISA. The PBGC has not instituted proceedings to terminate, or appointed a trustee to administer, a Plan. No lien upon the assets of Borrower has arisen with respect to a Plan. No prohibited transaction or Reportable Event has occurred with respect to a Plan. Neither Borrower nor any ERISA Affiliate has incurred any withdrawal liability with respect to any Multiemployer Plan. Borrower and each ERISA Affiliate have made all contributions required to be made by them to any Plan or Multiemployer Plan when due. There is no accumulated funding deficiency in any Plan, whether or not waived; 5.15 Taxes. Borrower has filed all tax returns and such other reports as it is ----- required by law to file and has paid or made adequate provision for the payment on or prior to the date when due of all taxes, assessments and similar charges that are due and payable; 5.16 Locations. Borrower's chief executive office and the offices and locations --------- where it keeps the Collateral (except for Inventory in transit) are at the locations set forth on the Schedule, except to the extent that such locations may have been changed after notice to FINOVA in accordance with Section 6.4 hereof; 5.17 Business Relationships. There exists no actual or threatened termination, ---------------------- cancellation or limitation of, or any modification or change in, the business relationship between Borrower and any customer or any group of customers whose purchases individually or in the aggregate are material to the business of Borrower, or with any material supplier, and there exists no present condition or state of facts or circumstances which would materially and adversely affect Borrower or prevent Borrower from conducting such business after the consummation of the transactions contemplated by this Agreement in substantially the same manner in which it has heretofore been conducted; and 5.18 Reaffirmations. Each request for a loan made by Borrower pursuant to this -------------- Agreement shall constitute (i) an automatic representation and warranty by Borrower to FINOVA that there does not then exist any Event of Default and (ii) a reaffirmation as of the date of said request of all of the representations and warranties of Borrower contained in this Agreement and the other Loan Documents. 6. COVENANTS. Affirmative Covenants: - --------------------- Borrower covenants that, so long as any Obligation remains outstanding and this Agreement is in effect, it shall: 6.1 Taxes. File all tax returns and pay or make adequate provision for the ----- payment of all taxes, assessments and other charges on or prior to the date when due; 6.2 Notice of Litigation. Promptly notify FINOVA in writing of any litigation, -------------------- suit or administrative proceeding which may materially and adversely affect the Collateral or Borrower's business, assets, operations, prospects or condition, financial or otherwise, whether or not the claim is covered by insurance; 6.3 ERISA. Notify FINOVA in writing (i) promptly upon the occurrence of any ----- event described in Paragraph 4043 of ERISA, other than a termination, partial termination or merger of a Plan or a transfer of a Plan's assets and (ii) prior to any termination, partial termination or merger of a Plan or a transfer of a Plan's assets; 6.4 Change in Location. Notify FINOVA in writing forty-five (45) days prior to ------------------ any change in the location of Borrower's chief executive office or the location of any Collateral, or Borrower's opening or closing of any other place of business; 6.5 Corporate Existence. Maintain its corporate existence and its qualification ------------------- to do business and good standing in all states necessary for the conduct of its business and the ownership of its property and maintain adequate assets, licenses, patents, copyrights, trademarks and trade names for the conduct of its business; -9- 6.6 Labor Disputes. Promptly notify FINOVA in writing of any material labor -------------- dispute to which Borrower is or may become subject and the expiration of any labor contract to which Borrower is a party or bound; 6.7 Violations of Law. Promptly notify FINOVA in writing of any violation of ------------------ any law, statute, regulation or ordinance of any governmental entity, or of any agency thereof, applicable to Borrower which may materially and adversely affect the Collateral or Borrower's business, assets, prospects, operations or condition, financial or otherwise; 6.8 Defaults. Notify FINOVA in writing within five (5) business days of -------- becoming aware of Borrower's default under any note, indenture, loan agreement, mortgage, lease or other agreement to which Borrower is a party or by which Borrower is bound, or of any other default under any Indebtedness of Borrower; 6.9 Capital Expenditures. Promptly notify FINOVA in writing of the making of any -------------------- Capital Expenditure materially affecting Borrower's business, assets, prospects, operations or condition, financial or otherwise; 6.10 Books and Records. Keep adequate records and books of account with respect ----------------- to its business activities in which proper entries are made in accordance with generally accepted accounting principles consistently applied, reflecting all of its financial transactions; 6.11 Leases; Warehouse Agreement. Provide FINOVA with (i) copies of all --------------------------- agreements between Borrower and any landlord or warehouseman which owns any premises at which any Collateral may, from time to time, be located, and (ii) landlord and mortgagee waivers in form acceptable to FINOVA with respect to all locations where any Collateral is hereafter located; 6.12 Additional Documents. At FINOVA's request, promptly execute or cause to be -------------------- executed and delivered to FINOVA any and all documents, instruments or agreements deemed necessary by FINOVA to facilitate the collection of the Obligations or the Collateral or otherwise to give effect to or carry out the terms or intent of this Agreement or any of the other Loan Documents. Without limiting the generality of the foregoing, if any of the Receivables with a face value in excess of $1,000.00 arises out of a contract with the United States of America or any department, agency, subdivision or instrumentality thereof, Borrower shall promptly notify FINOVA of such fact in writing and shall execute any instruments and take any other action required or requested by FINOVA to comply with the provisions of the Federal Assignment of Claims Act; 6.13 Financial Covenants. Comply with the financial covenants set forth on the ------------------- Schedule; 6.14 Issuing of Credit Memoranda. Borrower shall issue credit memoranda in the --------------------------- ordinary course of its business no later than one (1) Business Day After; (i) Borrower's receipt of returned goods or merchandise; or (ii) any account debtor shall become entitled to a credit from Borrower under any other circumstances; and 6.15 Other Covenants. Borrower shall comply with any other covenants set forth --------------- on the Schedule. Negative Covenants: - ------------------ Without FINOVA's prior written consent, which consent FINOVA may withhold in its sole discretion, so long as any Obligation remains outstanding and this Agreement is in effect, Borrower shall not: 6.16 Mergers. Merger or consolidate with or acquire any other Person, or make ------- any other material change in its capital structure or in its business or operations which in FINOVA's sole discretion would adversely affect Borrower's ability to repay the Obligations; 6.17 Loans. Make advances, loans or extensions of credit to, or invest in, any ----- Person except in he ordinary course of Borrower's business with respect to trade credit only; 6.18 Dividends. Declare or pay cash dividends upon any of its stock or --------- distribute any of its property or redeem, retire, purchase or acquire directly or indirectly any of its stock; 6.19 Adverse Transactions. Enter into any transaction which materially and -------------------- adversely affects the Collateral or its ability to repay the Obligations in full as and when due; 6.20 Indebtedness of Others. Become directly or contingently liable for the ---------------------- Indebtedness of any Person, except by endorsement of instruments for deposit; 6.21 Repurchase. Make a sale to any customer on a bill-and-hold, guaranteed ---------- sale, sale and return, sale on approval, consignment, or any other repurchase or return basis; 6.22 Name. Use any corporate or fictitious name other than its corporate name ---- as set forth in its Articles or Certificate of Incorporation on the date hereof or as set forth on the Schedule; 6.23 Prepayment. Prepay any Indebtedness other than trade payables and other ---------- than the Obligations; 6.24 Capital Expenditure. Make or incur any Capital Expenditure if, after ------------------- giving effect thereto, the aggregate amount of all Capital Expenditures by Borrower in any fiscal year would exceed the amount set forth on the Schedule; 6.25 Indebtedness. Create, incur, assume or permit to exist any Indebtedness ------------ (including Indebtedness in connection with Capital Leases) in excess of the amount set forth on the Schedule, other than (i) the Obligations, (ii) trade payables and other contractual obligations to suppliers and customers incurred in the ordinary course of business, and (iii) other Indebtedness existing on the date of this Agreement and reflected in the Prepared Financials (except Indebtedness paid on the date of this Agreement from proceeds of the initial advances hereunder) and (iv) unsecured Indebtedness fully subordinated to the Obligations in and (iv) unsecured Indebtedness fully subordinated to the Obligations in all respects and subject to a Subordination Agreement in form and substance satisfactory to FINOVA; 6.26 Affiliate Transactions. Except as set forth below, sell, transfer, ---------------------- distribute or pay any money or property to any Affiliate, or invest in (by capital contribution or otherwise) or purchase or repurchase any stock or Indebtedness, or any property, of any Affiliate, or become liable on any guaranty of the indebtedness, dividends or other obligations of any Affiliate. Notwithstanding the foregoing, if no Event of Default has occurred, Borrower may engage in transactions with Affiliates in the ordinary course of business, in amounts and upon terms which are fully disclosed to FINOVA and which are no less favorable to Borrower than would be obtainable in a comparable arm's length transaction with a Person who is not an Affiliate; 6.27 Nature of Business. Enter into any new business or make any material change ------------------ in any of Borrower's business objectives, purposes or operations; - 10 - 6.28 FINOVA's Name. Use the name of FINOVA in connection with any of ------------- Borrower's business or activities, except in connection with internal business matters or as required in dealings with governmental agencies and financial institutions or with trade creditors of Borrower, solely for credit reference purposes; or 6.29 Margin Security. Own, purchase or acquire (or enter into any contract to --------------- purchase or acquire) any "margin security" as defined by any regulation of the Federal Reserve Board as now in effect or as the same may hereafter be in effect. 7. DEFAULT AND REMEDIES. 7.1 Event of Default. Any one or more of the following events shall constitute ---------------- an Event of Default under this Agreement: (a) Borrower fails to pay when due and payable any portion of the Obligations at stated maturity, upon acceleration or otherwise; (b) Borrower or any other Loan Party fails or neglects to perform, keep, or observe in any material respect any term, provision, condition, covenant or agreement contained in any Loan Document to which Borrower or such other Loan Party is a party; and Borrower fails to cure such default within 5 days of its occurrence. (c) Any material adverse change occurs in Borrower's business, assets, operations, prospects or condition, financial or otherwise; and Borrower fails to cure such default within 5 days of its occurrence. (d) Borrower's ability to repay any portion of the Obligations or the value or priority of FINOVA's security interest in the Collateral is materially impaired; and Borrower fails to cure such default within 5 days of its occurrence. (e) Any material portion of Borrower's assets is seized, attached, subjected to a writ or distress warrant, is levied upon or comes into the possession of any judicial officer unless such action is stayed and such attachment is dismissed within thirty (30) days; (f) 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 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; (g) Any bankruptcy or other insolvency proceeding is commenced by Borrower, or any such proceeding is commenced against Borrower and remains undischarged or unstayed for forty-five (45) days; (h) Any notice of lien, levy or assessment in an aggregate amount exceeding the amount set forth in the Schedule is filed of record with respect to any of the Collateral; and Borrower fails to cure such default within 5 days of its occurrence. (i) Any judgments are entered against Borrower in an aggregate amount exceeding the amount set forth in the Schedule; (j) Any default shall occur under any material agreement between Borrower and any third party including, without limitation, any default which would result in a right by such third party to accelerate the maturity of any Indebtedness of Borrower to such third party; and Borrower fails to cure such default within 30 days of its occurrence. (k) Any representation or warranty made or deemed to be made by Borrower, any Affiliate or any other Loan party in any Loan Document or any other statement, document or report made or delivered to FINOVA in connection therewith shall prove to have been misleading in any material respect; (l) Any Guarantor dies, becomes disabled, terminates or attempts to terminate its Guaranty or any security therefor or becomes subject to any bankruptcy or other insolvency proceeding; (m) Any Prohibited Transaction or Reportable Event shall occur with respect to a Plan which could have a material adverse effect on the financial condition of Borrower; any lien upon the assets of Borrower in connection with any Plan shall arise; Borrower or any of its ERISA Affiliates shall fail to make full payment when due of all amounts which Borrower or any of its ERISA Affiliates may be required to pay to any Plan or any Multiemployer Plan as one or more contributions thereto; Borrower or any of its ERISA Affiliates creates or permits the creation of any accumulated funding deficiency, whether or not waived; and Borrower fails to cure such default within 30 days of its occurrence. or (n) Any transfer of more than ten percent (10%) of the issued and outstanding shares of common stock or other evidence of ownership of Borrower. 7.2 Remedies. Upon the occurrence of an Event of Default, FINOVA may, at its -------- option and in its sold discretion and in addition to all of its other rights under the Loan Documents, terminate this Agreement and declare all of the Obligations to be immediately payable in full. FINOVA shall also have all of its rights and remedies under applicable law, including, without limitation, the default rights and remedies of a secured party under the Code and upon the occurrence of an Event of Default Borrower hereby consents to the appointment of a receiver by FINOVA in any action initiated by FINOVA pursuant to this Agreement and to the jurisdiction and venue set forth in Section 9.26 hereof, and Borrower waives notice and posting of a bond in connection therewith. Further, FINOVA may, at any time, take possession of the Collateral and keep it on Borrower's premises, at no cost to FINOVA, or remove any part of it to such other place(s) as FINOVA may desire, or Borrower shall, upon FINOVA's demand, at Borrower's sole cost, assemble the Collateral and make it available to FINOVA at a place reasonably convenient to FINOVA. FINOVA may sell and deliver any Collateral at public or private sales, for cash, upon credit or otherwise, at such prices and upon such terms as FINOVA deems advisable, at FINOVA's discretion, and may, if FINOVA deems it reasonable, postpone or adjourn any sale of the Collateral by an announcement at the time and place of sale or of such postponed or adjourned sale without giving a new notice of sale. Borrower agrees that FINOVA has no obligation to preserve rights to the Collateral or marshall any Collateral for the benefit of any Person, at any time, including at all times prior to the occurrence of an Event of Default. Upon the occurrence and confirmation of an Event of Default, FINOVA is hereby granted a non-exclusive license or other right to use, without charge, Borrower's labels, patents, copyrights, name, trade secrets, trade names, trademarks and advertising matter, or any similar property, in completing production, advertising or selling any Collateral and Borrower's rights under all licenses and all franchise agreements shall inure to FINOVA's benefit. Any requirement of reasonable notice shall be met if such notice is mailed postage prepaid to Borrower at its address set forth in the heading to this Agreement at least five (5) days before sale or other disposition. The proceeds of sale shall be applied, first, to all attorneys fees and other expenses of sale, and second, to the Obligations in such order as FINOVA shall elect, in its sole discretion. FINOVA shall return any excess to Borrower and Borrower shall -11- remain liable for any deficiency to the fullest extent permitted by law. Upon Event of Default only, FINOVA, in its sole discretion, may at any time have the right to reduce the Total Facility amount, the Revolving Loans Borrowing Base, the Floorplan Loans Borrowing Base, or any portion of either borrowing base, or the advance rates or to modify the terms and conditions upon which FINOVA is willing to consider making advances under the Total Facility or to take additional reserves in the Revolving Loans Borrowing Base or the Floorplan Loans Borrowing Base for any reason. 7.3 Standards for Determining Commercial Reasonableness. Borrower and FINOVA --------------------------------------------------- agree that the following conduct by FINOVA with respect to any disposition of Collateral shall conclusively be deemed commercially reasonable (but other conduct by FINOVA, including, but not limited to, FINOVA'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 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 once in a newspaper of general circulation in the county where the sale is to be conducted. The public disposition shall be at any place designated by FINOVA, with or without the Collateral being present, and which commences at any time between 8:00 a.m. and 5:00 p.m. (provided that no notice of any public or private disposition need be given to the Borrower if the Collateral is perishable or threatens to decline speedily in value or is of a type customarily sold on a recognized market). Without limiting the generality of the foregoing, Borrower expressly agrees that, with respect to any disposition of accounts, instruments and general intangibles, it shall be commercially reasonable for FINOVA to direct any prospective purchaser thereof to ascertain directly from Borrower any and all information concerning the same, including, but not limited to, the terms of payment, aging and delinquency, if any, the financial condition of any obligor or account debtor thereon or guarantor thereof, and any collateral therefor. 8. EXPENSES AND INDEMNITIES. 8.1 Expenses. Borrower agrees to promptly reimburse FINOVA for all costs, fees -------- and expenses incurred by FINOVA in connection with the negotiation, preparation, execution, delivery, administration and enforcement of each of the Loan Documents, including, but not limited to, the attorneys' and paralegals' fees of in-house and outside counsel, expert witness fees, lien, title search and insurance fees, appraisal fees, all charges and expenses incurred in connection with any and all environmental reports and environmental remediation activities, and all other costs, expenses, taxes and filing or recording fees payable in connection with the transactions contemplated by this Agreement, including without limitation all such costs, fees and expenses as FINOVA shall incur or for which FINOVA shall become obligated in connection with (i) any inspection or verification of the Collateral, (ii) any proceeding relating to the Loan Documents or the Collateral, (iii) actions taken with respect to the Collateral and FINOVA's security interest therein, including, without limitation, the defense or prosecution of any action involving FINOVA and Borrower or any third party, (iv) enforcement of any of FINOVA's rights and remedies with respect to the Obligations or Collateral, and (v) consultation with FINOVA's attorneys and participation in any workout, bankruptcy or other insolvency or other proceeding involving any Loan Party or any Affiliate, whether or not suit is filed. Borrower shall also pay all FINOVA charges in connection with bank wire transfers, forwarding of loan proceeds, deposits of checks and other items of payment, returned checks, establishment and maintenance of lockboxes and other Blocked Accounts, and all other bank and administrative matters, in accordance with FINOVA's schedule of bank and administrative fees and charges in effect from time to time. 8.2 Environmental Matters. --------------------- (1) Definitions. The following definitions apply to the provisions of this ----------- Section 8.2: (a) the term "Applicable Law" shall include, but shall not be limited to, each statute named or referred to in this Section 8.2(1) and all rules and regulations thereunder, and any other local, state and/or federal laws, rules, regulations or ordinances, whether currently in existence or hereafter enacted, which govern, to the extent applicable to the Property or to Borrower, (i) the existence, cleanup and/or remedy of contamination on real property; (ii) the protection of the environment from soil, air or water pollution, or from spilled, deposited or otherwise emplaced contamination; (iii) the emission or discharge of hazardous substances into the environment; (iv) the control of hazardous wastes; or (v) the use, generation, transport, treatment, removal or recovery of Hazardous Substances; and (b) The term "Hazardous Substance" shall mean (i) any oil, flammable substance, explosives, radioactive materials, hazardous wastes or substances, toxic wastes or substances or any other wastes, materials or pollutants which either pose a hazard to the Property or to persons on or about the Property or cause the Property to be in violation of any Applicable Law; (ii) asbestos in any form which is or could become friable, urea formaldehyde foam insulation, transformers or other equipment which contain dielectric fluid containing levels of polychlorinated biphenyls, or radon gas; (iii) any chemical, material or substance defined as or included in the definition of "hazardous substances," "waste," "hazardous wastes," "hazardous materials," "extremely hazardous waste," "hazardous wastes," "Hazardous materials," "extremely hazardous waste," "restricted hazardous waste," or "toxic substances" or words of similar import under any Applicable Law, including, but not limited to, the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), 42 USC (S)(S)9601 et seq.; the Resource Conservation and Recovery Act ("RCRA"), 42 -- --- USC(S)(S) 6901 et seq.; the Hazardous Materials Transportation Act, 49 USC -- --- (S)(S)1801 et seq.; the Federal Water Pollution Control Act, 33 USC (S)(S)1251 et seq.; (iv) any other chemical, material or substance, exposure to which is - -- --- prohibited, limited or regulated by any governmental authority which may or could pose a hazard to the health or safety of the occupants of the Property or the owners and/or occupants of property adjacent to or surrounding the Property, or any other person coming upon the Property or adjacent property; and (v) any other chemical, materials or substance which may or could pose a hazard to the environment; and (c) the term "Property" shall mean all real property, wherever located, in which Borrower or any subsidiary of Borrower or any Affiliate of Borrower has any right, title or interest, whether now existing or hereafter arising, and including, without limitation, as owner, lessor or lessee. (2) Covenants and Representations. ----------------------------- (a) Borrower represents, and warrants that there have not been during the period of Borrower's possession of any interest in the Property and, to the best of its knowledge after reasonable inquiry, there have not been at any other times, any activities on the Property involving, directly or indirectly, the use, generation, treatment, storage or disposal of any Hazardous Substances except in compliance with Applicable Law (i) under, on or in the land included in the Property, whether contained in soil, tanks, sumps, ponds, lagoons, barrels, cans or other -12- containments, structures or equipment, (ii) incorporated in the buildings, structures or improvements included in the Property, including any building material containing asbestos, or (iii) used in connection with any operations on or in the Property. (b) Without limiting the generality of the foregoing and to the extent not included within the scope of this Section 8.2(2), Borrower represents and warrants that it is in full compliance with Applicable Law and has received no notice from any person or any governmental agency or other entity of any violation by Borrower or its Affiliates of any Applicable Law. (c) Borrower shall be solely responsible for and agrees to indemnify FINOVA, protect and defend FINOVA with counsel reasonably acceptable to FINOVA, and hold FINOVA harmless from and against any claims, actions, administrative proceedings, judgments, damages, punitive damages, penalties, fines, costs, liabilities (including sums paid in settlement of claims), interest or losses, attorneys' fees (including any fees and expenses incurred in enforcing this indemnity), consultant fees, expert fees, and other out-of-pocket costs or expenses actually incurred by FINOVA (collectively, the "Environmental Costs"), that may, at any time or from time to time, arise directly or indirectly from or in connection with: (i) the presence, suspected presence, release or suspected release of any Hazardous Substance whether into the air, soil, surface water or groundwater of or at the Property, or any other violation of Applicable Law, or (ii) any breach of the representations and covenants set forth in paragraph 8.2(a); except to the extent any of the foregoing result from the actions of FINOVA, its employees, agents and representatives. All Environmental Costs incurred or advanced by FINOVA shall be deemed to be made by FINOVA in good faith and shall constitute Obligations hereunder. 9. MISCELLANEOUS. 9.1 Examination of Records; Financial Reporting. ------------------------------------------- (a) Examinations. FINOVA shall at all reasonable times have full access to and ------------ the right to examine, audit, make abstracts and copies from and inspect Borrower's records, files, books of account and all other documents, instruments and agreements relating to the Collateral and the right to check, test and appraise the Collateral. Borrower shall deliver to FINOVA any instrument necessary for FINOVA to obtain records from any service bureau maintaining records for Borrower. All instruments and certificates prepared by Borrower showing the value of any of the Collateral shall be accompanied, upon FINOVA's request, by copies of related purchase orders and invoices. FINOVA may, at any time after the occurrence of an Event of Default, remove from Borrower's premises Borrower's books and records (or copies thereof) or require Borrower to deliver such books and records or copies to FINOVA. If originals are removed, FINOVA shall permit Borrower to make copies prior to such removal. FINOVA may, without expense to FINOVA, use Borrower's personnel, supplies and premises as may be reasonable necessary for examining the Collateral or for maintaining or enforcing FINOVA's security interest. FINOVA shall use its best efforts not to disrupt Borrower's business operations during any examination, as long as no Event of Default exists or has occurred since the previous examination. (b) Reporting Requirements. Borrower shall furnish FINOVA, upon request, such ---------------------- information and statements as FINOVA shall reasonably request from time to time regarding Borrower's business affairs, financial condition and the results of its operations. Without limiting the generality of the foregoing. Borrower shall provide FINOVA with (i) copies of sales journals, cash receipts journals, deposit slips and FINOVA's standard form collateral and loan report, daily; (ii) upon FINOVA's request, copies of sales invoices, customer statements and credit memoranda issued, remittance advises and reports; (iii) copies of shipping and delivery documents, upon request; (iv) on or prior to the date set forth on the Schedule, monthly agings and reconciliations of Receivables, payables reports, inventory reports and unaudited financial statements (certified by an officer of Borrower acceptable to FINOVA) with respect to the prior month prepared on a basis consistent with such statements prepared in prior months and otherwise in accordance with generally accepted accounting principles, consistently applied; (v) audited annual consolidated and consolidating financial statements, prepared in accordance with generally accepted accounting principles applied on a basis consistent with the most recent Prepared Financials provided to FINOVA by Borrower, including balance sheets, income and cash flow statements, accompanied by the unqualified report thereon of independent certified public accountants acceptable to FINOVA, as soon as available, and in any event, within one hundred and twenty (120) days after the end of each of Borrower's fiscal years; (vi) such certificates relating to the foregoing as FINOVA may request, including, without limitation, a monthly certificate from the president and the chief financial officer of Borrower showing Borrower's compliance with each of the financial covenants set forth in this Agreement, and stating whether any Event of Default has occurred or event which, with giving of notice or the passage of time, or both, would constitute an Event of Default, and if so, the steps being taken to prevent or cure such Event of Default; and (vii) such other reports specified in the Schedule. (c) Confidentiality. All confidential information provided by Borrower or by --------------- any Loan party to FINOVA shall be kept confidential and shall only be used by FINOVA and/or its counsel in connection herewith. 9.2 Term; Termination. ----------------- (a) Term. The initial term of this Agreement shall be as set forth on the ---- Schedule (the "Initial Term") and may be automatically renewed by FINOVA in its sole discretion for successive periods of one (1) year (each, a "Renewal term"), unless earlier terminated as provided herein. (b) Prior Notice. Each party shall have the right to terminate this Agreement ------------ at the end of the Initial term or at the end of any Renewal Term by giving the other party written notice not less than sixty (60) days prior to the effective date of such termination, by registered or certified mail, or by recognized overnight delivery service; provided, however, that FINOVA may terminate the --------- -------- Floorplan Credit Line at any time, with or without notice to Borrower, as set forth in Section 2.4 hereof. (c) Payment in Full. Upon the effective date of termination, the Obligations --------------- shall become immediately due and payable in full in cash. (d) Early Termination; Termination Fee. In addition to the procedure set forth ---------------------------------- in Section 9.2(b), Borrower may terminate this Agreement at any time but only upon ninety (90) days' prior written notice and prepayment of the Obligations. Upon any such early termination by Borrower or any termination of this Agreement by FINOVA upon the occurrence of an Event of Default, then, and in any such event, Borrower shall pay to FINOVA upon the effective date of such termination a fee (the "Termination Fee") in an amount equal to the amount shown on the Schedule. 9.3 Recourse to Security; Certain Waivers. All Obligations shall be payable by ------------------------------------- Borrower as provided for herein and, in full, at the termination of this Agreement; recourse to security shall not be required at any time. Borrower waives presentment and protest of any instrument and notice thereof, notice of default and, to the extent -13- permitted by applicable law, all other notices to which Borrower might otherwise be entitled. 9.4 No Waiver by FINOVA. Neither FINOVA's failure to exercise any right, ------------------- remedy or option under this Agreement, any supplement, the Loan Documents or other agreement between FINOVA and Borrower nor any delay by FINOVA in exercising the same shall operate as a waiver. No waiver by FINOVA shall be effective unless in writing and then only to the extent stated. No waiver by FINOVA shall affect its right to require strict performance of this Agreement. FINOVA's rights and remedies shall be cumulative and not exclusive. 9.5 Binding on Successor and Assigns. All terms, conditions, promises, -------------------------------- covenants, provisions and warranties shall inure to the benefit of and bind FINOVA's and Borrower's respective representatives, successors and assigns. 9.6 Severability. If any provision of this Agreement shall be prohibited or ------------ invalid under applicable law, it shall be ineffective only to such extent, without invalidating the remainder of this Agreement. 9.7 Amendments; Assignments. This Agreement may not be modified, altered or ----------------------- amended, except by an agreement in writing signed by Borrower and FINOVA. Borrower may not sell, assign or transfer any interest in this Agreement or any other Loan Document, or any portion thereof, including, without limitation, any of Borrower's rights, title, interests, remedies, powers and duties hereunder or thereunder. Borrower hereby consents to FINOVA's participation, sale, assignment, transfer or other disposition, at any time or times hereafter, of this Agreement and any of the other Loan Documents, or of any portion hereof or thereof, including, without limitation, FINOVA's rights, title, interests, remedies, powers and duties hereunder or thereunder. In connection therewith, FINOVA may disclose all documents and information which FINOVA now or hereafter may have relating to Borrower or Borrower's business. To the extent that FINOVA assigns its rights and obligations hereunder to a third party, FINOVA shall thereafter be released from such assigned obligations to Borrower and such assignment shall effect a novation between Borrower and such third party. 9.8 Integration. This Agreement, together with the Schedule (which is a part ----------- hereof) and the other Loan Documents, reflect the entire understanding of the parties with respect to the transactions contemplated hereby. 9.9 Survival. All of the representations and warranties of Borrower contained in -------- this Agreement shall survive the execution, delivery and acceptance of this Agreement by the parties. No termination of this Agreement or of any guaranty of the Obligations shall affect or impair the powers, obligations, duties, rights, representations, warranties or liabilities of the parties hereto and all shall survive any such termination. 9.10 Evidence of Obligations. Each Obligation may, in FINOVA's discretion, be ----------------------- evidenced by notes or other instruments issued or made by Borrower to FINOVA. If not so evidenced, such Obligation shall be evidenced solely by entries upon FINOVA's books and records. 9.11 Loan Requests. Each oral or written request for a loan by any Person who ------------- purports to be any employee, officer or authorized agent of Borrower shall be made to FINOVA on or prior to 11:00 a.m., Pennsylvania time, on the Business Day on which the proceeds thereof are requested to be paid to Borrower and shall be conclusively presumed to be made by a Person authorized by Borrower to do so and the crediting of a loan to Borrower's operating account shall conclusively establish Borrower's obligation repay such loan. Unless and until Borrower otherwise directs FINOVA in writing, all loans shall be wired to Borrower's operating account set forth on the Schedule. 9.12 Notices. Any notice required hereunder shall be in writing and addressed to ------- the Borrower and FINOVA at their addresses set forth at the beginning of this Agreement and in the Schedule. Notices hereunder shall be deemed received on the earlier of receipt, whether by delivery by a reputable overnight delivery service, personal delivery, or facsimile. 9.13 Brokerage Fees. Borrower represents and warrants to FINOVA that, with -------------- respect to the financing transaction herein contemplated, no Person is entitled to any brokerage fee or other commission and Borrower agrees to indemnify and hold FINOVA harmless against any and all such claims. 9.14 Disclosure. No representation or warranty made by Borrower in this ---------- Agreement, or in any financial statement, report, certificate or any other document furnished in connection herewith contains any untrue statement of a material fact or omits to state any material fact necessary to make the statements herein or therein not misleading. There is no fact known to Borrower or which reasonably should be known to Borrower which Borrower has not disclosed to FINOVA in writing with respect to the transactions contemplated by this Agreement which materially and adversely affects the business, assets, operations, prospects or condition (financial or otherwise), of Borrower. 9.15 Publicity. FINOVA is hereby authorized to issue appropriate press releases --------- and to cause a tombstone to be published announcing the consummation of this transaction and the aggregate amount thereof. 9.16 Captions. The Section titles contained in this Agreement are without -------- substantive meaning and are not part of this Agreement. 9.17 Injunctive Relief. Borrower recognizes that, in the event Borrower fails to ----------------- perform, observe or discharge any of its Obligations under this Agreement, any remedy at law may prove to be inadequate relief to FINOVA. Therefore, FINOVA, if it so requests, shall be entitled to temporary and permanent injunctive relief in any such case without the necessity of proving actual damages. 9.18 Counterparts. This Agreement may be executed in one or more counterparts, ------------ each of which taken together shall constitute one and the same instrument. 9.19 Construction. The parties acknowledge that each party and its counsel have ------------ reviewed this Agreement and that the normal rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall not be employed in the interpretation of this Agreement or any amendments or exhibits hereto. 9.20 Time of Essence. Time is of the essence for the performance by Borrower of --------------- the Obligations set forth in this Agreement. 9.21 Limitation of Actions. Borrower agrees that any claim or cause of action by --------------------- Borrower against FINOVA, or any of FINOVA's directors, officers, employees, agents, accountants or attorneys, based upon, arising from, or relating to this 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, whether or not relating hereto or thereto, occurred, done, omitted or suffered to be done by FINOVA, or by FINOVA's directors, officers, employees, agents, accountants or attorneys, whether sounding in contract or in tort or otherwise, shall be barred unless asserted by - 14 - Borrower by the commencement of an action of proceeding in a court of competent jurisdiction by the filing of a complaint within one year after the first act, occurrence or omission upon which such claim or cause of action, or any part thereof, is based and service of a summons and complaint on an officer of FINOVA or any other person authorized to accept service of process on behalf of FINOVA, within 30 days thereafter. Borrower agrees that such one-year period of time is a reasonable and sufficient time for Borrower to investigate and act upon any such claim or cause of action. The one-year period provided herein shall not be waived, tolled, or extended except by a specific written agreement of FINOVA. This provision shall survive any termination of this Loan Agreement or any other agreement. 9.22 Liability. Neither FINOVA nor any FINOVA Affiliate shall be liable for any --------- indirect, special, incidental or consequential damages in connection with any breach of contract, tort or other wrong relating to this Agreement or the Obligations or the establishment, administration or collection thereof (including without limitation damages for loss of profits, business interruption, or the like) whether such damages are foreseeable or unforeseeable, even if FINOVA has been advised of the possibility of such damages. Neither FINOVA, nor any FINOVA Affiliate shall be liable for any claims, demands, losses or damages, of any kind whatsoever, made, claimed, incurred or suffered by the Borrower through the ordinary negligence of FINOVA, or any FINOVA Affiliate. "FINOVA Affiliate" shall mean FINOVA's directors, officers, employees, agents, attorneys or other person or entity affiliated with or representing FINOVA. 9.23 Notice of Breach by FINOVA. Borrower agrees to give FINOVA written notice -------------------------- of (i) any action or inaction by FINOVA or any attorney of FINOVA in connection with any Loan Documents that may be actionable against FINOVA or any attorney of FINOVA or (ii) any defense to the payment of the Obligations for any reason, including, but not limited to, commission of a tort or violation of any contractual duty or duty implied by law. Borrower agrees that unless such notice is fully given as promptly as possible (and in any event within thirty (30) days) after Borrower has knowledge, or with the exercise of reasonable diligence should have had knowledge, of any such action, inaction or defense, Borrower shall not assert, and Borrower shall be deemed to have waived, any claim or defense arising therefrom. 9.24 Withholding and Other Tax Liabilities: FINOVA shall have the right to ------------------------------------- refuse to make any advances from time to me unless Borrower shall, at FINOVA's request, have given to FINOVA evidence, reasonably satisfactory to FINOVA, that Borrower has properly deposited or paid, as required by law, all withholding taxes and all federal, state, city, county or other taxes due up to and including the date of the advance. Until all of Borrower's liabilities and obligations to FINOVA have been paid in full (and notwithstanding any termination or expiration of this Agreement), FINOVA shall be entitled to continue to hold any and all of the Collateral until Borrower has given to FINOVA evidence, reasonably satisfactory to FINOVA, that Borrower has properly deposited or paid, as required by law, all federal withholding taxes due up to and including the date of such expiration or termination. Copies of validated deposit slips showing payment shall likewise constitute satisfactory evidence for such purpose. In the event that any lien, assessment or tax liability against Borrower shall arise in favor of any taxing authority, whether or not notice thereof shall be filed or recorded as may be required by law, FINOVA shall have the right (but shall not be obligated, nor shall FINOVA hereby assume the duty), upon reasonable prior notice to Borrower to pay any such lien, assessment or tax liability by virtue of which such charge shall have arisen, provided however, that FINOVA shall not pay any such tax, assessment or lien if - ---------------- the amount, applicability or validity thereof is being contested in good faith and by appropriate proceedings by Borrower and further provided that Borrower's title to and its right to use, the Collateral are not materially adversely affected and FINOVA's lien and priority in the Collateral are not affected, altered or impaired thereby. In order to pay any such lien, assessment or tax liability, FINOVA shall not be obliged to wait until said lien, assessment or tax liability is filed before taking such action permitted hereby. Any sum or sums which FINOVA shall have paid for the discharge of any such lien shall constitute an Obligation and shall be added to the Revolving Loans and shall be paid by Borrower to FINOVA with interest thereon, upon demand, and FINOVA shall be subrogated to all rights of such taxing authority against Borrower. FINOVA may establish reserves against the Revolving Loans Borrowing Base for any amounts paid by FINOVA pursuant to this paragraph or for any amounts being contested in good faith under this paragraph. 9.25 Power of Attorney. Borrower appoints FINOVA and its designees as Borrower's ----------------- attorney, with the power to endorse Borrower's name on any checks, notes, acceptances, money orders or other forms of payment or security that come into FINOVA's possession; after the occurrence of any Event of Default, to sign Borrower's name on any invoice or bill of lading relating to any Receivable, on drafts against customers, on assignments of Receivables, on notices of assignment, financing statements and other public records, on verifications of accounts and on notices to customers or account debtors; to send requests for verification of Receivables to customers or account debtors; after the occurrence of any Event of Default, to notify the post office authorities to change the address for delivery of Borrower's mail to an address designated by FINOVA and to open and dispose of all mail addressed to Borrower; and to do all other things FINOVA deems necessary or desirable to carry out the terms of this Agreement. Borrower hereby ratifies and approves all acts of such attorney. Neither FINOVA nor any of its designees shall be liable for any acts or omissions nor for any error of judgment or mistake of fact or law while acting as Borrower's attorney. This power, being coupled with an interest, is irrevocable until the Obligations have been fully satisfied and FINOVA's obligation to provide loans hereunder shall have terminated. 9.26 GOVERNING LAW; WAIVERS. THIS AGREEMENT SHALL BE INTERPRETED IN ACCORDANCE ---------------------- WITH THE INTERNAL LAWS (AND NOT THE CONFLICT OF LAWS RULES) OF THE STATE OF ARIZONA GOVERNING CONTRACTS TO BE PERFORMED ENTIRELY WITHIN SUCH STATE. BORROWER HEREBY CONSENTS TO THE EXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED WITHIN THE COUNTY OF MARICOPA, THE STATE OF ARIZONA OR, AT THE SOLE OPTION OF FINOVA, IN ANY OTHER COURT IN WHICH FINOVA SHALL INITIATE LEGAL OR EQUITABLE PROCEEDINGS AND WHICH HAS SUBJECT MATTER JURISDICTION OVER THE MATTER IN CONTROVERSY. BORROWER WAIVES ANY OBJECTION OF FORUM NON CONVENIENS AND VENUE. BORROWER WAIVES PERSONAL SERVICE OF ANY AND ALL PROCESS UPON IT, AND CONSENTS THAT ALL SUCH SERVICE OF PROCESS BE MADE IN THE MANNER SET FORTH IN SECTION 9.12 HEREOF FOR THE GIVING OF NOTICE. BORROWER FURTHER WAIVES ANY RIGHT IT MAY OTHERWISE HAVE TO COLLATERALLY ATTACK ANY JUDGMENT ENTERED AGAINST IT IN ANY JURISDICTION OTHER THAN MARICOPA COUNTY. 9.27 MUTUAL WAIVER OF RIGHT TO JURY TRIAL. FINOVA AND BORROWER EACH HEREBY ------------------------------------ WAIVES THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT OF, OR IN ANY - 15 - WAY RELATING TO: (i) THIS AGREEMENT; (ii) ANY OTHER PRESENT OR FUTURE INSTRUMENT OR AGREEMENT BETWEEN FINOVA AND BORROWER; OR (iii) ANY CONDUCT, ACTS OR OMISSIONS OF FINOVA OR BORROWER OR ANY OF THEIR DIRECTORS, OFFICERS, EMPLOYEES, AGENTS, ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH FINOVA OR BORROWER; IN EACH OF THE FOREGOING CASES, WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE. BORROWER: CUMETRIX DATA SYSTEMS CORP. Tax I.D. No. 95-4574138 ---------- By: /s/ James Ung -------------------- James Ung, President State of __________ County of _________ The Foregoing instrument was acknowledged before me this 29th day of September, 1998 by Carl Wood of CUMETRIX a corporation duly organized under the State of California on behalf of the corporation. /s/ Carl H. Wood -------------------------------- Carl H. Wood Title or rank: CFO ------------------ Serial number, if any ---------- FINOVA CAPITAL CORPORATION By: [ILLEGIBLE]^^^^^ ----------------- Title: Vice President -16- EX-10.2 3 SCHEDULE TO LOAN AND SECURITY AGREEMENT EXHIBIT 10.2 [LOGO OF FINOVA] Schedule to Loan and Security Agreement Borrower: Cumetrix Data Systems Corp. Address: 957 Lawson Street City of Industry, California 91748 Date: 10/22/98 -------- This Schedule forms an integral part of the Loan and Security Agreement between the above Borrower and FINOVA Capital Corporation dated the above date, and all references herein and therein to "this Agreement" shall be deemed to refer to said Agreement and to this Schedule. TOTAL FACILITY (Section 2.1): Twenty-Five Million Dollars ($25,000,000) (the "Total Facility") LOANS (Section 2.2): A. Revolving Loans: a revolving line of credit ("Revolving Credit Line") --------------- consisting of loans against Borrower's Eligible Receivables and Eligible Inventory ("Revolving Loans") in an aggregate outstanding principal amount (the "Revolving Loans Borrowing Base") not to exceed the lesser of: (a) Five Million Dollars ($5,000,000) (the "Maximum Revolving Facility Amount"); or (b) an amount equal to the sum of: (i) eighty-five percent (85%) of the net amount of Eligible Receivables due from an account debtor other than FINOVA; and (ii) one hundred percent (100%) of the net amount of Eligible Receivables due from FINOVA pursuant to a floor plan financing arrangement with Borrower's customer. B. Floorplan Loans: a floorplan line of credit consisting of loans against --------------- Borrower's Floorplanned Inventory ("Floorplan Loans") in an aggregate principal amount not to exceed at any time Twenty Million Dollars ($20,000,000) less the amount of any outstanding approvals given by FINOVA to any manufacturer of Floorplanned Inventory. No individual Floorplan Loan shall exceed 100% of the manufacturer's invoice price for Eligible Inventory ("Floorplan Loans Borrowing Base"). In no event may the sum of the Revolving Loans and Floorplan Loans exceed the Total Facility. CONDITIONS PRECEDENT (SECTION 4): The obligation of FINOVA to make the initial advance hereunder is subject to the fulfillment, to the satisfaction of FINOVA and its counsel, of the following conditions, in addition to the conditions set forth in Sections 2.1 and 2.2 above: (i) There shall have been no material adverse change in the business, operations,profits or prospects of Borrower, or in the condition of the assets of Borrower, between April 30, 1998 and the date hereof. (ii) Receipt by FINOVA of the monthly unaudited financial statement for the month ending June 30, 1998. (iii) Receipt by FINOVA of the SEC Form 10-Q for the quarter ending June 30, 1998. (iv) Receipt by FINOVA of the Year 2000 Compliant Questionnaire. INTEREST AND FEES (SECTION 2.6): Revolving Credit Line Interest Rate: Borrower shall pay FINOVA interest ----------------------------------- on the daily outstanding balance of all Revolving Loans at a per annum rate equal to the "Base Rate". The Base Rate shall equal the rate of interest published in the "Money Rates" section of The Wall Street Journal as the "Prime Rate". ----------------------- In the event that the Borrower's total debt to tangible capital funds (Section 6.13 of Schedule) exceeds 3.0:1.0 at any quarter-end, the rate chargeable hereunder will be increased to the Base Rate plus one-half of one percentage point (0.5%). Floorplan Credit Line Interest. Interest free, if paid within the free ------------------------------ period (60 days) extended by FINOVA. Interest on any amount past due under the Floorplan Credit Line pursuant to Section 2.7 hereof shall accrue from the due date or any extended due date at a per annum rate of six percentage points (6.0%) in excess of the Base Rate. In all applications, the interest rate chargeable hereunder shall be increased or decreased, as the case may be, without notice or demand of any kind, upon the announcement of any change in the Base Rate. Each change in the Base Rate shall be effective immediately. In all applications unless specified otherwise, interest charges and all other fees and charges herein shall be computed on the basis of a year of 360 days and actual days elapsed and shall be payable to FINOVA in arrears on the first day of each month. Facility Fee. NONE ------------ Transaction Fee. NONE --------------- Application Fee. None --------------- Examination Fees. None, as long as no Event of Default shall have ---------------- occurred. After an Event of Default has occurred, Borrower agrees to pay FINOVA an examination fee in the amount of Five Hundred Dollars ($500) per person per day plus out-of-pocket expenses in connection with each audit or examination of Borrower performed by FINOVA. INSURANCE (Section 3.4): Borrower agrees to maintain insurance in an amount sufficient to fully cover the cost of all Inventory at all time which amount shall initially be Five Million Dollars ($5,000,000). In the event that the amount of Inventory exceeds such amount, FINOVA may require at any time that Borrower provide to FINOVA evidence of insurance covering all inventory. 2 REPORTING REQUIREMENTS (SECTION 9.1): 1. Borrower shall provide FINOVA with collateral and loan reports when Revolving Loan advances are requested, and at least as of month-end. In the event that the lockbox is implemented, a Collateral and Loan Report shall be submitted when revolving loan advances are requested, and at least on a weekly basis, and as of month-end. 2. Borrower shall provide FINOVA with monthly agings aged by invoice date and reconciliations of Receivables within ten (10) days after the end of each month. 3. Borrower shall provide FINOVA with monthly accounts payable agings aged by invoice date, outstanding or held check registers and inventory certificates within ten (10) days after the end of each month. 4. Borrower shall provide FINOVA with monthly perpetual inventory reports for the Inventory (segregating Floorplanned Inventory from Eligible Inventory and from Ineligible Inventory) valued on a first-in, first-out basis at the lower of cost or market (in accordance with generally accepted accounting principles) or such other inventory reports as are reasonably requested by FINOVA, all weekly reports by Tuesday of each week with respect to reports for the immediately preceding week. Monthly reports shall be aged and provided to FINOVA within ten days after the end of each month. Without limiting the generality of the foregoing, each separate inventory report as to Floorplanned Inventory shall also set forth the applicable Valid Price Protection and RMA Credit amounts. Inventory reports will be sorted by location and further sub-totaled by product line. 5. Borrower shall provide FINOVA with monthly unaudited financial statements within forty-five (45) days after the end of each month. 6. Borrower shall provide FINOVA with quarterly unaudited financial statements within forty-five (45) days after the end of each quarter. In addition, Borrower shall provide FINOVA with its SEC Form 10-Q within forty-five (45) days after the end of each quarter. 7. Borrower shall provide FINOVA with audited consolidated and consolidating fiscal financial statements within ninety (90) days after the end of each fiscal year, as more specifically described in Section 9.1 hereof, and with an opinion issued by a Certified Public Accountant which is acceptable to FINOVA. In addition, Borrower shall provide FINOVA with its SEC-Form 10-K within ninety (90) days after the end of each fiscal year. 8. Borrower shall provide FINOVA with annual operating budgets (including income statements, balance sheets and cash flow statements, by month) for the upcoming fiscal year of Borrower within ninety (90) days after the end of each fiscal year of Borrower. Credit Memoranda (Section 3.5): $50,000 Business Days for Clearance (Section 2.11): 2 days Inventory Returns (Section 3.6): $25,000 Events of Default-liens (Section 7.1(h)): $20.000 Events of Default-Judgments (7.1): $100,000 3 BORROWER INFORMATION: Borrower's State of Incorporation (Section 5.1): California Fictitious Names/Prior Corporate Names (Section 5.2): Data Net International, Inc. Cumetrix Computer Systems, Inc. Borrower Location(s) (Section 5.16): 957 Lawson Street, City of Industry CA 91748 Permitted Encumbrances (Section 1.1): Sunston Equipment Inc.
FINANCIAL COVENANTS (Section 6.13): Borrower shall comply with all of the following covenants. Compliance shall be determined as of the end of each quarter, except as otherwise specifically provided below: Working Borrower shall maintain Working Capital of not less than: - ------- Capital $5,000,000 at the Closing Date and at all times thereafter. - ------- ---------- Tangible - -------- Capital Funds. Borrower shall maintain Tangible Capital Funds of not less than; - ------------- $6,500,000 at the Closing Date and at all times thereafter. ---------- Debt to Tangible - ---------------- Capital Funds. Borrower shall maintain a ratio of Indebtedness to Tangible Capital Funds of not greater - ------------- than: 4.0x to 1.0x At the Closing Date and at all times thereafter ------------
All capitalized terms used in the financial covenants section of the Agreement not otherwise defined herein shall have the meaning ascribed to such term under the generally accepted accounting principles, as of the Closing Date, and shall be calculated on a basis consistent therewith. NEGATIVE COVENANTS (Section 6): Capital Expenditures: $500,000 beginning with 1999 fiscal year. - -------------------- Indebtedness: $500,000 - ------------ Year 2000 Compliance: Borrower must implement its new accounting system (Navision) by 12/31/98. This system - -------------------- must be Year 2000 compliant.
TERM (Section 9.2): The initial term of this Agreement shall be Two (2) year(s) from the date hereof (the "Initial Term"), unless earlier terminated as provided in Section 9 or 7.2 above or elsewhere in this Agreement. 4 TERMINATION FEE (Section 9.2): (a) 2% of the $5,000,000 Revolving Credit Facility if terminated in the first year, And (b) 1% of the $5,000,000 Revolving Credit Facility if terminated during the second year. DEFINITIONS (Section 1.1): - ------------------------- "Eligible Inventory" means Inventory which FINOVA, in its sole judgment, deems ------------------ Eligible Inventory, based on such considerations as FINOVA may from time to time deem appropriate. Without limiting the generality of the foregoing, no Inventory shall be Eligible Inventory unless, in FINOVA's sole judgment, such Inventory (i) consists of finished goods, in good, new and salable condition which are not obsolete or unmerchantable, and unless otherwise provided for in the Schedule are not comprised of raw materials, parts, work in process, packaging, materials or supplies; (ii) meets all standards imposed by any governmental agency or authority; (iii) conforms in all respects to the warranties and representations set forth herein; (iv) is at all times subject to FINOVA's duly perfected, first priority security interest; (v) meets all criteria under FINOVA's agreement with the manufacturer of such Inventory; (vi) is not Floorplanned Inventory and (vii) is situated at a location in compliance with Section 5.16 hereof. "Eligible Receivables" means Receivables arising in the ordinary course of -------------------- Borrower's business from the sale of goods or rendition of services which FINOVA, in its sole judgment, shall deem eligible based on such considerations as FINOVA may from time to time deem appropriate. Without limiting the foregoing, a Receivable shall not be deemed to be an Eligible Receivable if (i) the account debtor has failed to pay the Receivable within a period of ninety (90) days after invoice date or, with respect to any Receivable where the account debtor is the United States or any department, agency or instrumentality thereof, ninety (90) days after invoice date, to the extent of any amount remaining unpaid after such period, or, if the Receivable is payable C.O.D., the Receivable has not been paid within ninety (90) days after the date the goods were shipped; (ii) the account debtor has failed to pay more than the Cross-age percentage specified below of all outstanding Receivables owed to it by Borrower within ninety (90) days after invoice date; (iii) the account debtor is an Affiliate of Borrower; (iv) the goods relating thereto are placed on consignment, guaranteed sale or other terms pursuant to which payment by the account debtor may be conditional; (v) the account debtor is not located in the United States or Canada, unless the Receivable is supported by a letter of credit or other form of guaranty or security, in each case in form and substance satisfactory to FINOVA; (iv) the account debtor is the United States or any department, agency or instrumentality thereof, which has not acknowledged the assignment of the contract Receivable to FINOVA in accordance with the Federal Assignment of Claims Acts (open account Receivables due from the United States or any department, agency or instrumentality thereof may be excluded from this provision in FINOVA's sole discretion); (vii) Borrower is or may become liable to the account debtor for goods sold or services rendered by the account debtor to Borrower; (viii) the account debtor's total obligations to Borrower exceed the Concentration limit specified below of all Eligible Receivables, (ix) the account debtor disputes liability or makes any claim with respect thereto (up to the amount of such liability or claim), or is subject to any insolvency or bankruptcy proceeding, or becomes insolvent, fails or goes out of a material portion of its business; (x) the amount thereof consists of late charges or finance charges; (xi) the amount thereof consists of a credit balance more than ninety (90) days past due; or (xii) the face amount thereof exceeds the Proof of Shipment threshold amount specified below, unless accompanied by evidence of shipment of the goods relating thereto satisfactory to FINOVA in its sole discretion. (ii) Cross-age percentage 25% (viii) Concentration limit 25% (xii) Proof of Shipment threshold $50,000 5 "Prepared Financials" means the balance sheets of Borrower as of the date ------------------- hereof, and as of each subsequent date on which audited balance sheets are delivered to FINOVA from time to time hereunder, and the related statements of operations, changes in stockholder's equity and changes in cash flow for the periods ended on such dates in each case prepared in accordance with Generally Accepted Accounting Principles consistently applied. "Guarantors" None. ---------- "Subordinated Creditor" means any individual who may subordinate its --------------------- indebtedness of FINOVA from time to time. There are no subordinated creditors as of the date hereunder. DISBURSEMENT (Section 9.11): Unless and until Borrower otherwise directs FINOVA in writing, all loans (other than Floorplan Loans disbursed directly to manufacturers or vendors of Floorplanned Inventory as contemplated in Section 2.4 of this Agreement) shall be wired to Borrower's operating bank account: Account Number: 1463401601 Bank: Bank of America City, State: City of Industry, CA ABA#: 121000358 NOTICE (Section 9.12): Any notices sent to FINOVA should be sent simultaneously to the address listed in the preamble to the Agreement and to the following: FINOVA Capital Corporation 1850 Central Avenue P.O. Box 2209 Phoenix, AZ 85002-2209 Attn: Associate General Counsel FINOVA Capital Corporation 1060 First Avenue, Suite 100 King of Prussia, PA 19406 Attn: Portfolio Manager ADDITIONAL PROVISIONS: 1. Field exams to be conducted on a quarterly basis. 2. A lockbox will be required if average outstandings under the Revolving Credit Facility exceed One Million Five Hundred Thousand Dollars ($1,500,000) for 90 days. 6 3. Borrower must submit evidence of casualty insurance in the amount of Five Million Dollars ($5,000,000), with the FINOVA listed as Lender Loss Payee on the policy. In the event that Borrower's inventory levels exceed $5,000,000, Borrower must provide FINOVA with evidence of casualty insurance to cover all inventory. 4. Borrower must provide FINOVA with company-prepared monthly projections by August 31, 1998 for the Fiscal year ending March 31, 1999. 5. Borrower must complete FINOVA's Year 2000 Questionnaire. BORROWER: FINOVA: CUMETRIX DATA SYSTEMS CORP. FINOVA CAPITAL CORPORATION Tax I.D. No. 95-4574138 ------------------------ By: /s/ James Ung By: /s/ [ILLEGIBLE] -------------------------------- ---------------------- James Ung, President Vice President By: /s/ Mei Yang -------------------------------- Mei Yang, Secretary 7 EX-10.3 4 SECURED REVOLVING CREDIT NOTE EXHIBIT 10.3 [LOGO OF FINOVA] SECURED REVOLVING CREDIT NOTE $5,000,000 As Of 10/22, 1998 - ---------- ----- FOR VALUE RECEIVED, the undersigned Cumetrix Data Systems Corp. (the "Borrower"), a California corporation with its principal place of business at 957 Lawson Street, City of Industry, CA 91748, hereby promises to pay to FINOVA CAPITAL CORPORATION ("Lender"), or order, at 1060 First Avenue, Suite 100, King of Prussia, Pennsylvania 19406, or at such other address as the holder may specify in writing, the principal sum of Five Million Dollars ($5,000,000), or such lesser sum which represents the principal balance outstanding under the Revolving Loans facility established pursuant to the provisions of that certain Loan and Security Agreement dated of even date herewith, between Borrower and Lender (the "Agreement"), plus interest in the manner and upon the terms and conditions set forth below. This Secured Revolving Credit Note ("Note") is made pursuant to the Agreement, the provisions of which are incorporated herein by this reference. Capitalized terms herein, unless otherwise noted, shall have the meaning set forth in the Agreement. The actual amount due and owing hereunder shall be evidenced by FINOVA's records of receipts and disbursements with respect to Revolving Loans, which records shall be conclusive evidence of such amount due and owing absent manifest error. 1.0 Rate And Payment Of Interest. The outstanding principal balance of this Note shall bear interest at a per annum rate of Base Rate. Interest charges and all other fees and charges herein shall be computed on the basis of a year of 360 days and actual number of days elapsed and shall be payable to Lender in arrears on the first day of each month hereafter at its address set forth above. Accrued but unpaid interest under this Note shall be due and payable on the first day of each month, commencing , 1998, and at maturity, on which date all interest remaining ------ unpaid shall be due and payable. 2.0 Schedule of Principal Payments. A final installment of all outstanding principal, accrued and unpaid interest and all other sums payable pursuant to the Loan Documents on 10/22, ----- 2000 unless due earlier pursuant to the terms of the Loan Agreement. 3.0 Prepayment. Prepayment may be made under this Note in whole or in part, subject to the Prepayment Fee, as applicable, as set forth in the Agreement. 4.0 Holder's Right Of Acceleration If the Agreement is terminated for any reason whatsoever, or if there shall occur an Event of Default or if this Note is not paid when due, the entire remaining principal balance and all accrued and unpaid interest and other fees and charges with respect to this Note shall, at Lender's option, become immediately due and payable. 5.0 Holder's Rights Upon Default. If any Event of Default occurs, then from the date such Event of Default occurs until it is cured or waived in writing, in addition to any agreed upon charges, the principal balance of this Note shall thereafter, at Lender's option, bear interest at three percentage points (3.0%) per annum in excess of the Base Rate, computed on the basis of a year of three hundred sixty (360) days and the actual number of days elapsed. 6.0 Additional Rights of Holder. If any installment of principal or interest hereunder is not paid when due, the holder shall have, in addition to the rights set forth herein, in the Agreement under law, the right to compound interest by adding the unpaid interest to principal, with such amount thereafter bearing interest at the rate provided in this Note. 7.0 General Provisions. 7.1 If this Note is not paid when due or upon the occurrence of any Event of Default, the undersigned further promises to pay all costs of collection, foreclosure fees, reasonable attorneys' fees and expert witness fees incurred by the holder, whether or not suit is filed hereon, and the fees, costs and expenses as provided in the Agreement. 7.2 The undersigned hereby consents to any and all renewals, replacements and/or extensions of time for payment of this Note before, at or after maturity. 7.3 The Undersigned hereby consents to the acceptance, release or substitution of security for this Note. 7.4 Presentment for payment, notice of dishonor, protest and notice of protest are hereby expressly waived. 7.5 The contracted for rate of interest of the loan contemplated hereby, without limitation, shall consist of the following: (i) the interest rate set forth on the Schedule to Loan Agreement, calculated and applied to the principal balance of this Note in accordance with the provisions of this Note; (ii) interest after an Event of Default, calculated and applied to the amounts due under this Note in accordance with the provisions hereof; and (iii) all Additional Sums (as herein defined), if any. Borrower agrees to pay an effective contracted for rate of interest which is the sum of the above-referenced elements. All examination fees, reasonable attorneys' fees, expert witness fees, letter of credit fees, collateral monitoring fees, closing fees, Facility Fees, Anniversary Fees, Prepayment Fees, minimum interest charges, other charges, goods, things in action or any other sums or things of value paid or payable by Borrower 2 (collectively, the Additional Sums), whether pursuant to this Note, the Agreement or any other documents or instruments in any way pertaining to this lending transaction, or otherwise with respect to this lending transaction for the purpose of any applicable law that may limit the maximum amount of interest to be charged with respect to this lending transaction, shall be payable by Borrower as, and shall deemed to be, additional interest and for such purposes only, the agreed upon and "contracted for rate of interest" of this lending transaction shall be deemed to be increased by the rate of interest resulting from the inclusion of the Additional Sums. It is the intent of the parties to comply with the usury law of the State of Arizona (the "Applicable Usury Law"). Accordingly, it is agreed that notwithstanding any provision to the contrary in this Note, or in any of the documents securing payment hereof or otherwise relating hereto, in no event shall this Note or such documents require the payment or permit the collection of interest in excess of the maximum contract rate permitted by the Applicable Usury Law (the "Maximum Interest Rate"). In the event (a) any such excess of interest otherwise would be contracted for, charged or received from Borrower or otherwise in connection with the loan evidenced hereby, (b) the maturity of indebtedness evidenced by this Note is accelerated in whole or in part, or (c) all or part of the principal or interest of this Note shall be prepaid, so that under any of such circumstances the amount of interest contracted for, shared or received in connection with the loan evidenced hereby, would exceed the Maximum Interest Rate, then in any such event (1) the provisions of this paragraph shall govern and control, (2) neither Borrower nor any other person or entity now or hereafter liable for the payment hereof shall be obligated to pay the amount of such interest to the extent that it is in excess of the Maximum Interest Rate, (3) any such excess which may have been collected shall be either applied as a credit against the then unpaid principal amount hereof or refunded to Borrower, at Lender's option, and (4) the effective rate of interest shall be automatically reduced to the Maximum Interest Rate. It is further agreed, without limiting the generality of the foregoing, that to the extent permitted by the Applicable Usury Law; (x) all calculations of interest which are made for the purpose of determining whether such rate would exceed the Maximum Interest Rate shall be made by amortizing, prorating, allocating and spreading during the period of the full stated term of the loan evidenced hereby, all interest at any time contracted for, charged or received from Borrower or otherwise in connection with such loan; and (y) in the event that the effective rate of interest on the loan should at any time exceed the Maximum Interest Rate, such excess interest that would otherwise have been collected had there been no ceiling imposed by the Applicable Usury Law shall be paid to Lender from time to time, if and when the effective interest rate on the loan otherwise falls below the Maximum Interest Rate, to the extent that interest paid to the date of calculation does not exceed the Maximum Interest Rate, until the entire amount of interest which would otherwise have been collected had there been no ceiling imposed by the Applicable Usury Law has been paid in full. Borrower further agrees that should the Maximum Interest Rate be increased at any time hereafter because of a change in the Applicable Usury Law, then to the extent not prohibited by the Applicable Usury Law, such increases, if applicable, shall apply to all indebtedness evidenced hereby regardless of when incurred; but, again to the extent not prohibited by the Applicable Usury Law, such decreases shall not apply to the indebtedness evidenced hereby regardless of when incurred. 3 7.6 No delay or omission on the part of the holder of this Note in exercising any right shall operate as a waiver thereof or of any other right. 7.7 No waiver by the holder of this Note upon any one occasion shall be effective unless in writing nor shall it be construed as a bar or waiver of any right or remedy on any future occasion. 7.8 Time is of the essence for the performance by the undersigned of the obligations set forth in this Note. 7.9 Should any one or more of the provisions of this Note be determined illegal or unenforceable, all other provisions shall nevertheless remain effective. 7.10 This Note cannot be changed, modified, amended or terminated orally. 7.11 This Note shall be governed by, construed and enforced in accordance with the laws of the State of Arizona, without reference to the principles of conflicts of laws thereof. 7.12 THE UNDERSIGNED HEREBY WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION TO ENFORCE OR DEFEND ANY MATTER ARISING FROM OR RELATED TO THIS NOTE AND ACKNOWLEDGES THAT LENDER ALSO WAIVES SUCH RIGHT. 8.0 Security For This Note. This Note is secured pursuant to the Agreement and is subject to all of the terms and conditions thereof, including, but not limited to, the remedies specified therein. IN WITNESS WHEREOF, this Secured Revolving Credit Note has been executed and delivered as of the date first set forth above. CUMETRIX DATA SYSTEMS CORP. BY: /s/ James Ung ------------------------ James Ung President Tax I.D. No.: 95-4574138 (CORPORATE SEAL) 4 EX-10.4 5 PREFERRED STOCK PURCHASE AGREEMENT EXHIBIT 10.4 ONLINE TRANSACTION TECHNOLOGIES, INC. PREFERRED STOCK PURCHASE AGREEMENT THIS PREFERRED STOCK PURCHASE AGREEMENT (the "Agreement") is entered into as of December 15, 1998, by and among ONLINE TRANSACTION TECHNOLOGIES, INC., a California corporation (the "Company"), and CUMETRIX DATA SYSTEMS CORPORATION (the "Purchaser"). RECITALS A. WHEREAS, the Company has authorized the sale and issuance of shares of its unissued and outstanding Series A-1, A-2, and A-3 Preferred Stock (collectively, the "Series A Preferred Stock"); B. WHEREAS, Purchaser desires to purchase Series A-1 Preferred Stock and the Company desires to issue and sell the Series A Preferred Stock to the Purchaser on the terms and conditions set forth herein; C. WHEREAS, Purchaser shall receive upon issuance of the Series A-1 Preferred Stock an option (the "First Option") to acquire shares of the Company's Series A-2 Preferred Stock on the terms described below and as set forth more fully in the form of First Stock Option Agreement attached hereto as Exhibit A (the "First Stock Option Agreement"); and D. WHEREAS, Purchaser shall receive upon exercise of the First Option an additional option (the "Second Option" and, together with the First Option, the "Options") to acquire shares of the Company's Series A-3 Preferred Stock on the terms described below and as set forth more fully in the form of the Second Stock Option Agreement attached hereto as Exhibit B (the "Second Stock Option Agreement," and together with the First Stock Option Agreement the "Option Agreements"). NOW, THEREFORE, in consideration of the foregoing recitals and the mutual promises hereinafter set forth, the parties hereto agree as follows: 1. AGREEMENT TO SELL AND PURCHASE. 1.1 Purchase of Series A-1 Preferred Stock. At the closing (as defined in section 2 below), the Company agrees to sell to Purchaser and Purchaser agrees to purchase from the Company, the number of shares of the Company's Series A-1 Preferred Stock (the "Purchase Shares") equal to the remainder of (a) the quotient of (x) the number of shares of the Company's Common Stock issued and outstanding (including shares issuable upon conversion or exercise of outstanding options, warrants, rights and convertible debt or equity securities other than the options granted pursuant to this agreement) as of the 1 closing date (as defined in section 2 below) divided by (y) .9714, minus ----- (b) the number of shares of the Company's Common Stock issued and outstanding (including shares issuable upon conversion or exercise of outstanding options, warrants, rights and convertible debt or equity securities other than the options granted pursuant to this agreement) all determined on an as-converted basis as of the Closing Date (as defined in section 2 below). The per share purchase price (the "Per Share Price") of the shares shall be equal to the quotient of (x) $100,000 divided by (y) the number of Purchase Shares. The total purchase price (the "Purchase Price") for the Purchase Shares shall be $100,000. The Purchase Shares shall be sold at the Closing as hereinafter provided. 1.2 Designation of Rights, Preferences and Privileges of the Series A Preferred Stock. Attached hereto as Exhibit 1.2 is a true and correct copy of a form of an Amendment and Restatement of the Articles of Incorporation (the "Restated Articles") duly authorized and adopted by the Company by all necessary corporate action and submitted for filing with the Secretary of State of the State of California. Upon acceptance of the Restated Articles by the Secretary of State of California, the Series A Preferred Stock and the Common Stock shall have the rights, preferences, privileges and restrictions set forth in the Restated Articles. 2. CLOSING, DELIVERY AND PAYMENT AND WARRANT ISSUANCES. 2.1 Closing. The closing (the "Closing") of the sale and purchase of the Purchase Shares under this Agreement shall occur on a date that is within three (3) business days of the satisfaction (or waiver) of all conditions to closing set forth in Section 7; provided, however, that if the Closing -------- ------- shall not have occurred by 11:59 p.m. on December 31, 1998 other than as a result of a breach of this Agreement by the Company, this Agreement shall terminate, become void ab initio, and be of no force or effect. The date --------------------------------------- of the occurrence of the Closing shall be referred to herein as the "Closing Date." 2.2 Delivery. At the Closing, subject to the terms and conditions hereof, the Company will deliver to the Purchaser certificates representing the number of Purchase Shares to be purchased at the Closing by Purchaser, against payment of the Purchase Price therefor by check or wire transfer made payable to the order of the Company. 2.3 Warrant Issuances. 2.3.1 At the Closing, the Company shall issue to Purchaser the First Option duly executed on behalf of the Company, substantially in the form of Exhibit A attached hereto, to acquire such number of shares of the Company's authorized but unissued Series A-2 Preferred Stock (the "First Option Shares") equal to the remainder of (A) the quotient of (x) the number of shares of the Company's Common Stock issued and outstanding (including shares issuable upon conversion or exercise of outstanding options, warrants, rights and convertible debt or equity securities other than options granted pursuant to this Agreement) all determined on an as- converted basis as of the date the First Option is 2 exercised, divided by (y) .7429, minus (B) the number of shares of the ----- Company's Common Stock issued and outstanding (including shares issuable upon conversion or exercise of outstanding options, warrants, rights and convertible debt or equity securities other than options granted pursuant to this Agreement) as of the date the First Option is exercised. 2.3.2 Upon the exercise of the First Option (the "First Option Exercise Date"), the Company will issue to Purchaser the Second Option duly executed on behalf of the Company, substantially in the form of Exhibit B attached hereto, to acquire such number of shares of the Company's authorized but unissued Series A-3 Preferred Stock (the "Second Option Shares") equal to the remainder of (A) the quotient of (x) the number of shares of the Company's Common Stock issued and outstanding (including shares issuable upon conversion or exercise of outstanding options, warrants, rights and convertible debt or equity securities other than options granted pursuant to this Agreement) as of the date the Second Option is initially exercised, divided by (y) .7857, minus (B) the number of shares of the ----- Company's Common Stock issued and outstanding (including shares issuable upon conversion or exercise of outstanding options, warrants, rights and convertible debt or equity securities other than options granted pursuant to this Agreement) all determined on an as-converted basis as of the date the Second Option is initially exercised. The per share exercise price of the Second Option Shares shall be equal to the quotient of (x) $8,000,000 divided by (y) the number of Second Option Shares. The total purchase price of the Second Option Shares shall be $8,000,000. 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby represents and warrants to the Purchaser as follows: 3.1 Organization and Standing of the Company. The Company is a duly organized and validly existing corporation in good standing under the laws of the State of California and has all requisite corporate power and authority for the ownership and operation of its properties and for the carrying on of its business as now conducted and as proposed to be conducted. The Company is duly licensed or qualified and in good standing as a foreign corporation authorized to do business in California and in all other jurisdictions in which the failure to be so qualified would have a material adverse effect upon the business as now conducted. 3.2 Capitalization; Voting Rights. The authorized capital stock of the Company, immediately prior to the Closing, will consist of (i) 10,000,000 shares of Common Stock, 3,000,000 shares of which are issued and outstanding and (ii) 2,657,122 shares of preferred stock, designated Series A Preferred Stock, of which 88,326 shares shall be designated Series A-1 Preferred Stock none of which will be issued and outstanding, 1,068,796 shares shall be designated as Series A-2 Preferred Stock, none of which will be issued and outstanding, and 1,500,000 shares shall be designated as Series A-3 Preferred Stock, none of which will be issued and outstanding. All issued and outstanding shares of the Company's Common Stock and Preferred Stock(a) have been duly authorized and (b) 3 the Company's Common Stock is validly issued, fully paid and nonassessable. The First Option Shares and the Second Option Shares have been duly and validly reserved for issuance and, upon issuance and delivery against payment therefor, will be validly issued, fully paid and nonassessable. Except as may be granted pursuant to the Options and the Option Agreements, there are no outstanding options, warrants, rights (including conversion or preemptive rights and rights of first refusal), proxy or shareholder agreements, or agreements of any kind for the purchase or acquisition from the Company of any of its securities. When issued in compliance with the provisions of this Agreement and the Option Agreements, the Purchased Shares, the First Option, the Second Option, the First Option Shares and the Second Option Shares (collectively, the "Securities") will be validly issued (and, in the case of the Purchased Shares, the First Option Shares and the Second Option Shares only), fully paid and nonassessable, and will be free of any liens or encumbrances; provided, however, that the Securities may be subject to restrictions on transfer under state and/or federal securities laws as set forth herein or as otherwise required by such laws at the time a transfer is proposed. 3.3 Authorization; Binding Obligations. All corporate action on the part of the Company, its officers, directors and shareholders necessary for the authorization of this Agreement and the Option Agreements, the performance of all obligations of the Company hereunder and thereunder at the Closing and the authorization, sale, issuance and delivery of the Purchased Shares pursuant hereto and the First Option Shares and the Second Option Shares pursuant to the Option Agreements has been taken or will be taken prior to the Closing. The Agreement and the Option Agreements, when executed and delivered, will be valid and binding obligations of the Company enforceable in accordance with their terms, except (a) as limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application affecting enforcement of creditors' rights; (b) general principles of equity that restrict the availability of equitable remedies; and (c) to the extent that the enforceability of the indemnification provisions in Section 6 of the Option Agreements may be limited by applicable laws. The sale of the Purchased Shares and the subsequent issuance of shares of the Company's Series A Preferred Stock upon exercise of the First Option Shares and the Second Option Shares are not and will not be subject to any preemptive rights or rights of first refusal that have not been properly waived or complied with. 3.4 Compliance With Contracts. Except as set forth in the Disclosure Letter, the Company is in compliance in all respects with the terms and provisions of its Articles of Incorporation and bylaws. The Company is in compliance in all material respects with the terms and provisions of each mortgage, indenture, lease, agreement and other instrument relating to obligations of the Company, and of all judgments, decrees, governmental orders, statutes, rules or regulations by which it is bound or to which its properties or assets are subject, in each case or in the aggregate if the failure to comply would have a material adverse effect on the business, properties, or condition, financial or otherwise, of the Company. Neither the execution and delivery of this Agreement or the Option Agreements, nor the consummation of any transaction contemplated hereby or thereby, 4 has constituted or resulted in a default or violation of any term or provision in any of the foregoing documents or instruments. 3.5 Registration Rights. Except as set forth in this Agreement, no Person has demand or other rights to cause the Company to file any registration statement under the Securities Act relating to any securities of the Company or any right to participate in an offering of shares under any such registration statement. 3.6 Securities Act of 1933. The Company has complied and will comply with all applicable federal and state securities laws in connection with the issuance and sale of the Securities. 3.7 No Brokers or Finders. The Company owes no commission, fee or other compensation to any Person as a finder or broker as a result of the transactions contemplated by this Agreement. 3.8 Good Title. The Company has title to, or a valid leasehold interest in, its properties and assets in each case free and clear of all liens, claims, security interests, charges and encumbrances, except such liens, claims, security interests, charges and encumbrances as arise in the ordinary course of business and do not materially impair the Company's ownership or use of such property or assets, and has the right to use all the assets it presently uses in the operation of its business. The properties and assets of the Company are in all material respects in good operating condition and repair, normal wear and tear excepted. 3.9 Subsidiaries. The Company does not own, control, directly or indirectly, any other corporation, association, partnership or other business entity or own any shares of capital stock or other securities of any other Person. 3.10 Certain Transactions. Except as thoroughly set forth in the Disclosure Letter and other than the interest arising from a Person's stock ownership of the Company or for compensation as an employee or director of the Company, there are no material transactions between the Company, on the one hand, and any of its officers, directors or shareholders, or their immediate family members, on the other hand, and no such person is an interested party to any material contract of the Company or to the best of the Company's knowledge holds a direct or indirect ownership interest in any business or corporation which competes with the Company, except that any such Person may own up to one percent of the stock of a company whose stock is publicly traded and that does or may compete with the Company. 3.11 Material Contracts and Commitments. All of the material contracts, agreements and instruments to which the Company is a party, are valid, binding and in full force and effect in all material respects, subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors and rules of law governing specific performance, injunctive relief or other equitable remedies. A material contract is a 5 contract reasonably deemed to be material by the Company. A true and correct copy of each of such material written contracts and a description of such material oral contracts, together with all amendments, waivers or other changes thereto has been supplied to the Purchaser and its counsel. 3.12 Patents, Copyrights and Trademarks. To the best knowledge of the Company and its officers and current shareholders (the "Company's Knowledge"), the Company has sufficient title to and ownership of, or can obtain on terms which will not result in any material adverse effect on its businesses, all necessary patents, licenses, trademarks, service marks, trade names, copyrights, trade secrets, inventions, franchises, computer software and other proprietary rights necessary for their businesses as now conducted, or as presently proposed to be conducted through calendar year 1999, without, to the Company's Knowledge, any conflict with or infringement of, the rights of others. To the Company's Knowledge, no employee has violated, or is currently violating, any intellectual property rights of any other person or entity. To the Company's Knowledge, no third party is infringing upon or violating any of the intellectual property rights of the Company. The Company has not granted any license or option or entered into any agreement of any kind with respect to the use of its proprietary information, other than licenses to and uses of its products made in the ordinary course of its business. 3.13 Employees and Employee Benefit Plans. The Company does not have any employment contracts with any of its employees not terminable at will (upon notice as provided in such employee contracts) and does not have any collective bargaining agreements covering any of its employees. Other than as disclosed in the Disclosure Letter, there is no pension, health, profit- sharing, bonus, stock purchase, stock option, hospitalization, insurance, severance, or other employee benefit or welfare benefit plan with respect to any officer or employee of the Company. 3.14 Year 2000. All software material to the Company's business, including without limitation all of the Company's software products, is Year 2000 Compliant, as defined herein. For purposes of this Agreement, "Year 2000 Compliant" shall mean the ability of software to provide all of the following functions: (a) consistently handle data information before, during and after January 1, 2000, including but not limited to accepting date input, providing date output, and performing calculations on dates or portions of dates; (b) function accurately, in accordance with any and all published documentation, and without interruption before, during and after January 1, 2000, without any change in operations associated with the advent of the new century; (c) respond to two-digit year-date input in a way that resolves any ambiguity as to century in a disclosed, defined and predetermined manner; and (d) store and provide output of date information in ways that are unambiguous as to century. 3.15 Proprietary Information. Each employee, officer and consultant of the Company is subject to a valid and binding Proprietary Information and Inventions Agreement in 6 substantially the forms provided to counsel to the Purchaser. The Company is not aware that any of its employees, officers or consultants are in violation thereof. 3.16 Disclosure. No representation, warranty or statement by the Company in this Agreement or in any written statement or certificate required by this Agreement to be furnished to Purchaser or its counsel pursuant to this Agreement contains or will contain any untrue statement of material fact or to the Company's Knowledge, omits to state a material fact necessary to make the statements made herein or therein, in light of the circumstances under which they were made, not misleading. 4. REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS. Purchaser hereby represents and warrants to the Company as follows (such representations and warranties do not lessen or obviate the representations and warranties of the Company set forth in this Agreement): 4.1 Requisite Power and Authority. Purchaser has all necessary power and authority under all applicable provisions of law to execute and deliver this Agreement and the Option Agreements and to carry out their provisions. All action on Purchaser's part required for the lawful execution and delivery of this Agreement and the Option Agreements have been or will be effectively taken prior to the Closing. Upon their execution and delivery, this Agreement and the Option Agreements will be valid and binding obligations of Purchaser, enforceable in accordance with their terms, except (a) as limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application affecting enforcement of creditors' rights, (b) general principles of equity that restrict the availability of equitable remedies, and (c) to the extent that the enforceability of the indemnification provisions of Section 6 of the Option Agreements may be limited by applicable laws 4.2 Investment Representations. Purchaser understands that the Securities have not been registered under the Securities Act. Purchaser also understands that the Securities are being offered and sold pursuant to an exemption from registration contained in the Securities Act based in part upon Purchaser's representations contained in the Agreement. Purchaser hereby represents and warrants as follows: 4.2.1 Acquisition for Own Account. Purchaser is acquiring the Securities for Purchaser's own account for investment only, and not with a view towards their distribution. 4.2.2 Accredited Investor. Purchaser represents that it is an accredited investor within the meaning of Regulation D under the Securities Act.. 4.2.3 Company Information. Purchaser has had an opportunity to discuss the Company's business, management and financial affairs with directors, officers and management of the Company and has had the opportunity to review the Company's operations and facilities. 7 Purchaser has also had the opportunity to ask questions of and receive answers from the Company and its management regarding the terms and conditions of this investment. 4.2.4 Rule 144. Purchaser acknowledges and agrees that the Purchased Shares, the First Option, the Second Option and, if issued, the First Option Shares and Second Option Shares must be held indefinitely unless they are subsequently registered under the Securities Act or an exemption from such registration is available. Purchaser has been advised or is aware of the provisions of Rule 144 promulgated under the Securities Act as in effect from time to time, which permits limited resale of shares purchased in a private placement subject to the satisfaction of certain conditions, including, among other things: the availability of certain current public information about the Company, the resale occurring following the required holding period under Rule 144 and the number of shares being sold during any three-month period not exceeding specified limitations. 4.2.5 Residence. The office or offices of the Purchaser in which its investment decision was made is located at the address or addresses of the Purchaser set forth on the signature page hereof. 4.3 Transfer Restrictions. Purchaser acknowledges and agrees that the Purchased Shares, the First Option, the Second Option and, if issued, the First Option Shares and the Second Option Shares are subject to restrictions on transfer as set forth in the Option Agreements. 5. COVENANTS OF THE COMPANY 5.1 Affirmative Covenants of the Company Other Than Reporting Requirements. Without limiting any other covenants and provisions hereof, the Company covenants and agrees that until a Covenant Termination Event (as defined in Section 9) it will perform and observe the following covenants and provisions and will cause each Subsidiary to perform and observe such of the following covenants and provisions as are applicable to such Subsidiary, and will not, without approval of the Purchaser, amend, revise or waive any terms of this Section 5.1: 5.1.1 Payment of Taxes and Trade Debt. Pay and discharge, and cause each Subsidiary to pay and discharge, all taxes, assessments and governmental charges or levies imposed upon it or upon its income or profits or business, or upon any properties belonging to it, prior to the date on which penalties attach thereto, and all lawful claims, which, if unpaid, might become a lien or charge upon any properties of the Company or any Subsidiary, provided that neither the Company nor any Subsidiary shall be required to pay any such tax, assessment, charge, levy or claim (i) that is being contested in good faith and by appropriate proceedings if the Company or Subsidiaries concerned shall have set aside on its books adequate reserves with respect thereto as shall be determined by its Board of Directors or (ii) if the failure to pay such tax, assessment, charge, levy or claim would not have a material adverse effect on the business, properties, or condition, 8 financial or otherwise, of the Company. Pay, and cause each Subsidiary to pay, when due, or in conformity with customary trade terms, after any adjustments agreed upon among the parties thereto, all lease obligations, all trade debt, and all other Indebtedness incident to the operations of the Company or its Subsidiaries, except (i) such as are being contested in good faith and by appropriate proceedings if the Company or Subsidiary concerned shall have set aside on its books adequate reserves with respect thereto as shall be determined by its Board of Directors or (ii) if the failure to pay would not have a material adverse effect on the business, properties, or condition, financial or otherwise, of the Company. 5.1.2 Maintenance of Insurance. Maintain, and as appropriate and necessary cause each Subsidiary to maintain, with responsible and reputable insurance companies or associations insurance in such amounts and covering such risks as is usually carried by companies of similar size engaged in similar businesses and owning similar properties in the same general areas in which the Company or such Subsidiary. 5.1.3 Preservation of Corporate Existence. Preserve and maintain its corporate existence, rights, franchises and privileges in the jurisdiction of its incorporation, and qualify and remain qualified, and cause each Subsidiary to qualify and remain qualified, as a foreign corporation in each jurisdiction in which such qualification is necessary or desirable in view of its business and operations or the ownership of its properties, and where failure to qualify would have a materially adverse effect upon the Company. Preserve and maintain, and cause each Subsidiary to preserve and maintain, all material licenses and other material rights to use patents, processes, licenses, trademarks, trade names, inventions, intellectual property rights or copyrights owned or possessed by it and necessary to the conduct of its business, unless fair and reasonable consideration is received by the Company or such subsidiary in exchange for such licenses or other rights. 5.1.4 Compliance with Laws. Comply in all material respects with all applicable laws. rules, regulations and orders of any governmental authority, noncompliance with which could materially adversely affect its business or condition, financial or otherwise, except non-compliance being contested in good faith through appropriate proceedings, so long as the Company shall have set up sufficient reserves, if any, required under generally accepted accounting principles with respect to such items. 5.1.5 Keeping of Records and Books of Account. Keep, and cause each Subsidiary to keep, materially adequate records and books of account, in which materially complete entries will be made in accordance with generally accepted accounting principles consistently applied, reflecting all material financial transactions of the Company and such Subsidiary, and in which, for each fiscal year, all material proper reserves for depreciation, depletion, obsolescence, amortization, taxes, bad debts and other purposes in connection with its business shall be made. 9 5.1.6 Maintenance of Properties, etc, Maintain and preserve, and cause each Subsidiary to maintain and preserve, all of its properties that the Board of Directors of the Company or such Subsidiary deems necessary in the proper conduct of its business, in good repair, working order and condition in all material respects, ordinary, wear and tear excepted, it being understood that this covenant relates only to the working order and condition of such properties and shall not be construed as a covenant not to dispose of properties. 5.1.7 Compensation. Cause aggregate compensation of Colin Kruger, Igor Kogan and Michael Shirman each to be fixed (i) at amounts not to exceed $8,333.33 per month during the period from the date of this Agreement through December 31, 1999, and (ii) thereafter, at amounts not in excess of the levels set forth in the Company's Budget for the applicable period established as required by Section 5.1.10 below (the Budget") 5.1.8 New Developments. Cause all material technological or other material proprietary developments, inventions, discoveries or improvements by the Company's or any Subsidiary's employees to be fully documented in accordance with the practice in the industry. Cause all employees and, all consultants hereafter employed by the Company and each Subsidiary, to execute appropriate patent and copyright assignment agreements to the Company and, when the Company so requests, to file and prosecute United States and foreign patent or copyright applications relating to and protecting such developments on behalf of the Company or such Subsidiary. 5.1.9 Employee Invention and Non-Disclosure Agreement. Use its best efforts to cause each employee or consultant and all employees hereafter employed by the Company or any Subsidiary promptly to execute an agreement substantially in the form of Attachment 5.1.9 hereto. ---------------- 5.1.10 Budgets. Prior to the commencement of each fiscal year, prepare and submit to, and obtain Purchaser Budget Approval of a budget for the upcoming fiscal year (including projections or forecasts of capital and operating expenses, cash flow, and profits and losses, all itemized in reasonable detail, and setting forth compensation levels for all officers and the 6 most highly compensated employees and consultants), with the Purchaser Budget Approval for such budget being obtained no later than the end of the fiscal year then ending, and thereafter operate the business of the Company in accordance with such Budget. "Purchaser Budget Approval" means, (i) with respect to the budget for the fiscal year ending December 31, 1999, the approval of such Budget by the Purchaser at or prior to the Closing (or any amendments mutually agreed upon by the Company and the Purchaser), (ii) with respect to any Budget covering the first 18 full calendar months following the Closing, the written approval of such Budget by Purchaser in the exercise of Purchaser's sole discretion; provided that Purchaser agrees not to unreasonably withhold -------- approval of Budgets applicable to such period if variances between the applicable Budget and the budget for such period set forth in the Business Plan of the Company attached hereto as Attachment 5.1.10 (the ----------------- "Business Plan") do not exceed 20% in the case of budgeted marketing expense, and 10% in the case of all other budget items, 10 and (iii) with respect to the portion of any Budget covering the period following the completion of the first 18 full calendar months following the Closing, the written approval of such Budget by Purchaser in the exercise of its reasonable business judgment. 5.1.11 Financings. Promptly, fully and in detail, inform the Purchaser in advance of any material commitments or contracts relating to financing of any nature in which the Company pledges material corporate assets, other than under purchase money security interests secured only by the assets purchased with such financing in the ordinary course of business. 5.1.12 Required Use of Proceeds. Use the proceeds from the issuance and sale of the Shares hereunder as specified in Attachment 5.1.12. ------------------ 5.1.13 Board of Directors; Chief Executive Officer. Provide Purchaser with at least 2 business days notice of any meeting of the Board of Directors of the Company or the taking of any action by unanimous written consent of the Board of Directors; and, from and after such time as the Purchaser has purchased Equity Securities of the Company with an aggregate purchase price of at least $1,000,000, (a) cause to be appointed to the Board of Directors of the Company and each committee thereof, one director nominated by the Purchaser, and (b) commence a search for a Chief Executive Officer (who shall have all the duties and responsibilities customarily given the most senior executive officer of a corporation and shall report only to the Board of Directors), whose appointment shall be subject to the approval of the Purchaser, which approval shall not be unreasonably withheld, and whose removal (and all subsequent appointments and removals of the Chief Executive Officer) shall be subject to the approval of the Purchaser, which approval shall not be unreasonably withheld. 5.1.14 Filing of Amended and Restated Articles of Incorporation. Prepare and file the Restated Articles, substantially in the form attached hereto as Exhibit 1.2, and use its best efforts to cause the Restated Articles to be accepted for filing by the Secretary of State of the State of California. 5.1.15 Execution and Delivery of Second Option Agreement. If the Purchaser exercises the First Option, as provided in the First Option Agreement attached hereto as Exhibit A, execute and deliver the Second Option Agreement, in the form attached hereto as Exhibit B, to the Purchaser. 5.2 Negative Covenants of the Company. Without limiting any other covenants and provisions hereof, the Company covenants and agrees that until a Covenant Termination Event it will not take the actions contained in the following covenants and provisions, without the approval of the Purchaser, and will cause each Subsidiary, to not take the actions contained in the following covenants and provisions as are applicable to such Subsidiary, and will not, without the approval of the Purchaser amend, revise or waive any terms of this Section 5.2: 11 5.2.1 Issuance of Shares. The Company shall not issue any authorized but unissued shares of Series A Preferred Stock except to the Purchaser at the Closing or to the Purchaser in subsequent transactions. 5.2.2 Mergers, Sale of Assets, etc. Merge or consolidate with, or sell, assign, lease or otherwise dispose of or voluntarily part with the control of (whether in one transaction or in a series of transactions), all or substantially all of its assets (whether now owned or hereinafter acquired) to any Person, or permit any Subsidiary to do any of the foregoing, except for sales, assignments, leases or other dispositions of assets in the ordinary course of business. Notwithstanding the foregoing, this clause shall be effective only (i) if and so long as the aggregate cash price paid by the Purchaser for Common Stock of the Company is at least 50% of the aggregate cash price received by the Company for all outstanding capital stock of the Company, and (ii) for all periods following exercise of the Second Option. 5.2.3 Maintenance of Ownership of Subsidiaries. Create any Subsidiary (i) that is not a Wholly-Owned Subsidiary, unless a majority of the Board of Directors of the Company shall have approved the creation of such Subsidiary or (ii) any of whose shares of capital stock shall be owned by any officer, director or shareholder of the Company or affiliate of an officer, director, or shareholder of the Company; sell or otherwise dispose of any shares of capital stock of any Subsidiary, except to the Company or another Subsidiary, or to another Person who is not an officer, director, or shareholder of the Company, or affiliate of an officer, director, or shareholder of the Company, if, in the judgment of a majority of the Board of Directors of the Company, such sale or disposition is in the best interests of the Company; provided, however, that nothing herein contained shall prevent any merger, consolidation or transfer of assets permitted by subsection 4.2(a). 5.2.4 Dealings with Affiliates and Others. Enter into any material transaction, including, without limitation, any material loans or extensions of credit or royalty agreements, with any officer or director of the Company or any Subsidiary or holder of any class of capital stock of the Company, or any member of their respective immediate families or any corporation or other entity, directly or indirectly controlled by one or more of such officers, directors or shareholders or members of their immediate families (other than any such transactions in the ordinary course of business which are in an amount not in excess of $5,000) unless such transaction is approved in advance by the Purchaser. 5.2.5 Change in Nature of Business. Make, or permit any Subsidiary to make, any material change in the nature of its business as carried on at the date hereof or as contemplated in the Business Plan. 5.2.6 Dividends. So long as the Purchaser is permitted to cause the Company to repurchase the Purchase Shares hereunder and if such right is exercised, until the Purchase Shares have been repurchased by the Company, declare or pay any cash dividends on any class of the Company's capital stock now or hereafter outstanding, or purchase, redeem or otherwise 12 acquire or retire any of the Company's capital stock of any class now or hereafter outstanding or otherwise return capital or make distributions of assets to shareholders as such, except repurchase of the Company's capital stock pursuant to the terms of Section 6.1 below. The Company shall not contribute assets in any material amount to any of its Subsidiaries who are not Wholly Owned Subsidiaries. 5.2.7 Stock Restriction Agreements, Stock Options. Authorize, grant or issue, upon the exercise of options or otherwise under any plan for the benefit of employees, officers, directors, or consultants of the Company a number of shares greater than 450,000 shares, (ii) issue any shares for consideration less than the fair market value of such shares except for shares issuable upon exercise of options, (iii) issue any options or warrants to purchase shares at a price which is less than the fair market value of the shares issuable upon exercise of such rights or options on the date such rights or options are issued, or (iv) authorize, grant or issue to employees, officers, directors of the Company compensatory options or rights which may be exercised in whole or in part prior to the completion of one year of continuous service to the Company. 5.3 Reporting Requirements. The Company will furnish the following to the Purchaser so long as the Company holds any Series A Preferred Stock (or Common Stock issued upon conversion of Series A Preferred Stock) and so long as the Options remain exercisable: 5.3.1 as soon as reasonably available, and in any event within thirty (30) days after the end of each fiscal quarter of the Company, unaudited Consolidated balance sheets of the Company and its Subsidiaries as of the end of such quarter and unaudited Consolidated statements of income and retained earnings and of cash flow of the Company and its Subsidiaries for the period ending on the last day of such quarter, setting forth in each case in comparative form the corresponding figures for the corresponding period of the prior fiscal year, all in reasonable detail and duly certified (subject to year-end audit adjustments) by the chief executive officer or chief financial officer of the Company as having been prepared in all material respects in accordance with generally accepted accounting principles consistently applied, not including footnote disclosures; 5.3.2 as soon as reasonably available and in any event within ninety (90) days after the end of each fiscal year of the Company thereafter, a copy of the annual audit report for such year for the Company and its Subsidiaries, including therein Consolidated and consolidating balance sheets of the Company as of the end of such fiscal year and Consolidated and consolidating statements of income and retained earnings and of cash flow of the Company and its Subsidiaries for such fiscal year, setting forth in each case in comparative form the corresponding figures for the preceding fiscal year, all duly certified by an a recognized independent certified public accountant which in the regular conduct of its business audits the financial statements of at least one company which files reports under Section 13 or 15(d) of the Exchange Act; 13 5.3.3 promptly upon the request of the Purchaser, any written report submitted to the Company by independent public accountants in connection with an annual or interim audit of the books of the Company and its Subsidiaries made by such accountants; 5.3.4 promptly after the commencement thereof, notice of all material actions, suits and proceedings before any court or governmental department, commission, board, bureau, agency or instrumentality,, domestic or foreign, materially affecting the Company and any Subsidiary; 5.3.5 at least thirty (30) days prior to the commencement of each fiscal year of the Company, a copy of the Budget provided for in Section 5.1.10; and 5.3.6 promptly after sending, making available, or filing the same, all reports and financial statements that the Company or any Subsidiary sends or makes available to the shareholders of the Company or the Securities and Exchange Commission. 5.4 Confidentiality. Each Purchaser represents and warrants that any information obtained by such Purchaser pursuant to Section 5.3 of this Agreement or otherwise obtained by such Purchaser from the Company if such information is designated as confidential information or is otherwise not available to the Purchaser or the public shall be treated as confidential and, except as may be required by applicable law or the rules of NASDAQ or any stock exchange applicable to Purchaser, shall not be disclosed to a third party (except a Purchaser's legal counsel, accountants or similar advisors) without the consent of the Board of Directors, except that such information shall not be deemed confidential for the purpose of enforcement of this Agreement or valuation of the Securities. At the request of the Board of Directors, any Person, prior to receiving any information pursuant to this Agreement, shall execute reasonable confidentiality agreements consistent with this Section 5.4. 6. REPURCHASE OPTION, FINANCING RESTRICTION AND RIGHT OF PARTICIPATION. 6.1 Repurchase Option. In the event that (i) Purchaser elects not to exercise the First Option by the First Option Expiration Date, and (ii) the Company secures additional equity financing in an amount not less than $1,000,000 other than from the Purchaser (together, the "Repurchase Condition"), Purchaser shall have an irrevocable option (the "Repurchase Option"), to elect to sell to the Company all of the Purchased Shares and the Company shall agree to purchase such Purchased Shares under the conditions contained in this Section 5.1. Upon Purchaser's election of the Repurchase Option, Purchaser shall deliver notice to the Company (the "Notice") of the Repurchase Option within thirty (30) days after the occurrence of the Repurchase Conditions. Within ninety (90) days after receipt of the Notice, the Company shall repurchase the Purchased Shares at the Per Share Price for an aggregate purchase price of $100,000 with no interest. If the Company shall fail to repurchase the Purchased Shares as required herein, without limitation of 14 other remedies available to Purchaser hereunder, the amount due to Purchaser hereunder shall accrue interest at the rate of the lesser of 1.167% per month or the maximum rare permitted by law. The Company may satisfy its obligation to repurchase the Purchased Shares upon exercise by the Purchaser of the Repurchase Option by causing a third party to purchase the Purchased Shares; provided, that the Company shall remain liable for payment therefor. 6.2 Financing Restriction. Commencing on the Closing Date and ending on the earlier of (i) expiration of the First Option, or (ii) the date on which Purchaser elects to exercise the First Option, neither the Company nor any of its representatives shall enter into any agreement for a Financing Proposal (as defined below) unless Purchaser is a party to the relevant agreement or arrangement or consents in writing to such financing. The term "Financing Proposal," as used in this section, refers to any plan, proposal, agreement or understanding or arrangement contemplating any sale or issuance of any Debt Security or equity security related to the financing of the Company other than any sale or issuance to the shareholders of the Company. 6.3 Right of Participation. The Company shall afford the Purchaser with the following rights of participation: 6.3.1 Until the Company has completed a Qualified Public Offering, the Company shall not issue, sell or exchange, agree to issue, sell or exchange, or reserve or set aside for issuance, sale or exchange, for cash or cash equivalents (i) any shares of Common Stock, (ii) any other equity security of the Company (other than the Purchased Shares, the First Option Shares and the Second Option Shares), including, without limitation, shares of Preferred Stock, (iii) , any option, warrant or other right to subscribe for, purchase or otherwise acquire any equity security of the Company (other than the Options), or (iv) any Debt Securities (collectively, the "Offered Securities"), unless in each such case the Company shall have offered to sell a portion of the Offered Securities to the Purchaser as follows: the Company shall offer to sell to the Purchaser on the same terms and conditions as the Offered Securities are being sold to other persons, that number of the Offered Securities so that Purchaser shall retain its then existing equity percentage of the Company on an as-converted fully diluted basis assuming for this purpose that the Options had been exercised in their entirety and all Series A Preferred Stock had been converted into Common Stock of the Company. For purposes of making this calculation, all outstanding options and warrants to purchase common stock and common stock issuable on the conversion of convertible securities of the Company shall be deemed to be issued and outstanding shares of Common Stock of the Company. The Company shall offer to sell to the Purchaser that portion of the Offered Securities as the aggregate number of shares of Series A Preferred Stock (on an as-converted basis) then held by or issuable to the Purchaser upon exercise of the Options (but only to the extent such Options have not expired due to passage of time) or otherwise bears to the total number of outstanding shares of Common Stock of the Company, plus all shares of Common Stock issuable upon exercise of then exercisable warrants or options or upon conversion 15 of convertible securities of the Company, at a price and on the other terms specified by the Company in writing delivered to the Purchaser (the "Offer"), and the Offer by its terms shall remain open and irrevocable for a period of thirty (30) days. 6.3.2 Notice of Acceptance. Notice of each Purchaser 's intention to accept, in whole or in part, an Offer made pursuant to Section 6.3.1 shall be evidenced by a writing signed by such Purchaser and delivered to the Company prior to the end of the thirty (30) day period of the Offer, setting forth the portion of the Offered Securities that the Purchaser elects to purchase (the "Notice of Acceptance"). 6.4 Conditions to Acceptance By Purchaser. 6.4.1 Permitted Sales of Refused Securities. In the event that a Notice of Acceptance is not given by the Purchaser in respect of all the Offered Securities to which the Purchaser is entitled, the Company shall have on hundred and twenty (120) days from the expiration of the period set forth in Section 6.3 to sell, or to enter into a binding agreement to sell, all or any part of such Offered Securities as to which a Notice of Acceptance has not been given by Purchaser (the "Refused Securities") to the Person or Persons specified in the Offer, but only upon terms and conditions, including, without limitation, unit price and interest rates, which are not more favorable, in unit price and interest rates, in the aggregate, to such other Person or Persons or less favorable to the Company than those set forth in the Offer. 6.4.2 Reduction in Amount of Offered Securities. In the event the Company shall propose to sell less than all the Refused Securities, then the Purchaser may, at its sole option and in its sole discretion, reduce the number of, or other units of the Offered Securities specified in its Notice of Acceptance to an amount that shall be not less than the amount of the Offered Securities that the Purchaser elected to purchase pursuant to Section 6.3 multiplied by a fraction, (i) the numerator of which shall be the amount of Offered Securities the Company actually proposes to sell, and (ii) the denominator of which shall be the amount of all Offered Securities. In the event that the Purchaser so elects to reduce the number or amount of Offered Securities specified in its Notice of Acceptance, the Company may not sell or otherwise dispose of more than the reduced amount of the Offered Securities until such securities have again been offered to the Purchasers in accordance with Section 6.3. 6.4.3 Closing. Upon the closing, which shall include full payment to the Company, of the sale to such other Person or Persons of all or less than all the Offered Securities not being purchased by Purchaser, the Purchaser shall purchase from the Company, and the Company shall sell to Purchaser, the number of Offered Securities specified in the Notice of Acceptance, as reduced pursuant to Section 6.4.2 if the Purchaser have so elected, upon the terms and conditions specified in the Offer. The purchase by Purchaser of any Offered Securities is subject in all cases to the preparation, execution and delivery by the 16 Company and the Purchaser of a purchase agreement relating to such Offered Securities reasonably satisfactory in form and substance to Purchaser and its counsel. 6.5 Further Sale. In each case, any Offered Securities not purchased by the Purchaser or other Persons in accordance with Section 6.4 may not be sold or otherwise disposed of until they are again offered to the Purchaser under the procedures specified in Section 6.3, 6.4 and 6.5. 6.6 Exceptions. The rights of the Purchasers under Section 6.3 shall not apply to: 6.6.1 Common Stock issued as a stock dividend to holders of Common Stock or upon any subdivision or combination of shares of Common Stock, 6.6.2 Common Stock issued in a Qualified Public Offering, 6.6.3 Common Stock issued upon exercise of the Options, 6.6.4 issuance of shares of Common Stock, or options exercisable therefor to officers, employees, directors or consultants of the Company and any Subsidiary pursuant to the Company's Stock Option Plan, or any other stock option agreement or plan or stock purchase agreement or plan approved by the Purchaser in an amount not greater than the amount specified in Section 5.2.6 hereof, 6.6.5 the issuance by the Company of securities in connection with a merger, consolidation or other acquisition of another corporation, or 6.7 Transfer of Right of Participation. The right of participation held by Purchaser may not be transferred or assigned to any individual or entity which is not an accredited investor within the meaning of Regulation D under the Securities Act. 7. CONDITIONS TO CLOSING. 7.1 Conditions to Purchasers' Obligations at the Closing. The Purchaser's obligation to purchase the Purchased Shares at the Closing are subject to the satisfaction (or, waiver by the Purchaser in the exercise of the Purchaser's sole discretion), at or prior to the Closing Date, of the following conditions: 7.1.1 Amended and Restated Articles of Incorporation. The Amended and Restated Articles of Incorporation in the form attached hereto as Exhibit 1.2 shall have been filed with, and accepted for filing by, the office of the Secretary of State of the State of California, and shall be in full force and effect. 7.1.2 Representations and Warranties True; Performance of Obligations. The representations and warranties made by the Company in Section 3 hereof shall be true and correct in all material respects as of the Closing Date with the same force and effect as if 17 they had been made as of the Closing Date, and the Company shall have performed all obligations and conditions herein required to be performed or observed by it on or prior to the Closing. 7.1.3 Legal Investment. On the Closing Date, the sale and issuance of the Purchase Shares, the First Option and the Second Option and the proposed issuance of the First Option Shares and the Second Option Shares shall be legally permitted by all laws and regulations to which Purchaser and the Company are subject. 7.1.4 Consents, Permits, and Waivers. The Company shall have obtained any and all consents, permits and waivers necessary or appropriate for consummation of the transactions contemplated by the Agreement and the Option Agreements (except for such as may be properly obtained subsequent to the Closing). 7.1.6 Reservation of Conversion Shares. The First Option Shares and the Second Option Shares issuable upon exercise of the exercise of the Option Agreements shall have been duly authorized and reserved for issuance upon such exercise. 7.1.7 Execution and Delivery of First Stock Option Agreement. Purchaser shall have received the First Stock Option Agreement, duly executed by the parties thereto, in the form attached hereto as Exhibit A. 7.1.8 Execution and Delivery of Indemnification Agreement. Purchaser shall have received the Indemnification Agreement, duly executed by the parties thereto, in the form attached hereto as Exhibit C. 7.1.9 Approval of Budget for Calendar Year 1999. Purchaser shall have been presented with, and shall have approved a budget of the Company for the calendar year ending December 31, 1999 (the "1999 Budget"). 7.7 Conditions to Obligations of the Company. The Company's obligation to issue and sell the Purchase Shares at the Closing is subject to the satisfaction, on or prior to the Closing Date, of the following conditions: 7.7.1 Representations and Warranties True. The representations and warranties made by the Purchaser acquiring Purchase Shares in Section 4 hereof shall be true and correct in all material respects at the date of the Closing, with the same force and effect as if they had been made on and as of said date. 7.7.2 Performance of Obligations. Purchaser shall have performed and complied with all agreements and conditions herein required to be performed or complied with by such Purchasers on or before the Closing. 18 8. REGISTRATION RIGHTS. The registration rights set forth in this Section 8 are only applicable after the exercise of the First Option or investment by the Purchaser of at least $1,000,000 in securities of the Company. 8.1 "Piggy Back" Registration. If at any time after the exercise of the First Option or investment by the Purchaser of at least $1,000,000 in securities of the Company, the Company shall determine to register under the Securities Act (including pursuant to a demand of any shareholder of the Company exercising registration rights) any of its Common Stock (except (i) shares to be issued solely in connection with any acquisition of any entity or business; (ii) shares issuable solely upon exercise of stock options; (iii) shares issuable solely pursuant to employee benefit plans; or (iv) shares proposed to be registered on any form that does not include substantially the same information as would be required to be included in a registration statement covering the sale of the Registrable Shares), it shall send to each holder of Registrable Shares, written notice of such determination and, if within twenty (20) days after receipt of such notice, such holder shall so request in writing, the Company shall use its best efforts to include in such registration statement all or any part of the Registrable Shares that such holder requests to be registered, except that if, in connection with any offering involving an underwriting of shares of the Company's Common Stock, the managing underwriter shall impose a reasonable limitation on the number of shares of Common Stock included in any such registration statement because, in its judgment, such limitation is necessary to effect an orderly public distribution or will otherwise jeopardize the success of the Offering, then such limitation shall be imposed pro rata among the holders of such Common Stock having an incidental ("piggy back") right to include such Common Stock in the registration statement as provided below, and, to the extent any Registrable Shares remain available for registration after the underwriter's cut-back, the Company shall be obligated to include in such registration statement only the product of (i) the number of Registrable Shares with respect to which such holder has requested inclusion hereunder and (ii) such holder's Ownership Percentage, as that term is defined in Section 9.1. For purposes of the apportionment provided for in the preceding sentence, for any holder of Registrable Shares that is a partnership or a corporation, the partners, retired partners, and stockholders of such holder, or the estates and family members of any such partners and retired partners and any trusts for the benefit of any of the foregoing persons shall be deemed to be a single holder, Notwithstanding the foregoing, no such reduction shall be made with respect to securities being offered by the Company for its own. If any holder of Registrable Shares disapproves of the terms of such underwriting, he may elect to withdraw therefrom by written notice to the Company and the underwriter given within three (3) days of the time such holder becomes aware of such terms. No incidental right under this Section 8.1 shall be construed to limit any registration required under Section 8.2. 8.2 Required Registration. 19 8.2.1 If on any two occasions, following the completion of the Company's initial public offering (other than an offering relating solely to any acquisition of any entity or business, or to the sale of securities to officers, directors, employees, or consultants of the Company pursuant to a stock option, stock purchase, or similar plan or arrangement), one or more holders of the Registrable Shares shall notify the Company in writing that it or they intend to offer or cause to be offered for public sale at least fifty percent (50%) of the Registrable Shares, the Company will so notify all holders of Registrable Shares. Upon written request of any holder given within thirty (30) days after the receipt by such holder from the Company of such notification, the Company will use its reasonable best efforts to cause all or any part of the Registrable Shares that may be requested by any holder thereof (including the holder or holders giving the initial notice of intent to offer) to be registered under the Securities Act as expeditiously as reasonably possible. If (i) the Company determines to include shares to be sold by it in any registration request under this Section 8.2 pursuant to a registration statement for which the Company has previously sent written notice of its determination to register shares to holders of Registrable Shares under Section 8.1, or (ii) the Company determines to include shares to be sold by it in any registration request under this Section 8.2 and such inclusion of shares results in a cut-back or limitation of the number of shares or other benefits to the holder(s) of the Registrable Shares submitting the registration request under this Section 8.2, then such registration shall be deemed to have been a registration under Section 8.1. 8.2.2 If the holders initiating the registration request hereunder ("Initiating Holders") intend to distribute the Registrable Shares covered by their request by means of an underwriting, they shall so advise the Company as a part of their request made pursuant to subsection (a) and the Company shall include such information in the written notice referred to in subsection (a). The underwriter will be selected by the Company and shall be reasonably acceptable to a majority in interest of the Initiating Holders. In such event, the right of any holder to include its Registrable Shares in such registration shall be conditioned upon such holder's participation in such underwriting and the inclusion of such holder's Registrable Shares in the underwriting (unless otherwise mutually agreed by a majority in interest of the Initiating Holders and such holder) to the extent provided herein. All holders proposing to distribute their Securities through such underwriting shall (together with the Company if required or desired by the Company) enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting. Notwithstanding any other provision of this Section 8.2, if the underwriter advises the Initiating Holders in writing that marketing factors require a limitation of the number of shares to be underwritten, then the Initiating Holders shall so advise all holders of Registrable Shares which would otherwise be underwritten pursuant hereto, and the number of Registrable Shares that may be included in the underwriting shall be allocated among all holders thereof, including the Initiating Holders, in proportion (as nearly as practicable) to the amount of Registrable Shares of the Company owned by each holder; provided, however, that the number of Registrable Shares to be included in such 20 underwriting shall not be reduced unless all other securities are first entirely excluded from the underwriting. 8.2.3 Notwithstanding the foregoing, if the Company shall furnish to holders requesting a registration statement pursuant to this Section 8.2, a certificate signed by the chief executive officer of the Company stating that in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company and its shareholders for such registration statement to be filed and it is therefore essential to defer the filing of such registration statement, the Company shall have the right to defer taking action with respect to such filing for a period of not more than 90 days after receipt of the request of the Initiating Holders; provided, however, that the Company may not utilize this right more than once in any twelve-month period. 8.2.4 In addition, the Company shall not be obligated to effect, or to take any action to effect, any registration pursuant to this Section 8.2: 8.2.4.1 after the Company has effected two registrations pursuant to this Section 8.2 and such registrations have been declared or ordered effective; or 8.2.4.2 if the Initiating Holders propose to dispose of shares of Registrable Shares that may be immediately registered on Form S-3 pursuant to a request made pursuant to Section 8.3 below: or 8.2.4.3 if the Company has effected a registration pursuant to this Section 8.2 and such registration has been declared or ordered effective within the previous 12 months. 8.3 Registration on Form S-3. In addition to the rights provided the holders of Registrable Shares in Section 8.1 and Section 8.2 above, from and after the date that the registration of Registrable Shares under the Securities Act can be effected on Form S-3 (or any similar successor form promulgated by the Securities and Exchange Commission) through the period ending five years following the Company's first public offering of its Common Stock in an offering registered under the Securities Act, the Company will promptly so notify each holder of Registrable Shares and then will at any time, and from time to time, during such period, as expeditiously as possible, use its best efforts to effect registration under the Securities Act on said Form S-3 of all or such portion of the Registrable Shares as the holder or holders shall specify. Notwithstanding the above, the Company shall not be obligated to effect any registration pursuant to this Section 8.3: (i) if Form S-3 (or any similar successor form promulgated by the Securities and Exchange Commission) is not available for such offering by the holders; (ii) if the holders of Registrable Shares, together with the holders of any other securities of the Company entitled to inclusion in such registration, propose to sell Registrable Shares and such other securities (if any) at an aggregate price to the public (net of any underwriters' discounts or commissions) of less than $500,000: (iii) if the Company shall furnish the holders a certificate signed by the chief executive officer of the Company stating that in the good faith judgment of the 21 Board of Directors of the Company, it would be seriously detrimental to the Company and its shareholders for such Form S-3 Registration to be effected at such time, in which event the Company shall have the right to defer the filing of the Form S-3 registration statement for a period of not more than 90 days after receipt of the request of the holder or holders under this Section 8 3; provided, however, that the Company shall not utilize this right more than once in any twelve (12) month period; or (iv) if the Company has, within the twelve (12) month period preceding the date of such request, already effected two registrations on Form S-3 (or any similar successor form promulgated by the Securities and Exchange Commission).for the holders pursuant to this Section 8.3. 8.4 Effectiveness. The Company will use its best efforts to maintain the effectiveness for up to nine (9) months of any registration statement pursuant to which any of the Registrable Shares are being offered and will from time to time amend or supplement such registration statement and the prospectus contained therein as and to the extent necessary to comply with the Securities Act and any applicable state securities statute or regulation. 8.5 Indemnification of Holders of Registrable Shares. In the event that the Company registers any of the Registrable Shares under the Securities Act, to the extent permitted by law, the Company will indemnify and hold harmless each holder and each underwriter of the Registrable Shares so registered (including any broker or dealer through whom such shares may be sold) and each person, if any, who controls such holder or any such underwriter within the meaning of Section 15 of the Securities Act from and against any and all losses, claims, damages, expenses or liabilities, joint or several, to which they or any of them become subject under the Securities Act and, except as hereinafter provided, will reimburse each such holder, each such underwriter and each such controlling person, if any, for any legal or other expenses reasonably incurred by them or any of them in connection with investigating or defending any actions whether or not resulting in any liability, insofar as such losses, claims, damages, expenses, liabilities or actions arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in the registration statement, in any preliminary or amended preliminary prospectus or in the prospectus (or the registration statement or prospectus as from time to time amended or supplemented by the Company) or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary in order to make the statements therein not misleading or any violation by the Company of any rule or regulation promulgated under the Securities Act applicable to the Company and relating to action or inaction required of the Company in connection with such registration, unless such untrue statement or omission was made in such registration statement, preliminary, or amended, preliminary prospectus or prospectus in reliance upon and in conformity with information furnished in writing to the Company in connection therewith by such holder of Registrable Shares, any such underwriter or any such controlling person expressly for use therein; provided that if a registration statement or any prospectus is amended to correct an untrue or misleading statement or omission, and any person who would otherwise be entitled to indemnification under this Section 8.5 fails to read such amendment and that failure results in a claim, loss, damage, expense or 22 liability which would otherwise be covered under this section, then the indemnification of this section shall not apply; and provided, further that if any untrue statement or omission is contained in a preliminary, or amended preliminary prospectus and the final prospectus corrects the untrue statement or omission and is timely furnished to the holders of Registrable Shares and any underwriters, then the indemnification of this section shall not apply. Promptly after receipt, but in any event, not more than 30 days after receipt, by any holder of Registrable Shares, any underwriter or any controlling person of notice of the commencement of any action in respect of which indemnity may be sought against the Company, such holder of Registrable Shares, or such underwriter or such controlling person, as the case may be, will notify the Company in writing of the commencement thereof, and, subject to the provisions hereinafter stated, the Company shall have the right to participate in, and to the extent it so desires, to assume the defense and full control of such action (including the employment of counsel, who shall be counsel reasonably satisfactory to such holder of Registrable Shares, such underwriter or such controlling person, as the case may be), and the payment of expenses insofar as such action shall relate to any alleged liability in respect of which indemnity may be sought against the Company, except as otherwise provided herein, Such holder of Registrable Shares, any such underwriter or any such controlling person shall have the right to employ separate counsel in any such action and to participate in the defense thereof but the fees and expenses of such counsel shall not be at the expense of the Company unless the employment of such counsel and payment of such fees and expenses of such counsel has been specifically authorized by the Company. The Company shall not be liable to indemnify any person for any settlement of any such action effected without the Company's consent. The Company shall not, except with the approval of each party, being indemnified under this Section 8.5, consent to entry of any judgment with respect to a matter against an indemnitee or enter into any settlement of a matter against an indemnitee that does not include as an unconditional term thereof the giving by the claimant or plaintiff to the parties being so indemnified of a release from all liability in respect to such claim or litigation. 8.6 Indemnification of Company. In the event that the Company registers any of the Registrable Shares under the Securities Act, to the extent permitted by law, each holder of the Registrable Shares so registered will indemnify and hold harmless the Company, each of its directors, each of its officers who have signed the registration statement, each underwriter of the Registrable Shares so registered (including any broker or dealer through whom such of the shares may be sold) and each person, if any, who controls the Company within the meaning of Section 15 of the Securities Act from and against any and all losses, claims, damages, expenses or liabilities, joint or several, to which they or any of them may become subject under the Securities Act and, except as hereinafter provided, will reimburse the Company and each such director, officer, underwriter or controlling person for any legal or other expenses reasonably incurred by them or any of them in connection with investigating or defending any actions whether or not resulting in any liability, insofar as such losses, claims, damages, expenses, liabilities or actions arise out 23 of or are based upon any untrue statement or alleged untrue statement of a material fact contained in the registration statement, in any preliminary or amended preliminary prospectus or in the prospectus (or the registration statement or prospectus as from time to time amended or supplemented) or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary in order to make the statements therein not misleading, but only insofar as any such statement or omission was made in reliance upon and in conformity with information furnished in writing to the Company in connection therewith by such holder of Registrable Shares, expressly for use therein; provided, however, that such holder's obligations hereunder shall be limited to an amount equal to the proceeds to such holder of the Registrable Shares sold in such registration, and provided further, that if a registration statement or any prospectus is amended to correct an untrue or misleading statement or omission and any person who would otherwise be entitled to indemnification under this section fails to read such amendment and that failure results in a claim, loss, damages, expenses or liability which would otherwise be covered under this section, then the indemnification of this Section 5.6 shall not apply; and provided, further that if any untrue statement or omission is contained in a preliminary or amended preliminary prospectus and the final prospectus corrects the untrue statement or omission and is timely furnished to the holders of Registrable Shares and any underwriters, then the indemnification of this section shall not apply, Promptly after receipt, but in any event not more than 30 days after receipt of notice of the commencement of any action in respect of which indemnity may be sought against such holder of Registrable Shares, the Company will notify such holder of Registrable Shares in writing of the commencement thereof, and such holder of Registrable Shares shall, subject to the provisions hereinafter stated, such holder shall have the right to participate in, and to the extent it so desires, to assume the defense and full control of such action (including the employment of counsel, who shall be counsel satisfactory to the Company) and the payment of expenses insofar as such action shall relate to the alleged liability in respect of which indemnify may be sought against such holder of Registrable Shares, except as otherwise provided herein. The Company and each such director, officer, underwriter or controlling person shall have the right to employ separate counsel in any such action and to participate in the defense thereof but the fees and expenses of such counsel shall not be at the expense of such holder of Registrable Shares unless employment of such counsel and payment of such fees and expenses of such counsel has been specifically authorized by such holder of Registrable Shares. Notwithstanding the two preceding sentences, if the action is one in which the Company may be obligated to indemnify, any holder of Registrable Shares pursuant to Section 8.5, the Company shall have the right to assume the defense of such action, subject to the right of such holders to participate therein as permitted by Section 8.5. Such holder of Registrable Shares shall not be liable to indemnify any person for any settlement of any such action effected without such holder's consent. Such holder shall not, except with the approval of the Company, consent to entry of any judgment or enter into any settlement that does not include as an unconditional term thereof the giving 24 by the claimant or plaintiff to the party being so indemnified of a release from all liability in respect to such claim or litigation. 8.7 Exchange Act Registration. At such time as it is required under the Exchange Act, the Company will use its best efforts to file on a timely basis with the Securities and Exchange Commission all material information that the Commission may require under either of Section 13 or Section 15(d) of the Exchange Act and, so long as it is required to file such information under the Exchange Act, shall use its best reasonable efforts to take all action that may be required as a condition to the availability of Rule 144 under the Securities Act (or any successor exemptive rule hereinafter in effect) with respect to the Company's Common Stock. From and after the first filings provided above, the Company shall furnish to any holder of Registrable Shares forthwith upon request (i) a written statement by the Company as to its compliance with the reporting requirements of Rule 144, (ii) a copy of the most recent annual or quarterly report of the Company as filed with the Securities and Exchange Commission, and (iii) any other reports and documents that a holder may reasonably request in availing itself of any rule or regulation of the Securities and Exchange Commission allowing a holder to sell any such Registrable Securities without registration. 8.8 Further Obligations of the Company. Whenever under the preceding Sections of this Section 8 the Company is required hereunder to register Registrable Shares, it agrees that it shall also do the following: 8.8.1 Furnish to each selling holder such copies of each preliminary and final prospectus and any other documents that such holder may reasonably request to facilitate the public offering of its Registrable Shares; 8.8.2 Use its best efforts to register or qualify the Registrable Shares to be registered pursuant to this Article 5 under the applicable securities or "blue sky" laws of such jurisdictions as any selling holder may reasonably request; provided, however, that the Company shall not be obligated to qualify to do business in any jurisdiction where it is not then so qualified or to take any action that would subject it to the service of process in suits other than those arising out of the offer or sale of the securities covered by the registration statement in any jurisdiction where it is not then so subject; 8.8.3 Furnish to each selling holder a signed counterpart of: 8.8.3.1 an opinion of counsel for the Company, dated the effective date of the registration statement: and 8.8.3.2 "comfort" letters signed by the Company's independent public accountants who have examined and reported on the Company's financial statements included in the registration statement, to the extent permitted by the standards of the American Institute of Certified Public Accountants, covering substantially the same matters with respect to 25 the registration statement (and the prospectus included therein) and (in the case of the accountants' "comfort" letters) with respect to events subsequent to the date of the financial statements, as are customarily covered in opinions of issuer's counsel and in accountants' "comfort" letters delivered to the underwriters in underwritten public offerings of securities, but only if and to the extent that the Company is required to deliver or cause the delivery of such opinion or "comfort" letters to the underwriters in an underwritten public offering of securities: and 8.8.4 Permit each selling holder or its counsel or other representatives to inspect and copy such corporate documents and records as may reasonably be requested by it; and 8.8.5 Furnish to each selling holder, upon request, a copy of all documents filed with and all correspondence from or to the Securities and Exchange Commission in connection with any such offering unless confidential treatment of such information has been requested of the Securities and Exchange Commission. 8.9 Expenses. Except as otherwise provided in this Agreement, in the case of a registration under Section8.1, 8.2 or 8.3 the Company shall bear all reasonable costs and expenses of each such registration, including, but not limited to, printing, legal and accounting expenses, Securities and Exchange Commission filing fees and "blue sky" fees and expenses; provided, however, that the Company shall have no obligation to pay or otherwise bear (i) any portion of the fees or disbursements of more than one counsel for the selling holders of Registrable Shares in connection with the registration of their Registrable Shares, (ii) any portion of the underwriter's commissions or discounts attributable to the Registrable Shares being offered and sold by the holders of Registrable Shares, (iii) any of such expenses if the payment of such expenses by the Company is prohibited by the laws of a state in which such offering is qualified, but only to the extent so prohibited, or (iv) any of such expenses in any registration proceeding begun pursuant to Section 5.2 or 5.3 if the registration request is subsequently withdrawn at the request of the holders of Registrable Shares participating therein unless such withdrawal is due to a material adverse change in the condition, business, or prospects of the Company from that known to the holders of Registrable Shares at the time of their request and the request is withdrawn with reasonable promptness following disclosure by the Company of such material adverse change. 8.10 Transfer of Registration Rights. The registration rights of the holders of Registrable Shares under this Article 8 may be transferred to any transferee of Registrable Shares that is an accredited investor within the meaning of Regulation D under the Securities Act; and provided, that (i) all provisions of this Agreement with respect to the transfer of Registrable Shares have been complied with: (ii) such transferee or assignee agrees in writing to be bound by and subject to the terms and conditions of this Agreement: (iii) such Transferee acquires from the purchaser at least $100,000 worth of shares of Common Stock; and (iv) such assignment shall be effective only if immediately following 26 such transfer the further disposition of such Securities by the transferee or assignee is restricted under the Securities Act. 8.11 No Superior Rights. The Company will not grant registration rights to any Person that are superior to the rights granted hereunder. 9. DEFINITIONS AND ACCOUNTING TERMS 9.1 Certain Defined Terms. As used in this Agreement, the following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined): 9.1.1 "Closing" shall have the meaning assigned to that term in Section.2.1. 9.1.2 "Company" means and shall include ONLINE TRANSACTION TECHNOLOGIES, INC., a California corporation and its successors and assigns. 9.1.3 "Common Stock" includes (a) the Company's Common Stock, without par value, as authorized on the date of this Agreement, (b) any other capital stock of any class or classes (however designated) of the Company, authorized on or after the date hereof, the holders of which shall have the right, without limitation as to amount, either to all or to a share of the balance of current dividends and liquidating dividends after the payment of dividends and distributions on any shares entitled to preference, and the holders of which shall ordinarily, in the absence of contingencies, be entitled to vote for the election of directors of the Company (even though the right so to vote has been suspended by the happening of such a contingency), and (c) any other securities into which or for which any of the securities described in (a) or (b) may be converted or exchanged pursuant to a plan of recapitalization, reorganization, merger, sale of assets or otherwise. 9.1.4 "Consolidated" when used with reference to any term defined herein shall mean that term as applied to the accounts of the Company and its Subsidiaries consolidated in accordance with generally accepted accounting principles after eliminating intercompany items and minority interests. 9.1.5 A "Covenant Termination Event" is (i) the closing of a Qualified Public Offering, or (ii) the occurrence of the Repurchase Condition and subsequent expiration without exercise by the Purchaser of the Repurchase Option, or (iii) the completion of the purchase by the Company of the Purchased Shares if the Purchaser exercises the Repurchase Option. 9.1.6 "Debt Securities" means and includes (i) any debt security of the Company that by its terms is convertible into or exchangeable for any equity security of the Company or (ii) any option, warrant or other right to subscribe for, purchase or otherwise acquire any such debt security of the Company. 27 9.1.7 "Disclosure Letter" shall mean that certain disclosure letter of even date herewith certified by the President and the Chairman of the Company and delivered to the Purchaser on or prior to the date hereof. 9.1.8 "Exchange Act" means the Securities Exchange Act of 1934, or any similar federal statute, and the rules and regulations of the Securities and Exchange Commission (or of any other Federal Agency then administering the Exchange Act) thereunder, all as the same shall be in effect at the time. 9.1.9 "Indebtedness" means all material obligations, contingent and otherwise, which should, in accordance with generally accepted accounting principles consistently applied, be classified upon the obligor's balance sheet as liabilities, excluding any liabilities in respect of deferred federal or state income taxes, but in any event including, without limitation, liabilities secured by any material mortgage on property owned or acquired subject to such mortgage, whether or not the liability secured thereby shall have been assumed, and also including, without limitation, (i)all material guaranties, endorsements and other contingent obligations in respect of Indebtedness of others, whether or not the same are or should be so reflected in said balance sheet, except guaranties by endorsement of negotiable instruments for deposit or collection or similar transactions in the ordinary course of business and (ii) the present value of any material lease payments due under leases in respect to which the obligor is liable as a lessee, required to be capitalized in accordance with applicable Statements of Financial Accounting Standards, determined by discounting all such payments at the interest rate determined in accordance with applicable Statements of Financial Accounting Standards. 9.1.10 "Ownership Percentage" means and includes, with respect to each holder of Registrable Shares requesting inclusion of Registrable Shares in an offering pursuant to Section 8.1, the number of Registrable Shares held by such holder divided by the aggregate of (i) all Registrable Shares and (ii) the total number of all other securities entitled to registration pursuant to agreement with the Company. 9.1.11 "Person" means an individual, corporation, partnership, joint venture, trust, or unincorporated organization, or a government or any agency or political subdivision thereof. 9.1.12 "Qualified Public Offering" means and includes the closing of an underwritten public offering pursuant to an effective registration statement under the Securities Act, covering the offer and sale of Common Stock for the account of the Company from which the aggregate net proceeds to the Company exceed $15,000,000 and in which the price per share is at least four times the Per Share Price (such amount to be equitably adjusted whenever there shall occur a stock split, combination, reclassification, or other similar event affecting the Common Stock). 28 9.1.13 "Registrable Shares" means and includes (i) the Common Stock held by the Purchaser or its permitted assignees; (ii) any other shares of Common Stock held by Purchaser; and (iii) any shares of Common Stock issued or issuable upon conversion of the Purchased Shares, the First Option Shares and/or the Second Option Shares or conversion of other securities of the Company held by the Purchaser. 9.1.14 "Securities" shall have the meaning assigned to that term in Section 1.2. 9.1.15 "Securities Act" means the Securities Act of 1933, as mended, or any similar Federal statute, and the rules and regulations of the Securities and Exchange Commission (or of any other Federal agency then administering the Securities Act) thereunder, all as the same shall be in effect at the time. 9.1.16 "Stock Option Plan" means the Company's Stock Option and Incentive Plan complying with the provisions of Section 5.2.6 , as hereafter adopted and amended from time to time. 9.1.17 "Subsidiary." or "Subsidiaries" means any corporation, 50% or more of the outstanding voting stock of which shall at the time be owned by the Company or by one or more Subsidiaries, or any other entity or enterprise, 50% or more of the equity of which shall at the time be owned by the Company or by one or more Subsidiaries. 9.1.18 "Wholly-Owned Subsidiary" or "Wholly-Owned Subsidiaries" means any corporation, 100% of the outstanding voting stock of which shall at the time be owned by the Company or by one or more Wholly-Owned Subsidiaries, or any other entity or enterprise, 100% of the equity of which shall at the time be owned by the Company or by one or more Wholly-Owned Subsidiaries. 9.2 Accounting Terms. All accounting terms not specifically defined herein shall be construed in accordance with generally accepted accounting principles, and all other financial data submitted pursuant to this Agreement shall be prepared and calculated in all material respects in accordance with such principles. 10. MISCELLANEOUS. 10.1 Survival. The representations, warranties, covenants and agreements of each party made herein shall survive any investigation made by any party and the closing of the transactions contemplated hereby. 10.2 Successors and Assigns. Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors and administrators of the parties hereto and shall inure to the benefit of and be enforceable by each person who shall be a holder of the Series A Preferred Stock, the First Option or the Second Option from time to time. 29 10.3 Entire Agreement. This Agreement, the Exhibits and Schedules hereto, the Option Agreements and the other documents delivered pursuant hereto constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof and supercedes all prior writings or communications and no party shall be liable or bound to any other in any manner by any representations, warranties, covenants and agreements except as specifically set forth herein and therein. 10.4 Severability. In case any provision of the Agreement shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. 10.5 Amendment, Waiver and Remedies. This Agreement may be amended or modified only upon the written consent of the Company and Purchaser. The obligations of the Company and the rights of the Purchaser under this Agreement may be waived only with the written consent of the Company and the Purchaser. No failure or delay on the part of the Purchaser, or any other holder of the Registrable Shares, in exercising any right, power or remedy hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy hereunder. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. 10.6 Notices. All notices required or permitted hereunder shall be in writing and shall be deemed effectively given: (a) upon personal delivery to the party to be notified; (b) when sent by confirmed telex or facsimile if sent during normal business hours of the recipient, if not, then on the next business day; (c) five (5) days after having been sent by registered or certified mail, return receipt requested, postage prepaid; or (d) one (1) day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt. All communications shall be sent to the Company or the Purchaser at the addresses as set forth on the signature page hereof or at such other address as the Company or Purchaser may designate by ten (10) days advance written notice to the other parties hereto. 10.7 Expenses. From and after the Closing, so long as there remain obligations due by the Company under this Agreement, the Company agrees to pay the reasonable fees and out-of-pocket expenses of legal counsel, independent public accountants and other outside experts reasonably retained by Purchaser in connection with any amendments, modifications or waivers under this Agreement, the Option Agreements, the Options and other instruments and documents to be delivered hereunder or thereunder; provided, however, that the Company will pay Purchaser's legal fees and expenses resulting from amendments only if prior to the preparation of documents effectuating such amendments the Company and Purchaser have mutually agreed in writing to the proposed amendment and, provided further, that the Company will have no obligation to pay Purchaser's legal fees and expenses resulting from amendments, modifications or waivers requested by the Purchaser. Each party shall pay all costs and expenses that it incurs with respect to the 30 negotiation, execution, delivery and performance of this Agreement. If any action at law or in equity is necessary to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to reasonable attorney's fees, costs and necessary disbursements in addition to any other relief to which such party may be entitled. 10.8 Titles and Subtitles. The titles of the sections and subsections of the Agreement are for convenience of reference only and are not to be considered in construing this Agreement. 10.9 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. 10.10 Broker's Fees. Each party hereto represents and warrants that no agent, broker, investment banker, person or firm acting on behalf of or under the authority of such party hereto is or will be entitled to any broker's or finder's fee or any other commission directly or indirectly in connection with the transactions contemplated herein. Each party hereto further agrees to indemnify each other party for any claims, losses or expenses incurred by such other party as a result of the representation in this paragraph being untrue. 10.11 Pronouns. All pronouns contained herein, and any variations thereof, shall be deemed to refer to the masculine, feminine or neutral, singular or plural, as to the identity of the parties hereto may require.Negotiation of Agreement. Each of the parties acknowledges that it has been represented by independent counsel of its choice throughout all negotiations that have preceded the execution of this Agreement and that it has executed the same with consent and upon the advice of said independent counsel. Each party and its counsel cooperated in the drafting and preparation of this Agreement and the documents referred to herein, and any and all drafts relating thereto shall be deemed the work product of the parties and may not be construed against any party by reason of its preparation. Accordingly, any rule of law or any legal decision that would require interpretation of any ambiguities in this Agreement against the party that drafted it is of no application and is hereby expressly waived. The provisions of this Agreement shall be interpreted in a reasonable manner to effect the intentions of the parties and this Agreement. 10.12 Further Assurances. From and after the date of this Agreement, upon the reasonable request of Purchasers, or the Company and each Subsidiary, the other party shall execute and deliver such instruments, documents and other writings as may be reasonably necessary or desirable to confirm and carry out and to effectuate fully the intent and purposes of this Agreement and the Securities. 10.13 California Corporate Securities Law. THE SALE OF THE SECURITIES WHICH ARE THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF SUCH SECURITIES OR THE 31 PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR PRIOR TO SUCH QUALIFICATION OR IN THE ABSENCE OF AN EXEMPTION FROM SUCH QUALIFICATION IS UNLAWFUL. PRIOR TO ACCEPTANCE OF SUCH CONSIDERATION BY THE COMPANY, THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED OR AN EXEMPTION FROM SUCH QUALIFICATION BEING AVAILABLE. 32 IN WITNESS WHEREOF, the parties hereto have executed the STOCK PURCHASE AGREEMENT as of the date set forth in the first paragraph hereof. COMPANY: PURCHASER: ONLINE TRANSACTION. CUMETRIX DATA SYSTEMS TECHNOLOGIES, INC CORP. By: /s/ IGOR KOGAN By: /s/ MAX TOGHRAIE --------------------- ----------------------- Igor Kogan, President Max Toghraie Chief Executive Officer By: /s/ MICHAEL SHIRMAN ------------------------- Michael Shirman, Chairman Address: 909 6th Street, Suite 6 Address: 957 Lawson Street Santa Monica, California 90403 Industry, California 91748 EXHIBIT A FIRST STOCK OPTION AGREEMENT THE SECURITIES EVIDENCED BY THIS AGREEMENT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, HAVE BEEN TAKEN FOR INVESTMENT AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF EXCEPT IN ACCORDANCE WITH THE TERMS OF THIS AGREEMENT. FIRST STOCK OPTION AGREEMENT THIS FIRST STOCK OPTION AGREEMENT (the "Agreement") is made as of the _____ day of December, 1998, by and among ONLINE TRANSACTION TECHNOLOGIES, INC., a California corporation (the "Company"), and CUMETRIX DATA SYSTEMS CORPORATION, a California corporation ("Holder"). RECITALS 33 A. The Company and Holder have agreed to enter into a Preferred Stock Purchase Agreement, dated as of the date hereof (the "Purchase Agreement") relating to the sale and issuance of shares of the Company's Series A-1 Preferred Stock. B. The Company desires to grant Holder, pursuant to the Purchase Agreement and in consideration of Holder's agreement to enter into the Purchase Agreement, the right to purchase shares of its Series A-2 Preferred Stock. NOW THEREFORE, in consideration of the foregoing and of the mutual covenants and agreements set forth below, the parties hereto covenant and agree as follows: AGREEMENT 1. OPTIONS. 1.1 Grant of Option. The Holder is hereby granted an option (the "First Option") to purchase such number of shares (rounded up to the nearest whole share) of the Company's Series A-2 Preferred Stock (the "First Option Shares") equal to the remainder of (A) the quotient of (x) the number of shares of the Company's Common Stock issued and outstanding (including shares issuable pursuant to outstanding options, warrants, rights and convertible debt or equity securities other than options granted pursuant to this Agreement) as of the date the First Option is exercised, divided by (y) .7429 minus (B) the number of ----- shares of the Company's Common Stock issued and outstanding (including shares issuable pursuant to outstanding options, warrants, rights and convertible debt or equity securities other than options granted pursuant to this Agreement) all determined on an as-converted basis as of the date the First Option is exercised. The per share exercise price for the First Option Shares (the "First Option Share Price") shall be equal to the quotient of (x) $900,000 divided by (y) the number of First Option Shares. The total purchase price (the "Total Purchase Price") of the First Option Shares shall be $900,000. The number and purchase price of such shares are subject to adjustment as provided in Section 2 hereof. 1.2 Exercise of Option. The First Option may be exercised at any time, only as to all of the First Option Shares, commencing on the date hereof and ending the later of (i) at 5:00 p.m., California Time, on February 1, 1999, and (ii) seven (7) business days following such time as the Company delivers to the Holder the Company's interactive software capable of performing in all material respects the operations and functions set forth on Exhibit B (the "Term"). The First Option may be exercised prior to the expiration of the Term by the execution and delivery to the Company of a written notice in the form of Exhibit "A" attached hereto, duly completed and executed. The written notice shall be accompanied by payment of the Total Purchase Price in immediately available funds. 2. ADJUSTMENTS TO EXERCISE PRICE AND NUMBER OF OPTION SHARES. The First Option Share Price and number of First Option Shares shall be subject to adjustment from time to time as follows: 2 2.1 In case of any capital reorganization, any reclassification of the Common Stock (other than a change in par value), or the consolidation of the Company with, or a sale of substantially all of the assets of the Company to (which sale is followed by a liquidation or dissolution of the Company), or merger of the Company with, another person, except in the case of a consolidation, sale or merger resulting in a Liquidity Event (as defined below), Holder shall thereafter be entitled upon exercise of the First Option to purchase the kind and number of shares of stock or other securities or property of the surviving corporation receivable upon such event by a holder of the number of shares of the Common Stock which the First Option entitles Holder to purchase from the Company immediately prior to such event; and in any such case, appropriate adjustment shall be made in the application of the provisions set forth in this Agreement with respect to Holder's rights and interests thereafter, to the end that the provisions set forth in this Agreement (including the specified changes and other adjustments to the First Option Share Price and the Total Purchase Price) shall thereafter be applicable in relation to any other shares or other property thereafter purchasable upon exercise of the First Option. 2.2 A consolidation of the Company with, or a sale of substantially all of the assets of the Company to (which sale is followed by a liquidation or dissolution of the Company), or the merger of the Company with, any other person, in each case resulting in a Liquidity Event shall cause the First Option Shares to terminate on the effective date of such consolidation, sale or merger, provided, however, that Holder shall have the right ending on the fifth day prior to such consolidation, sale or merger to exercise the First Option Shares in part or in whole. 2.3 A consolidation, sale or merger of the Company as described in Section 2.1 and 2.2 above shall be deemed to result in a "Liquidity Event" if (i) the Company is not the "Surviving Corporation" in such consolidation, sale or merger, and (ii) all of the securities of the Company outstanding immediately prior to such consolidation, sale or merger are exchanged, sold, redeemed or otherwise converted into cash or publicly traded securities. The determination as to whether or not the Company is the "surviving corporation" in any consolidation, sale or merger shall be made on the basis of the relative equity interests of the shareholders in the Company existing after such consolidation, sale or merger as follows: If following any consolidation, sale or merger the holders of outstanding voting securities of the Company prior to such consolidation, sale or merger own equity securities possessing more than 50% of the voting power of the corporation existing after such consolidation, sale or merger then for purposes of this Agreement, the Company shall be the surviving corporation. In all other cases, the Company shall not be the surviving corporation. In making the determination of ownership by the stockholders of a corporation, immediately after a consolidation, sale or merger, of securities pursuant to this Section 2.3, securities which they owned immediately prior to such consolidation, sale or merger as stockholders of another party to the transaction shall be disregarded. 2.4 In the case the Company, subsequent to the date hereof and prior to the exercise of this First Option, distributes to any holders of Common Stock, assets (including cash distributions), then upon the exercise of the First Option, Holder shall be entitled to receive an 3 amount equal to the greatest per share amount of consideration received by any holder of the Common Stock times the number of shares of Common Stock into which the shares purchased upon exercise of the First Option are convertible. 2.5 The grant of the First Option shall not affect in any way the right or power of the Company to make adjustments, reclassification, reorganizations or changes in its capital or business structure, or to merge, consolidate, dissolve or liquidate, or to sell or transfer all or any part of its business or assets. 3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF Holder. Holder makes the following representations, warranties and covenants: 3.1 Holder is acquiring the First Option Shares for its own account with the present intention of holding such security for investment purposes only and not with a view to, or for sale in connection with, any distribution of such securities (other than a distribution in compliance with all applicable federal and state securities laws); provided, that nothing contained herein will prevent Holder and its permitted assigns from transferring such securities in compliance with the provisions of Section 5 of this Agreement. 3.2 Holder is an experienced and sophisticated investor and has such knowledge and experience in financial and business matters that it is capable of evaluating the relative merits and the risks of an investment in the First Option and in the First Option Shares and of protecting its own interests in connection with this transaction. 3.3 Holder is willing to bear and is capable of bearing the economic risk of an investment in the First Option and the First Option Shares. In making this representation, consideration has been given to the fact that there is no public market for the First Option and the First Option Shares and as to whether the Holder could afford to hold the First Option and the First Option Shares for an indefinite period of time and whether, at this time, Holder could afford a complete loss of its First Option and the First Option Shares. Holder understands that the restrictions on transfer placed upon Holder pursuant to the provisions of Section 5 of this Agreement may result in Holder being required to hold the First Option until the date of expiration thereof or to hold the First Option Shares for an indefinite period off time. 3.4 The Company has made available, prior to the date of this Agreement, to Holder the opportunity to ask questions of the Company and its officers, and to receive from the Company and its officers information concerning the terms and conditions of the First Option and this Agreement and to obtain any additional information with respect to the Company, its business, operations and prospects, as reasonably requested by Holder. 3.5 Holder is an "accredited investor" as that term is defined under Regulation D promulgated by the Securities and Exchange Commission under the Securities Act of 1933, as amended (the "Act") and an "excluded purchaser" as such term is defined in Section 260.102.13 of the Rules of the California Corporations Commissioner. 4 4. RESERVATION OF STOCK. The Company covenants that it will at all times reserve and keep (i) available out of its authorized but unissued shares of Series A-2 Preferred Stock, solely for the purpose of issuance upon exercise of the First Option, such number of shares of Series A-2 Preferred Stock as shall at any time be issuable upon the exercise of the First Option and (ii) out of its authorized but unissued shares of Common Stock, solely for the purpose of issuance upon the conversion of the shares of Series A-2 Preferred Stock issuable upon exercise of the First Option, such number of shares of Common Stock as shall at any time be issuable upon conversion of the Series A-2 Preferred Stock issuable upon exercise of the First Option. 5. RESTRICTIONS ON TRANSFER OR EXERCISE OF THE OPTIONS. 5.1 All certificates representing the First Option Shares and any certificates representing the Common Stock issuable upon conversion of the First Option Shares will bear the following legend: "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, (THE "ACT") AND MAY NOT BE SOLD, TRANSFERRED, OR OTHERWISE DISPOSED OF UNLESS REGISTERED IN ACCORDANCE WITH SAID ACT OR PURSUANT TO AN EXEMPTION FROM THE REGISTRATION THEREUNDER." If in the reasonable opinion of counsel for the Company, or the opinion of counsel for Holder all future dispositions of any of the First Option or First Option Shares by the contemplated transferee would be exempt from the registration and prospectus delivery requirements of the Securities Act and the qualification requirements of the California Corporate Securities Law, then the restrictions on transfer of such securities contained in this Section 5 shall not apply to any subsequent transfer thereof and the legend set forth above may be removed from the certificates representing such securities. 5.2 Holder may not transfer, sell, pledge, assign or hypothecate the First Option or the First Option Shares to any person or entity and no person other than Holder may exercise any options unless the transfer of the First Option or First Option Shares to such person was permitted by this Section 5. Prior to any exercise of the First Options or any transfer or attempted transfer of any of the First Options or First Option Shares, Holder shall give the Company written notice of its intention so to do, describing briefly the manner of any such proposed exercise, sale or transfer. The Company agrees to permit such exercise or transfer, provided that such exercise or transfer is not prohibited by this Section 5 and that the Company is reasonably satisfied that such exercise or transfer complies with all applicable federal and state securities laws and regulations, and provided, further, in the case of a sale or transfer Holder deliver to the Company an assignment form in the form attached to this Agreement. 5 6. REGISTRATION UNDER THE SECURITIES ACT OF 1933 (the "1933 Act"). The Holder will have the right to cause the Common Stock into which the First Option Shares are convertible to be registered under the 1933 Act in accordance with Section 8 of the Purchase Agreement. 7. DISPUTES. 7.1 Arbitration. 7.1.1 Except as otherwise expressly provided for in Section 6(c) below, all disputes arising in connection with this Agreement shall be finally settled by arbitration in Los Angeles, California, in accordance with the rules of the American Arbitration Association (the "Rules of Arbitration") and judgment on the award rendered by the arbitration panel (the "Arbitration Panel") may be entered in any court or tribunal of competent jurisdiction. 7.1.2 Any party which desires to initiate arbitration proceedings as provided in Section 7.1.1 above may do so by delivering written notice to the other party (the "Arbitration Notice") specifying (A) the nature of the dispute or controversy to be arbitrated, (B) the name and address of the arbitrator appointed by the party initiating such arbitration and (C) such other matters as may be required by the Rules of Arbitration. 7.1.3 The party who receives an Arbitration Notice shall appoint an arbitrator and notify the initiating party of such arbitrator's name and address within 30 days after delivery of the Arbitration Notice; otherwise, a second arbitrator shall be appointed at the request of the party who delivered the Arbitration Notice as provided in the Rules of Arbitration. The two arbitrators so appointed shall appoint a third arbitrator who shall be the chairman of the Arbitration Panel and who shall be of American nationality. Should the arbitrators appointed by the parties not agree upon the appointment of the third arbitrator within 30 days of their appointment, the third shall be appointed in accordance with the Rules of Arbitration. 7.1.4 In any arbitration proceeding conducted pursuant to the provision of this Section 7, both parties shall have the right to discovery, to call witnesses and to cross-examine the opposing party's witnesses, either through legal counsel, expert witnesses or both, and such proceedings shall be conducted in the English language. 7.2 Finality of Decision. All decisions of the Arbitration Panel shall be final, conclusive and binding on all parties and shall not be subject to judicial review. The arbitrator shall divide all costs (other than fees of counsel) incurred in conducting the arbitration proceeding and the final award in accordance with what they deem just and equitable under the circumstances. 7.3 Limitations. Notwithstanding anything to the contrary contained in Sections 6.1 and 6.2 above, any claim by either party for injunctive or other equitable relief, including specific performance, may be brought in the Superior Court of the State of California for Los Angeles County, or in the United States District Court for the Central District of California, and any 6 judgment, order or decree relating thereto shall have precedence over any arbitral award or proceeding. The Company and the Executive each consent and submit in advance to the jurisdiction of the above-mentioned courts and agrees that venue will be proper in such courts on any such matter. 8. MISCELLANEOUS. 8.1 All notices or demands shall be in writing and shall be delivered personally, electronically, telegraphically, or by express or certified mail or registered mail or by private overnight express mail service. Delivery shall be deemed conclusively made (i) at the time of delivery if personally delivered, (ii) immediately in the event notice is delivered by transmittal over electronic or telephonic transmitting devices, such as telex or telecopy, provided, the party to whom the notice is delivered has a compatible device and electronically or by other written document confirms receipt thereof, or the party otherwise confirms actual receipt thereof, (iii) at the time that the telegraphic agency confirms to the sender delivery thereof to the addressee if served telegraphically, (iv) twenty-four (24) hours after delivery to the carrier if served by any private, overnight, express mail service, (v) twenty-four (24) hours after deposit thereof in the United States mail, properly addressed and postage prepaid, return receipt requested, if served by express mail, or (vi) five (5) days after deposit thereof in the United States mail, properly addressed and postage prepaid, return receipt requested, if served by certified mail. Any notice or demand to the Company shall be given to: Online Transaction Technologies, Inc. 909 6th Street, Suite 6 Santa Monica, California 90403 Attn: Board of Directors Any notice of demand to the Holder shall be given to: Cumetrix Data Systems Corp. 957 Lawson Street Industry, California 9148 Fax: (626) 965-8159 Attn: Max Toghraie ------------ Any party may, by virtue of written notice in compliance with this paragraph, alter or change the address or the identity of the person to whom any notice, or copy thereof, is to be delivered. 8.2 Each party shall execute and deliver all such further instruments, documents and papers, and shall perform any and all acts necessary, to give full force and effect to all of the terms and provisions of this Agreement. 7 8.3 No course of dealing or any delay or failure to exercise any right hereunder on the part of Holder shall operate as a waiver of such right or otherwise prejudice Holder's rights, powers or remedies. 8.4 This Agreement and the rights evidenced hereby shall inure to the benefit of and be binding upon the successors of the Company and the successors and assigns of Holder except that the rights contained in Section 6 may not be transferred to a purchaser the First Option Shares pursuant to a registration statement under the Act covering such proposed distribution or pursuant to the limitations contained in Rule 144 of the Act. The provisions of this Agreement are intended to be for the benefit of all holders from time to time of this Agreement, and shall be enforceable by any such holder. 8.5 The Company shall not by any action including, without limitation, amending its articles of incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Agreement, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such actions as may be necessary or appropriate to protect the rights of Holder against impairment. Without limiting the generality of the foregoing, the Company will (a) not increase the par value of any shares of Common Stock receivable upon the exercise of the Option above the amount payable therefor upon such exercise immediately prior to such increase in par value, (b) take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable shares of Common Stock upon the exercise of the Option, and (c) use its best efforts to obtain all such authorizations, exemptions or consents from any public regulatory body having jurisdiction thereof as may be necessary to enable the company to perform its obligations under this Agreement. Upon the request of Holder, the Company will at any time during the term of this Agreement acknowledge in writing, in form reasonably satisfactory to Holder, the continuing validity of this Agreement and the obligations of the Company hereunder. 8.6 Upon receipt by the Company from Holder of evidence reasonably satisfactory to the Company of the ownership of any loss, theft, distribution or mutilation of this Agreement and indemnity reasonably satisfactory to the Company (it being understood that the written agreement of Holder shall be sufficient indemnity) and in case of mutilation upon surrender and cancellation hereof, the Company will execute and deliver in lieu hereof a new Agreement of like tenor to Holder; provided, in the case of mutilation, no indemnity shall be required if this Agreement in identifiable form is surrendered to the Company for cancellation. 8.7 This Agreement shall be governed by and construed in accordance with the laws of the State of California applicable to contracts entered into and fully to be performed therein. In all matters of interpretation, whenever necessary to give effort to any provision of this Agreement, each gender shall include the others, the singular shall include the plural, and the plural shall include the singular. The titles of the paragraphs of this Agreement are for convenience only and shall not in any way affect the interpretation of any provision or condition 8 of this Agreement. All remedies, rights, undertakings, obligations and agreements contained in this Agreement shall be cumulative and none of them shall be in limitation of an other remedy, right, undertaking, obligation or agreement of any party. Each party and its counsel have reviewed and revised this Agreement. As a result, the normal rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall not be employed in the interpretation of this Agreement or any amendments or exhibits thereto. 8.8 This Agreement may be executed in counterparts which, taken together, shall constitute the whole of the agreement as between the parties. 8.9 Each party to this Agreement which is a corporation hereby represents and warrants that all necessary corporate action has been taken, including the due adoption of a resolution by its board of directors sufficient to enable such corporation to enter into this Agreement, to be bound thereby and to perform fully as required hereunder. 8.10 Each person executing this Agreement on behalf of an entity represents and warrants that he or she has been duly authorized to enter into this Agreement on behalf of such entity, and that such entity is thereby fully bound. 8.11 The terms and conditions of this Agreement shall be subject to all applicable laws and regulations of any governing jurisdictions. If an clause or provision of this Agreement is illegal, invalid or unenforceable under present or future laws effective during the term of this Agreement, then and, in that event, the remainder of this Agreement shall not be affected thereby, and in lieu of each clause or provision of this Agreement that is illegal, invalid or unenforceable, there shall be added a clause or provision as similar in terms and in amount to such illegal, invalid or unenforceable clause or provision as may be possible and be legal, valid and enforceable, as long as it does not otherwise frustrate the principal purposes of this Agreement. 8.12 This Agreement may be amended or modified only with the written agreement of the Company and upon the written consent of a majority of the Holders. 8.13 In the event that any dispute among the parties to this Agreement should result in litigation, the prevailing party in such dispute shall be entitled to recover from the losing party all fees, costs and expenses of enforcing any right of such prevailing party under or with respect to this Agreement, including without limitation, such reasonable fees and expenses of attorneys and accountants, which shall include, without limitation, all fees, costs and expenses of appeals. 9 IN WITNESS WHEREOF, the parties have entered into and executed this Option Agreement as of the date first above written. Online Transaction Technologies, Inc. By: ------------------------------------ Its: ------------------------------------ Cumetrix Data Systems Corporation By: ------------------------------------ Its: ------------------------------------ 10 EXHIBIT "A" TO EXHIBIT A NOTICE OF EXERCISE (To be signed only upon exercise of the First Option) TO: Online Transaction Technologies, Inc. The undersigned, hereby irrevocably elects to exercise the purchase rights represented by the First Option granted to the undersigned on ____________, 1998 and to purchase thereunder ___* shares of Series A-2 Preferred Stock of Online Transaction Technologies, Inc., (the "Company") and herewith encloses payment of $900,000 in full payment for the First Option Shares. Dated: ________________, _______ ------------------------------------ (Signature must conform in all respects to name of either holder as specified on the face of the Option) ------------------------------------ (Please Print Name) ------------------------------------ (Address) 11 EXHIBIT B TO EXHIBIT A SPECIFICATIONS OF SOFTWARE To be provided Separately to the Holder EXHIBIT B SECOND STOCK OPTION AGREEMENT THE SECURITIES EVIDENCED BY THIS AGREEMENT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, HAVE BEEN TAKEN FOR INVESTMENT AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF EXCEPT IN ACCORDANCE WITH THE TERMS OF THIS AGREEMENT. SECOND STOCK OPTION AGREEMENT THIS SECOND STOCK OPTION AGREEMENT (the "Agreement") is made as of the _____ day of _________________, 1998, by and among ONLINE TRANSACTION TECHNOLOGIES, INC., a California corporation (the "Company"), and CUMETRIX DATA SYSTEMS CORPORATION, a California corporation ("Holder"). RECITALS A. The Company and Holder have agreed to enter into a Preferred Stock Purchase Agreement, dated as of the date hereof (the "Purchase Agreement") relating to the sale and issuance of shares of the Company's Series A-1 Preferred Stock. B. Holder received upon entering into the Purchase Agreement an option (the "First Option") to acquire shares of the Company's Series A-2 Preferred Stock. C. Upon exercise of the First Option, the Company desires to grant Holder, pursuant to the Purchase Agreement and in consideration of Holder's exercise of the First Option, the right to purchase shares of its Series A-3 Preferred Stock. NOW THEREFORE, in consideration of the foregoing and of the mutual covenants and agreements set forth below, the parties hereto covenant and agree as follows: 12 AGREEMENT 1. OPTIONS. 1.1 Grant of Option. The Holder is hereby granted an option (the "Second Option") to purchase such number of shares (rounded up to the nearest whole share) of the Company's Series A-3 Preferred Stock (the "Second Option Shares") equal to the remainder of (A) the quotient of (x) the number of shares of the Company's Common Stock issued and outstanding (including shares issuable pursuant to outstanding options, warrants, rights and convertible debt or equity securities other than options granted pursuant to this Agreement) as of the date the Second Option is initially exercised, divided by (y) .7857 minus (B) the ----- number of shares of the Company's Common Stock issued and outstanding (including shares issuable pursuant to outstanding options, warrants, rights and convertible debt or equity securities other than options granted pursuant to this Agreement) all determind on an as-converted basis as of the date the Second Option is initially exercised. The per share exercise price for the Second Option Shares (the "Second Option Share Price") shall be equal to the quotient of (x) $8,000,000 divided by (y) the number of Second Option Shares. The total purchase price (the "Total Purchase Price") of the Second Option Shares shall be $8,000,000. The number and purchase price of such shares are subject to adjustment as provided in Section 2 hereof. 1.2 Exercise of Option. The Second Option may be exercised at any time, in whole or in part, provided the Second Option is initially exercised as to at least $4 million worth of the Second Option Shares, commencing on the date the First Option is exercised and ending at 5:00 p.m., California Time, on the date that is the later of (i) nine months after the First Option is exercised or (ii) November 1, 1999 (the "Term"). Holder shall be entitled to purchase all the Second Option Shares, but only up to an amount not to exceed, on an as-converted basis determined as of the date of the exercise of the Second Option, 50% of the issued and outstanding shares of the Company's Common Stock on a fully diluted basis as of the date the Second Option is initially exercised. The Second Option may be exercised prior to the expiration of the Term by the execution and delivery to the Company of a written notice in the form of Exhibit "A" attached hereto, duly completed and executed. The written notice shall be accompanied by payment of the Second Option Share Price for each share for which the Second Option is exercised in immediately available funds. 2. ADJUSTMENTS TO EXERCISE PRICE AND NUMBER OF OPTION SHARES. The Second Option Share Price and number of Second Option Shares shall be subject to adjustment from time to time as follows: 2.1 In case of any capital reorganization, any reclassification of the Common Stock (other than a change in par value), or the consolidation of the Company with, or a sale of substantially all of the assets of the Company to (which sale is followed by a liquidation or dissolution of the Company), or merger of the Company with, another person, except in the case of a consolidation, sale or merger resulting in a Liquidity Event (as defined below), Holder shall thereafter be entitled upon exercise of the Second Option to purchase the kind and number of shares of stock or other securities or property of the surviving corporation receivable upon such 2. event by a holder of the number of shares of the Common Stock which the Second Option entitles Holder to purchase from the Company immediately prior to such event; and in any such case, appropriate adjustment shall be made in the application of the provisions set forth in this Agreement with respect to Holder's rights and interests thereafter, to the end that the provisions set forth in this Agreement (including the specified changes and other adjustments to the Second Option Share Price and the Total Purchase Price) shall thereafter be applicable in relation to any other shares or other property thereafter purchasable upon exercise of the Second Option. 2.2 A consolidation of the Company with, or a sale of substantially all of the assets of the Company to (which sale is followed by a liquidation or dissolution of the Company), or the merger of the Company with, any other person, in each case resulting in a Liquidity Event shall cause the Second Option Shares to terminate on the effective date of such consolidation, sale or merger, provided, however, that Holder shall have the right ending on the fifth day prior to such consolidation, sale or merger to exercise the Second Option Shares in part or in whole. 2.3 A consolidation, sale or merger of the Company as described in Section 2.1 and 2.2 above shall be deemed to result in a "Liquidity Event" if (i) the Company is not the "Surviving Corporation" in such consolidation, sale or merger, and (ii) all of the securities of the Company outstanding immediately prior to such consolidation, sale or merger are exchanged, sold, redeemed or otherwise converted into cash or publicly traded securities. The determination as to whether or not the Company is the "surviving corporation" in any consolidation, sale or merger shall be made on the basis of the relative equity interests of the shareholders in the Company existing after such consolidation, sale or merger as follows: If following any consolidation, sale or merger the holders of outstanding voting securities of the Company prior to such consolidation, sale or merger own equity securities possessing more than 50% of the voting power of the corporation existing after such consolidation, sale or merger then for purposes of this Agreement, the Company shall be the surviving corporation. In all other cases, the Company shall not be the surviving corporation. In making the determination of ownership by the stockholders of a corporation, immediately after a consolidation, sale or merger, of securities pursuant to this Section 2.3, securities which they owned immediately prior to such consolidation, sale or merger as stockholders of another party to the transaction shall be disregarded. 2.4 In the case the Company, subsequent to the date hereof and prior to the exercise of the Second Option, distributes to any holders of Common Stock, assets (including cash distributions), then upon the exercise of the Second Option, Holder shall be entitled to receive an amount equal to the greatest per share amount of consideration received by any holder of the Common Stock times the number of shares of Common Stock into which the shares purchased upon exercise of the Second Option are convertible. 2.5 The grant of the Second Option shall not affect in any way the right or power of the Company to make adjustments, reclassification, reorganizations or changes in its capital or business structure, or to merge, consolidate, dissolve or liquidate, or to sell or transfer all or any part of its business or assets. 3. 3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF HOLDER. Holder makes the following representations, warranties and covenants: 3.1 Holder is acquiring the Second Option Shares for its own account with the present intention of holding such security for investment purposes only and not with a view to, or for sale in connection with, any distribution of such securities (other than a distribution in compliance with all applicable federal and state securities laws); provided, that nothing contained herein will prevent Holder and its permitted assigns from transferring such securities in compliance with the provisions of Section 5 of this Agreement. 3.2 Holder is an experienced and sophisticated investor and has such knowledge and experience in financial and business matters that it is capable of evaluating the relative merits and the risks of an investment in the Second Option and in the Second Option Shares and of protecting its own interests in connection with this transaction. 3.3 Holder is willing to bear and is capable of bearing the economic risk of an investment in the Second Option and the Second Option Shares. In making this representation, consideration has been given to the fact that there is no public market for the Second Option and the Second Option Shares and as to whether the Holder could afford to hold the Second Option and the Second Option Shares for an indefinite period of time and whether, at this time, Holder could afford a complete loss of its Second Option and the Second Option Shares. Holder understands that the restrictions on transfer placed upon Holder pursuant to the provisions of Section 5 of this Agreement may result in Holder being required to hold the Second Option until the date of expiration thereof or to hold the Second Option Shares for an indefinite period off time. 3.4 The Company has made available, prior to the date of this Agreement, to Holder the opportunity to ask questions of the Company and its officers, and to receive from the Company and its officers information concerning the terms and conditions of the Second Option and this Agreement and to obtain any additional information with respect to the Company, its business, operations and prospects, as reasonably requested by Holder. 3.5 Holder is an "accredited investor" as that term is defined under Regulation D promulgated by the Securities and Exchange Commission under the Securities Act of 1933, as amended (the "Act") and an "excluded purchaser" as such term is defined in Section 260.102.13 of the Rues of the California Corporations Commissioner. 4. RESERVATION OF STOCK. The Company covenants that it will at all times reserve and keep (i) available out of its authorized but unissued shares of Series A-3 Preferred Stock, solely for the purpose of issuance upon exercise of the Second Option, such number of shares of Series A-3 Preferred Stock as shall at any time be issuable upon the exercise of the Second Option and (ii) out of its authorized but unissued shares of Common Stock, solely for the purpose of issuance upon the conversion of the shares of Series A-3 Preferred Stock issuable upon the exercise of the Second Option, such number of shares of Common Stock as shall then be issuable upon the conversion of the shares of Series A-3 Preferred Stock issuable upon the exercise of the Second Option. 4. 5. RESTRICTIONS ON TRANSFER OR EXERCISE OF THE OPTIONS. 5.1 All certificates representing the Second Option Shares and any certificates representing the Common Stock issuable upon conversion of the Second Option Shares will bear the following legend: "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, (THE "ACT") AND MAY NOT BE SOLD, TRANSFERRED, OR OTHERWISE DISPOSED OF UNLESS REGISTERED IN ACCORDANCE WITH SAID ACT OR PURSUANT TO AN EXEMPTION FROM THE REGISTRATION THEREUNDER." If in the reasonable opinion of counsel for the Company, or the opinion of counsel for Holder all future dispositions of any of the Second Option or Second Option Shares by the contemplated transferee would be exempt from the registration and prospectus delivery requirements of the Securities Act and the qualification requirements of the California Corporate Securities Law, then the restrictions on transfer of such securities contained in this Section 5 shall not apply to any subsequent transfer thereof and the legend set forth above may be removed from the certificates representing such securities. 5.2 Holder may not transfer, sell, pledge, assign or hypothecate the Second Option or the Second Option Shares to any person or entity and no person other than Holder may exercise any options unless the transfer of the Second Option or Second Option Shares to such person was permitted by this Section 5. Prior to any exercise of the Second Options or any transfer or attempted transfer of any of the Second Options or Second Option Shares, Holder shall give the Company written notice of its intention so to do, describing briefly the manner of any such proposed exercise, sale or transfer. The Company agrees to permit such exercise or transfer, provided that such exercise or transfer is not prohibited by this Section 5 and that the Company is reasonably satisfied that such exercise or transfer complies with all applicable federal and state securities laws and regulations, and provided, further, in the case of a sale or transfer Holder deliver to the Company an assignment form in the form attached to this Agreement. 6. REGISTRATION UNDER THE SECURITIES ACT OF 1933 (the "1933 Act"). The Holder will have the right to cause the Common Stock into which the Second Option Shares are convertible to be registered under the 1933 Act in accordance with Section 8 of the Purchase Agreement. 7. DISPUTES. 7.1 Arbitration. 7.1.1 Except as otherwise expressly provided for in Section 6(c) below, all disputes arising in connection with this Agreement shall be finally settled by arbitration in Los Angeles, California, in accordance with the rules of the American Arbitration Association (the 5. "Rules of Arbitration") and judgment on the award rendered by the arbitration panel (the "Arbitration Panel") may be entered in any court or tribunal of competent jurisdiction. 7.1.2 Any party which desires to initiate arbitration proceedings as provided in Section 7.1.1 above may do so by delivering written notice to the other party (the "Arbitration Notice") specifying (A) the nature of the dispute or controversy to be arbitrated, (B) the name and address of the arbitrator appointed by the party initiating such arbitration and (C) such other matters as may be required by the Rules of Arbitration. 7.1.3 The party who receives an Arbitration Notice shall appoint an arbitrator and notify the initiating party of such arbitrator's name and address within 30 days after delivery of the Arbitration Notice; otherwise, a second arbitrator shall be appointed at the request of the party who delivered the Arbitration Notice as provided in the Rules of Arbitration. The two arbitrators so appointed shall appoint a third arbitrator who shall be the chairman of the Arbitration Panel and who shall be of American nationality. Should the arbitrators appointed by the parties not agree upon the appointment of the third arbitrator within 30 days of their appointment, the third shall be appointed in accordance with the Rules of Arbitration. 7.1.4 In any arbitration proceeding conducted pursuant to the provision of this Section 7, both parties shall have the right to discovery, to call witnesses and to cross-examine the opposing party's witnesses, either through legal counsel, expert witnesses or both, and such proceedings shall be conducted in the English language. 7.2 Finality of Decision. All decisions of the Arbitration Panel shall be final, conclusive and binding on all parties and shall not be subject to judicial review. The arbitrator shall divide all costs (other than fees of counsel) incurred in conducting the arbitration proceeding and the final award in accordance with what they deem just and equitable under the circumstances. 7.3 Limitations. Notwithstanding anything to the contrary contained in Sections 6.1 and 6.2 above, any claim by either party for injunctive or other equitable relief, including specific performance, may be brought in the Superior Court of the State of California for Los Angeles County, or in the United States District Court for the Central District of California, and any judgment, order or decree relating thereto shall have precedence over any arbitral award or proceeding. The Company and the Executive each consent and submit in advance to the jurisdiction of the above-mentioned courts and agrees that venue will be proper in such courts on any such matter. 8. MISCELLANEOUS. 8.1 All notices or demands shall be in writing and shall be delivered personally, electronically, telegraphically, or by express or certified mail or registered mail or by private overnight express mail service. Delivery shall be deemed conclusively made (i) at the time of delivery if personally delivered, (ii) immediately in the event notice is delivered by transmittal over electronic or telephonic transmitting devices, such as telex or telecopy, provided, the party to whom the notice is delivered has a compatible device and electronically or by other written 6. document confirms receipt thereof, or the party otherwise confirms actual receipt thereof, (iii) at the time that the telegraphic agency confirms to the sender delivery thereof to the addressee if served telegraphically, (iv) twenty- four (24) hours after delivery to the carrier if served by any private, overnight, express mail service, (v) twenty-four (24) hours after deposit thereof in the United States mail, properly addressed and postage prepaid, return receipt requested, if served by express mail, or (vi) five (5) days after deposit thereof in the United States mail, properly addressed and postage prepaid, return receipt requested, if served by certified mail. Any notice or demand to the Company shall be given to: Online Transaction Technologies, Inc. 909 6th Street, Suite 6 Santa Monica, California 90403 Attn: Board of Directors Any notice of demand to the Holder shall be given to: Cumetrix Data Systems Corp. 957 Lawson Street Industry, CA 91748 Attn: Chairman Any party may, by virtue of written notice in compliance with this paragraph, alter or change the address or the identity of the person to whom any notice, or copy thereof, is to be delivered. 8.2 Each party shall execute and deliver all such further instruments, documents and papers, and shall perform any and all acts necessary, to give full force and effect to all of the terms and provisions of this Agreement. 8.3 No course of dealing or any delay or failure to exercise any right hereunder on the part of Holder shall operate as a waiver of such right or otherwise prejudice Holder's rights, powers or remedies. 8.4 This Agreement and the rights evidenced hereby shall inure to the benefit of and be binding upon the successors of the Company and the successors and assigns of Holder except that the rights contained in Section 6 may not be transferred to a purchaser of the Second Option Shares pursuant to a registration statement under the Act covering such proposed distribution or pursuant to the limitations contained in Rule 144 of the Act. The provisions of this Agreement are intended to be for the benefit of all holders from time to time of this Agreement, and shall be enforceable by any such holder. 8.5 The Company shall not by any action including, without limitation, amending its articles of incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Agreement, but will at all times in good 7. faith assist in the carrying out of all such terms and in the taking of all such actions as may be necessary or appropriate to protect the rights of Holder against impairment. Without limiting the generality of the foregoing, the Company will (a) not increase the par value of any shares of Common Stock receivable upon the exercise of the Option above the amount payable therefor upon such exercise immediately prior to such increase in par value, (b) take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable shares of Common Stock upon the exercise of the Option, and (c) use its best efforts to obtain all such authorizations, exemptions or consents from any public regulatory body having jurisdiction thereof as may be necessary to enable the company to perform its obligations under this Agreement. Upon the request of Holder, the Company will at any time during the term of this Agreement acknowledge in writing, in form reasonably satisfactory to Holder, the continuing validity of this Agreement and the obligations of the Company hereunder. 8.6 Upon receipt by the Company from Holder of evidence reasonably satisfactory to the Company of the ownership of any loss, theft, distribution or mutilation of this Agreement and indemnity reasonably satisfactory to the Company (it being understood that the written agreement of Holder shall be sufficient indemnity) and in case of mutilation upon surrender and cancellation hereof, the Company will execute and deliver in lieu hereof a new Agreement of like tenor to Holder; provided, in the case of mutilation, no indemnity shall be required if this Agreement in identifiable form is surrendered to the Company for cancellation. 8.7 This Agreement shall be governed by and construed in accordance with the laws of the State of California applicable to contracts entered into and fully to be performed therein. In all matters of interpretation, whenever necessary to give effort to any provision of this Agreement, each gender shall include the others, the singular shall include the plural, and the plural shall include the singular. The titles of the paragraphs of this Agreement are for convenience only and shall not in any way affect the interpretation of any provision or condition of this Agreement. All remedies, rights, undertakings, obligations and agreements contained in this Agreement shall be cumulative and none of them shall be in limitation of an other remedy, right, undertaking, obligation or agreement of any party. Each party and its counsel have reviewed and revised this Agreement. As a result, the normal rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall not be employed in the interpretation of this Agreement or any amendments or exhibits thereto. 8.8 This Agreement may be executed in counterparts which, taken together, shall constitute the whole of the agreement as between the parties. 8.9 Each party to this Agreement which is a corporation hereby represents and warrants that all necessary corporate action has been taken, including the due adoption of a resolution by its board of directors sufficient to enable such corporation to enter into this Agreement, to be bound thereby and to perform fully as required hereunder. 8.10 Each person executing this Agreement on behalf of an entity represents and warrants that he or she has been duly authorized to enter into this Agreement on behalf of such entity, and that such entity is thereby fully bound. 8. 8.11 The terms and conditions of this Agreement shall be subject to all applicable laws and regulations of any governing jurisdictions. If an clause or provision of this Agreement is illegal, invalid or unenforceable under present or future laws effective during the term of this Agreement, then and, in that event, the remainder of this Agreement shall not be affected thereby, and in lieu of each clause or provision of this Agreement that is illegal, invalid or unenforceable, there shall be added a clause or provision as similar in terms and in amount to such illegal, invalid or unenforceable clause or provision as may be possible and be legal, valid and enforceable, as long as it does not otherwise frustrate the principal purposes of this Agreement. 8.12 This Agreement may be amended or modified only upon the written agreement of the Company and upon the written consent of a majority of the Holders. 8.13 In the event that any dispute among the parties to this Agreement should result in litigation, the prevailing party in such dispute shall be entitled to recover from the losing party all fees, costs and expenses of enforcing any right of such prevailing party under or with respect to this Agreement, including without limitation, such reasonable fees and expenses of attorneys and accountants, which shall include, without limitation, all fees, costs and expenses of appeals. 9. IN WITNESS WHEREOF, the parties have entered into and executed this Option Agreement as of the date first above written. Online Transaction Technologies, Inc. By: ------------------------------------ Its: ------------------------------------ Cumetrix Data Systems Corporation By: ------------------------------------ Its: ------------------------------------ 10. EXHIBIT "A" TO EXHIBIT B NOTICE OF EXERCISE (To be signed only upon exercise of the Second Option) TO: Online Transaction Technologies, Inc. The undersigned, hereby irrevocably elects to exercise the purchase rights represented by the Second Option granted to the undersigned on ____________, 1998 and to purchase thereunder ___* shares of Series A-3 Preferred Stock of Online Transaction Technologies, Inc., (the "Company") and herewith encloses payment of $_____________ in full payment of the purchase price of such shares being purchased. Dated: ________________, _______ ------------------------------------ (Signature must conform in all respects to name of either holder as specified on the face of the Option) ------------------------------------ (Please Print Name) ------------------------------------ (Address) 11. EXHIBIT C INDEMNIFICATION AGREEMENT ------------------------- THIS INDEMNIFICATION AGREEMENT (this "Agreement") is made and entered into as of December ___, 1998, by and among Cumetrix Data Systems Corp., a California corporation ("Cumetrix") on the one hand, and Colin P. Kruger, Igor Kogan, Michael Shirman (collectively, the "Principal Shareholders"), on the other hand. R E C I T A L S - - - - - - - - A. Cumetrix has, upon the terms and subject to the conditions of that certain Stock Purchase Agreement, dated as of even date herewith (the "Purchase Agreement"), entered into with Online Transaction Technologies, Inc., a California corporation (the "Company"), has agreed to purchase from the Company 88,326 shares (the "Purchased Shares") of the Series A-1 Preferred Stock, without par value, of the Company (the "Series A-1 Preferred Stock"). B. In consideration of the purchase of the Purchased Shares by Cumetrix, the Company has granted Cumetrix (i) an option (the "First Option") to purchase shares of Series A-2 Preferred Stock, without par value, pursuant to that certain First Stock Option Agreement, dated as of even date herewith (the "First Option Agreement"), and (ii) an option (the "Second Option") to purchase Series A-3 Preferred Stock, without par value, pursuant to that certain Second Stock Option Agreement, dated as of even date herewith (the "Second Option Agreement"). C. A material and essential inducement for Cumetrix (i) to enter into the Purchase Agreement, the First Option Agreement and the Second Option Agreement, and the other agreements contemplated thereby and (ii) to exercise the First Option and/or the Second Option, if applicable, is that the Principal Shareholders, who collectively hold all of the outstanding Common Stock of the Company, enter into this Agreement. A G R E E M E N T - - - - - - - - - NOW, THEREFORE, for good and valuable consideration, the receipt, adequacy and sufficiency of which is hereby acknowledged by the parties hereto, and as a material inducement to Cumetrix to enter into the Purchase Agreement, First Option Agreement and Second Option Agreement, the parties hereto hereby agree as follows: 1. Indemnification by the Principal Shareholders. The Principal --------------------------------------------- Shareholders hereby jointly and severally covenant and agree to indemnify, defend and hold harmless Cumetrix and its respective former and current directors, officers, shareholders, employees, attorneys and agents, as the case may be, and each of their successors and assigns (individually, an "Indemnified Party") and hold them harmless from, against and in respect of any and all costs, losses (including investment losses), claims, liabilities, damages and expenses, including court costs and fees and disbursements of counsel, (collectively, "Losses") incurred by any of them, directly or indirectly, in connection with: 12. (a) any action, proceeding, investigation, inquiry or suit, commenced or threatened, arising under or in connection with that certain Contract to Provide Web Site Related Services, dated as of August 7, 1995, by and between ZAUCTION, a California general partnership and CODA, a partnership (the "ZAUCTION Agreement"); and (b) any action, proceeding, investigation, inquiry or suit, commenced or threatened, by ZAUCTION, its principals or affilates (collectively, the "Z Group") or any person or entity claiming through, for, or on behalf of Z Group or its principals or affiliates (by assignment, subrogation or otherwise), relating to the intellectual property rights (or alleged rights) of Z Group, including without limitation infringement (or alleged infringement or other claimed invasion) of the ZAUCTION Agreement and all claims related thereto. 2. Duty to Defend, Etc. If the facts giving rise to any such indemnification ------------------- shall involve any actual claim or demand by any third Person (an "Indemnified Claim") against an Indemnified Party, said Indemnified Party shall as soon as reasonably practicable notify the Principal Shareholders in writing of such Indemnified Claim (a "Claim Notice") stating with reasonable specificity the circumstances giving rise to the Indemnified Party's claim for indemnification; provided, however, that any failure to give such notice will not waive any - -------- ------- rights of the Indemnified Party except to the extent that the rights of the Principal Shareholders are actually and substantially prejudiced. Within ten (10) days of receipt of a Claim Notice, the Principal Shareholders shall acknowledge receipt of the Claim Notice and agree to comply with their obligations under this Agreement and shall assume the defense of the Indemnified Party. After providing the Principal Shareholders with the Claim Notice, an Indemnified Party may defend such Indemnified Claim with attorneys of its own choosing until it shall have received written notice from the Principal Shareholders agreeing to assume the defense of such Indemnified Claim and providing a written undertaking of their agreement to assume the defense or prosecution of such Indemnified Claim at the Principal Shareholders' sole cost and expense in accordance with this Agreement. The Principal Shareholders then shall be entitled (without prejudice to the right of any Indemnified Party to participate at its own expense through counsel of its own choosing) to defend or prosecute such claim at its expense and through counsel acceptable to such Indemnified Party; provided, however, that if the defendants in any action shall -------- ------- include both the Principal Shareholders and the Indemnified Party, and the Indemnified Party shall have reasonably concluded that counsel selected by the Principal Shareholders has an actual or potential conflict of interest, the Indemnified Party shall have the right to separate counsel of its choosing to participate in the defense of such action on its behalf, at the reasonable expense of the Principal Shareholders. Each Indemnified Party shall cooperate fully in the defense of such claim and shall make available to the Principal Shareholders pertinent information under its control relating thereto, but shall be entitled to be reimbursed for all actual costs and expenses incurred by it in connection therewith, including actual loss of earnings of the Indemnified Party (which, in the case of an individual, shall not be greater than $300 per day), with prejudgment interest at the prevailing rate. 3. Right to Settle or Compromise Claims. The Principal Shareholders will not, ------------------------------------ without the prior written consent of each affected Indemnified Party, settle or compromise any pending or 13. threatened Indemnified Claim, unless such settlement or compromise includes a full and unconditional release of each such Indemnified Party from all liability arising out of such Indemnified Claim, reasonably satisfactory in form and substance to such Indemnified Party. If the Principal Shareholders assume the defense of an Indemnified Claim, no Indemnified Party will, without the prior written consent of each of the Principal Shareholders, settle or compromise any pending or threatened Indemnified Claim unless such settlement or compromise includes a full and unconditional release of each Principal Shareholder from all liability to the Indemnified Parties arising (under this Agreement or otherwise) out of such claim, action, suit or proceeding, reasonably satisfactory in form and substance to the Principal Shareholders. If the Principal Shareholders decline to assume the defense of an Indemnified Claim, the Indemnified Party shall not, without the prior written consent of each of the Principal Shareholders, which shall not be unreasonably withheld, settle or compromise the Indemnified Claim unless such settlement or compromise includes a full and unconditional release of each Principal Shareholder from all liability to the Indemnified Parties arising (under this Agreement or otherwise) out of such claim, action, suit or proceeding, reasonably satisfactory in form and substance to the Principal Shareholders. 4. Subrogation. If the Indemnified Party receives payment or other ----------- indemnification from the Principal Shareholders hereunder with respect to any claim or demand by any third Person against the Indemnified Party, the Principal Shareholders shall be subrogated to the extent of such payment or indemnification to all rights in respect of the subject matter of such claim to which the Indemnified Party may be entitled and to institute appropriate action for the recovery thereof. The Indemnified Party agrees to provide reasonable levels of assistance and cooperation to the Principal Shareholders in enforcing such rights, but shall be entitled to be reimbursed for all actual costs and expenses incurred by it in connection therewith. 5. Payment; Attorneys' Fees. The Indemnified Parties shall be entitled to ------------------------ recover from the Principal Shareholders all amounts due the Indemnified Parties pursuant to this Agreement arising out of all matters described in Section 1 and ------------- Section 2 of this Agreement, including court costs and fees of and disbursements - --------- of counsel, in connection with the enforcement of this Agreement. If any action, suit, or other proceeding is instituted to remedy, prevent or obtain relief from a default in the performance by either party of its obligations under this Agreement, the prevailing party shall recover all of such party's costs and reasonable attorneys' fees incurred in each and every such action, suit or other proceeding, including any and all appeals or petitions therefrom. 6. Limitations on Liability. Notwithstanding anything to the contrary in this ------------------------ Agreement, with respect to any and all matters described in Section 1 and Section 2, in no event shall the Principal Shareholders, aggregate indemnification liability exceed 115% of Cumetrix's total cash investment in the Company, determined as of the date of the Claim Notice. 7. Time Limit on Indemnification and Duty to Defend. The Principal ------------------------------------------------ Shareholders shall only be liable under this Agreement to provide indemnification against Losses and/or defense to Cumetrix for any action, proceeding, investigation, inquiry or suit (as provided in Section 1 and Section 2, above) (a) with respect to which a Claim Notice is received, (b) with respect to which Cumetrix notifies the Principal Shareholders in writing, or (c) which 14. is asserted in a written claim for indemnification under this Agreement specifying the basis therefor, within one (1) year from the date hereof. 8. Insurance Proceeds. Notwithstanding any provision of this Agreement to the ------------------ contrary, the Principal Shareholders shall not be obligated to make any payment or otherwise indemnify the Indemnified Parties for losses, damages and expenses paid, suffered or incurred by the Indemnified Parties if and to the extent that the Indemnified Parties have actually received any insurance proceeds under policies purchased by the Company attributable to such losses, damages or expenses. 9. Further Assurances re Insurance. The Principal Shareholders will cooperate ------------------------------- with Cumetrix in its attempt to purchase insurance relating to the claims covered by this Agreement and will provide all requested representations and warranties to any insurer selected by Cumetrix; provided, that the Principal Shareholders shall not by this paragraph be required to incur personal liability for monetary damages for any breach of representations and warranties to any insurer (other than for fraud). 10. Waiver of Jury Trial. EACH SIGNATORY TO THIS AGREEMENT FURTHER WAIVES ITS -------------------- RESPECTIVE RIGHT TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION ARISING OUT OF THIS AGREEMENT OR ANY DEALINGS BETWEEN ANY OF THE SIGNATORIES HERETO RELATING TO THE SUBJECT MATTER OF THIS AGREEMENT. The scope of this waiver is intended to be all-encompassing of any and all disputes that may be filed in any court and that relate to the subject matter of this Agreement, including, without limitation, contract claims, tort claims, and all other common law and statutory claims. This waiver is irrevocable, meaning that it may not be modified either orally or in writing, and this waiver shall apply to any subsequent amendments, supplements or other modifications to this Agreement or to any other document or agreement relating to the transactions contemplated by this Agreement. 11. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ------------- ACCORDANCE WITH, THE LAWS OF THE STATE OF CALIFORNIA APPLICABLE TO AGREEMENTS TO BE EXECUTED AND WHOLLY PERFORMED THEREIN (WITHOUT REGARD TO THE CONFLICT OF LAWS PROVISIONS THEREOF). 12. Amendments. Amendments may be made to this Agreement from time to time ---------- with the signed written consent of Cumetrix and each of the Principal Shareholders. 13. Assignment. Neither Cumetrix nor any of the Principal Shareholders may ---------- assign its rights or delegate its obligations under this Agreement without the written consent of the other parties to this Agreement. 14. Binding Provisions. The covenants and agreements contained herein shall be ------------------ binding upon, and inure to the benefit of, the permitted successors and assigns of the parties hereto. 15. Notices. All notices, demands or other communications hereunder shall be ------- in writing and shall be deemed to have been duly given (i) if delivered in person, on the date actually given, (ii) 15. if by United States mail, certified or registered, with return receipt requested, on the date which is two business days after the date of mailing, or (iii) if sent by telecopier, on the date transmitted, provided receipt is confirmed by telephone and United States mail with postage prepaid: if to Cumetrix: 16. Cumetrix Data Systems Corp. 957 Lawson Street Industry, California 91748 Telecopy No.: (626) 965-8159 Attention: Max Toghraie if to the Principal Shareholders: to the addresses set forth opposite their signatures hereto, or at such other address as may have been furnished by such Person in writing to the other parties. 16. Counterparts. This Agreement may be executed in two or more counterparts, ------------ each of which shall be deemed an original, but all of which together shall constitute one and the same agreement. 17. Negotiation of Agreement. Each of the parties acknowledges that it has ------------------------ been represented by independent counsel of its choice throughout all negotiations that have preceded the execution of this Agreement and that it has executed the same with consent and upon the advice of said independent counsel. Each party and its counsel cooperated in the drafting and preparation of this Agreement and the documents referred to herein, and any and all drafts relating thereto shall be deemed the work product of the parties and may not be construed against any party by reason of its preparation. Accordingly, any rule of law or any legal decision that would require interpretation of any ambiguities in this Agreement against the party that drafted it is of no application and is hereby expressly waived. The provisions of this Agreement shall be interpreted in a reasonable manner to effect the intentions of the parties and this Agreement. 18. Severability. If one or more provisions of this Agreement are held to be ------------ unenforceable under applicable law, such provision shall be excluded from this Agreement and the balance of this Agreement shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its terms to the fullest extent permitted by law. 19. Entire Agreement. This Agreement embodies the entire agreement and ---------------- understanding of the parties hereto in respect of the subject matter of this Agreement and supersedes all prior agreements, understandings and representations relating to such subject matter. 17. IN WITNESS WHEREOF, the parties have executed this Agreement upon the date first written above. CUMETRIX DATA SYSTEMS CORP., a California corporation By: ______________________________ Max Toghraie Chief Executive Officer PRINCIPAL SHAREHOLDERS: Address: ___________________________ ___________________________ ___________________________ ___________________________ Colin P. Kruger Address: ___________________________ ___________________________ ___________________________ ___________________________ Igor Kogan Address: ___________________________ ___________________________ ___________________________ ___________________________ Michael Shirman 18. EXHIBIT 1.2 RESTATED ARTICLES OF INCORPORATION OF ONLINE TRANSACTION TECHNOLOGIES, INC. Igor Kogan and Colin Kruger hereby certify that: ONE: They are the duly elected and acting President and Secretary, respectively, of Online Transaction Technologies, Inc., a California corporation (the "Corporation"). TWO: The Articles of Incorporation of this Corporation are hereby amended and restated to read as follows: I. The name of the Corporation is ONLINE TRANSACTION TECHNOLOGIES, INC. II. The purpose of the Corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of California other than the banking business, the trust company business or the practice of a profession permitted to be incorporated by the California Corporations Code. III. A. This Corporation is authorized to issue two classes of stock to be designated, respectively, "Common Stock" and "Preferred Stock." The total number of shares which the Corporation is authorized to issue is Twelve Million Six Hundred Fifty-Seven Thousand One Hundred and Twenty-Two (12,657,122) shares, Ten Million (10,000,000) shares of which shall be Common Stock (the "Common Stock") and Two Million Six Hundred Fifty-Seven Thousand One Hundred and Twenty- Two (2,657,122) shares of which shall be Preferred Stock (the "Preferred Stock"). B. The Preferred Stock may be issued from time to time in one or more series. The Board of Directors is hereby authorized, within the limitations and restrictions stated in these Restated Articles of Incorporation, to fix or alter the dividend rights, dividend rate, conversion rights, voting rights, rights and terms of redemption (including sinking fund provisions), the redemption price or prices, the liquidation preferences of any wholly unissued series of Preferred Stock, and the number of shares constituting any such series and the designation thereof, or any of them; and to increase or decrease the number of shares of any series subsequent to the issue of shares of that series, but not below the number of shares of such series then outstanding. In case the number of shares of any series shall be so decreased, the shares constituting such decrease shall resume the status which they had prior to the adoption of the resolution originally fixing the number of shares of such series. 19. C. Eighty-Eight Thousand Three Hundred and Twenty-Six (88,326) of the authorized shares of Preferred Stock are hereby designated "Series A-1 Preferred Stock," One Million Sixty-Eight Thousand Seven Hundred Ninety-Six (1,068,796) of the authorized shares of Preferred Stock are hereby designated "Series A-2 Preferred Stock," and One Million Five Hundred Thousand (1,500,000) of the authorized shares of Preferred Stock are hereby designated "Series A-3 Preferred Stock" (collectively, the "Series A Preferred"). D. The rights, preferences, privileges, restrictions and other matters relating to the Series A Preferred are as follows: 1. DIVIDEND RIGHTS. a. So long as any shares of Series A Preferred shall be outstanding, no dividend, whether in cash or property, shall be paid or declared, nor shall any other distribution be made, on any other stock of the Corporation ("Junior Stock"), nor shall any shares of any Junior Stock of the Corporation be purchased, redeemed, or otherwise acquired for value by the Corporation (except for acquisitions of Common Stock by the Corporation pursuant to agreements which permit the Corporation to repurchase such shares upon termination of services to the Corporation or in exercise of the Corporation's right of first refusal upon a proposed transfer). The provisions of this Section 1.a. shall not, however, apply to (i) a dividend payable in Common Stock, (ii) the acquisition of shares of any Junior Stock in exchange for shares of any other Junior Stock, or (iii) any repurchase of any outstanding securities of the Corporation that is unanimously approved by the Corporation's Board of Directors. The holders of the Series A Preferred expressly waive their rights, if any, as described in California Corporations Code Sections 502, 503 and 506 as they relate to repurchase of shares upon termination of employment. 2. VOTING RIGHTS. a. General Rights. Except as otherwise provided herein or as required by law, the Series A Preferred shall be voted equally with the shares of the Common Stock of the Corporation and not as a separate class, at any annual or special meeting of shareholders of the Corporation, and may act by written consent in the same manner as the Common Stock, in either case upon the following basis: each holder of shares of Series A Preferred shall be entitled to such number of votes as shall be equal to the number of shares of Common Stock (rounded up to the nearest whole number) into which such holder's aggregate number of shares of Series A Preferred are convertible (pursuant to Section 5 hereof) immediately after the close of business on the record date fixed for such meeting or the effective date of such written consent. b. Separate Vote of Series A Preferred. Until the occurrence of a Covenant Termination Event (as defined in that certain Preferred Stock Purchase Agreement dated as of December 15, 1998 between the Corporation and Cumetrix Data Systems, Inc.) and thereafter, for so long as at least One Million One Hundred Fifty-Seven Thousand One Hundred And Twenty-Two (1,157,122) shares of Series A Preferred (subject to adjustment for any stock split, reverse stock split or other similar event affecting the Series A Preferred) remain outstanding, in addition to any other vote or consent required herein or by law, the vote or 20. written consent of the holders of at least a majority of the outstanding Series A Preferred shall be necessary for effecting or validating the following actions: (i) Any authorization or any designation, whether by reclassification or otherwise, of any new class or series of stock or any other securities convertible into equity securities of the Corporation ranking pari passu or senior to the Series A Preferred in liquidation preference, voting or dividends or any increase in the authorized or designated number of any such new class or series; or (ii) Any redemption, purchase or other acquisition (or payment into or setting aside for a sinking fund for such purpose) any share or shares of Common Stock; provided, however, that this restriction shall not apply to the repurchase of shares of Common Stock from employees, officers, directors, consultants or other persons performing services for this Corporation or any subsidiary pursuant to agreements under which this Corporation has the option to repurchase such shares at cost upon the occurrence of certain events, such as the termination of services. c. Additional Series A Preferred Protective Provisions. In addition to any other vote or consent required herein or by law, the vote or written consent of the holders of at least a majority of the outstanding Series A Preferred shall be necessary for effecting or validating the following actions: (i) Any amendment, alteration, or repeal of any provision of the Articles of Incorporation of the Corporation (including any filing of a Certificate of Determination) that changes the voting powers, preferences, or other special rights or privileges, or restrictions of the Series A Preferred; (ii) Any liquidation or dissolution of this corporation or reclassification of its outstanding capital stock; or (iii) Any issuance of Series A-3 Preferred Stock other than pursuant to the terms of that certain "Second Option" (as defined in that certain Stock Purchase Agreement dated as of December 15, 1998 between the Corporation and Cumetrix Data Systems, Inc. d. Election of Board of Directors. For so long as at least One Million One Hundred Fifty-Seven Thousand One Hundred and Twenty-Two (1,157,122) shares of Series A Preferred remain outstanding (subject to adjustment for any stock split, reverse stock split or similar event affecting the Series A Preferred) and the authorized size of the Corporation's Board of Directors is three (3) or more, (i) until such time that the Series A Preferred may elect more than one (1) member of the Corporation's Board of Directors pursuant to the right to cumulate votes for the election of directors under Section 708 of the California Corporations Code, the holders of Series A Preferred, voting as a separate class, shall be entitled to elect one (1) member of the Corporation's Board of Directors at each meeting or pursuant to each consent of the Corporation's shareholders for the election of directors, and to remove from office such director and to fill any vacancy caused by the resignation, death or removal of such director; and (ii) the holders of Common Stock and Series A Preferred, voting as a single class, shall be entitled to elect all remaining members of the Board of Directors at each meeting or 21. pursuant to each consent of the Corporation's shareholders for the election of directors, and to remove from office such directors and to fill any vacancy caused by the resignation, death or removal of such directors. 3. LIQUIDATION RIGHTS. a. Upon any liquidation, dissolution, or winding up of the Corporation, whether voluntary or involuntary, before any distribution or payment shall be made to the holders of any Junior Stock, the holders of Series A Preferred shall be entitled to be paid out of the assets of the Corporation an amount per share of Series A Preferred equal to the Original Issue Price (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like with respect to such shares) for each share of Series A Preferred held by them. The Original Issue Price of the Series A-1 Preferred Stock shall be equal to one dollar and thirteen cents ($1.13), the Original Issue Price of the Series A-2 Preferred Stock shall be equal to eighty four and two tenths cents ($.842), and the Original Issue Price of the Series A-3 Preferred Stock shall be equal to the total amount paid for the Series A-3 Preferred Stock upon the first issuance of such shares divided by the total number of Series A-3 Preferred Stock issued upon the first issuance of such shares. If, upon any liquidation, distribution, or winding up, the assets of the Corporation shall be insufficient to make payment in full to all holders of Series A Preferred of the liquidation preference set forth above, then such assets shall be distributed among the holders of Series A Preferred at the time outstanding, ratably in proportion to the full amounts to which they would otherwise be respectively entitled. b. After the payment of the full liquidation preference of the Series A Preferred as set forth in Section 3.a. above, the remaining assets of the Corporation legally available for distribution, if any, shall be distributed ratably to the holders of the Common Stock. c. The following events shall be considered a liquidation under this Section: (i) a consolidation or merger of the Corporation with or into any other corporation or other entity or person, or any other corporate reorganization in which the stockholders of the Corporation immediately prior to such consolidation, merger or reorganization, own less than fifty percent (50%) of the Corporation's voting power immediately after such consolidation, merger or reorganization, or any transaction or series of related transactions to which the Corporation is a party in which excess of fifty present (50%) of the Corporation's voting power is transferred; or (ii) a sale, lease or other disposition of all or substantially all of the assets of the Corporation. d. If any of the assets of the corporation are to be distributed other than in cash under this Section 3 or for any purpose, then the Board of Directors of the Corporation shall promptly engage independent competent appraisers to determine the value of the assets to be distributed to the holders of Series A Preferred or Common Stock. The Corporation shall, upon receipt of such appraiser's valuation, give prompt written notice to each holder of shares of Series A Preferred or Common Stock of the appraiser's valuation. 22. e. If, upon any liquidation, dissolution, or winding up, the assets of the Corporation shall be insufficient to make payment in full to all holders of Series A Preferred of the liquidation preference set forth in Section 3(a), then such assets shall be distributed among the holders of Series A Preferred at the time outstanding, ratably in proportion to the full amounts to which they would otherwise be respectively entitled. 4. CONVERSION RIGHTS. The holders of the Series A Preferred shall have the following rights with respect to the conversion of the Series A Preferred into shares of Common Stock (the "Conversion Rights"): a. Optional Conversion. Subject to and in compliance with the provisions of this Section 4, any shares of Series A Preferred may, at the option of the holder, be converted at any time into fully-paid and nonassessable shares of Common Stock. The number of shares of Common Stock to which a holder of Series A Preferred shall be entitled upon conversion shall be the product obtained by multiplying the "Series A Preferred Conversion Rate" then in effect (determined as provided in Section 4.b.) by the number of shares of Series A Preferred being converted. b. Series A Preferred Conversion Rate. The conversion rate in effect at any time for conversion of the Series A Preferred (the "Series A Preferred Conversion Rate") shall be the quotient obtained by dividing the Original Issue Price of the Series A Preferred by the "Series A Preferred Conversion Price," calculated as provided in Section 4.c. c. Conversion Price. The conversion price for the Series A Preferred shall initially be the Original Issue Price of the Series A Preferred (the "Series A Preferred Conversion Price"). Such initial Series A Preferred Conversion Price shall be adjusted from time to time in accordance with this Section 4. All references to the Series A Preferred Conversion Price herein shall mean the Series A Preferred Conversion Price as so adjusted. d. Mechanics of Conversion. Each holder of Series A Preferred who desires to convert the same into shares of Common Stock pursuant to this Section 4 shall surrender the certificate or certificates therefor, duly endorsed, at the office of the Corporation or any transfer agent for the Series A Preferred, and shall give written notice to the Corporation at such office that such holder elects to convert the same. Such notice shall state the number of shares of Series A Preferred being converted. Thereupon, the Corporation shall promptly issue and deliver at such office to such holder a certificate or certificates for the number of shares of Common Stock to which such holder is entitled and shall promptly pay in cash or, to the extent sufficient funds are not then legally available therefor, in Common Stock (at the Common Stock's fair market value determined by the Board of Directors as of the date of such conversion), any declared and unpaid dividends on the shares of Series A Preferred being converted. Such conversion shall be deemed to have been made at the close of business on the date of such surrender of the certificates representing the shares of Series A Preferred to be converted, and the person entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder of such shares of Common Stock on such date. 23. e. Adjustment for Stock Splits and Combinations. If the Corporation shall at any time or from time to time after the date that the first share of Series A Preferred is issued (the "Original Issue Date") effect a subdivision of the outstanding Common Stock without a corresponding subdivision of the Preferred Stock, the Series A Preferred Conversion Price in effect immediately before that subdivision shall be proportionately decreased. Conversely, if the Corporation shall at any time or from time to time after the Original Issue Date combine the outstanding shares of Common Stock into a smaller number of shares without a corresponding combination of the Preferred Stock, the Series A Preferred Conversion Price in effect immediately before the combination shall be proportionately increased. Any adjustment under this Section 4.e. shall become effective at the close of business on the date the subdivision or combination becomes effective. f. Adjustment for Common Stock Dividends and Distributions. If the Corporation at any time or from time to time after the Original Issue Date makes, or fixes a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in additional shares of Common Stock, in each such event the Series A Preferred Conversion Price that is then in effect shall be decreased as of the time of such issuance or, in the event such record date is fixed, as of the close of business on such record date, by multiplying the Series A Preferred Conversion Price then in effect by a fraction (i) the numerator of which is the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date, and (ii) the denominator of which is the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date plus the number of shares of Common Stock issuable in payment of such dividend or distribution; provided, however, that if such record date is fixed and such dividend is not fully paid or if such distribution is not fully made on the date fixed therefor, the Series A Preferred Conversion Price shall be recomputed accordingly as of the close of business on such record date and thereafter the Series A Preferred Conversion Price shall be adjusted pursuant to this Section 4.f. to reflect the actual payment of such dividend or distribution. g. Adjustment for Reclassification, Exchange and Substitution. If at any time or from time to time after the Original Issue Date, the Common Stock issuable upon the conversion of the Series A Preferred is changed into the same or a different number of shares of any class or classes of stock, whether by recapitalization, reclassification or otherwise (other than as a result of a subdivision or combination of shares or stock dividend or a reorganization, merger or consolidation in which the Corporation is the continuing entity and which does not result in any change in the Common Stock) in any such event the Series A Preferred shall be convertible into the kind and amount of stock and other securities and property receivable upon such recapitalization, reclassification or other change by holders of the maximum number of shares of Common Stock into which such shares of Series A Preferred could have been converted immediately prior to such recapitalization, reclassification or change, all subject to further adjustment as provided herein or with respect to such other securities or property by the terms thereof. h. Reorganizations, Mergers, Consolidations or Sales of Assets. If at any time or from time to time after the Original Issue Date, there is a capital reorganization of the Common Stock (other than a recapitalization, subdivision, combination, reclassification, exchange or substitution of shares), as a part of such capital reorganization, provision shall be 24. made so that the holders of the Series A Preferred shall thereafter be entitled to receive upon conversion of the Series A Preferred the number of shares of stock or other securities or property of the Corporation to which a holder of the number of shares of Common Stock deliverable upon conversion would have been entitled on such capital reorganization, subject to adjustment in respect of such stock or securities by the terms thereof. In any such case, appropriate adjustment shall be made in the application of the provisions of this Section 4 with respect to the rights of the holders of Series A Preferred after the capital reorganization to the end that the provisions of this Section 4 (including adjustment of the Series A Preferred Conversion Price then in effect and the number of shares issuable upon conversion of the Series A Preferred) shall be applicable after that event and be as nearly equivalent as practicable. i. Sale of Shares Below Series A Preferred Conversion Price. (i) If at any time or from time to time after the Original Issue Date, the Corporation issues or sells, or is deemed by the express provisions of this subsection i to have issued or sold, Additional Shares of Common Stock (as defined in subsection i.(iv) below)), other than as a dividend or other distribution on any class of stock as provided in Section 4.f. above, and other than a subdivision or combination of shares of Common Stock as provided in Section 4.e. above, for an Effective Price (as defined in subsection i.(iv) below) less than the then effective Series A Preferred Conversion Price for any then outstanding sub-series of Series A Preferred, then and in each such case the then existing Series A Preferred Conversion Price for such sub-series shall be reduced, as of the opening of business on the date of such issue or sale, to a price determined by multiplying the Series A Preferred Conversion Price for such sub-series by a fraction (i) the numerator of which shall be (A) the number of shares of Common Stock deemed outstanding (as defined below) immediately prior to such issue or sale, plus (B) the number of shares of Common Stock which the aggregate consideration received (as defined in subsection i.(ii)) by the Corporation for the total number of Additional Shares of Common Stock so issued would purchase at such Series A Preferred Conversion Price, and (ii) the denominator of which shall be the number of shares of Common Stock deemed outstanding (as defined below) immediately prior to such issue or sale plus the total number of Additional Shares of Common Stock so issued. For the purposes of the preceding sentence, the number of shares of Common Stock deemed to be outstanding as of a given date shall be the sum of (A) the number of shares of Common Stock actually outstanding, (B) the number of shares of Common Stock into which the then outstanding shares of Series A Preferred could be converted if fully converted on the day immediately preceding the given date, and (C) the number of shares of Common Stock which could be obtained through the exercise or conversion of all other rights, options and convertible securities outstanding or exercisable on the day immediately preceding the given date. (ii) For the purpose of making any adjustment required under this Section 4.i., the consideration received by the Corporation for any issue or sale of securities shall (A) to the extent it consists of cash, be computed at the net amount of cash received by the Corporation after deduction of any underwriting or similar commissions, compensation or concessions paid or allowed by the Corporation in connection with such issue or sale but without deduction of any expenses payable by the Corporation, (B) to the extent it consists of property other than cash, be computed at the fair value of that property as determined in good faith by the Board of Directors, and (C) if Additional Shares of Common Stock, Convertible Securities (as defined in subsection i.(iii) below) or rights or options to purchase either Additional Shares of 25. Common Stock or Convertible Securities are issued or sold together with other stock or securities or other assets of the Corporation for a consideration which covers both, be computed as the portion of the consideration so received that may be reasonably determined in good faith by the Board of Directors to be allocable to such Additional Shares of Common Stock, Convertible Securities or rights or options. (iii) For the purpose of the adjustment required under this Section 4.i., if the Corporation issues or sells any (i) stock or other securities convertible into, Additional Shares of Common Stock (such convertible stock or securities being herein referred to as "Convertible Securities") or (ii) rights or options for the purchase of Additional Shares of Common Stock or Convertible Securities and if the Effective Price of such Additional Shares of Common Stock is less than the Series A Preferred Conversion Price, in each case the Corporation shall be deemed to have issued at the time of the issuance of such rights or options or Convertible Securities the maximum number of Additional Shares of Common Stock issuable upon exercise or conversion thereof and to have received as consideration for the issuance of such shares an amount equal to the total amount of the consideration, if any, received by the Corporation for the issuance of such rights or options or Convertible Securities, plus, in the case of such rights or options, the minimum amounts of consideration, if any, payable to the Corporation upon the exercise of such rights or options, plus, in the case of Convertible Securities, the minimum amounts of consideration, if any, payable to the Corporation (other than by cancellation of liabilities or obligations evidenced by such Convertible Securities) upon the conversion thereof; provided that if in the case of Convertible Securities the minimum amounts of such consideration cannot be ascertained, but are a function of antidilution or similar protective clauses, the Corporation shall be deemed to have received the minimum amounts of consideration without reference to such clauses; provided further that if the minimum amount of consideration payable to the Corporation upon the exercise or conversion of rights, options or Convertible Securities is reduced over time or on the occurrence or non-occurrence of specified events other than by reason of antidilution adjustments, the Effective Price shall be recalculated using the figure to which such minimum amount of consideration is reduced; provided further that if the minimum amount of consideration payable to the Corporation upon the exercise or conversion of such rights, options or Convertible Securities is subsequently increased, the Effective Price shall be again recalculated using the increased minimum amount of consideration payable to the Corporation upon the exercise or conversion of such rights, options or Convertible Securities. No further adjustment of the Series A Preferred Conversion Price, as adjusted upon the issuance of such rights, options or Convertible Securities, shall be made as a result of the actual issuance of Additional Shares of Common Stock on the exercise of any such rights or options or the conversion of any such Convertible Securities. If any such rights or options or the conversion privilege represented by any such Convertible Securities shall expire without having been exercised, the Series A Preferred Conversion Price as adjusted upon the issuance of such rights, options or Convertible Securities shall be readjusted to the Series A Preferred Conversion Price which would have been in effect had an adjustment been made on the basis that the only Additional Shares of Common Stock so issued were the Additional Shares of Common Stock, if any, actually issued or sold on the exercise of such rights or options or rights of conversion of such Convertible Securities, and such Additional Shares of Common Stock, if any, were issued or sold for the consideration actually received by the Corporation upon such exercise, plus the consideration, if any, actually received by the Corporation for the granting of all such rights or options, whether or not exercised, plus the consideration received for issuing or selling the 26. Convertible Securities actually converted, plus the consideration, if any, actually received by the Corporation (other than by cancellation of liabilities or obligations evidenced by such Convertible Securities) on the conversion of such Convertible Securities; provided that such readjustment shall not apply to prior conversions of Series A Preferred. (iv) "Additional Shares of Common Stock" shall mean all shares of Common Stock issued by the Corporation or deemed to be issued pursuant to this Section 4.i., whether or not subsequently reacquired or retired by the Corporation other than (A) shares of Common Stock issued upon conversion of the Series A Preferred; (B) shares of Common Stock and/or options, warrants or other Common Stock purchase rights and the Common Stock issued pursuant to such options, warrants or other rights (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like) after the Original Issue Date to employees, officers or directors of, or consultants or advisors to the Corporation or any subsidiary pursuant to stock purchase or stock option plans or other arrangements that are approved by the Board; (C) shares of Common Stock issued pursuant to the exercise of options, warrants or convertible securities outstanding as of the Original Issue Date; (D) shares of Common Stock issued for consideration other than cash pursuant to a merger, consolidation, acquisition or similar business combination; and (E) shares of Common Stock issued pursuant to any equipment leasing arrangement, or debt financing from a bank or similar financial institution. The "Effective Price" of Additional Shares of Common Stock shall mean the quotient determined by dividing the total number of Additional Shares of Common Stock issued or sold, or deemed to have been issued or sold by the Corporation under this Section 4.i., into the aggregate consideration received, or deemed to have been received by the Corporation for such issue under this Section 4.i., for such Additional Shares of Common Stock. j. Certificate of Adjustment. In each case of an adjustment or readjustment of the Series A Preferred Conversion Price for the number of shares of Common Stock or other securities issuable upon conversion of the Series A Preferred, if the Series A Preferred is then convertible pursuant to this Section 4, the Corporation, at its expense, shall compute such adjustment or readjustment in accordance with the provisions hereof and prepare a certificate showing such adjustment or readjustment, and shall mail such certificate, by first class mail, postage prepaid, to each registered holder of Series A Preferred at the holder's address as shown in the Corporation's books. The certificate shall set forth such adjustment or readjustment, showing in detail the facts upon which such adjustment or readjustment is based, including a statement of (i) the consideration received or deemed to be received by the Corporation for any Additional Shares of Common Stock issued or sold or deemed to have been issued or sold, (ii) the Series A Preferred Conversion Price at the time in effect, (iii) the number of Additional Shares of Common Stock and (iv) the type and amount, if any, of other property which at the time would be received upon conversion of the Series A Preferred. k. Notices of Record Date. Upon (i) any taking by the Corporation of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend or other distribution, or (ii) any capital reorganization of the Corporation, any reclassification or recapitalization of the capital stock of the Corporation, any merger or consolidation of the Corporation with or into any other corporation, or any voluntary or involuntary dissolution, liquidation or winding up of the Corporation, the Corporation shall mail to each holder of Series A Preferred at least twenty (20) days prior to the record date specified therein a notice specifying (A) the date on which any such 27. record is to be taken for the purpose of such dividend or distribution and a description of such dividend or distribution, (B) the date on which any such reorganization, reclassification, transfer, consolidation, merger, dissolution, liquidation or winding up is expected to become effective, and (C) the date, if any, that is to be fixed as to when the holders of record of Common Stock (or other securities) shall be entitled to exchange their shares of Common Stock (or other securities) for securities or other property deliverable upon such reorganization, reclassification, transfer, consolidation, merger, dissolution, liquidation or winding up. l. Automatic Conversion. (i) Each share of Series A Preferred shall automatically be converted into shares of Common Stock, based on the then-effective Series A Preferred Conversion Price, (A) at any time upon the affirmative election of the holders of at least a majority of the outstanding shares of the Series A Preferred, or (B) immediately upon the closing of a firmly underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, covering the offer and sale of Common Stock for the account of the Corporation in which (i) the per share price is at least $3.00 (as adjusted for stock splits, dividends, recapitalizations and the like), and (ii) the gross cash proceeds to the Corporation (before underwriting discounts, commissions and fees) are at least $15,000,000. Upon such automatic conversion, any declared and unpaid dividends shall be paid in accordance with the provisions of Section 4.d. (ii) Upon the occurrence of the event specified in paragraph (i) above, the outstanding shares of Series A Preferred shall be converted automatically without any further action by the holders of such shares and whether or not the certificates representing such shares are surrendered to the Corporation or its transfer agent; provided, however, that the Corporation shall not be obligated to issue certificates evidencing the shares of Common Stock issuable upon such conversion unless the certificates evidencing such shares of Series A Preferred are either delivered to the Corporation or its transfer agent as provided below, or the holder notifies the Corporation or its transfer agent that such certificates have been lost, stolen or destroyed and executes an agreement satisfactory to the Corporation to indemnify the Corporation from any loss incurred by it in connection with such certificates. Upon the occurrence of such automatic conversion of the Series A Preferred, the holders of Series A Preferred shall surrender the certificates representing such shares at the office of the Corporation or any transfer agent for the Series A Preferred. Thereupon, there shall be issued and delivered to such holder promptly at such office and in its name as shown on such surrendered certificate or certificates, a certificate or certificates for the number of shares of Common Stock into which the shares of Series A Preferred surrendered were convertible on the date on which such automatic conversion occurred, and any declared and unpaid dividends shall be paid in accordance with the provisions of Section 4.d. m. Fractional Shares. No fractional shares of Common Stock shall be issued upon conversion of Series A Preferred. All shares of Common Stock (including fractions thereof) issuable upon conversion of more than one share of Series A Preferred by a holder thereof shall be aggregated for purposes of determining whether the conversion would result in the issuance of any fractional share. If, after the aforementioned aggregation, the conversion would result in the issuance of any fractional share, the Corporation shall, in lieu of issuing any fractional share, pay cash equal to the product of such fraction multiplied by the 28. Common Stock's fair market value (as determined by the Board of Directors) on the date of conversion. n. Reservation of Stock Issuable Upon Conversion. The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the shares of the Series A Preferred, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of the Series A Preferred. If at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of the Series A Preferred, the Corporation will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose. o. Notices. Any notice required by the provisions of this Section 4 shall be in writing and shall be deemed effectively given: (i) upon personal delivery to the party to be notified, (ii) when sent by confirmed telex or facsimile if sent during normal business hours of the recipient; if not, then on the next business day, (iii) five (5) days after having been sent by registered or certified mail, return receipt requested, postage prepaid, or (iv) one (1) day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt. All notices shall be addressed to each holder of record at the address of such holder appearing on the books of the Corporation. p. Payment of Taxes. The Corporation will pay all taxes (other than taxes based upon income) and other governmental charges that may be imposed with respect to the issue or delivery of shares of Common Stock upon conversion of shares of Series A Preferred, excluding any tax or other charge imposed in connection with any transfer involved in the issue and delivery of shares of Common Stock in a name other than that in which the shares of Series A Preferred so converted were registered. q. No Dilution or Impairment. Without the consent of the holders of the then outstanding Series A Preferred, as required under Section 2.b., the Corporation shall not amend its Restated Articles of Incorporation or participate in any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or take any other voluntary action, for the purpose of avoiding or seeking to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Corporation, but shall at all times in good faith assist in carrying out all such action as may be reasonably necessary or appropriate in order to protect the conversion rights of the holders of the Series A Preferred against dilution or other impairment. 5. NO REISSUANCE OF SERIES A PREFERRED. No share or shares of Series A Preferred acquired by the Corporation by reason of redemption, purchase, conversion or otherwise shall be reissued. 6. NO PREEMPTIVE RIGHTS. Shareholders shall have no preemptive rights except as granted by the Corporation pursuant to written agreements. 29. IV. A. The liability of the directors of the Corporation for monetary damages shall be eliminated to the fullest extent permissible under California law. B. The Corporation is authorized to provide indemnification of agents (as defined in Section 317 of the General Corporation Law of California) for breach of duty to the Corporation and its shareholders through bylaw provisions or through agreements with agents, or both, in excess of the indemnification otherwise permitted by Section 317 of the General Corporation Law of California, subject to the limits on such excess indemnification set forth in Section 204 of the General Corporation Law of California. If, after the effective date of this Article, California law is amended in a manner which permits a corporation to limit the monetary or other liability of its directors or to authorize indemnification of, or advancement of such defense expenses to, its directors or other persons, in any such case to a greater extent than is permitted on such effective date, the references in this Article to "California law" shall to that extent be deemed to refer to California law as so amended. C. Any repeal or modification of this Article shall only be prospective and shall not effect the rights under this Article in effect at the time of the alleged occurrence of any action or omission to act giving rise to liability." THREE: The foregoing amendment and restatement of the Articles of Incorporation has been duly approved by the Board of Directors of this Corporation. FOUR: The foregoing amendment and restatement of the Articles of Incorporation has been duly approved by the required vote of shareholders in accordance with Section 902 of the California Corporations Code. The Corporation has one class of stock outstanding and such class of stock is entitled to vote with respect to the amendment herein set forth. The total number of outstanding shares of Common Stock of the Corporation is 3,000,000. The number of shares voting in favor of the amendment equaled or exceeded the vote required. The percentage vote required was more than fifty percent (50%) of the outstanding Common Stock voting as a class. [THIS SPACE INTENTIONALLY LEFT BLANK] 30. The undersigned, Igor Kogan and Colin Kruger, the President and Secretary, respectively, of ONLINE TRANSACTION TECHNOLOGIES, INC., declares under penalty of perjury under the laws of the State of California that the matters set out in the foregoing Certificate are true of his own knowledge. Executed at San Diego, California on __________________, 1998. ----------------------------------------- Igor Kogan, President Attest: - ---------------------------------- Colin Kruger, Secretary 31. ATTACHMENT 5.1.9 EMPLOYEE INVENTION AND NON-DISCLOSURE AGREEMENT [Original Document Appears in Dual Column Format] ONLINE TRANSACTION TECHNOLOGIES, INC. EMPLOYEE AND CONSULTANT PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT In consideration of my employment with or continued employment by or engagement as a consultant to perform services for or for the benefit of ONLINE TRANSACTION TECHNOLOGIES, INC. (the "Company"), and the compensation now and hereafter paid to me for such services, I hereby agree as follows: 1. Nondisclosure 1.1 Recognition of Company's Rights; Nondisclosure. At all times during my employment or engagement as a consultant and thereafter, I will hold in strictest confidence and will not disclose, use, lecture upon or publish any of the Company's Proprietary Information (defined below), except as such disclosure, use or publication may be required in connection with my work for the Company, or unless an officer of the Company expressly authorizes such in writing. I will obtain the Company's written approval before publishing or submitting for publication any material (written, verbal, or otherwise) that relates to my work at Company and/or incorporates any Proprietary Information. I hereby assign to the Company any rights I may have or acquire in such Proprietary Information and recognize that all Proprietary Information shall be the sole property of the Company and its assigns. 1.2 Proprietary Information. The term "Proprietary Information" shall mean any and all confidential and/or proprietary knowledge, data or information of the Company. By way of illustration but not limitation, "Proprietary Information" includes (a) trade secrets, inventions, mask works, ideas, processes, formulas, source and object codes, data, programs, other works of authorship, know-how, improvements, discoveries, developments, designs and techniques (hereinafter collectively referred to as "Inventions"); and (b) information regarding plans for research, development, new products, marketing and selling, business plans, budgets and unpublished financial statements, licenses, prices and costs, suppliers and customers; and (c) information regarding the skills and compensation of other employees of the Company. Notwithstanding the foregoing, it is understood that, at all such times, I am free to use information which is generally known in the trade or industry, which is not gained as result of a breach of this Agreement, and my own, skill, knowledge, know-how and experience to whatever extent and in whichever way I wish. 1.3 Third Party Information. I understand, in addition, that the Company has received and in the future will receive from third parties confidential or proprietary information ("Third Party Information") subject to a duty on the Company's part to maintain the confidentiality of such information and to use it only for certain limited purposes. During the 33 term of my employment and thereafter, I will hold Third Party Information in the strictest confidence and will not disclose to anyone (other than Company personnel who need to know such information in connection with their work for the Company) or use, except in connection with my work for the Company, Third Party Information unless expressly authorized by an officer of the Company in writing. 1.4 No Improper Use of Information of Prior Employers and Others. During my employment by or engagement as a consultant to the Company I will not improperly use or disclose any confidential information or trade secrets, if any, of any current or former employer or any other person to whom I have an obligation of confidentiality, and I will not bring onto the premises of the Company any unpublished documents or any property belonging to any current or former employer or any other person to whom I have an obligation of confidentiality unless consented to in writing by that current or former employer or other person. I will use in the performance of my duties only information which is generally known and used by persons with training and experience comparable to my own, which is common knowledge in the industry or otherwise legally in the public domain, or which is otherwise provided or developed by the Company. 2. Assignment of Inventions. 2.1 Proprietary Rights. The term "Proprietary Rights" shall mean all trade secret, patent, copyright, mask work and other intellectual property rights throughout the world. 2.2 Prior Inventions. Inventions, if any, patented or unpatented, which I made prior to the commencement of my employment with or engagement as a consultant to the Company are excluded from the scope of this Agreement. To preclude any possible uncertainty, I have set forth on Exhibit B (Previous Inventions) attached hereto a complete list of all Inventions that I have, alone or jointly with others, conceived, developed or reduced to practice or caused to be conceived, developed or reduced to practice prior to the commencement of my employment with or engagement as a consultant to the Company, that I consider to be my property or the property of third parties and that I wish to have excluded from the scope of this Agreement (collectively referred to as "Prior Inventions"). If disclosure of any such Prior Invention would cause me to violate any prior confidentiality agreement, I understand that I am not to list such Prior Inventions in Exhibit B but am only to disclose a cursory name for each such invention, a listing of the party(ies) to whom it belongs and the fact that full disclosure as to such inventions has not been made for that reason. A space is provided on Exhibit B for such purpose. If no such disclosure is attached, I represent that there are no Prior Inventions. If, in the course of my employment with or engagement as a consultant to the Company, I incorporate a Prior Invention into a Company product, process or machine, the Company is hereby granted and shall have a nonexclusive, royalty-free, irrevocable, perpetual, worldwide license (with rights to sublicense through multiple tiers of sublicensees) to make, have made, modify, use and sell such Prior Invention. Notwithstanding the foregoing, I agree that I will not incorporate, or permit to be incorporated, Prior Inventions in any Company Inventions without the Company's prior written consent. 34 2.3 Assignment of Inventions. Subject to Sections 2.4, and 2.6, I hereby assign and agree to assign in the future (when any such Inventions or Proprietary Rights are first reduced to practice or first fixed in a tangible medium, as applicable) to the Company all my right, title and interest in and to any and all Inventions (and all Proprietary Rights with respect thereto) whether or not patentable or registrable under copyright or similar statutes, made or conceived or reduced to practice or learned by me, either alone or jointly with others, during the period of my employment with or as a result of services performed by me as a consultant to the Company. Inventions assigned to the Company, or to a third party as directed by the Company pursuant to this Section 2, are hereinafter referred to as "Company Inventions." 2.4 Nonassignable Inventions. This Agreement does not apply to an Invention which qualifies fully as a nonassignable Invention under Section 2870 of the California Labor Code (hereinafter "Section 2870"). I have reviewed the notification on Exhibit A (Limited Exclusion Notification) and agree that my signature acknowledges receipt of the notification. 2.5 Obligation to Keep Company Informed. During the period of my employment or engagement as a consultant and for six (6) months after termination of my employment with or engagement as a consultant to the Company, I will promptly disclose to the Company fully and in writing all Inventions authored, conceived or reduced to practice by me, either alone or jointly with others. In addition, I will promptly disclose to the Company all patent applications filed by me or on my behalf within a year after termination of employment or my engagement as a consultant to the Company. At the time of each such disclosure, I will advise the Company in writing of any Inventions that I believe fully qualify for protection under Section 2870; and I will at that time provide to the Company in writing all evidence necessary to substantiate that belief. The Company will keep in confidence and will not use for any purpose or disclose to third parties without my consent any confidential information disclosed in writing to the Company pursuant to this Agreement relating to Inventions that qualify fully for protection under the provisions of Section 2870. I will preserve the confidentiality of any Invention that does not fully qualify for protection under Section 2870. 2.6 Government or Third Party. I also agree to assign all my right, title and interest in and to any particular Company Invention to a third party, including without limitation the United States, as directed by the Company. 2.7 Works for Hire. I acknowledge that all original works of authorship which are made by me (solely or jointly with others) within the scope of my employment or engagement as a consultant to and which are protectable by copyright are "works made for hire," pursuant to United States Copyright Act (17 U.S.C., Section 101). 2.8 Enforcement of Proprietary Rights. I will assist the Company in every proper way to obtain, and from time to time enforce, United States and foreign Proprietary Rights relating to Company Inventions in any and all countries. To that end I will execute, verify and deliver such documents and perform such other acts (including appearances as a witness) as the Company may reasonably request for use in applying for, obtaining, perfecting, evidencing, sustaining and enforcing such Proprietary Rights and the assignment thereof. In addition, I will execute, verify and deliver assignments of such Proprietary Rights to the Company or its 35 designee. My obligation to assist the Company with respect to Proprietary Rights relating to such Company Inventions in any and all countries shall continue beyond the termination of my employment or engagement as a consultant, but the Company shall compensate me at a reasonable rate after my termination for the time actually spent by me at the Company's request on such assistance. In the event the Company is unable for any reason, after reasonable effort, to secure my signature on any document needed in connection with the actions specified in the preceding paragraph, I hereby irrevocably designate and appoint the Company and its duly authorized officers and agents as my agent and attorney in fact, which appointment is coupled with an interest, to act for and in my behalf to execute, verify and file any such documents and to do all other lawfully permitted acts to further the purposes of the preceding paragraph with the same legal force and effect as if executed by me. I hereby waive and quitclaim to the Company any and all claims, of any nature whatsoever, which I now or may hereafter have for infringement of any Proprietary Rights assigned hereunder to the Company. 3. RECORDS. I agree to keep and maintain adequate and current records (in the form of notes, sketches, drawings and in any other form that may be required by the Company) of all Proprietary Information developed by me and all Inventions made by me during the period of my employment with or engagement as a consultant to the Company, which records shall be available to and remain the sole property of the Company at all times. 4. ADDITIONAL ACTIVITIES. I agree that during the period of my employment by or engagement as a consultant to the Company I will not, without the Company's express written consent, engage in any employment or business activity which is competitive with, or would otherwise conflict with, my employment by or engagement as a consultant to the Company. I agree further that for the period of my employment by or engagement as a consultant to the Company and for one (l) year after the date of termination of my employment by or engagement as a consultant to the Company I will not induce any employee of or engagement as a consultant to the Company to leave the employ of the Company. 5. NO CONFLICTING OBLIGATION. I represent that my performance of all the terms of this Agreement and as an employee of or a consultant to the Company does not and will not breach any agreement to keep in confidence information acquired by me in confidence or in trust prior to my employment by the Company. I have not entered into, and I agree I will not enter into, any agreement either written or oral in conflict herewith. 6. RETURN OF COMPANY DOCUMENTS. When I leave the employ of or upon the termination of my services as a consultant to the Company, I will deliver to the Company any and all drawings, notes, memoranda, specifications, devices, formulas, and documents, together with all copies thereof, and any other material containing or disclosing any Company Inventions, Third Party Information or Proprietary Information of the Company. I further agree that any property situated on the Company's premises and owned by the Company, including disks and other storage media, filing cabinets or other work areas, is subject to inspection by Company personnel at any time with or without notice. Prior to leaving, I will cooperate with the Company in completing and signing the Company's termination statement. 36 7. LEGAL AND EQUITABLE REMEDIES. Because my services are personal and unique and because I may have access to and become acquainted with the Proprietary Information of the Company, the Company shall have the right to enforce this Agreement and any of its provisions by injunction, specific performance or other equitable relief, without bond and without prejudice to any other rights and remedies that the Company may have for a breach of this Agreement. 8. NOTICES. Any notices required or permitted hereunder shall be given to the appropriate party at the address specified below or at such other address as the party shall specify in writing. Such notice shall be deemed given upon personal delivery to the appropriate address or if sent by certified or registered mail, three (3) days after the date of mailing. 9. NOTIFICATION OF NEW EMPLOYER OR CURRENT EMPLOYER. As an employee, in the event that I leave the employ of the Company, I hereby consent to the notification of my new employer of my rights and obligations under this Agreement. As a consultant, in connection with my services as a consultant to the Company, I hereby consent to the notification of my employer and any third party to whom I may provide consulting services of my rights and obligations under this Agreement. 10. General Provisions. 10.1 Governing Law; Consent to Personal Jurisdiction. This Agreement will be governed by and construed according to the laws of the State of California, as such laws are applied to agreements entered into and to be performed entirely within California between California residents. I hereby expressly consent to the personal jurisdiction of the state and federal courts located in San Diego County, California for any lawsuit filed there against me by Company arising from or related to this Agreement. 10.2 Severability. In case any one or more of the provisions contained in this Agreement shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect the other provisions of this Agreement, and this Agreement shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein. If moreover, any one or more of the provisions contained in this Agreement shall for any reason be held to be excessively broad as to duration, geographical scope, activity or subject, it shall be construed by limiting and reducing it, so as to be enforceable to the extent compatible with the applicable law as it shall then appear. 10.3 Successors and Assigns. This Agreement will be binding upon my heirs, executors, administrators and other legal representatives and will be for the benefit of the Company, its successors, and its assigns. 10.4 Survival. The provisions of this Agreement shall survive the termination of my employment or engagement as a consultant and the assignment of this Agreement by the Company to any successor in interest or other assignee. 37 10.5 Employment or Engagement as a Consultant. I agree and understand that nothing in this Agreement shall confer any right with respect to continuation of employment by or engagement as a consultant to the Company, nor shall it interfere in any way with my right or the Company's right to terminate my employment or engagement as a consultant at any time, with or without cause. 10.6 Waiver. No waiver by the Company of any breach of this Agreement shall be a waiver of any preceding or succeeding breach. No waiver by the Company of any right under this Agreement shall be construed as a waiver of any other right. The Company shall not be required to give notice to enforce strict adherence to all terms of this Agreement. 10.7 Entire Agreement. The obligations pursuant to Sections 1 and 2 of this Agreement shall apply to any time during which I was previously employed, or am in the future employed, by the Company. This Agreement is the final, complete and exclusive agreement of the parties with respect to the subject matter hereof and supersedes and merges all prior discussions between us. No modification of or amendment to this Agreement, nor any waiver of any rights under this Agreement, will be effective unless in writing and signed by the party to be charged. Any subsequent change or changes in my duties, salary or compensation will not affect the validity or scope of this Agreement. Dated: ___________ I HAVE READ THIS AGREEMENT CAREFULLY AND UNDERSTAND ITS TERMS. I HAVE COMPLETELY FILLED OUT EXHIBIT B TO THIS AGREEMENT. - ----------------------------------- (Signature) - ----------------------------------- (Printed Name) ACCEPTED AND AGREED TO: ONLINE TRANSACTION TECHNOLOGIES, INC. By: ------------------------------- Title: ----------------------------- - ----------------------------------- (Address) - ----------------------------------- Dated: ------- 38 EXHIBIT A TO ATTACHMENT 5.1.9 LIMITED EXCLUSION NOTIFICATION THIS IS TO NOTIFY you in accordance with Section 2872 of the California Labor Code that the foregoing Agreement between you and the Company does not require you to assign or offer to assign to the Company any invention that you developed entirely on your own time without using the Company's equipment, supplies, facilities or trade secret information except for those inventions that either: 1. Relate at the time of conception or reduction to practice of the invention to the Company's business, or actual or demonstrably anticipated research or development of the Company; 2. Result from any work performed by you for the Company. To the extent a provision in the foregoing Agreement purports to require you to assign an invention otherwise excluded from the preceding paragraph, the provision is against the public policy of this state and is unenforceable. This limited exclusion does not apply to any patent or invention covered by a contract between the Company and the United States or any of its agencies requiring full title to such patent or invention to be in the United States. I ACKNOWLEDGE RECEIPT of a copy of this notification. By: (PRINTED NAME OF EMPLOYEE) Date: ----------------------------------- WITNESSED BY: - ----------------------------------- (PRINTED NAME OF REPRESENTATIVE) A-1. EXHIBIT B TO ATTACHMENT 5.1.9 TO: ONLINE TRANSACTION TECHNOLOGIES, INC. FROM: ____________________ DATE: ____________________ SUBJECT: Previous Inventions 1. Except as listed in Section 2 below, the following is a complete list of all inventions or improvements relevent to the subject matter of my employment by or engagement as a consultant to Online Transaction Technologies, Inc. (the "Company") that have been made or conceived or first reduced to practice by me alone or jointly with others prior to my engagement by the Company: [_] No inventions or improvements. [_] See below: --------------------------------------------------------------------- --------------------------------------------------------------------- --------------------------------------------------------------------- [_] Additional sheets attached. 2. Due to a prior confidentiality agreement, I cannot complete the disclosure under Section 1 above with respect to inventions or improvements generally listed below, the proprietary rights and duty of confidentiality with respect to which I owe to the following party(ies): Invention or Improvement Party(ies) Relationship 1. ---------------------------- ----------------- ------------------------ 2. ---------------------------- ----------------- ------------------------ 3. ---------------------------- ----------------- ------------------------ [_] Additional sheets attached. ATTACHMENT 5.1.10 BUSINESS PLAN To be provided separately to the Purchaser ATTACHMENT 5.1.12 USE OF PROCEEDS The proceeds from the sale of the Purchase Shares pursuant to this Agreement will be used by the Company for the development of the software system, purchase of related hardware, licenses, and general infrastructure and working capital. EX-10.5 6 FIRST STOCK OPTION AGREEMENT EXHIBIT 10.5 THE SECURITIES EVIDENCED BY THIS AGREEMENT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, HAVE BEEN TAKEN FOR INVESTMENT AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF EXCEPT IN ACCORDANCE WITH THE TERMS OF THIS AGREEMENT. First Stock Option Agreement This First Stock Option Agreement (the "Agreement") is made as of the 30th day of December, 1998, by and among Online Transaction Technologies, Inc., a California corporation (the "Company"), and Cumetrix Data Systems Corporation, a California corporation ("Holder"). Recitals A. The Company and Holder have agreed to enter into a Preferred Stock Purchase Agreement, dated as of the date hereof (the "Purchase Agreement") relating to the sale and issuance of shares of the Company's Series A-1 Preferred Stock. B. The Company desires to grant Holder, pursuant to the Purchase Agreement and in consideration of Holder's agreement to enter into the Purchase Agreement, the right to purchase shares of its Series A-2 Preferred Stock. Now therefore, in consideration of the foregoing and of the mutual covenants and agreements set forth below, the parties hereto covenant and agree as follows: Agreement 1. Options. 1.1 Grant of Option. The Holder is hereby granted an option (the "First Option") to purchase such number of shares (rounded up to the nearest whole share) of the Company's Series A-2 Preferred Stock (the "First Option Shares") equal to the remainder of (A) the quotient of (x) the number of shares of the Company's Common Stock issued and outstanding (including shares issuable pursuant to outstanding options, warrants, rights and convertible debt or equity securities other than options granted pursuant to this Agreement) as of the date the First Option is exercised, divided by (y) .7429 minus (B) the number of ----- shares of the Company's Common Stock issued and outstanding (including shares issuable pursuant to outstanding options, warrants, rights and convertible debt or equity securities other than options granted pursuant to this Agreement) all determined on an as-converted basis as of the date the First Option is exercised. The per share exercise price for the First Option Shares (the "First Option Share Price") shall be equal to the quotient of (x) $900,000 divided by (y) the number of First Option Shares. The total purchase price (the "Total Purchase Price") of the First Option Shares shall be $900,000. The number and purchase price of such shares are subject to adjustment as provided in Section 2 hereof. 1.2 Exercise of Option. The First Option may be exercised at any time, only as to all of the First Option Shares, commencing on the date hereof and ending the later of (i) at 5:00 p.m., California Time, on February 1, 1999, and (ii) seven (7) business days following such time as the Company delivers to the Holder the Company's interactive software capable of performing in all material respects the operations and functions set forth on Exhibit B (the "Term"). The First Option may be exercised prior to the expiration of the Term by the execution and delivery to the Company of a written notice in the form of Exhibit "A" attached hereto, duly completed and executed. The written notice shall be accompanied by payment of the Total Purchase Price in immediately available funds. 2. Adjustments to Exercise Price and Number of Option Shares. The First Option Share Price and number of First Option Shares shall be subject to adjustment from time to time as follows: 2.1 In case of any capital reorganization, any reclassification of the Common Stock (other than a change in par value), or the consolidation of the Company with, or a sale of substantially all of the assets of the Company to (which sale is followed by a liquidation or dissolution of the Company), or merger of the Company with, another person, except in the case of a consolidation, sale or merger resulting in a Liquidity Event (as defined below), Holder shall thereafter be entitled upon exercise of the First Option to purchase the kind and number of shares of stock or other securities or property of the surviving corporation receivable upon such event by a holder of the number of shares of the Common Stock which the First Option entitles Holder to purchase from the Company immediately prior to such event; and in any such case, appropriate adjustment shall be made in the application of the provisions set forth in this Agreement with respect to Holder's rights and interests thereafter, to the end that the provisions set forth in this Agreement (including the specified changes and other adjustments to the First Option Share Price and the Total Purchase Price) shall thereafter be applicable in relation to any other shares or other property thereafter purchasable upon exercise of the First Option. 2.2 A consolidation of the Company with, or a sale of substantially all of the assets of the Company to (which sale is followed by a liquidation or dissolution of the Company), or the merger of the Company with, any other person, in each case resulting in a Liquidity Event shall cause the First Option Shares to terminate on the effective date of such consolidation, sale or merger, provided, however, that Holder shall have the right ending on the fifth day prior to such consolidation, sale or merger to exercise the First Option Shares in part or in whole. 2.3 A consolidation, sale or merger of the Company as described in Section 2.1 and 2.2 above shall be deemed to result in a "Liquidity Event" if (i) the Company is not the "Surviving Corporation" in such consolidation, sale or merger, and (ii) all of the securities of the 2 Company outstanding immediately prior to such consolidation, sale or merger are exchanged, sold, redeemed or otherwise converted into cash or publicly traded securities. The determination as to whether or not the Company is the "surviving corporation" in any consolidation, sale or merger shall be made on the basis of the relative equity interests of the shareholders in the Company existing after such consolidation, sale or merger as follows: If following any consolidation, sale or merger the holders of outstanding voting securities of the Company prior to such consolidation, sale or merger own equity securities possessing more than 50% of the voting power of the corporation existing after such consolidation, sale or merger then for purposes of this Agreement, the Company shall be the surviving corporation. In all other cases, the Company shall not be the surviving corporation. In making the determination of ownership by the stockholders of a corporation, immediately after a consolidation, sale or merger, of securities pursuant to this Section 2.3, securities which they owned immediately prior to such consolidation, sale or merger as stockholders of another party to the transaction shall be disregarded. 2.4 In the case the Company, subsequent to the date hereof and prior to the exercise of this First Option, distributes to any holders of Common Stock, assets (including cash distributions), then upon the exercise of the First Option, Holder shall be entitled to receive an amount equal to the greatest per share amount of consideration received by any holder of the Common Stock times the number of shares of Common Stock into which the shares purchased upon exercise of the First Option are convertible. 2.5 The grant of the First Option shall not affect in any way the right or power of the Company to make adjustments, reclassification, reorganizations or changes in its capital or business structure, or to merge, consolidate, dissolve or liquidate, or to sell or transfer all or any part of its business or assets. 3. Representations, Warranties and Covenants of Holder. Holder makes the following representations, warranties and covenants: 3.1 Holder is acquiring the First Option Shares for its own account with the present intention of holding such security for investment purposes only and not with a view to, or for sale in connection with, any distribution of such securities (other than a distribution in compliance with all applicable federal and state securities laws); provided, that nothing contained herein will prevent Holder and its permitted assigns from transferring such securities in compliance with the provisions of Section 5 of this Agreement. 3.2 Holder is an experienced and sophisticated investor and has such knowledge and experience in financial and business matters that it is capable of evaluating the relative merits and the risks of an investment in the First Option and in the First Option Shares and of protecting its own interests in connection with this transaction. 3.3 Holder is willing to bear and is capable of bearing the economic risk of an investment in the First Option and the First Option Shares. In making this representation, 3 consideration has been given to the fact that there is no public market for the First Option and the First Option Shares and as to whether the Holder could afford to hold the First Option and the First Option Shares for an indefinite period of time and whether, at this time, Holder could afford a complete loss of its First Option and the First Option Shares. Holder understands that the restrictions on transfer placed upon Holder pursuant to the provisions of Section 5 of this Agreement may result in Holder being required to hold the First Option until the date of expiration thereof or to hold the First Option Shares for an indefinite period off time. 3.4 The Company has made available, prior to the date of this Agreement, to Holder the opportunity to ask questions of the Company and its officers, and to receive from the Company and its officers information concerning the terms and conditions of the First Option and this Agreement and to obtain any additional information with respect to the Company, its business, operations and prospects, as reasonably requested by Holder. 3.5 Holder is an "accredited investor" as that term is defined under Regulation D promulgated by the Securities and Exchange Commission under the Securities Act of 1933, as amended (the "Act") and an "excluded purchaser" as such term is defined in Section 260.102.13 of the Rules of the California Corporations Commissioner. 4. Reservation of Stock. The Company covenants that it will at all times reserve and keep (i) available out of its authorized but unissued shares of Series A-2 Preferred Stock, solely for the purpose of issuance upon exercise of the First Option, such number of shares of Series A-2 Preferred Stock as shall at any time be issuable upon the exercise of the First Option and (ii) out of its authorized but unissued shares of Common Stock, solely for the purpose of issuance upon the conversion of the shares of Series A-2 Preferred Stock issuable upon exercise of the First Option, such number of shares of Common Stock as shall at any time be issuable upon conversion of the Series A-2 Preferred Stock issuable upon exercise of the First Option. 5. Restrictions On Transfer Or Exercise Of The Options. 5.1 All certificates representing the First Option Shares and any certificates representing the Common Stock issuable upon conversion of the First Option Shares will bear the following legend: "The Securities represented by this Certificate have not been registered under the Securities Act of 1933, as amended, (the "Act") and may not be sold, transferred, or otherwise disposed of unless registered in accordance with said Act or pursuant to an exemption from the registration thereunder." If in the reasonable opinion of counsel for the Company, or the opinion of counsel for Holder all future dispositions of any of the First Option or First Option Shares by the contemplated transferee would be exempt from the registration and prospectus delivery 4 requirements of the Securities Act and the qualification requirements of the California Corporate Securities Law, then the restrictions on transfer of such securities contained in this Section 5 shall not apply to any subsequent transfer thereof and the legend set forth above may be removed from the certificates representing such securities. 5.2 Holder may not transfer, sell, pledge, assign or hypothecate the First Option or the First Option Shares to any person or entity and no person other than Holder may exercise any options unless the transfer of the First Option or First Option Shares to such person was permitted by this Section 5. Prior to any exercise of the First Options or any transfer or attempted transfer of any of the First Options or First Option Shares, Holder shall give the Company written notice of its intention so to do, describing briefly the manner of any such proposed exercise, sale or transfer. The Company agrees to permit such exercise or transfer, provided that such exercise or transfer is not prohibited by this Section 5 and that the Company is reasonably satisfied that such exercise or transfer complies with all applicable federal and state securities laws and regulations, and provided, further, in the case of a sale or transfer Holder deliver to the Company an assignment form in the form attached to this Agreement. 6. Registration Under The Securities Act Of 1933 (the "1933 Act"). The Holder will have the right to cause the Common Stock into which the First Option Shares are convertible to be registered under the 1933 Act in accordance with Section 8 of the Purchase Agreement. 7. Disputes. 7.1 Arbitration. 7.1.1 Except as otherwise expressly provided for in Section 6(c) below, all disputes arising in connection with this Agreement shall be finally settled by arbitration in Los Angeles, California, in accordance with the rules of the American Arbitration Association (the "Rules of Arbitration") and judgment on the award rendered by the arbitration panel (the "Arbitration Panel") may be entered in any court or tribunal of competent jurisdiction. 7.1.2 Any party which desires to initiate arbitration proceedings as provided in Section 7.1.1 above may do so by delivering written notice to the other party (the "Arbitration Notice") specifying (A) the nature of the dispute or controversy to be arbitrated, (B) the name and address of the arbitrator appointed by the party initiating such arbitration and (C) such other matters as may be required by the Rules of Arbitration. 7.1.3 The party who receives an Arbitration Notice shall appoint an arbitrator and notify the initiating party of such arbitrator's name and address within 30 days after delivery of the Arbitration Notice; otherwise, a second arbitrator shall be appointed at the request of the party who delivered the Arbitration Notice as provided in the Rules of Arbitration. The two arbitrators so appointed shall appoint a third arbitrator who shall be the chairman of the Arbitration Panel and who shall be of American nationality. Should the arbitrators appointed by 5 the parties not agree upon the appointment of the third arbitrator within 30 days of their appointment, the third shall be appointed in accordance with the Rules of Arbitration. 7.1.4 In any arbitration proceeding conducted pursuant to the provision of this Section 7, both parties shall have the right to discovery, to call witnesses and to cross-examine the opposing party's witnesses, either through legal counsel, expert witnesses or both, and such proceedings shall be conducted in the English language. 7.2 Finality of Decision. All decisions of the Arbitration Panel shall be final, conclusive and binding on all parties and shall not be subject to judicial review. The arbitrator shall divide all costs (other than fees of counsel) incurred in conducting the arbitration proceeding and the final award in accordance with what they deem just and equitable under the circumstances. 7.3 Limitations. Notwithstanding anything to the contrary contained in Sections 6.1 and 6.2 above, any claim by either party for injunctive or other equitable relief, including specific performance, may be brought in the Superior Court of the State of California for Los Angeles County, or in the United States District Court for the Central District of California, and any judgment, order or decree relating thereto shall have precedence over any arbitral award or proceeding. The Company and the Executive each consent and submit in advance to the jurisdiction of the above-mentioned courts and agrees that venue will be proper in such courts on any such matter. 8. Miscellaneous. 8.1 All notices or demands shall be in writing and shall be delivered personally, electronically, telegraphically, or by express or certified mail or registered mail or by private overnight express mail service. Delivery shall be deemed conclusively made (i) at the time of delivery if personally delivered, (ii) immediately in the event notice is delivered by transmittal over electronic or telephonic transmitting devices, such as telex or telecopy, provided, the party to whom the notice is delivered has a compatible device and electronically or by other written document confirms receipt thereof, or the party otherwise confirms actual receipt thereof, (iii) at the time that the telegraphic agency confirms to the sender delivery thereof to the addressee if served telegraphically, (iv) twenty-four (24) hours after delivery to the carrier if served by any private, overnight, express mail service, (v) twenty-four (24) hours after deposit thereof in the United States mail, properly addressed and postage prepaid, return receipt requested, if served by express mail, or (vi) five (5) days after deposit thereof in the United States mail, properly addressed and postage prepaid, return receipt requested, if served by certified mail. Any notice or demand to the Company shall be given to: Online Transaction Technologies, Inc. 909 6th Street, Suite 6 Santa Monica, California 90403 6 Attn: Board of Directors Any notice of demand to the Holder shall be given to: Cumetrix Data Systems Corp. 957 Lawson Street Industry, California 9148 Fax: (626) 965-8159 Attn: Max Toghraie ------------ Any party may, by virtue of written notice in compliance with this paragraph, alter or change the address or the identity of the person to whom any notice, or copy thereof, is to be delivered. 8.2 Each party shall execute and deliver all such further instruments, documents and papers, and shall perform any and all acts necessary, to give full force and effect to all of the terms and provisions of this Agreement. 8.3 No course of dealing or any delay or failure to exercise any right hereunder on the part of Holder shall operate as a waiver of such right or otherwise prejudice Holder's rights, powers or remedies. 8.4 This Agreement and the rights evidenced hereby shall inure to the benefit of and be binding upon the successors of the Company and the successors and assigns of Holder except that the rights contained in Section 6 may not be transferred to a purchaser the First Option Shares pursuant to a registration statement under the Act covering such proposed distribution or pursuant to the limitations contained in Rule 144 of the Act. The provisions of this Agreement are intended to be for the benefit of all holders from time to time of this Agreement, and shall be enforceable by any such holder. 8.5 The Company shall not by any action including, without limitation, amending its articles of incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Agreement, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such actions as may be necessary or appropriate to protect the rights of Holder against impairment. Without limiting the generality of the foregoing, the Company will (a) not increase the par value of any shares of Common Stock receivable upon the exercise of the Option above the amount payable therefor upon such exercise immediately prior to such increase in par value, (b) take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable shares of Common Stock upon the exercise of the Option, and (c) use its best efforts to obtain all such authorizations, exemptions or consents from any public regulatory body having jurisdiction thereof as may be necessary to enable the company to perform its obligations under this Agreement. Upon the request of Holder, the Company will at any time 7 during the term of this Agreement acknowledge in writing, in form reasonably satisfactory to Holder, the continuing validity of this Agreement and the obligations of the Company hereunder. 8.6 Upon receipt by the Company from Holder of evidence reasonably satisfactory to the Company of the ownership of any loss, theft, distribution or mutilation of this Agreement and indemnity reasonably satisfactory to the Company (it being understood that the written agreement of Holder shall be sufficient indemnity) and in case of mutilation upon surrender and cancellation hereof, the Company will execute and deliver in lieu hereof a new Agreement of like tenor to Holder; provided, in the case of mutilation, no indemnity shall be required if this Agreement in identifiable form is surrendered to the Company for cancellation. 8.7 This Agreement shall be governed by and construed in accordance with the laws of the State of California applicable to contracts entered into and fully to be performed therein. In all matters of interpretation, whenever necessary to give effort to any provision of this Agreement, each gender shall include the others, the singular shall include the plural, and the plural shall include the singular. The titles of the paragraphs of this Agreement are for convenience only and shall not in any way affect the interpretation of any provision or condition of this Agreement. All remedies, rights, undertakings, obligations and agreements contained in this Agreement shall be cumulative and none of them shall be in limitation of an other remedy, right, undertaking, obligation or agreement of any party. Each party and its counsel have reviewed and revised this Agreement. As a result, the normal rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall not be employed in the interpretation of this Agreement or any amendments or exhibits thereto. 8.8 This Agreement may be executed in counterparts which, taken together, shall constitute the whole of the agreement as between the parties. 8.9 Each party to this Agreement which is a corporation hereby represents and warrants that all necessary corporate action has been taken, including the due adoption of a resolution by its board of directors sufficient to enable such corporation to enter into this Agreement, to be bound thereby and to perform fully as required hereunder. 8.10 Each person executing this Agreement on behalf of an entity represents and warrants that he or she has been duly authorized to enter into this Agreement on behalf of such entity, and that such entity is thereby fully bound. 8.11 The terms and conditions of this Agreement shall be subject to all applicable laws and regulations of any governing jurisdictions. If an clause or provision of this Agreement is illegal, invalid or unenforceable under present or future laws effective during the term of this Agreement, then and, in that event, the remainder of this Agreement shall not be affected thereby, and in lieu of each clause or provision of this Agreement that is illegal, invalid or unenforceable, there shall be added a clause or provision as similar in terms and in amount to such illegal, invalid or unenforceable clause or provision as may be possible and be legal, valid 8 and enforceable, as long as it does not otherwise frustrate the principal purposes of this Agreement. 8.12 This Agreement may be amended or modified only with the written agreement of the Company and upon the written consent of a majority of the Holders. 8.13 In the event that any dispute among the parties to this Agreement should result in litigation, the prevailing party in such dispute shall be entitled to recover from the losing party all fees, costs and expenses of enforcing any right of such prevailing party under or with respect to this Agreement, including without limitation, such reasonable fees and expenses of attorneys and accountants, which shall include, without limitation, all fees, costs and expenses of appeals. 9 In Witness Whereof, the parties have entered into and executed this Option Agreement as of the date first above written. Online Transaction Technologies, Inc. By: /s/ COLIN KRUGER ---------------- Its: Chief Executive Officer ----------------------- Cumetrix Data Systems Corporation By: /s/ MAX TOGHRAIE ---------------- Its: Chief Executive Officer ------------------------- 10 EXHIBIT "A" Notice of Exercise (To be signed only upon exercise of the First Option) TO: Online Transaction Technologies, Inc. The undersigned, hereby irrevocably elects to exercise the purchase rights represented by the First Option granted to the undersigned on ____________, 1998 and to purchase thereunde ___* shares of Series A-2 Preferred Stock of Online Transaction Technologies, Inc., (the "Company") and herewith encloses payment of $900,000 in full payment for the First Option Shares . Dated: ________________, _______ ----------------------------- (Signature must conform in all respects to name of either holder as specified on the face of the Option) ------------------------------- (Please Print Name) ------------------------------- (Address) 1 EXHIBIT B SPECIFICATIONS OF SOFTWARE To be provided separately to the Holder 2 EX-27 7 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 9-MOS 3-MOS MAR-31-1999 MAR-31-1999 APR-01-1998 OCT-01-1998 DEC-31-1998 DEC-31-1998 9,439,425 0 0 0 3,951,435 0 (137,000) 0 3,580,356 0 17,316,913 0 347,623 0 (37,468) 0 18,864,536 0 6,137,963 0 0 0 0 0 0 0 11,967,061 0 753,652 0 12,720,713 0 54,084,126 16,251,491 54,084,126 16,251,491 52,592,335 15,740,845 1,898,243 796,548 0 0 0 0 4,098 1,894 11,188 (186,725) 6,052 (76,719) 5,136 (110,006) 0 0 0 0 0 0 5,136 (110,006) .00 (.01) .00 (.01)
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