-----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, TFQ3nHnAhOemdS+PK1TYULRj0nh1QsT48s2eXhDvYJIG7gMeknJ9dCyH6uzgw1ml 5/hn+Z6/U2Se/BWVM2X2PA== 0000950134-02-014718.txt : 20021119 0000950134-02-014718.hdr.sgml : 20021119 20021119154123 ACCESSION NUMBER: 0000950134-02-014718 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021119 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MOBILITY ELECTRONICS INC CENTRAL INDEX KEY: 0001075656 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER PERIPHERAL EQUIPMENT, NEC [3577] IRS NUMBER: 860843914 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-30907 FILM NUMBER: 02833051 BUSINESS ADDRESS: STREET 1: 7955 E REDFIELD RD CITY: SCOTTSDALE STATE: AZ ZIP: 85260 BUSINESS PHONE: 4805960061 MAIL ADDRESS: STREET 1: 7955 EAST REDFIELD ROAD CITY: SCOTTSDALE STATE: AZ ZIP: 85260 10-Q 1 d01471e10vq.txt FORM 10-Q 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 QUARTER ENDED SEPTEMBER 30, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________________ to _________________ Commission file number: 0-30907 MOBILITY ELECTRONICS, INC. (Exact name of registrant as specified in its charter) DELAWARE 86-0843914 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 7955 EAST REDFIELD ROAD SCOTTSDALE, ARIZONA 85260 (480) 596-0061 (Address and telephone number of principal executive offices) Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] At November 12, 2002, there were 19,883,740 shares of the Registrant's Common Stock outstanding. MOBILITY ELECTRONICS, INC. FORM 10-Q TABLE OF CONTENTS
PAGE NO. -------- PART I: FINANCIAL INFORMATION 3 Item 1. Financial Statements Condensed Consolidated Balance Sheets as of September 30, 2002 and December 31, 2001 3 Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2002 and 2001 4 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2002 and 2001 5 Notes to Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 16 Item 3. Quantitative and Qualitative Disclosures About Market Risk 22 Item 4. Controls and Procedures 22 PART II: OTHER INFORMATION Item 1. Legal Proceedings 23 Item 2. Changes in Securities and Use of Proceeds 24 Item 3. Defaults Upon Senior Securities 24 Item 4. Submission of Matters to a Vote of Security Holders 24 Item 5. Other Information 24 Item 6. Exhibits and Reports on Form 8-K 24 SIGNATURES 27 CERTIFICATIONS 28 INDEX TO EXHIBITS 30
-2- PART I: FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS: MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share amounts)
September 30, December 31, 2002 2001 -------------- ------------- (unaudited) ASSETS Current assets: Cash and cash equivalents $ 6,202 $ 14,753 Accounts receivable, net 7,668 6,035 Inventories 4,718 3,385 Prepaid expenses and other current assets 214 108 ------------ ------------ Total current assets 18,802 24,281 ------------ ------------ Property and equipment, net 2,210 1,869 Goodwill, net 7,336 5,627 Intangible assets, net 2,123 1,116 Other assets 340 2,144 ------------ ------------ Total assets $ 30,811 $ 35,037 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 6,365 $ 3,540 Accrued expenses and other current liabilities 4,261 1,349 Current installments of capital lease obligations 21 -- ------------ ------------ Total current liabilities 10,647 4,889 ------------ ------------ Stockholders' equity: Convertible preferred stock - Series C, $.01 par value; authorized 15,000,000 shares; 554,379 (unaudited) and 682,659 shares issued and outstanding at September 30, 2002 and December 31, 2001, respectively 6 7 Common stock, $.01 par value; authorized 90,000,000 shares; 19,443,548 (unaudited) and 15,128,641 shares issued and outstanding at September 30, 2002 and December 31, 2001, respectively 194 151 Additional paid-in capital 118,844 113,127 Accumulated deficit (97,050) (81,630) Stock subscription and deferred compensation (1,858) (1,484) Accumulated other comprehensive gain (loss) - foreign currency translation adjustment 28 (23) ------------ ------------ Total stockholders' equity 20,164 30,148 ------------ ------------ Total liabilities and stockholders' equity $ 30,811 $ 35,037 ============ ============
See accompanying notes to condensed consolidated financial statements. -3- MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) (unaudited)
Three Months Ended Nine Months Ended September 30, September 30, -------------------------- -------------------------- 2002 2001 2002 2001 ----------- ----------- ----------- ----------- Revenue: Net product sales $ 7,298 $ 6,990 $ 20,488 $ 20,971 Technology transfer fees 133 100 548 300 ----------- ----------- ----------- ----------- Total revenue 7,431 7,090 21,036 21,271 Cost of revenue: Product sales 5,760 6,669 15,985 19,490 Technology transfer -- -- -- -- ----------- ----------- ----------- ----------- Total cost of revenue 5,760 6,669 15,985 19,490 ----------- ----------- ----------- ----------- Gross profit 1,671 421 5,051 1,781 ----------- ----------- ----------- ----------- Operating expenses: Sales and marketing 1,841 2,030 4,988 6,730 Research and development 2,261 1,542 4,673 4,747 General and administrative 2,249 4,419 5,697 8,490 ----------- ----------- ----------- ----------- Total operating expenses 6,351 7,991 15,358 19,967 ----------- ----------- ----------- ----------- Loss from operations (4,680) (7,570) (10,307) (18,186) Other income (expense): Interest income, net 176 286 577 1,097 Other income (expense), net 16 24 (63) 26 ----------- ----------- ----------- ----------- Loss before provision for income taxes and cumulative effect of change in accounting principle (4,488) (7,260) (9,793) (17,063) Provision for income taxes -- -- -- -- ----------- ----------- ----------- ----------- Loss before cumulative effect of change in accounting principle (4,488) (7,260) (9,793) (17,063) Cumulative effect of change in accounting principle -- (5,627) -- ----------- ----------- ----------- ----------- Net loss $ (4,488) $ (7,260) $ (15,420) $ (17,063) =========== =========== =========== =========== Net loss per share -- basic and diluted: Loss before cumulative effect of change in accounting principle $ (0.26) $ (0.49) $ (0.61) $ (1.16) Cumulative effect of change in accounting principle -- -- (0.35) -- ----------- ----------- ----------- ----------- $ (0.26) $ (0.49) $ (0.96) $ (1.16) =========== =========== =========== =========== Weighted average common shares outstanding: Basic and diluted 17,159 14,846 16,125 14,715 =========== =========== =========== ===========
See accompanying notes to condensed consolidated financial statements. -4- MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (unaudited)
Nine months ended September 30, ---------------------------- 2002 2001 ------------ ------------ Cash flows from operating activities: Net loss $ (15,420) $ (17,063) Adjustments to reconcile net loss to net cash used in operating activities: Goodwill impairment 5,627 -- In-process research and development 620 -- Provision for accounts receivable 46 7 Provision for obsolete inventory 644 2,950 Depreciation and amortization 866 1,252 Provision for note receivable -- 3,000 Amortization of deferred loan costs -- 9 Amortization of deferred compensation 314 571 Write off of tooling equipment 400 216 Non-cash compensation 51 -- Loss on disposal of fixed assets 41 -- Changes in operating assets and liabilities, net of acquisition activities: Accounts receivable 1,698 266 Inventories (700) (1,335) Prepaid expenses and other assets (342) (946) Accounts payable 1,371 (1,687) Accrued expenses and other current liabilities (300) 184 ------------ ------------ Net cash used in operating activities (5,084) (12,576) ------------ ------------ Cash flows from investing activities, net of acquisition activities: Purchase of property and equipment (333) (1,167) Proceeds from sale of investment 1,870 -- Proceeds from sale of fixed assets 25 -- Cash received in connection with acquisitions 1,073 -- Cash paid for acquisitions (6,145) -- Cash paid for note receivable -- (640) Cash paid to exercise stock purchase warrant -- (764) ------------ ------------ Net cash used in investing activities (3,510) (2,571) ------------ ------------ Cash flows from financing activities: Repayment of long-term debt and capital lease obligations (1) (34) Cash paid for stock issuance costs (92) -- Net proceeds from issuance of common stock and exercise of warrants 85 4 ------------ ------------ Net cash used in financing activities (8) (30) ------------ ------------ Effects of exchange rate changes on cash and cash equivalents 51 (28) ------------ ------------ Net decrease in cash and cash equivalents (8,551) (15,205) Cash and cash equivalents, beginning of period 14,753 30,369 ------------ ------------ Cash and cash equivalents, end of period $ 6,202 $ 15,164 ============ ============
See accompanying notes to condensed consolidated financial statements. -5- MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. BASIS OF PRESENTATION The accompanying condensed consolidated financial statements include the accounts of Mobility Electronics, Inc. ("Mobility" or the "Company") which was formerly known as Electronics Accessory Specialists International, Inc., and its wholly-owned subsidiaries, Magma, Inc. ("Magma"), Portsmith, Inc. ("Portsmith"), which includes Portsmith from February 1, 2002 (date of acquisition) and Mobility 2001 Limited, Cutting Edge Software, Inc. ("Cutting Edge Software") from August 20, 2002 (date of acquisition), and iGo Direct Corporation ("iGo") from September 3, 2002 (date of acquisition). All significant intercompany balances and transactions have been eliminated in the accompanying condensed consolidated financial statements. The accompanying condensed consolidated financial statements are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America, pursuant to rules and regulations of the Securities and Exchange Commission (the "SEC"). In the opinion of management, the accompanying condensed consolidated financial statements include normal recurring adjustments that are necessary for a fair presentation of the results for the interim periods presented. Certain information and footnote disclosures have been condensed or omitted pursuant to such rules and regulations. These condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and notes thereto for the fiscal year ended December 31, 2001 included in our Form 10-K/A, filed with the SEC. The results of operations for the three and nine months ended September 30, 2002 are not necessarily indicative of results to be expected for the full year or any other period. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make a number of estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to bad debts, inventories, warranty obligations, and contingencies and litigation. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The Company believes its critical accounting policies, consisting of revenue recognition, accounts receivable, inventories, recovery of intangible assets, warranty costs, and deferred income taxes affect its more significant judgments and estimates used in the preparation of its consolidated financial statements. These policies are discussed below. (b) Principles of Consolidation The consolidated financial statements for the three and nine months ended September 30, 2002 include the accounts of Mobility and its wholly-owned subsidiaries, Magma, Portsmith, which includes Portsmith from February 1, 2002 (date of acquisition) and Mobility 2001 Limited, Cutting Edge Software from August 20, 2002 (date of acquisition) and iGo from September 3, 2002 (date of acquisition). The consolidated financial statements for the three and nine months ended September 30, 2001 include the accounts of Mobility and its wholly-owned subsidiaries, Magma and Portsmith. All significant intercompany balances and transactions have been eliminated in consolidation. (c) Revenue Recognition Revenue from product sales is recognized upon shipment and transfer of ownership from the Company or contract manufacturer to the customer. Allowances for sales returns and credits are provided for in the same period the related sales are recorded. Should the actual return or sales credit rates differ from the Company's estimates, revisions to the estimated allowance for sales returns and credits may be required. -6- MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Revenue from technology transfer fees, consisting of the licensing and transferring of Split Bridge(R) and other technology and architecture, and related training and implementation support services, is recognized over the term of the respective sales or license agreement. Certain license agreements contain no stated termination date, whereby the Company recognizes the revenue over the estimated life of the license. Should the actual life differ from the estimates, revisions to the estimated life may be required. (d) Cash and Cash Equivalents All short-term investments purchased with an original maturity of three months or less are considered to be cash equivalents. Cash and cash equivalents include cash on-hand and amounts on deposit with financial institutions. (e) Accounts receivable The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of the Company's customers to make required payments. If the financial condition of the Company's customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. (f) Inventories Inventories consist of finished goods and component parts purchased partially and fully assembled for computer accessory items. The Company has all normal risks and rewards of its inventory held by contract manufacturers. Inventories are stated at the lower of cost (first-in, first-out method) or market. Inventories include material and overhead costs. Overhead costs are allocated to inventory based upon a percentage of material costs. The Company monitors usage reports to determine if the carrying value of any items should be adjusted due to lack of demand for the items. The Company adjusts down the inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required. (g) Property and Equipment Property and equipment are stated at cost. Depreciation on furniture, fixtures and equipment is provided using the straight-line method over the estimated useful lives of the assets ranging from two to seven years. Tooling is capitalized at cost and is depreciated over a two-year period. Leasehold improvements are amortized over the shorter of the lease term or estimated useful lives of the assets. (h) Goodwill and Intangible Assets In July 2001, the FASB issued Statement No. 142, Goodwill and Other Intangible Assets ("Statement 142"). Statement 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of Statement 142. The Company adopted the provisions of Statement 142 effective January 1, 2002. Under Statement 142, the Company is required to reassess the useful lives and residual values of all intangible assets acquired in purchase business combinations, and make any necessary amortization period adjustments by the end of the first interim period after adoption. In addition, to the extent an intangible asset is identified as having an indefinite useful life, the Company will be required to test the intangible asset for impairment in accordance with the provisions of Statement 142 within the first interim period. Any impairment loss will be measured as of the date of adoption and recognized as the cumulative effect of a change in accounting principle in the first interim period. In connection with the transitional goodwill impairment evaluation, Statement 142 requires the Company to perform an assessment of whether there is an indication that goodwill is impaired as of the date of adoption. To accomplish this the Company must identify its reporting units and determine the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units as of the date of adoption. The Company will then have up to six months from the date of adoption to determine the fair value of each reporting unit and compare it to the reporting unit's carrying amount. To the extent a reporting unit's carrying amount exceeds its fair value, an indication exists that the reporting unit's goodwill may be impaired and the Company must perform the second step of the transitional impairment test. In the second step, the Company must compare the implied fair value of the reporting unit's goodwill, determined by allocating the reporting unit's fair value to all of it assets (recognized and unrecognized) and liabilities -7- MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) in a manner similar to a purchase price allocation, to its carrying amount, both of which would be measured as of the date of adoption. This second step is required to be completed as soon as possible, but no later than the end of the year of adoption. Any transitional impairment loss will be recognized as the cumulative effect of a change in accounting principle in the statement of operations. Intangible assets include the cost of patents, trademarks and non-compete agreements, as well as identifiable intangible assets acquired through business combinations including trade names, customer lists and software technology. Intangible assets are amortized on a straight-line basis over their estimated economic lives of two to 10 years. (i) Impairment of Long-Lived Assets The Company reviews long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. (j) Warranty Costs The Company provides limited warranties on certain of its products for periods generally not exceeding three years. The Company accrues for the estimated cost of warranties at the time revenue is recognized. The accrual is based on the Company's actual claim experience. Should actual warranty claim rates, or service delivery costs differ from our estimates, revisions to the estimated warranty liability would be required. (k) Net Loss Per Common Share Basic loss per share is computed by dividing loss available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted loss per share reflects the potential dilution that could occur if securities or contracts to issue common stock were exercised or converted to common stock or resulted in the issuance of common stock that then shared in the earnings or loss of the Company. (l) Fair value of Financial Instruments The fair value of accounts receivable, accounts payable, and accrued expenses approximates the carrying value due to the short-term nature of these instruments. (m) Research and Development The cost of research and development is charged to expense as incurred. (n) Foreign Currency Translation The financial statements of the Company's foreign subsidiary are measured using the local currency as the functional currency. Assets and liabilities of this subsidiary are translated at exchange rates as of the balance sheet date. Revenues and expenses are translated at average rates of exchange in effect during the year. The resulting cumulative translation adjustments have been recorded as comprehensive income (loss), a separate component of stockholders' equity. (o) Segment Reporting The Company has only one operating business segment, the sale of peripheral computer equipment. (p) Reclassifications Certain amounts included in the 2001 condensed consolidated financial statements have been reclassified to conform to the 2002 financial statement presentation. -8- MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 3. ACQUISITIONS (a) Portsmith As of February 1, 2002, the Company acquired Portsmith, Inc. through a merger of Portsmith with the Company's subsidiary, Mobility Europe Holdings, Inc., now Portsmith, Inc. Portsmith provides connectivity solutions for handheld computing devices. Under the terms of the merger agreement, the Company issued 800,000 shares of its common stock, valued at $1.35 per common share, to the former Portsmith stockholders of which 400,000 shares are held in escrow, including 53,646 shares held for Richard C. Liggitt. The release of the escrowed shares to the former Portsmith stockholders is contingent upon certain performance criteria of Portsmith during the first year after the acquisition. In addition, earn out payments may be made to the former Portsmith stockholders depending upon Portsmith's performance during the first year after the acquisition. Richard C. Liggitt, a former stockholder of Portsmith, filed a claim against Portsmith alleging (a) fraud in connection with merger negotiations that led to the execution of a merger agreement between a company owned by Mr. Liggitt and Portsmith, (b) wrongful termination of his employment with Portsmith, and (c) breach of the implied covenant of good faith and fair dealing under his employment agreement with Portsmith. The parties have reached a settlement and are awaiting approval of the settlement from the court. The settlement will not be effective unless that approval is obtained. Under the terms of the settlement, the Company will pay Mr. Liggitt an aggregate of $1,000,000 (the "Settlement Amount") in exchange for a settlement and release of all claims and a cancellation of all of Mr. Liggitt's rights as a former shareholder of Portsmith under the merger agreement between the Company and Portsmith, including, but not limited to, the 53,647 shares of the Company's common stock Mr. Liggitt received in connection with the merger, the 53,646 shares of the Company's common stock currently held in escrow that Mr. Liggitt may otherwise be entitled to receive and Mr. Liggitt's share in any potential earn-out payments. Of the Settlement Amount, $10,000 will be paid upon approval of the settlement by the court and $990,000 will be paid in the form of a convertible subordinated promissory note bearing interest at four percent per year, payable in quarterly installments of principal and interest beginning in January 2003, through December 2005. The outstanding principal of the promissory note may be converted by Mr. Liggitt at any time into shares of the Company's common stock, at a conversion price of $3.00 per share. In connection with this settlement, the potential earn-outs under the merger agreement between the Company and Portsmith will be reduced by $480,000, plus a certain additional amount for fees and expenses and a tax settlement, and Mr. Liggitt's share of the potential earn-puts will be eliminated. The acquisition has been accounted for as a purchase and, accordingly, the purchase price has been allocated to the assets acquired and the liabilities assumed, based upon the estimated fair values at the date of acquisition. Goodwill of $773,000 was recorded as a result of the transaction. The purchase price of $540,000, plus acquisition costs of $132,000, was allocated as follows (amounts in thousands): Purchase price: Common stock ................................. $ 540 Costs of acquisition ......................... 132 ------------ $ 672 ============ Assets acquired and liabilities assumed: Current assets ............................... $ 2,195 Equipment .................................... 31 Other assets ................................. 15 Goodwill ..................................... 773 Current liabilities .......................... (2,342) ------------ $ 672 ============
-9- MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (b) Cutting Edge Software As of August 20, 2002, the Company acquired Cutting Edge Software, Inc. through a merger of Cutting Edge Software with the Company's subsidiary, CES II Acquisition, Inc., now Cutting Edge Software, Inc. Cutting Edge Software provides software solutions for handheld computing devices. Under the terms of the merger agreement, the Company paid cash of $1,547,500 and issued 796,394 shares of its common stock, valued at $1.8835 per common share, to the former Cutting Edge Software stockholder. In addition, earn out payments may be made to such stockholder depending upon Cutting Edge Software's performance during each of the five years following the acquisition date. The acquisition has been accounted for as a purchase and, accordingly, the purchase price has been allocated to the assets acquired and the liabilities assumed, based upon the estimated fair values at the date of acquisition. Goodwill of $1,958,000 was recorded as a result of the transaction. The purchase price of $3,047,500, plus acquisition costs of $221,000, was allocated as follows (amounts in thousands): Purchase price: Cash .................................... $ 1,548 Common stock ............................ 1,500 Costs of acquisition .................... 221 ------------ $ 3,269 ============ Assets acquired and liabilities assumed: Current assets .......................... $ 123 Equipment ............................... 48 Intangible assets ....................... 643 Goodwill ................................ 1,958 Current liabilities ..................... (123) In-process research and development ..... 620 ------------ $ 3,269 ============
The Company recorded $620,000 in expense during the three months ended September 30, 2002 relating to in-process research and development acquired from Cutting Edge Software. (c) iGo On September 3, 2002, the Company completed its acquisition of iGo Corporation, as announced on March 25, 2002 and as amended on July 18, 2002, through the merger of iGo Corporation with the Company's subsidiary, IGOC Acquisition, Inc., now iGo Direct Corporation. iGo is a direct marketer of computer peripheral equipment. Under the terms of the merger agreement, the Company paid cash of $3,250,000 and issued 2,600,000 shares of its common stock, valued at $1.305 per common share, to the former iGo stockholders. Additional consideration of $1,000,000 and 500,000 shares of the Company's common stock may also be paid to the former iGo stockholders on the first anniversary date of the merger, the payment of which is contingent upon certain performance criteria. The acquisition has been accounted for as a purchase and, accordingly, the purchase price has been allocated to the assets acquired and the liabilities assumed, based upon the estimated fair values at the date of acquisition. Goodwill of $4,605,000 was recorded as a result of the transaction. -10- MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) The purchase price of $6,643,000, plus acquisition costs of $994,000, was allocated as follows (amounts in thousands): Purchase price: Cash ....................................... $ 3,250 Common stock ............................... 3,393 Costs of acquisition ....................... 994 ------------ $ 7,637 ============ Assets acquired and liabilities assumed: Current assets ............................. $ 3,503 Equipment .................................. 893 Intangible assets .......................... 411 Other assets ............................... 38 Goodwill ................................... 4,605 Current liabilities ........................ (2,220) Loan to stockholder ........................ 407 ------------ $ 7,637 ============
The consolidated financial statements as of September 30, 2002 include the accounts of Portsmith, Cutting Edge Software and iGo and results of operations since the dates of acquisition. The following summary, prepared on a pro forma basis, presents the results of operations as if the acquisitions had occurred on January 1, 2001 (unaudited amounts in thousands, except per share data).
Three months ended Nine months ended September 30, September 30, ---------------------------- ---------------------------- 2002 2001 2002 2001 ------------ ------------ ------------ ------------ Net revenue $ 9,716 $ 14,016 $ 34,018 $ 49,360 ============ ============ ============ ============ Net loss $ (7,494) $ (12,145) $ (24,381) $ (34,056) ============ ============ ============ ============ Net loss per share - basic and diluted $ (0.39) $ (0.65) $ (1.27) $ (1.84) ============ ============ ============ ============
The pro forma results are not necessarily indicative of what the actual consolidated results of operations might have been if the acquisitions had been effective at the beginning of 2001 or as a projection of future results. 4. INVENTORIES Inventories consist of the following (amounts in thousands):
September 30, December 31, 2002 2001 ------------ ------------ Raw materials $ 2,136 $ 1,494 Finished goods 2,582 1,891 ------------ ------------ $ 4,718 $ 3,385 ============ ============
5. GOODWILL AND INTANGIBLE ASSETS On January 1, 2002, the Company adopted Statement 142. Under this accounting standard, goodwill and intangible assets with indefinite lives are no longer subject to amortization but are tested for impairment at least annually. Amortization is still required for identifiable intangible assets with finite lives. -11- MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Statement 142 also requires the completion of the transitional impairment test of the recorded goodwill as of the date this accounting standard is adopted. The Company completed the first step of the transitional impairment test during the quarter ended June 30, 2002, noting an indication of impairment associated with the recorded goodwill balance of $5,627,000 as of January 1, 2002. As part of the transitional impairment test, the Company identified one reporting unit within its one operating business segment. The Company completed the second step of the transitional impairment test during the quarter ended September 30, 2002. The Company has recorded a goodwill impairment loss of $5,627,000 as a result of completing its transitional impairment test, and has recognized this loss as the effect of a change in accounting principle as of January 1, 2002 in accordance with Statement 142. This impairment loss was determined based on a comparison of the fair value of the Company with its carrying amount, including goodwill that resulted from prior business acquisitions. The results of the comparison and loss measurement indicated that goodwill existing at the date of adoption of this accounting standard was fully impaired. In connection with its adoption of Statement 142, the Company reassessed previously recognized intangible assets and determined their classification and useful lives were appropriate. As a result of the acquisitions of Portsmith, Cutting Edge Software and iGo, the Company has recorded goodwill of $7,336,000 during 2002. In accordance with Statement 142, the Company will evaluate this goodwill for impairment as of December 31, 2002. This evaluation may lead to the write down of all or a portion of the currently recorded goodwill. Goodwill consists of the following at September 30, 2002 and December 31, 2001 (amounts in thousands):
September 30, December 31, 2002 2001 ------------- ------------- Aggregate amount acquired $ 13,739 $ 6,403 Less accumulated amortization recognized prior to adoption of Statement 142 (776) (776) Impairment loss recognized as a result of transitional goodwill impairment test (5,627) -- ------------- ------------- Net carrying amount $ 7,336 $ 5,627 ============= =============
The changes in the carrying amount of goodwill follows (amounts in thousands): Reported balance at December 31, 2001 $ 5,627 Additional goodwill from acquisition of Portsmith 773 Additional goodwill from acquisition of Cutting Edge Software 1,958 Additional goodwill from acquisition of iGo 4,605 Impairment loss recognized as a result of transitional goodwill impairment test (5,627) ------------ $ 7,336 ============
The following table presents prior year loss and loss per share as if the non-amortization provisions of Statement 142 had been applied in the prior periods (amounts in thousands, except per share data).
Three months ended Nine months ended September 30, September 30, ---------------------------- ---------------------------- 2002 2001 2002 2001 ------------ ------------ ------------ ------------ Reported net loss $ (4,488) $ (7,260) $ (15,420) $ (17,063) Add back goodwill amortization -- 155 -- 465 ------------ ------------ ------------ ------------ Adjusted net loss $ (4,488) $ (7,105) $ (15,420) $ (16,598) ============ ============ ============ ============ BASIC AND DILUTED LOSS PER SHARE: Reported net loss per share $ (0.26) $ (0.49) $ (0.96) $ (1.16) Add back goodwill amortization -- 0.01 -- 0.03 ------------ ------------ ------------ ------------ Adjusted loss per share $ (0.26) $ (0.48) $ (0.96) $ (1.13) ============ ============ ============ ============
-12- MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Intangible assets consist of the following at September 30, 2002 and December 31, 2001 (amounts in thousands):
September 30, 2002 December 31, 2001 -------------------------------------- -------------------------------------- Average Gross Net Gross Net Life Carrying Accumulated Intangible Carrying Accumulated Intangible (Years) Amount Amortization Assets Amount Amortization Assets ------- -------- ------------ ---------- -------- ------------ ---------- Amortized intangible assets: License fees 4 $ 811 $ (223) $ 588 $ 761 $ (85) $ 676 Patents and trademarks 3 799 (383) 416 616 (204) 412 Non-compete agreements 2 159 (80) 79 75 (47) 28 Software 5 600 (10) 590 -- -- -- Trade names 10 378 (3) 375 -- -- -- Customer list 10 76 (1) 75 -- -- -- -------- ------------ ---------- -------- ------------ ---------- Total $ 2,823 $ (700) $ 2,123 $ 1,452 $ (336) $ 1,116 ======== ============ ========== ======== ============ ==========
Aggregate amortization expense for identifiable intangible assets totaled $145,000 and $364,000 for the three and nine months ended September 30, 2002, respectively and $33,000 and $77,000 for the three and nine months ended September 30, 2001, respectively. Estimated amortization expense for each of the five succeeding years ended December 31 is as follows (amounts in thousands): 2003 $ 642 2004 327 2005 207 2006 191 2007 151
6. LINE OF CREDIT In October 2002, the Company entered into a $10,000,000 line of credit with a bank. The line bears interest at prime plus 0.5% (5.25% at September 30, 2002), interest only payments due monthly, with final payment of interest and principal due on July 31, 2004. The line of credit is secured by all assets of the Company. The Company has not drawn against the line of credit as of September 30, 2002. The line of credit is subject to financial covenants. The Company was not in compliance with certain covenants as of September 30, 2002. 7. STOCKHOLDERS' EQUITY (a) Preferred Stock The Series C preferred stock is convertible into shares of common stock. The initial conversion rate was one for one, but was subject to change if certain events occur. Generally, the conversion rate will be adjusted if the Company issues any non-cash dividends on outstanding securities, splits its securities or otherwise effects a change to the number of its outstanding securities. The conversion rate will also be adjusted if the Company issues additional securities at a price that is less than the price that the Series C preferred stockholders paid for their shares. Such adjustments will be made according to certain formulas that are designed to prevent dilution of the Series C preferred stock. The Series C preferred stock can be converted at any time at the option of the holder, and will convert automatically, immediately prior to the consummation of a firm commitment public offering of common stock pursuant to a registration statement filed with the Securities and Exchange Commission having a per share price equal to or greater than $24.00 per share and a total gross offering amount of not less than $15,000,000. The rate of conversion was 1-to-0.9266 as of September 30, 2002. The Company may not pay any cash dividends on its common stock while any Series C preferred stock remains outstanding without the consent of the Series C preferred stockholders. Holders of Series C preferred stock are entitled to vote on all matters submitted for a vote of the holders of common stock. Holders will be entitled to one vote for each share of common stock into which one share of Series C preferred stock could then be converted. In the event of liquidation or dissolution, the holders of Series C preferred stock will be entitled to receive the amount they paid for their stock, plus accrued and unpaid dividends out of the Company's assets legally available for such payments prior to the holders of securities junior to the Series C preferred stock receiving payments. -13- MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) During the period from December 31, 2001 through September 30, 2002, 128,280 shares of Series C preferred stock were converted into 99,210 shares of common stock at a rate of 1-to-0.70220 for conversions through February 20, 2002, at a rate of 1-to-0.74385 for those conversions beginning February 21, 2002 and through May 6, 2002, at a rate of 1-to-0.7548 for those conversions beginning May 7, 2002 and through August 19, 2002, at a rate of 1-to-0.79145 for those conversions beginning August 20, 2002 and through September 2, 2002, and at a rate of 1-to-0.9266 for those conversions beginning September 3, 2002 and thereafter. (b) Common Stock Holders of shares of common stock are entitled to one vote per share on all matters submitted to a vote of the Company's stockholders. There is no right to cumulative voting for the election of directors. Holders of shares of common stock are entitled to receive dividends, if and when declared by the board of directors, out of funds legally available therefor, after payment of dividends required to be paid on any outstanding shares of preferred stock. Upon liquidation, holders of shares of common stock are entitled to share ratably in all assets remaining after payment of liabilities, subject to the liquidation preferences of any outstanding shares of preferred stock. Holders of shares of common stock have no conversion, redemption or preemptive rights. 8. NET LOSS PER SHARE The computation of basic and diluted net loss per share follows (amounts in thousands, except per share data):
Three months ended Nine months ended September 30, September 30, ---------------------------- ---------------------------- 2002 2001 2002 2001 ------------ ------------ ------------ ------------ Loss before cumulative effect of change in accounting principle $ (4,488) $ (7,260) $ (9,793) $ (17,063) Cumulative effect of change in accounting principle -- -- (5,627) -- ------------ ------------ ------------ ------------ Net loss $ (4,488) $ (7,260) $ (15,420) $ (17,063) ============ ============ ============ ============ Weighted average common shares outstanding - basic and diluted 17,159 14,846 16,125 14,715 ============ ============ ============ ============ Net loss per share - basic and diluted Loss before cumulative effect of change in accounting principle $ (0.26) $ (0.49) $ (0.61) $ (1.16) Cumulative effect of change in accounting principle -- -- (0.35) -- ------------ ------------ ------------ ------------ $ (0.26) $ (0.49) $ (0.96) $ (1.16) ============ ============ ============ ============
The following table summarizes securities outstanding which were not included in the calculation of diluted net loss per share since their inclusion would be antidilutive:
September 30, ----------------------------- 2002 2001 ------------- ------------- Stock options and warrants 2,858,704 1,446,641 ============= ============= Convertible preferred stock 554,379 695,826 ============= =============
-14- MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 9. CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS Two customers accounted for 22% and 20% of total revenue of the Company for the nine months ended September 30, 2002. Two customers accounted for 30% and 26% of total revenue of the Company for the nine months ended September 30, 2001. Export sales were approximately 17% and 32% of the Company's total revenues for the nine months ended September 30, 2002 and 2001, respectively. The principal international market served by the Company was Europe. 10. CONTINGENCIES AND LITIGATION The Company is involved in various claims and legal actions in the ordinary course of business. In the opinion of management, based on consultation with legal counsel, the ultimate disposition of these matters will not have a material adverse effect on the Company's financial position, results of operations or liquidity. Accordingly, the accompanying condensed consolidated financial statements do not include a provision for losses, if any, that might result from the ultimate disposition of these matters. 11. RECENTLY ISSUED ACCOUNTING STANDARDS In June 2001, the FASB issued Statement No. 143, "Accounting for Asset Retirement Obligations" ("Statement 143"). Statement 143 requires the Company to record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development and/or normal use of the assets. The Company also records a corresponding asset which is depreciated over the life of the asset. Subsequent to the initial measurement of the asset retirement obligation, the obligation will be adjusted at the end of each period to reflect the passage of time and changes in the estimated future cash flows underlying the obligation. The Company is required to adopt Statement 143 on January 1, 2003. The adoption of Statement 143 is not expected to have a material impact on the Company's consolidated financial statements. In April 2002, the FASB issued Statement No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections ("Statement 145"), which addresses financial accounting and reporting for reporting gains and losses from extinguishment of debt, accounting for intangible assets of motor carriers and accounting for leases. Statement 145 requires that gains and losses from early extinguishment of debt should not be classified as extraordinary, as previously required. Statement 145 also rescinds Statement 44, which was issued to establish accounting requirements for the effects of transition to the provisions of the Motor Carrier Act of 1980 (Public Law 96-296, 96th Congress, July 1, 1980). Those transitions are completed; therefore, Statement 44 is no longer necessary. Statement 145 also amends Statement 13 to require sale-leaseback accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. Statement 145 also makes various technical corrections to existing pronouncements. Those corrections are not substantive in nature. The provisions of this statement relating to Statement 4 are applicable in fiscal years beginning after May 15, 2002. The provisions of this Statement related to Statement 13 are effective for transactions occurring after May 15, 2002. All other provisions of this statement are effective for financial statements issued on or after May 15, 2002. The adoption of Statement 145 is not expected to have a material impact on the Company's consolidated financial statements. In June 2002, the FASB issued Statement No. 146, Accounting for Exit or Disposal Activities ("Statement 146"). Statement 146 addresses the recognition, measurement and reporting of costs associated with exit and disposal activities, including restructuring activities. Statement 146 also addresses recognition of certain costs related to terminating a contract that is not a capital lease, costs to consolidate facilities or relocate employees and termination of benefits provided to employees that are involuntarily terminated under the terms of a one-time benefit arrangement that is not an ongoing benefit arrangement or an individual deferred compensation contract. Statement 146 is effective for exit or disposal activities that are initiated after December 31, 2002. The Company is in the process of evaluating the adoption of Statement 146 and its impact on the financial position or results of operations of the Company. -15- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Certain statements under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" constitute "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause the actual results, performance or achievements of the Company, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: - loss of, and failure to replace, any significant customers; - timing and success of new product introductions; - product developments, introductions and pricing of competitors; - timing of substantial customer orders; - availability of qualified personnel; - performance of suppliers and subcontractors; - market demand and industry and general economic or business conditions; - other factors to which this report refers. The following discussion and analysis of our financial condition and results of operations should be read together with our condensed consolidated financial statements and notes thereto contained in this report. OVERVIEW The Company designs, develops and markets power, connectivity, and accessory products and solutions for the mobile computing user. This includes (1) universal docking products and remote peripheral component interface, or PCI bus, technology and products using our proprietary PCI expansion and Split Bridge(R) technologies, (2) batteries and various AC and DC power adapters which allow the user to power a notebook computer in an office, a home, a car, an airplane, or a boat, (3) a variety of cradle and connectivity products for handheld devices, and (4) a variety of accessories for portable computers such as monitor stands, travel adapters, and the like. To date, our revenues have come predominantly from monitor stands, handheld connectivity products, in air/in car chargers and expansion products. We expect revenues from those products to continue and also expect to see increasing revenues primarily from current and new power and handheld products and solutions as we further expand our markets and distribution channels for these products. We sell our products to OEMs, distributors, resellers, retailers, and end-users. A substantial portion of our net product sales is concentrated among a number of OEMs, including Symbol, Gateway, Hewlett-Packard, IBM, NEC, and Toshiba. A portion of our sales to IBM are made through Kingston Technologies, who acts as their fulfillment hub manager for sales in the United States and Malaysia. Direct sales to OEMs accounted for approximately 69% of net product sales for the nine months ended September 30, 2002 and approximately 75% of net product sales for the nine months ended September 30, 2001. We expect that we will continue to be dependent upon a number of OEMs for a significant portion of our net product sales in future periods, although no OEM is presently obligated to purchase a specified amount of products. Effective December 2001, we came to an agreement with Targus to terminate their distribution of our products, as it is our intention to market products previously sold through Targus under our own brand directly through our other distribution channels. A portion of our sales to distributors and resellers is generally under terms that provide for certain stock balancing return privileges and price protection. Accordingly, we make a provision for estimated sales returns and other allowances related to those sales. Returns, which have been netted in the product sales presented herein, were approximately 5% of net product sales for the nine months ended September 30, 2002 and 2001, respectively. The major distributors are allowed to return up to 20% of their prior quarter's purchases under the stock balancing programs, provided that they place a new order for equal or greater dollar value of the stock balancing return. We derive a material portion of our net product sales outside the United States, principally in France, Germany and the United Kingdom. International sales accounted for approximately 17% of our net product sales for the nine months ended September 30, 2002. We expect product sales outside the United States to continue to account for a large portion of our future net product sales. International sales are generally denominated in the currency of our foreign customers. A decrease in the value of foreign currencies relative to the U.S. dollar could result in a significant decrease in U.S. dollar sales received by us for our international sales. Various factors have in the past affected and may continue in the future to affect our gross profits, including but not limited to, our product mix, lower volume production and higher fixed costs for newly introduced product platforms and technologies, market acceptance of newly introduced products and the position of our products in their respective lifecycles. The initial stages of our product introductions are generally characterized by lower volume production, which is accompanied by higher costs, especially for specific products, which are initially purchased in small volumes during the development lifecycle. -16- We have experienced significant operating losses since inception and, as of September 30, 2002, we have an accumulated deficit of approximately $97.1 million. These accumulated losses have resulted in decreases in cash and cash equivalents. If we do not achieve continued revenue growth sufficient to absorb our recent and planned expenditures, we could experience additional losses and corresponding decreases in cash and cash equivalents in future periods, including the remainder of 2002. Operating expenses for the nine months ended September 30, 2002 totaled $15.4 million as compared to $20.0 million for the nine months ended September 30, 2001. We anticipate that in the future we will make additional investments in our sales and marketing activities and, as a result, operating expenses will increase. We intend to make such investments on an ongoing basis, from cash generated from operations and, if available, from lines of credit and other sources of financing, as we develop and introduce new products and expand into new markets. We expect that such increases in spending will result in increases in revenues and resulting gross profits, which should result in turning our net losses into net profits. Recent general economic conditions have contributed to a slow down in sales of computers and computer-related products and accessories. This economic slow down has had a negative impact on our revenues. If we are not able to grow revenues in future periods, we are likely to continue to incur net losses and our cash equivalents are likely to continue to decrease. In October 2000, we acquired all of the assets of Mesa Ridge Technologies, Inc. d/b/a MAGMA, a privately held company. MAGMA provides a range of PCI expansion products for the computer industry which utilize traditional PCI bridge technology and MAGMA's patented expansion technology. The acquisition of MAGMA solidified Mobility's market leadership position in the PCI expansion business by providing products, distribution channels, key customers, and additional resources that can leverage our Split Bridge(R) technology and accelerate our growth and development in this market segment. In February 2002, we acquired Portsmith, Inc., an industry leader in providing connectivity solutions for handheld computing devices. This acquisition provides us with an entrance into the rapidly growing handheld computing device market and reinforces our focus on delivering powerful mobile computing solutions. Portsmith currently provides a range of Ethernet, modem, and other connectivity products for the most popular handheld devices such as Palm, Handspring Visor, Compaq IPAQ, and other mainstream PDA products, and intends to undertake a number of important product development programs that expand on these solutions. In August 2002, we acquired Cutting Edge Software, Inc., a leading developer and provider of software solutions for handheld computing devices. Cutting Edge Software currently provides software that allows users of Palm operating system devices to utilize popular word processing, spreadsheet and presentation programs. Cutting Edge Software has also developed software that allows users to remotely access files stored on a desktop computer from a wireless PDA or smartphone. This acquisition, in conjunction with the Portsmith acquisition, enhances our product and service offering within the rapidly growing wireless handheld computing device market. In September 2002, we acquired iGo Corporation (now iGo Direct Corporation), a leading computer solutions provider. iGo distributes its products through distributors and directly through its catalog and internet channels, and is a well-recognized brand name in the portable computer power products and accessories market. We believe the acquisition of iGo will broaden our revenue base and substantially strengthen our distribution capabilities and brand identity. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make a number of estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to bad debts, inventories, warranty obligations, and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements. REVENUE RECOGNITION Revenue from product sales is recognized upon shipment and transfer of ownership from us or our contract manufacturer to the customer. Allowances for sales returns and credits are provided for in the same period the related sales are recorded. Should the actual return or sales credit rates differ from our estimates, revisions to the estimated allowance for sales returns and credits may be required. Revenue from technology transfer fees, consisting of the licensing and transferring of Split Bridge(R) and other technology and architecture, and related training and implementation support services, is recognized over the term of the respective sales or license agreement. Certain license agreements contain no stated termination date, whereby we recognize the revenue over -17- the estimated life of the license. Should the actual life differ from the estimates, revisions to the estimated life may be required. Our recognition of revenues from product sales to distributors and retailers (the "distribution channel") is affected by agreements we have giving certain customers rights to return our product at any time after purchase. We also have agreements with certain customers that allow them to receive credit for subsequent price reductions ("price protection"). At the time we recognize revenue, upon shipment and transfer of ownership, we reduce our measurements of those sales and the related cost of sales by our estimates of future returns and price protection. We also reduce our measurements of accounts receivable by the estimated profit margins associated with returns (i.e., sales price less cost of sales). For our products, a historical correlation exists between the amount of distribution channel inventory and the amount of returns that actually occur. The greater the distribution channel inventory, the more product returns we expect. For each of our products, we monitor levels of product sales and inventory at our distributors' warehouses and at retailers as part of our effort to reach an appropriate accounting estimate for returns. In estimating returns, we analyze historical returns, current inventory in the distribution channel, current economic trends, changes in consumer demand, introduction of new competing products, and acceptance of our products. In recent years, as a result of a combination of the factors described above, we have reduced our gross sales to reflect our estimated amounts of returns and price protection. It is also possible that returns could increase rapidly and significantly in the future. Accordingly, estimating product returns requires significant management judgment. In addition, different return estimates that we reasonably could have used would have had a material impact on our reported sales and thus have had a material impact on the presentation of the results of operations. For those reasons, we believe that the accounting estimate related to product returns and price protection is a "critical accounting estimate". For the nine months ended September 30, 2002, gross sales to the distribution channel accounted for approximately 11% of net product sales. Accordingly, in preparing our financial statements as of September 30, 2002, we estimated future product returns for sales into the distribution channel to be approximately 9% of gross sales into the distribution channel for the nine months ended September 30, 2002. This estimate has increased from previous estimates as a result of the acquisition of iGo products sold into the distribution channel. GOODWILL In conjunction with the implementation of the new accounting rules for goodwill, we performed a goodwill impairment evaluation relating the goodwill that was recorded as of December 31, 2001. Based on the results of that impairment evaluation, we determined the recorded goodwill at December 31, 2001 of approximately $5.6 million was fully impaired. We recorded the impairment write-down as a cumulative effect of change in accounting principle in accordance with the new accounting standard. As a result of our recent acquisitions of Portsmith, Cutting Edge Software and iGo we have recorded additional goodwill of approximately $7.3 million. In accordance with the new accounting rules, we will evaluate the newly acquired goodwill for impairment as of December 31, 2002. This evaluation may lead to the write down of all or a portion of the recorded goodwill in the fourth quarter of 2002. The impairment evaluation process is based on both a discounted future cash flow approach and a market comparable approach. The discounted cash flow approach uses our estimates of future market growth rates, market share, revenues and costs, as well as appropriate discount rates. If we fail to achieve our assumed revenue growth rates or assumed gross margin, we may incur charges for impairment of goodwill in the future. For these reasons, we believe that the accounting estimate related to goodwill impairment is a "critical accounting estimate". -18- RESULTS OF OPERATIONS The following table presents certain selected consolidated financial data for the periods indicated expressed as a percentage of total revenue:
Three months ended Nine months ended September 30, September 30, ----------------------------- ----------------------------- Unaudited Unaudited ----------------------------- ----------------------------- 2002 2001 2002 2001 ------------ ------------ ------------ ------------ Revenue: Net product sales 98.2% 98.6% 97.4% 98.6% Technology transfer 1.8% 1.4% 2.6% 1.4% ------------ ------------ ------------ ------------ Total revenue 100.0% 100.0% 100.0% 100.0% Cost of revenue: Product sales 77.5% 94.1% 76.0% 91.6% Technology transfer 0.0% 0.0% 0.0% 0.0% ------------ ------------ ------------ ------------ Total cost of revenue 77.5% 94.1% 76.0% 91.6% ------------ ------------ ------------ ------------ Gross profit 22.5% 5.9% 24.0% 8.4% Operating expenses: Sales and marketing 24.8% 28.6% 23.7% 31.6% Research and development 30.4% 21.7% 22.2% 22.3% General and administrative 30.3% 62.3% 27.1% 39.9% ------------ ------------ ------------ ------------ Total operating expenses 85.5% 112.6% 73.0% 93.8% ------------ ------------ ------------ ------------ Loss from operations (63.0)% (106.7)% (49.0)% (85.4)% Other income (expense): Interest, net 2.4% 4.0% 2.7% 5.2% Other, net 0.2% 0.3% (0.3)% 0.0% ------------ ------------ ------------ ------------ Loss before provision for income taxes and cumulative effect of change in accounting principle (60.4)% (102.4)% (46.6)% (80.2)% Provision for income taxes 0.0% 0.0% 0.0% 0.0% ------------ ------------ ------------ ------------ Loss before cumulative effect of change in accounting principle (60.4)% (102.4)% (46.6)% (80.2)% Cumulative effect of change in accounting principle 0.0% 0.0% (26.7)% 0.0% ------------ ------------ ------------ ------------ Net loss (60.4)% (102.4)% (73.3)% (80.2)% ============ ============ ============ ============
Comparison of Three Months Ended September 30, 2002 and 2001 Net product sales. Net product sales consist of sales of product, net of returns and allowances. We recognize sales at the time goods are shipped and the ownership of the goods is transferred to the customer. Allowances for returns and credits are made in the same period the related sales are recorded. Net product sales increased 4.4% to $7.3 million for the three months ended September 30, 2002 from $7.0 million for the three months ended September 30, 2001. The increase was primarily attributable to sales of approximately $3.9 million from recently acquired subsidiaries Portsmith, Cutting Edge Software and iGo. This increase was largely offset by decreases primarily attributable to a reduction in sales of power products to Targus, as a result of the termination of our relationship with Targus in December 2001. Technology transfer fees. Technology transfer fees consist of revenue from the licensing and transferring by the Company of its Split Bridge(R) and handheld docking cradle technology and architecture. Revenue from technology transfer fees is recognized ratably over the term of the sales agreement. During the three months ended September 30, 2002, the Company recognized a technology transfer fee of $133,000 or 1.8% of total revenue. Technology transfer fees represented revenue of $100,000, or 1.4% of total revenues, for the three months ended September 30, 2001. Cost of revenue - product sales. Cost of revenue - product sales consists primarily of costs associated with components, outsourced manufacturing and in-house labor associated with assembly, testing, packaging, shipping and quality assurance, and depreciation of equipment and indirect manufacturing costs. Cost of revenue - product sales decreased 13.6% to $5.8 million for the three months ended September 30, 2002 from $6.7 million for the three months ended September 30, 2001. The decrease in cost of revenue - product sales was due primarily to a $1.2 million charge to cost of revenue - product sales for excess and obsolete inventory for the three months ended September 31, 2001. Cost of revenue - product sales as a percentage of net product sales decreased to 77.5% for the three months ended September 30, 2002 from 94.1% for the three months ended -19- September 30, 2001. Excluding the $1.2 million inventory charge, cost of revenues - product sales as a percentage of net product sales for the three months ended September 30, 2001 was 78.2%. Cost of revenue - technology transfer. Cost of revenue - technology transfer consists of engineering expenses related to the Split Bridge(R) and handheld docking cradle technology. There were no costs of revenue - technology transfer for the three months ended September 30, 2002 and 2001, as the technology transfer fees for the periods consisted solely of fees for existing technology. Gross profit. Gross profit increased to 22.5% of total revenue for the three months ended September 30, 2002 from 5.9% of total revenue for the three months ended September 30, 2001. The gross profit rate increase is due primarily to the $1.2 million charge to cost of revenue - product sales for excess and obsolete inventory for the three months ended September 30, 2001. Excluding this charge, gross profit was 22.9% for the three months ended September 30, 2001. Sales and marketing. Sales and marketing expenses generally consist of salaries, commissions and other personnel related costs of our sales, marketing and support personnel, advertising, public relations, promotions, printed media and travel. Sales and marketing expenses decreased 9.3% to $1.8 million for the three months ended September 30, 2002 from $2.0 million for the three months ended September 30, 2001. The decrease is primarily the result of a reduction in marketing programs resulting from our decision to focus our marketing efforts on what we have deemed to be the most productive sales channels. As a percentage of total revenue, sales and marketing expenses decreased to 24.8% for the three months ended September 30, 2002 from 28.6% for the three months ended September 30, 2001. Research and development. Research and development expenses consist primarily of salaries and personnel-related costs, facilities, outside consulting, lab costs and travel related costs of our product development group. Research and development expenses increased 46.6% to $2.3 million for the three months ended September 30, 2002 from $1.5 for the three months ended September 30, 2001. Research and development expenses as a percentage of total revenue increased to 30.4% for the three months ended September 30, 2002 from 21.7% for the three months ended September 30, 2001. Research and development expense for the three months ended September 30, 2002 included $620,000 of in-process research and development recorded in connection with the acquisition of Cutting Edge Software and $400,000 associated with the write-down of certain tooling equipment. Excluding these charges, research and development expense decreased to $1.2 million or 16.7% of revenues. The decrease is due to reductions in engineering expenses and staff. General and administrative. General and administrative expenses consist primarily of salaries and other personnel-related expenses of our finance, human resources, information systems, corporate development and other administrative personnel, as well as professional fees, depreciation and amortization and related expenses. General and administrative expenses also include non-cash compensation, which is the result of the issuance of common stock, warrants and stock options at a price deemed to be less than market value to employees and outside consultants for services rendered. General and administrative expenses decreased 49.1% to $2.2 million for the three months ended September 30, 2002 from $4.4 million for the three months ended September 30, 2001. For the three months ended September 30, 2001, general and administrative expenses included a write-off of a $3.0 million loan to a strategic partner and also included goodwill amortization of $155,000 relating to the acquisition of Magma in October, 2000. Excluding the September 30, 2001 charges, general and administrative expenses for the three months ended September 30, 2002 increased approximately $900,000, primarily due to severance and termination costs and increases in general and administrative expenses, including personnel, facilities, travel and telecommunications as a result of the acquisitions of Portsmith, Cutting Edge Software and iGo. Interest, net. Interest, net consists primarily of interest earned on our cash balances and short-term investments, net of interest expense. Net interest income for three months ended September 30, 2002 was $176,000 compared to $286,000 for the three months ended September 30, 2001. The change was primarily due to the reduction in cash balance from September 30, 2001 to September 30, 2002. Income taxes. We have incurred losses from inception to date; therefore, no provision for income taxes was required for the three months ended September 30, 2002 and 2001. Comparison of Nine Months Ended September 30, 2002 and 2001 Net product sales. Net product sales consist of sales of product, net of returns and allowances. We recognize sales at the time goods are shipped and the ownership of the goods is transferred to the customer. Allowances for returns and credits are made in the same period the related sales are recorded. Net product sales decreased 2.3% to $20.5 million for the nine months ended September 30, 2002 from $21.0 million for the nine months ended September 30, 2001. The decrease was primarily attributable to a reduction in sales of power products to Targus, as a result of the termination of our relationship with Targus in December 2001. The decrease was partially offset by sales relating to handheld products as a result of our acquisition of Portsmith, Inc. in February 2002 as well as sales of power products and batteries as a result of our acquisition of iGo in September 2002 and sales of software as a result of our acquisition of Cutting Edge Software in August 2002, all of which totaled approximately $7.8 million. Technology transfer fees. Technology transfer fees consist of revenue from the licensing and transferring by the Company of its Split Bridge(R) and handheld docking cradle technology and architecture. Revenue from technology transfer fees is -20- recognized ratably over the term of the sales agreement. During the nine months ended September 30, 2002, the Company recognized a technology transfer fee of $548,000 or 2.6% of total revenue. Technology transfer fees represented revenue of $300,000, or 1.4% of total revenues, for the nine months ended September 30, 2001. Cost of revenue - product sales. Cost of revenue - product sales consists primarily of costs associated with components, outsourced manufacturing and in-house labor associated with assembly, testing, packaging, shipping and quality assurance, and depreciation of equipment and indirect manufacturing costs. Cost of revenue - product sales decreased 18.0% to $16.0 million for the nine months ended September 30, 2002 from $19.5 million for the nine months ended September 30, 2001. The decrease in cost of revenue - product sales was due primarily to a $3.4 million charge to cost of revenue - product sales for excess and obsolete inventory for the nine months ended September 30, 2001. Cost of revenue - product sales as a percentage of net product sales decreased to 76.0% for the nine months ended September 30, 2002 from 91.6% for the nine months ended September 30, 2001. Excluding the $3.4 million charge, cost of revenues - product sales as a percentage of net product sales for the nine months ended September 30, 2001 was 76.7%. Cost of revenue - technology transfer. Cost of revenue - technology transfer consists of engineering expenses related to the Split Bridge(R) and handheld docking cradle technology. There were no costs of revenue - technology transfer for the nine months ended September 30, 2002 and 2001, as the technology transfer fees for the periods consisted solely of fees for existing technology. Gross profit. Gross profit increased to 24.0% of total revenue for the nine months ended September 30, 2002 from 8.4% of total revenue for the nine months ended September 30, 2001. The gross profit rate increase is due primarily to the $3.4 million charge to cost of revenue - product sales for excess and obsolete inventory for the nine months ended September 30, 2001. Excluding this charge, gross profit was 24.4% for the nine months ended September 30, 2001. Sales and marketing. Sales and marketing expenses generally consist of salaries, commissions and other personnel related costs of our sales, marketing and support personnel, advertising, public relations, promotions, printed media and travel. Sales and marketing expenses decreased 25.9% to $5.0 million for the nine months ended September 30, 2002 from $6.7 million for the nine months ended September 30, 2001. The decrease is primarily the result of a reduction in marketing programs resulting from our decision to focus our marketing efforts on what we have deemed to be the most productive sales channels. As a percentage of total revenue, sales and marketing expenses decreased to 23.7% for the nine months ended September 30, 2002 from 31.6% for the nine months ended September 30, 2001. Research and development. Research and development expenses consist primarily of salaries and personnel-related costs, facilities, outside consulting, lab costs and travel related costs of our product development group. Research and development expenses decreased 1.6% to $4.7 million for the nine months ended September 30, 2002 from $4.7 million for the nine months ended September 30, 2001. Research and development expenses as a percentage of total revenue decreased to 22.2% for the nine months ended September 30, 2002 from 22.3% for the nine months ended September 30, 2001. The decrease is due to reductions in engineering expenses and staff as a result of the development of Split Bridge(R) technology, which was largely developed in 2000 and the early part of 2001. The decrease is partially offset by charges for acquired in-process research and development of $620,000 and the $400,000 write-off of certain tooling equipment during the nine months ended September 30, 2002. Excluding these charges, research and development expense decreased to $3.7 million or 17.4% of revenues. General and administrative. General and administrative expenses consist primarily of salaries and other personnel-related expenses of our finance, human resources, information systems, corporate development and other administrative personnel, as well as professional fees, depreciation and amortization and related expenses. General and administrative expenses also include non-cash compensation, which is the result of the issuance of common stock, warrants and stock options at a price deemed to be less than market value to employees and outside consultants for services rendered. General and administrative expenses decreased 32.9% to $5.7 million for the nine months ended September 30, 2002 from $8.5 million for the nine months ended September 30, 2001. For the nine months ended September 30, 2001, general and administrative expenses included a write-off of a $3.0 million loan to a strategic partner and also included goodwill amortization of $465,000 relating to the acquisition of Magma in October, 2000. Excluding the September 30, 2001 charges, general and administrative expenses for the nine months ended September 30, 2002 increased approximately $700,000, primarily due to severance and termination costs and increases in general and administrative expenses, including personnel, facilities, travel and telecommunications as a result of the acquisitions of Portsmith, Cutting Edge Software and iGo. Interest, net. Interest, net consists primarily of interest earned on our cash balances and short-term investments, net of interest expense. Net interest income for nine months ended September 30, 2002 was $577,000 compared to $1.1 million for the nine months ended September 30, 2001. The change was primarily due to the reduction in cash balance from September 30, 2001 to September 30, 2002. Income taxes. We have incurred losses from inception to date; therefore, no provision for income taxes was required for the six months ended September 30, 2002 and 2001. -21- LIQUIDITY AND CAPITAL RESOURCES Since inception, we have funded our operations primarily through debt and equity financing, as the cash consumed by our operating activities has exceeded cash generated by revenues. Our operating activities used cash of $5.1 million and $12.6 million for the nine months ended September 30, 2002 and 2001, respectively. Net cash used in operating activities for the nine months ended September 30, 2002 was primarily attributed to our net loss of $15.4 million, offset by non-cash charges of $8.6 million and a decrease in accounts receivable and an increase in accounts payable. Inventory and prepaid expenses increased, while accrued expenses decreased. Our investing activities used cash of $3.5 million and $2.6 million for the nine months ended September 30, 2002 and 2001, respectively. For the nine months ended September 30, 2002, cash used for investing was for the acquisitions of Portsmith, Cutting Edge Software and iGo and for purchases of property and equipment and is partially offset by cash acquired and the sale of an investment. For the nine months ended September 30, 2001, cash used in investing activities was for the purchase of property and equipment, cash paid for a note receivable which was written off in its entirety during the three months ended September 30, 2001, and cash paid to exercise a stock purchase warrant. Our net financing activities used cash of $8,000 and $30,000 for the nine months ended September 30, 2002 and 2001, respectively. Our cash and cash equivalents decreased to $6.2 million at September 30, 2002 compared to $14.8 million at December 31, 2001. Our net working capital at those same dates was $8.2 million and $19.4 million, respectively. At September 30, 2002 our available sources of liquidity were our cash and cash equivalents. At September 30, 2002, we had approximately $70.5 million of federal, foreign and state net operating loss carryforwards which expire at various dates. We anticipate that the sale of common stock in the IPO coupled with prior sales of common stock will cause an annual limitation on the use of our net operating loss carryforwards pursuant to the change in ownership provisions of Section 382 of the Internal Revenue Code of 1986, as amended. This limitation is expected to have a material effect on the timing of our ability to use the net operating loss carryforward in the future. Additionally, our ability to use the net operating loss carryforward is dependent upon our level of future profitability, which cannot be determined. At September 30, 2002, we had future commitments relating to various non-cancelable operating leases totaling approximately $2.9 million, payable over the next six years, with approximately $200,000 payable in 2002, $550,000 payable in 2003, $650,000 payable in 2004, $400,000 payable in 2005, $400,000 payable in 2006, $400,000 payable in 2007, and $300,000 payable in 2004. In October 2002, we entered into a $10,000,000 line of credit with a bank. The line bears interest at prime plus 0.5% (5.25% at September 30, 2002), interest only payments due monthly, with final payment of interest and principal on July 31, 2004. The line of credit is secured by all assets of the Company. The Company has not drawn against the line of credit as of September 30, 2002. The line of credit is subject to financial covenants. The Company was not in compliance with certain covenants as of September 30, 2002. In the event the Company is unsuccessful in obtaining a waiver from the bank or modifying the covenants, this could have a material adverse effect on the liquidity of the Company. Our future capital requirements include funding operations, financing the growth of working capital items such as accounts receivable and inventories, and the purchase of equipment and fixtures to accomplish future growth, and potential earn-out payments in connection with acquisitions. We believe that our cash and cash equivalents on hand and borrowings available under our line of credit will be sufficient to satisfy our expected cash and working capital requirements for the next twelve months. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to certain market risks in the ordinary course of our business. These risks result primarily from changes in foreign currency exchange rates and interest rates. In addition, our international operations are subject to risks related to differing economic conditions, changes in political climate, differing tax structures and other regulations and restrictions. To date we have not utilized derivative financial instruments or derivative commodity instruments. We do not expect to employ these or other strategies to hedge market risk in the foreseeable future. We invest our cash in money market funds and other short term, highly liquid investments, which are subject to minimal credit and market risk. We believe that the market risks associated with these financial instruments are immaterial. ITEM 4. CONTROLS AND PROCEDURES Based upon their evaluations of the effectiveness of the design and operation of the Company's disclosure controls and procedures as of a date within 90 days of the filing date of this report, the Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures were adequate and designed to ensure that information required to be disclosed by the Company in this report is recorded, processed, summarized and reported by the filing date of -22- this report, and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. There were no significant changes in internal controls or in other factors that could significantly affect internal controls to the date of such evaluation, and there were no corrective actions with regard to significant deficiencies and material weaknesses in internal controls, subsequent to the evaluation described above. PART II: OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS: Mobility Electronics, Inc. v. Comarco, Inc. and Comarco Wireless Technologies, Inc. No. CIV01-1489 PHX MHM was filed on August 10, 2001 in the United States District Court for the District of Arizona. In this lawsuit, we allege infringement of U.S. Patent No. 5,347,211 entitled "Selectable Output Power Converter." We have amended our complaint to further seek declaratory judgments of non-infringement, patent invalidity and/or patent unenforceability of three patents allegedly owned by Comarco: U.S. Patent Nos. 6,172,884, 6,091,661 and 5,838,554. The defendants have filed a motion to dismiss, which was denied by the Court on July 26, 2002. We will continue to vigorously pursue our claims in this litigation. Comarco Wireless Technologies, Inc. v. Xtend Micro Products Inc. and iGo Corporation No. SACV02-640 AHS (Anx) was filed on June 21, 2002, in the United States District Court for the Central District of California. In this lawsuit, Comarco is seeking injunctive relief, monetary damages, and costs and attorney fees. On October 28, 2002, the Court signed and Order transferring the lawsuit to the United States District Court for the District of Arizona where Mobility already has a lawsuit pending against Comarco involving certain patents as described in the preceding paragraph. We intend to vigorously defend ourselves against the claims in this lawsuit. Richard C. Liggitt v. Portsmith, Inc., et al., Case No. 02CC03308 was filed on February 22, 2002 in the Superior Court of the State of California, County of Orange, Central Judicial District. In this lawsuit the plaintiff alleges fraud in connection with merger negotiations that led to the execution of a merger agreement between a company owned by the plaintiff and Portsmith, which we acquired in February 2002. The plaintiff also alleges wrongful termination of his employment with Portsmith and breach of the implied covenant of good faith and fair dealing under his employment agreement with Portsmith. Finally, the plaintiff alleges that Portsmith was the alter ego of certain of Portsmith's former directors. The plaintiff is seeking general and special damages, punitive damages, attorneys' fees and costs. We have filed an answer denying all material allegations and have asserted a counterclaim for fraud and breach of contract. The parties have reached a settlement and are awaiting approval of the settlement from the court. The settlement will not be effective unless that approval is obtained. Under the terms of the settlement, the Company will pay Mr. Liggitt an aggregate of $1,000,000 (the "Settlement Amount") in exchange for a settlement and release of all claims and a cancellation of all of Mr. Liggitt's rights as a former shareholder of Portsmith under the merger agreement between the Company and Portsmith, including, but not limited to, the 53,647 shares of the Company's common stock Mr. Liggitt received in connection with the merger, the 53,646 shares of the Company's common stock currently held in escrow that Mr. Liggitt may otherwise be entitled to receive and Mr. Liggitt's share in any potential earn-out payments. Of the Settlement Amount, $10,000 will be paid upon approval of the settlement by the court and $990,000 will be paid in the form of a convertible subordinated promissory note bearing interest at four percent per year, payable in quarterly installments of principal and interest beginning in January 2003, through December 2005. The outstanding principal of the promissory note may be converted by Mr. Liggitt at any time into shares of the Company's common stock, at a conversion price of $3.00 per share. In connection with this settlement, the potential earn-outs under the merger agreement between the Company and Portsmith will be reduced by $480,000, plus a certain additional amount for fees and expenses and a tax settlement, and Mr. Liggitt's share of the potential earn-puts will be eliminated. Mobility Electronics, Inc. v. General Dynamics OTS, Inc., pending in The United States District Court for the District of Arizona, Docket No. Civ '02 0736 PHX JAT. This is a suit for declaratory judgment brought by Mobility arising out of a dispute involving a trademark license agreement with General Dynamics OTS, Inc., the owner of the trademark "EmPower." General Dynamics has contended that it is owed approximately $710,000 in back royalties and interest based upon its interpretation of the license agreement. Under Mobility's interpretation of the license, the royalties owed are substantially less. Mobility commenced this litigation on April 19, 2002, in order to have the Court construe the disputed terms of the license agreement and determine the amount owed by Mobility. General Dynamics has responded to the suit and asserted a counterclaim for, among other things, the royalties it alleges to be due, plus attorney's fees and interest. This lawsuit is in the initial stages and we cannot express an opinion as to the outcome of this action. Our failure to express an opinion at this stage should not be construed as an indication that we believe Mobility may ultimately be liable for any or all of the damages sought by General Dynamics. We intend to vigorously pursue the claims made in this lawsuit. -23- We are from time to time involved in various legal proceedings other than those set forth above incidental to the conduct of our business. We believe that the outcome of all such pending legal proceedings will not in the aggregate have a material adverse effect on our business, financial condition, results of operations or liquidity. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS Effective as of August 20, 2002, the Company issued 796,394 shares of common stock to Jeff Musa in connection with its acquisition of Cutting Edge Software, Inc. Effective September 12, 2002, Jackson Walker L.L.P., the Company's legal counsel, agreed to convert $600,000 of fees and expenses owed by the Company into 571,428 shares of the Company's common stock, subject to a re-sale registration statement for such shares being filed with, and declared effective by, the Securities and Exchange Commission on or prior to December 5, 2002. The two issuances set forth above were made in reliance upon the exemptions from registration requirements of the Securities Act of 1933, as amended (the "Securities Act"), contained in Section 4(2) on the basis that such transactions did not involve a public offering. When appropriate, the Company determined that the purchasers of securities described below were sophisticated investors who had the financial ability to assume the risk of their investment in the Company's securities and acquired such securities for their own account and not with a view to any distribution thereof to the public. The certificates evidencing the securities bear legends stating that the securities are not to be offered, sold or transferred other than pursuant to an effective registration statement under the Securities Act or an exemption from such registration requirements. On September 3, 2002, the Company issued 2,600,000 shares of its common stock to the former stockholders of iGo in connection with the acquisition of iGo. The issuance was registered by the Company with the Securities and Exchange Commission on Form S-4, Registration Number 333-88078. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS: None ITEM 5. OTHER INFORMATION: None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K: (a) Exhibits: Exhibit Number Description ------ ----------- 2.1 -- Agreement and Plan of Merger dated March 23, 2002, by and among Mobility Electronics, Inc., iGo Corporation and IGOC Acquisition, Inc.(8) 3.1 -- Certificate of Incorporation of the Company.(1) 3.2 -- Articles of Amendment to the Certificate of Incorporation of the Company dated as of June 17, 1997.(3) 3.3 -- Articles of Amendment to the Certificate of Incorporation of the Company dated as of September 10 1997.(1) 3.4 -- Articles of Amendment to the Certificate of Incorporation of the Company dated as of July 20, 1998.(1) 3.5 -- Articles of Amendment to the Certificate of Incorporation of the Company dated as of February 3, 2000.(1) 3.6 -- Certificate of Designations, Preferences, Rights and Limitations of Series C Preferred Stock.(1) 3.7 -- Amended Bylaws of the Company.(1) 3.8 -- Certificate of the Designations, Preferences, Rights and Limitations of Series D Preferred Stock.(2) 3.9 -- Articles of Amendment to the Certificate of Incorporation of the Company dated as of 2000.(3) 4.1 -- Specimen of Common Stock Certificate.(4) 4.2 -- Form of 12% Convertible Debenture of the Company.(1) 4.3 -- Registration Rights Agreement by and between the Company and Miram International, Inc. dated July 29, 1997.(1) 4.4 -- Placements for the Purchase of Up To 900 Units, Each Consisting of 1,000 shares of the Company's Common stock.(1) -24- 4.5 -- Form of Unit Purchase Agreement used in 1997 Private Placements for the Purchase of Up To 875 Units, Each Consisting of 2,000 shares of the Company's Common stock and warrants to purchase 500 shares of the Company's Common Stock. (1) 4.6 -- Form of 13% Bridge Promissory Note and Warrant Purchase Agreement used in March 1999 Private Placement.(1) 4.7 -- Form of 13% Bridge Promissory Note and Warrant Purchase Agreement used in March 1999 Private Placement.(1) 4.8 -- Form of 13% Bridge Promissory Note and Warrant Purchase Agreement used in July 1999 Private Placement.(1) 4.9 -- Form of 13% Bridge Note issued in July 1999 Private Placement.(1) 4.10 -- 13% Bridge Note Conversion Notice expired March 31, 1999.(1) 4.11 -- Form of Series C Preferred Stock Purchase Agreement used in 1998 and 1999 Private Placements.(1) 4.12 -- Form of Series C Preferred Stock and Warrant Purchase Agreements used in 1999 and 2000 Private Placements.(1) 4.13 -- Series C Preferred Stock Purchase Agreement executed May 3, 1999, between the Company, Philips Semiconductors VLSI, Inc. (f/k/a VSLI Technology, Inc.) and Seligman Communications and Information Fund, Inc.(1) 4.14 -- Amended and Restated Stock Purchase Warrant issued by the Company to Finova Capital Corporation (f/k/a Sirrom Capital Corporation) dated as of March 25, 1998.(1) 4.15 -- Stock Purchase Warrant issued by the Company to Finova Capital Corporation (f/k/a Sirrom Capital Corporation) dated as of March 25, 1998.(1) 4.16 -- Series C Preferred Stock and Warrant Purchase Agreement dated October 29, 1999, between the Company and Seligman Communications and Information Fund, Inc.(1) 4.17 -- Contribution and Indemnification Agreement by and among Janice L. Breeze, Jeffrey S. Doss, Charles R. Mollo, Cameron Wilson, the Company and certain Stockholders of the Company dated April 20, 1998.(1) 4.18 -- Form of Warrant to Purchase common stock of the Company issued to certain holders in Connection with that certain Contribution and Indemnification Agreement by and among Janice L. Breeze, Jeffrey S. Doss, Charles R. Mollo, Cameron Wilson, the Company and certain Stockholders of the Company dated April 20, 1998.(1) 4.19 -- Form of Warrant to Purchase common stock of the Company issued to certain holders in Connection with that certain Contribution and Indemnification Agreement by and among Janice L. Breeze, Jeffrey S. Doss, Charles R. Mollo, Cameron Wilson, the Company and certain Stockholders of the Company dated November 2, 1999.(2) 4.20 -- Form of Warrant to Purchase Common Stock of the Company issued in the 1997 Private Placement.(2) 4.21 -- Form of 13% Bridge Note issued in March 1999 Private Placement.(2) 4.23 -- Investor Rights Agreement dated October 29, 1999 by and between the Company and Seligman Communications and Information Fund, Inc. entered into in connection with The Series C Preferred Stock and Warrant Purchase Agreement Series C Preferred Stock and Warrant Purchase Agreement dated October 29, 1999.(2) 4.24 -- Form of Warrant to Purchase Shares of Common Stock issued in connection with the Loan Extension Agreement dated February 29, 2000.(2) 4.25 -- Investors' Rights Agreement executed May 3, 1999 between the Company, Philips Semiconductors VLSI, Inc. f/k/a VLSI Technology, Inc.) and Seligman Communications and Information Fund, Inc.(3) 4.26 -- Registration Rights granted by the Company to Cybex Computer Products Corporation in connection with the Strategic Partner Agreement dated March 6, 2000.(3) 4.27 -- 13% Bridge Note Conversion Notice used in July 1999 Private Placement.(5) 4.28 -- Letter agreement dated September 12, 2002 between Mobility Electronics, Inc. and Jackson Walker L.L.P.* 4.29 -- Mobility Electronics, Inc. Convertible Subordinated Promissory Note in the principal amount of $990,000 dated November 15, 2002* 10.1 -- Settlement Agreement dated July 18, 2002, by and among Xtend Micro Products, Inc., iGo Corporation, Xmicro Holding Company, Inc., Mark Rapparport, Mobility Electronics, Inc., and each of the Institutional Venture Partners VII, L.P., Ken Hawk, individually and as Trustee of the Kenneth W. Hawk Grantor Retained Annuity Trust, Peter Gotcher, IVM Investment Fund VIII, LLC, Robert Darrell Boyle Trustee UTA dated August 26, 1994, Lauren Reeves Boyle Trustee UTA dated August 26, 1994, IVM Investment Fund VIII-A, LLC, IVP Founders Fund, L.P., Ross Bott, Ph.D., David Olson, Scott Shackelton, Reid W. Dennis and IVP Founders Fund I, L.P.(7) 10.2 -- Depository Agreement made as of July 18, 2002, by and among U.S. Stock Transfer Corporation, iGo Corporation, Mark Rapparport, an individual, and XMicro Holding Company, Inc. (7) 10.3 -- Lock-up and Voting Agreement, dated July 18, 2002 by and between Mobility Electronics, Inc., iGo Corporation, Xmicro Holding Company, Inc., and Mark Rapparport.(7) 10.4 -- Agreement and Plan of Merger, dated as of August 20, 2002, by and among Cutting Edge Software, Inc., Jeff Musa, Mobility Electronics, Inc. and CES Acquisition, Inc.* -25- 10.5 -- Lockup Agreement dated as of August 20, 2002, by and between Mobility Electronics, Inc. and Jeff Musa* 10.6 -- Purchase Agreement dated as of November 15, 2002, by and between Richard C. Liggitt and Mobility Electronics, Inc.* 10.7 -- Compromise Settlement Agreement dated November 15, 2002, by and between Mobility Electronics, Inc., Portsmith, Inc., Holmes Lundt, Jeff Asla, Richard Neff, Dan Axtman and Richard C. Liggitt.* 24.1 -- None 99.1 -- Certification of Charles R. Mollo pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002* 99.2 -- Certification of Joan W. Brubacher pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002* - -------- * Filed herewith (1) Previously filed as an exhibit to Registration Statement No. 333-30264 dated February 11, 2000. (2) Previously filed as an exhibit to Amendment No. 1 to Registration Statement No. 333-30264 dated March 28, 2000. (3) Previously filed as an exhibit to Amendment No. 2 to Registration Statement No. 333-30264 dated May 4, 2000. (4) Previously filed as an exhibit to Amendment No. 3 to Registration Statement No. 333-30264 dated May 18, 2000. (5) Previously filed as an exhibit to Amendment No. 4 to Registration Statement No. 333-30264 dated May 26, 2000. (6) Previously filed as an exhibit to Current Report on Form 8-K No. 000-30907 filed on October 17, 2000. (7) Previously filed as an exhibit to Amendment No. 1 to Registration Statement No. 333-88078 filed on August 5, 2002. (8) Previously filed as an exhibit to Mobility's Form 10-K for the period ending December 31, 2001. (b) Reports on Form 8-K: The Company filed a Report on Form 8-K on September 17, 2002 reporting its acquisition of iGo Corporation. -26- MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES SIGNATURES 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 thereunto duly authorized. MOBILITY ELECTRONICS, INC. Dated: November 19, 2002 By: /S/ CHARLES R. MOLLO ------------------------------- Charles R. Mollo President, Chief Executive Officer and Chairman of the Board (Principal Executive Officer) By: /S/ JOAN W. BRUBACHER ------------------------------- Joan W. Brubacher Executive Vice President and Chief Financial Officer and Authorized Officer of Registrant (Principal Financial and Accounting Officer) -27- CERTIFICATIONS I, Charles R. Mollo, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Mobility Electronics, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. November 19, 2002 /s/ Charles R. Mollo - ----------------------------- Charles R. Mollo President and Chief Executive Officer -28- I, Joan W. Brubacher, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Mobility Electronics, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. November 19, 2002 /s/ Joan W. Brubacher - ------------------------------------- Joan W. Brubacher Executive Vice President and Chief Financial Officer -29- MOBILITY ELECTRONICS, INC. INDEX TO EXHIBITS
Exhibit Number Description ------ ----------- 2.1 -- Agreement and Plan of Merger dated March 23, 2002, by and among Mobility Electronics, Inc., iGo Corporation and IGOC Acquisition, Inc.(8) 3.1 -- Certificate of Incorporation of the Company.(1) 3.2 -- Articles of Amendment to the Certificate of Incorporation of the Company dated as of June 17, 1997.(3) 3.3 -- Articles of Amendment to the Certificate of Incorporation of the Company dated as of September 10 1997.(1) 3.4 -- Articles of Amendment to the Certificate of Incorporation of the Company dated as of July 20, 1998.(1) 3.5 -- Articles of Amendment to the Certificate of Incorporation of the Company dated as of February 3, 2000.(1) 3.6 -- Certificate of Designations, Preferences, Rights and Limitations of Series C Preferred Stock.(1) 3.7 -- Amended Bylaws of the Company.(1) 3.8 -- Certificate of the Designations, Preferences, Rights and Limitations of Series D Preferred Stock.(2) 3.9 -- Articles of Amendment to the Certificate of Incorporation of the Company dated as of 2000.(3) 4.1 -- Specimen of Common Stock Certificate.(4) 4.2 -- Form of 12% Convertible Debenture of the Company.(1) 4.3 -- Registration Rights Agreement by and between the Company and Miram International, Inc. dated July 29, 1997.(1) 4.4 -- Placements for the Purchase of Up To 900 Units, Each Consisting of 1,000 shares of the Company's Common stock.(1) 4.5 -- Form of Unit Purchase Agreement used in 1997 Private Placements for the Purchase of Up To 875 Units, Each Consisting of 2,000 shares of the Company's Common stock and warrants to purchase 500 shares of the Company's Common Stock.(1) 4.6 -- Form of 13% Bridge Promissory Note and Warrant Purchase Agreement used in March 1999 Private Placement.(1) 4.7 -- Form of 13% Bridge Promissory Note and Warrant Purchase Agreement used in March 1999 Private Placement.(1) 4.8 -- Form of 13% Bridge Promissory Note and Warrant Purchase Agreement used in July 1999 Private Placement.(1) 4.9 -- Form of 13% Bridge Note issued in July 1999 Private Placement.(1) 4.10 -- 13% Bridge Note Conversion Notice expired March 31, 1999.(1) 4.11 -- Form of Series C Preferred Stock Purchase Agreement used in 1998 and 1999 Private Placements.(1) 4.12 -- Form of Series C Preferred Stock and Warrant Purchase Agreements used in 1999 and 2000 Private Placements.(1) 4.13 -- Series C Preferred Stock Purchase Agreement executed May 3, 1999, between the Company, Philips Semiconductors VLSI, Inc. (f/k/a VSLI Technology, Inc.) and Seligman Communications and Information Fund, Inc.(1) 4.14 -- Amended and Restated Stock Purchase Warrant issued by the Company to Finova Capital Corporation (f/k/a Sirrom Capital Corporation) dated as of March 25, 1998.(1) 4.15 -- Stock Purchase Warrant issued by the Company to Finova Capital Corporation (f/k/a Sirrom Capital Corporation) dated as of March 25, 1998.(1) 4.16 -- Series C Preferred Stock and Warrant Purchase Agreement dated October 29, 1999, between the Company and Seligman Communications and Information Fund, Inc.(1) 4.17 -- Contribution and Indemnification Agreement by and among Janice L. Breeze, Jeffrey S. Doss, Charles R. Mollo, Cameron Wilson, the Company and certain Stockholders of the Company dated April 20, 1998.(1) 4.18 -- Form of Warrant to Purchase common stock of the Company issued to certain holders in Connection with that certain Contribution and Indemnification Agreement by and among Janice L. Breeze, Jeffrey S. Doss, Charles R. Mollo, Cameron Wilson, the Company and certain Stockholders of the Company dated April 20, 1998.(1) 4.19 -- Form of Warrant to Purchase common stock of the Company issued to certain holders in Connection with that certain Contribution and Indemnification Agreement by and among Janice L. Breeze, Jeffrey S. Doss, Charles R. Mollo, Cameron Wilson, the Company and certain Stockholders of the Company dated November 2, 1999.(2) 4.20 -- Form of Warrant to Purchase Common Stock of the Company issued in the 1997 Private Placement.(2)
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Exhibit Number Description ------ ----------- 4.21 -- Form of 13% Bridge Note issued in March 1999 Private Placement.(2) 4.23 -- Investor Rights Agreement dated October 29, 1999 by and between the Company and Seligman Communications and Information Fund, Inc. entered into in connection with The Series C Preferred Stock and Warrant Purchase Agreement Series C Preferred Stock and Warrant Purchase Agreement dated October 29, 1999.(2) 4.24 -- Form of Warrant to Purchase Shares of Common Stock issued in connection with the Loan Extension Agreement dated February 29, 2000.(2) 4.25 -- Investors' Rights Agreement executed May 3, 1999 between the Company, Philips Semiconductors VLSI, Inc. f/k/a VLSI Technology, Inc.) and Seligman Communications and Information Fund, Inc.(3) 4.26 -- Registration Rights granted by the Company to Cybex Computer Products Corporation in connection with the Strategic Partner Agreement dated March 6, 2000.(3) 4.27 -- 13% Bridge Note Conversion Notice used in July 1999 Private Placement.(5) 4.28 -- Letter agreement dated September 12, 2002 between Mobility Electronics, Inc. and Jackson Walker L.L.P.* 4.29 -- Mobility Electronics, Inc. Convertible Subordinated Promissory Note in the principal amount of $990,000 dated November 15, 2002* 10.1 -- Settlement Agreement dated July 18, 2002, by and among Xtend Micro Products, Inc., iGo Corporation, Xmicro Holding Company, Inc., Mark Rapparport, Mobility Electronics, Inc., and each of the Institutional Venture Partners VII, L.P., Ken Hawk, individually and as Trustee of the Kenneth W. Hawk Grantor Retained Annuity Trust, Peter Gotcher, IVM Investment Fund VIII, LLC, Robert Darrell Boyle Trustee UTA dated August 26, 1994, Lauren Reeves Boyle Trustee UTA dated August 26, 1994, IVM Investment Fund VIII-A, LLC, IVP Founders Fund, L.P., Ross Bott, Ph.D., David Olson, Scott Shackelton, Reid W. Dennis and IVP Founders Fund I, L.P.(7) 10.2 -- Depository Agreement made as of July 18, 2002, by and among U.S. Stock Transfer Corporation, iGo Corporation, Mark Rapparport, an individual, and XMicro Holding Company, Inc.(7) 10.3 -- Lock-up and Voting Agreement, dated July 18, 2002 by and between Mobility Electronics, Inc., iGo Corporation, Xmicro Holding Company, Inc., and Mark Rapparport.(7) 10.4 -- Agreement and Plan of Merger, dated as of August 20, 2002, by and among Cutting Edge Software, Inc., Jeff Musa, Mobility Electronics, Inc. and CES Acquisition, Inc.* 10.5 -- Lockup Agreement dated as of August 20, 2002, by and between Mobility Electronics, Inc. and Jeff Musa* 10.6 -- Purchase Agreement dated as of November 15, 2002, by and between Richard C. Liggitt and Mobility Electronics, Inc.* 10.7 -- Compromise Settlement Agreement dated November 15, 2002, by and between Mobility Electronics, Inc., Portsmith, Inc., Holmes Lundt, Jeff Asla, Richard Neff, Dan Axtman and Richard C. Liggitt.* 24.1 -- None 99.1 -- Certification of Charles R. Mollo pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002* 99.2 -- Certification of Joan W. Brubacher pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
- -------- * Filed herewith (1) Previously filed as an exhibit to Registration Statement No. 333-30264 dated February 11, 2000. (2) Previously filed as an exhibit to Amendment No. 1 to Registration Statement No. 333-30264 dated March 28, 2000. (3) Previously filed as an exhibit to Amendment No. 2 to Registration Statement No. 333-30264 dated May 4, 2000. (4) Previously filed as an exhibit to Amendment No. 3 to Registration Statement No. 333-30264 dated May 18, 2000. (5) Previously filed as an exhibit to Amendment No. 4 to Registration Statement No. 333-30264 dated May 26, 2000. (6) Previously filed as an exhibit to Current Report on Form 8-K No. 000-30907 filed on October 17, 2000. (7) Previously filed as an exhibit to Amendment No. 1 to Registration Statement No. 333-88078 filed on August 5, 2002. (8) Previously filed as an exhibit to Mobility's Form 10-K for the period ending December 31, 2001. All other schedules and exhibits are omitted because they are not applicable or because the required information is contained in the Financial Statements or Notes thereto. -31- EX-4.28 3 d01471exv4w28.txt LETTER AGREEMENT EXHIBIT 4.28 September 12, 2002 Jackson Walker L.L.P. 2435 N. Central Expressway, Suite 600 Richardson, Texas 75080 Attn: Richard F. Dahlson, Partner Dear Rick: Mobility Electronics, Inc., a Delaware corporation (the "Company"), and Jackson Walker L.L.P. ("JW") are parties to a letter agreement, dated as of August 7, 2002 (the "Prior Agreement"). This letter agreement supercedes the Prior Agreement, and the Prior Agreement shall be deemed to be of no further force or effect. The Company currently owes JW the sum of $868,988.69 for legal services and fees with respect to JW's invoice numbers 694093 (dated April 26, 2002), 699105 (dated May 23, 2002), 703685 (dated June 21, 2002), 705742 (dated July 19, 2002), 711952 (dated August 16, 2002) and 716799 (to be dated September 17, 2002) (collectively, the "Owed Fees"). The Company acknowledges and agrees that it owes the Owed Fees to JW and has no dispute or claim against JW with respect to the Owed Fees. The Company desires for JW to convert $600,000 of the Owed Fees (the "Convertible Fees") into 571,428 shares (the "Shares") of common stock, par value $0.01 per share, of Mobility (the "Common Stock"), and JW is agreeable to such request on the terms and conditions set forth below. For good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged and agreed, the Company and JW hereby agree as follows: 1. If on or prior to December 5, 2002 (the "Deadline"), the Company has filed a registration statement (the "Registration Statement") with the Securities and Exchange Commission (the "SEC") which registers the resale of the Shares by JW, and the Registration Statement has been declared effective by the SEC (the "Effective Date"), then the Convertible Fees shall automatically be deemed to be converted into the Shares as of the Effective Date, and within five (5) business days after the Effective Date, the Company will cause its transfer agent to deliver to JW a certificate representing the Shares (or, at JW's discretion, the transfer agent will cause the Shares to be DTC transferred into JW's brokerage account). 2. If the Registration Statement has not been declared effective by the SEC on or prior to December 5, 2002, then on December 6, 2002 the Company shall wire transfer to JW the sum of $600,000 as payment for the $600,000 of the Convertible Fees not so converted pursuant to Section 1 above. 3. If the average closing price of the Common Stock for the period between the Effective Date and December 31, 2002 (the "Average Closing Price"), does not exceed $1.16 per share, then on or prior to January 10, 2003, the Company shall pay to JW by wire transfer an amount equal to the difference between $1.16 and the Average Closing Price, less an amount equal to the amounts received by JW (net of commissions) from the sale of Shares from the Richard F. Dahlson September 12, 2002 Page 2 Effective Date to December 31, 2002, in excess of the product of $1.16 per Share multiplied by the number of Shares sold during such period. 4. On October 1, 2002, the Company shall wire transfer to JW the $268,988.69 of the Owed Fees which are not included in the Convertible Fees. 5. This letter may be executed in two or more counterparts, each of which shall be deemed to be an original but all of which shall constitute one and the same instrument. If the terms set forth in this letter agreement are acceptable to you, please sign and date the enclosed copy of this letter and return it to the Company. MOBILITY ELECTRONICS, INC. By: /s/Joan W. Brubacher ---------------------------- Joan W. Brubacher, Chief Financial Officer AGREED TO AND ACCEPTED as of the date first above written: JACKSON WALKER L.L.P. By: /s/Richard F. Dahlson -------------------------------- Richard F. Dahlson, Partner EX-4.29 4 d01471exv4w29.txt CONVERTIBLE SUBORDINATED PROMISSORY NOTE EXHIBIT 4.29 THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR THE SECURITIES LAWS OF ANY STATE. NO SALE OR DISPOSITION MAY BE EFFECTED EXCEPT IN COMPLIANCE WITH RULE 144 UNDER SAID ACT OR AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL FOR THE HOLDER SATISFACTORY TO THE COMPANY, THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE ACT OR RECEIPT OF A NO-ACTION LETTER FROM THE SECURITIES AND EXCHANGE COMMISSION. MOBILITY ELECTRONICS, INC. CONVERTIBLE SUBORDINATED PROMISSORY NOTE $990,000.00 November __, 2002 FOR VALUE RECEIVED, Mobility Electronics, Inc., a Delaware corporation (the "Company"), hereby promises to pay to Richard C. Liggitt ("Holder') in accordance with the terms and conditions contained herein, the principal amount of $990,000.00, together with simple interest on the unpaid principal amount hereof at the rate of four percent (4%) per annum (subject to Section 11 below) from the date hereof to maturity. 1. DEFINED TERMS. As used herein, the following terms have the following meanings: "Common Stock" means the common stock, par value $0.01 per share, of the Company. "Designated Senior Debt" means any and all principal, premium, interest, fees, expenses and all other amounts owing with respect to the indebtedness of the Company from time to time under that certain Loan and Security Agreement, dated as of September 27, 2002, by and among the Company, certain subsidiaries of the Company and Silicon Valley Bank, as amended, and as it may be further amended, supplemented or otherwise modified from time to time, and any agreement relating to any refunding, refinancing, successor or replacement facility, without regard to the principal outstanding thereunder. "Interest Payment Date" has the meaning set forth in Section 3 below. "Note" means this Convertible Subordinated Promissory Note. "Prepayment Date" means any date on which the Company prepays all or any portion of the principal of this Note. 2. PRINCIPAL PAYMENTS. The principal of this Note shall be due and payable in twelve equal installments of $82,500, on the following dates: (i) January 2, 2003; (ii) June 30, 2003; (iii) September 30, 2003; (iv) December 31, 2003; (v) March 31, 2004; (vi) June 30, 2004; (vii) September 30, 2004; (viii) December 31, 2004; (ix) March 31, 2005; (x) June 30, 2005; (xi) September 30, 2005; and (xii) December 31, 2005; provided, however, that if any portion of the principal amount of this Note is converted into shares of Common Stock or is prepaid, as provided herein, then the balance of the principal remaining at such time shall be reduced in the amount of the conversion or prepayment amount, and shall be subtracted from the above principal payments starting from the last payment date and working forward. 3. INTEREST PAYMENTS. Accrued but unpaid interest on the unpaid principal balance of this Note shall be payable at such times as the principal payments are due in Section 2 above, and shall continue until such principal has been repaid. 4. PREPAYMENT. Subject to the conversion rights set forth in Section 6 below, at the option of the Company, the unpaid principal balance of this Note may be prepaid in whole or in part from time to time, at any time after December 30, 2003. Notice of prepayment will be given at least 30 days before the Prepayment Date to the Holder of this Note at its address as provided in Section 18 below. 5. OFFSET. The Holder hereby agrees that the principal amount due hereunder shall be subject to offset for fifty percent (50%) of any taxes owed by the Holder pursuant to Section 7 of the Compromise Settlement Agreement, dated as of November 13, 2002, entered into among the Holder, the Company, Portsmith, Inc., and certain other persons (the "Settlement Agreement"), and not paid by the Holder within ten (10) days following written notice thereof by the Company to the Holder. If any amount owed pursuant to the previous sentence is not paid within such ten (10) day period, then the Company may give the Holder written notice of such offset, which offset shall be deemed to be effective as of the date of such written notice. Any amounts offset under this Section 5 shall be deemed to come from the principal amount due hereunder, coming first from the last scheduled principal payment and moving forward as necessary. 6. CONVERSION. The then outstanding principal of this Note is convertible, in whole or in part from time to time (in denominations of $10,000 or integral multiples thereof), at the option of the holder, into shares of Common Stock, initially at the conversion price of $3.00 (the "Conversion Price"), at any time prior to payment, prepayment or maturity, except that the right to convert the portion of the principal amount of this Note called for prepayment will terminate at the close of business on the third day preceding the Prepayment Date and will be lost if not exercised prior to that time, unless the Company defaults in making such prepayment. The Conversion Price and the number of shares of Common Stock subject to this Note shall be subject to adjustment from time to time as provided in Section 13 below and as follows: (a) If at any time or from time to time the Company shall subdivide its outstanding shares of Common Stock, the Conversion Price in effect immediately prior to such issuance or subdivision shall be proportionately reduced. If the outstanding shares of Common Stock shall be combined into a smaller number of shares, the Conversion Price in effect immediately prior to such combination shall be proportionately increased. 2 (b) If at any time or from time to time the Company shall declare a dividend or make any other distribution upon any class or series of stock of the Company payable in shares of Common Stock or securities convertible into shares of Common Stock the Conversion Price and the number of shares to be obtained upon exercise of this Note shall be proportionately adjusted to reflect the issuance of any shares of Common Stock or convertible securities, as the case may be, issuable in payment of such dividend or distribution. (c) If at any time or from time to time the Company undertakes any capital reorganization, reclassification of the Common Stock, the consolidation or merger of the Company with or into another corporation (other than a consolidation or merger in which the Company is the surviving corporation), or the sale or other disposition of all or substantially all the properties and assets of the Company to any other person, this Note shall, after such reorganization, reclassification, consolidation, merger, sale or other disposition, be convertible so that upon conversion the Holder shall procure, in lieu of each of Common Stock, the kind and amount of shares of stock, other securities, money or property receivable upon such reorganization, reclassification, consolidation, merger, sale or other disposition by the holder of one share of Common Stock issuable upon conversion of this Note had this Note been converted immediately prior to such reorganization, reclassification, consolidation, merger, sale or other disposition. The provisions of this subsection (c) shall similarly apply to successive reorganizations, reclassification, consolidations, mergers, sales or other dispositions. (d) No adjustment in the Conversion Price and/or the number of shares of Common Stock subject to this Note need be made if such adjustment would result in a change in the Conversion Price of less than ten cents ($0.10) or a change in the number of subject shares of less than one-tenth (1/10th) of a share. Any adjustment less than these amounts which is not made shall be carried forward and shall be made at the time of and together with any subsequent adjustment which, on a cumulative basis, amounts to an adjustment of at least these amounts. (e) Upon the occurrence of each adjustment or readjustment of the Conversion Price pursuant to this Section 6, the Company at its expense shall, upon demand, promptly compute such adjustment or readjustment in accordance with the term hereof and prepare and finish to the Holder a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Company shall, upon written request at any time of the Holder, furnish or cause to be furnished to the Holder a like certificate setting forth (i) such adjustments and readjustments, (ii) the then effective Conversion Price and number of shares of Common Stock subject to this Note, and (iii) the then effective amount of securities (other than Common Stock) and other property, if any, which would be received upon conversion of this Note. 7. CONVERSION PROCEDURE. To exercise conversion rights and to obtain a stock certificate, the Holder shall present this Note at the principal office of the Company with a Conversion Form, in the form attached hereto as Exhibit A, duly executed by the Holder. As soon as practicable after the submission of this Note and the duly executed Conversion Form, the Company will cause to be issued in the name of and delivered to the Holder a certificate or certificates for the number of full shares of Common Stock to which the Holder shall be entitled on such conversion. In the case of a partial conversion, the Company shall deliver to the Holder a Note in principal amount equal to the unconverted portion of the principal amount hereof. 3 From and after the date on which this Note and a duly executed Conversion Form are surrendered to the Company (the "Conversion Date"), the Holder shall be deemed to be the record Holder of all shares of Common Stock to which the Holder shall be entitled on such conversion for all purposes, and all rights, preferences and privileges of such shares of Common Stock shall be attributable to the Holder. 8. FRACTIONAL SHARES. Fractional shares of Common Stock will not be issued upon conversion, but, in lieu thereof the Company will pay a cash adjustment based upon the fair market value of a share of Common Stock. The fair market value shall be the closing price of the Common Stock on the applicable exchange or market on which the Common Stock is primarily trading at the time of such determination, and if the Common Stock is not then trading, the fair market value shall be such price as the Board of Directors of the Company determines in its sole and absolute discretion. 9. METHOD OF PAYMENT. Any payment made under this Note, whether of principal or interest, shall be made by the Company to the Holder on the date specified or provided herein and shall be delivered by means of check or wire transfer of immediately available funds to an account specified by the Holder. 10. SUBORDINATION. The indebtedness evidenced by the Note shall be subordinate to the prior payment of the Designated Senior Debt. Upon any payment or distribution of assets of the Company to creditors upon any dissolution, winding up, liquidation, reorganization, recapitalization or readjustment of the Company or its property or securities, payment of the principal of and interest on this Note shall be subordinated to the extent and manner set forth herein, to the prior payment in full of the Designated Senior Debt. No payments of principal or interest on this Note may be made by or on behalf of the Company (i) at any time when there exists (or after giving effect to the payment thereof there would exist) an event of default, or a condition or event which with notice or lapse of time or both would constitute an event of default, under the Designated Senior Debt or pursuant to any agreement under which the Designated Senior Debt has been issued, (ii) if full payment of amounts then due for principal and interest on the Designated Senior Debt has not been made or duly provided for; or (iii) if such payment would result in a default under the Designated Senior Debt. The subordination rights of holders of Designated Senior Debt will not be prejudiced or impaired by acts or failures to act by the Company or by the Holder. The subordination of this Note as set forth above shall not, however, prevent the occurrence of any Event of Default (as defined below) or impair, as between the Company, the Holder and creditors of the Company other than holders of Designated Senior Debt, the obligations of the Company to make payments on this Note in accordance with its terms. The payment of cash, property or securities (other than Common Stock and other securities that are junior to the Designated Senior Debt) upon conversion of this Note shall constitute payment on this Note and therefore shall be subject to the subordination provisions hereof. 11. RESERVATION OF SECURITIES. So long as this Note is outstanding, the Company covenants that it will reserve from its authorized and unissued shares of Common Stock a sufficient number of shares to provide for the delivery of Common Stock pursuant to the conversion provisions of this Note. 4 12. EVENTS OF DEFAULT. The following will be Events of Default hereunder (each, an "Event of Default"): (i) failure by the Company to pay any principal or interest payment when due, whether or not such payment is prohibited by Section 10 hereof, and such failure continues for a period of five (5) consecutive days after delivery of written notice from the Holder to the Company of such failure; (ii) failure by the Company to perform any other covenant contained herein, if the same has continued for a period of thirty (30) consecutive days after delivery of written notice from the Holder to the Company of such failure; or (iii) the dissolution, winding up or liquidation of the Company or the insolvency of or the appointment of an assignee for the benefit of creditors of, or of a receiver for, the Company, or a petition in bankruptcy shall be filed either by or against the Company, and the same shall not be dismissed within sixty (60) days. 13. ACCELERATION UPON DEFAULT. If an Event of Default shall occur and be continuing: (i) which is an event of bankruptcy, insolvency or reorganization of the Company, the maturity of this Note shall immediately accelerate without any act on the part of the Holder, including demand for payment thereof and notice to the Company, which demand and notice are hereby expressly waived; or (ii) which is not an event of bankruptcy, insolvency or reorganization of the Company, the Holder may accelerate the maturity of this Note five business days after written notice of such Event of Default is received by the Company. In addition, if an Event of Default has occurred and has continued for at least thirty (30) days after written notice of such occurrence from the Holder to the Company (the "Notice Effective Date"), then thereafter during the continuance of such Event of Default: (i) the interest rate on this Note shall be fifteen percent (15%) per annum; and (ii) the Conversion Price shall be sixty percent (60%) of the Current Market Price of the Common Stock as of the Notice Effective Date. The term "Current Market Price" shall mean the per share price of the Common Stock on the trading day immediately prior to the Notice Effective Date and shall be: (i) if the principal trading market for such securities is a national or regional securities exchange, the closing price on such exchange on such day; or (ii) if sales prices for shares of Common Stock are reported by the Nasdaq National Market System or Small Cap Market System (or a similar system then in use), the last reported sales price so reported on such day; or (iii) if neither (i) nor (ii) above are applicable, and if bid and ask prices for shares of Common Stock are reported in the over-the-counter market by Nasdaq (or, if not so reported, by the National Quotation Bureau), the average of the high bid and low ask prices so reported on such day. Notwithstanding the foregoing, if there is no reported closing price, last reported sales price, or bid and ask prices, as the case may be, then the "Current Market Price" shall be determined as of the latest date prior to the Notice Effective Date day for which such closing price, last reported sales price, or bid and ask prices, as the case may be, are available, unless such securities have not been traded on an exchange or in the over-the-counter market for 30 or more days immediately prior to the Notice Effective Date, in which case the Current Market Price shall be determined in good faith by, and reflected in a formal resolution of, the Board of Directors of the Company. 14. RIGHTS AND REMEDIES. If the Company fails to comply with the terms of this Note, unless such failure shall have been waived in writing, and subject to Section 13 hereof, the Holder may proceed to protect and enforce its rights by suit in equity or action at law, whether for the specific performance of any term contained in this Note or for an injunction against any breach of any such term or in aid of the exercise of any power granted in this Note or may proceed to enforce the performance of this Note (including the payment of this Note) or to 5 enforce any other legal or equitable right of the Holder, or may take any one or more of such actions. In the event that the Holder seeks to enforce its rights under this Note, the prevailing party shall be entitled to recover reasonable fees, costs and expenses incurred in connection therewith including, without limitation, the fees, costs and expenses of attorneys, accountants and experts, whether or not litigation is instituted, and including such fees, costs and expenses. 15. ASSIGNMENT OR LOSS OF NOTE. (a) Subject to the provisions of Section 14 hereof, this Note and all rights hereunder may be assigned or otherwise transferred by the Holder, in whole or in part, but not in the aggregate principal amount of less than $250,000, upon surrender of this Note to the principal office of the Company. Upon surrender of this Note to the Company, with the Assignment Form attached hereto as Exhibit B hereto duly executed and funds sufficient to pay any transfer tax, the Company shall, without charge, execute and deliver a new Note in the name of the Holder or the assignee or assignees named in such instrument of assignment (as applicable), and such surrendered Note shall promptly be canceled. Upon any partial transfer, the Company shall deliver to the Holder a Note in principal amount equal to portion of the principal amount which has not been so transferred. (b) Upon receipt of evidence satisfactory to the Company of the loss, theft, destruction or mutilation of this Note and (in the case of loss, theft or destruction) of indemnification satisfactory to the Company, and upon surrender and cancellation of this Note, if mutilated, the Company shall execute and deliver a new Note of like tenor and date. 16. TRANSFER TO COMPLY WITH THE SECURITIES ACT. This Note may not be transferred, and neither this Note nor any of the underlying Common Stock nor any interest in either, may be sold, assigned, pledged, hypothecated, encumbered or in any other manner transferred or disposed of, in whole or in part, except in compliance with applicable United States federal and state securities or Blue Sky laws and the terms and conditions hereof. Each certificate for Common Stock issued upon exercise of this Note, unless at the time of exercise such Common Stock is acquired pursuant to a registration statement that has been declared effective under the Securities Act of 1933, as amended, shall bear a legend substantially in the following form: THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR THE SECURITIES LAWS OF ANY STATE. NO SALE OR DISPOSITION MAY BE EFFECTED EXCEPT IN COMPLIANCE WITH RULE 144 UNDER SAID ACT OR AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL FOR THE HOLDER, SATISFACTORY TO THE COMPANY, THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE ACT OR RECEIPT OF A NO-ACTION LETTER FROM THE SECURITIES AND EXCHANGE COMMISSION. 17. RIGHTS OF THE HOLDER. The Holder shall not, by virtue hereof, be entitled to any rights of a stockholder in the Company, either at law or equity, and the rights of the Holder are limited to those in this Note. Nothing contained in this Note shall be construed as conferring 6 upon the Holder the right to vote or to consent or to receive notice as a stockholder of the Company or any other matters or any rights whatsoever as a stockholder of the Company. No dividends shall be payable or accrued in respect of this Note or the shares of Common Stock underlying this Note until, and only to the extent that, this Note shall have been converted in accordance with its terms. 18. NOTICE. Any notice authorized by this Note to be given or made shall be given or made by certified mail, return receipt requested, postage prepaid, overnight courier, personal delivery or facsimile transmission and shall be deemed delivered: (i) if by personal delivery, on the date of delivery; (ii) if by certified mail, on the date shown on the applicable return receipt; (iii) if by overnight delivery service, on the day after the date delivered to the service; or (iv) if by facsimile, on the date of transmission. The current addresses for delivery are as follows: If to the Company: Mobility Electronics, Inc. 7955 East Redfield Road Scottsdale, Arizona 85260 Attention: Chief Executive Officer Facsimile: (480) 596-0349 If to the Holder: Richard C. Liggitt 7 Marquette Way Coto De Caza, California 92679 Facsimile: (949) 888-5644 With a copy to: Smith, Chapman & Campbell 1800 North Broadway, Suite 200 Santa Ana, California 92706 Facsimile: (714) 550-1251 The above addresses may be changed by any addressee by giving the other addressee notice of such change in accordance with the provisions of this Section. 19. MAXIMUM LAWFUL RATE. It is the intent of the Company and the Holder to conform to and contract in strict compliance with applicable usury law from time to time in effect. In no way, nor in any event or contingency (including but not limited to prepayment, default, demand for payment, or acceleration of the maturity of any obligation), shall the rate of interest taken, reserved, contacted for, charged or received under this Note exceed the highest lawful interest rate permitted under applicable law. If the Holder shall ever receive anything of value which is characterized as interest under applicable law and which would apart from this provision be in excess of the highest lawful interest rate permitted under applicable law, an amount equal to the amount which would have been excessive interest shall, without penalty, be applied to the reduction of the principal amount owing on this Note in the inverse order of its maturity and not to the payment of interest, or refunded to the Company or the other payor thereof if and to the extent such amount which would have been excessive exceeds such unpaid principal. All interest paid or agreed to be paid to the Holder shall, to the extent permitted by applicable law, be amortized, prorated, allocated and spread throughout the full stated term 7 (including any renewal or extension) of this Note so that the amount of interest on account of such obligation does not exceed the maximum permitted by applicable law. As used in this Section, the term "applicable law" shall mean the laws of the State of Delaware or the federal laws of the United States, whichever laws allow the greater interest, as such laws now exist or may be changed or amended or come into effect in the future. 20. AMENDMENT; WAIVER. This Note may be modified, amended, waived or terminated only by an instrument in writing signed by both the Company and the Holder 21. GOVERNING LAW. THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED UNDER THE LAWS OF THE STATE OF CALIFORNIA, WITHOUT GIVING EFFECT TO ANY CONFLICT OF LAWS PROVISIONS THEREOF. Any action or dispute from this Note shall be subject to the exclusive jurisdiction of the Superior Court of the State of California, County of Orange. 22. NON-BUSINESS DAYS. If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall be a Saturday or a Sunday or shall be a legal holiday, then such action may be taken or such right may be exercised on the next succeeding day not a Saturday, Sunday or legal holiday. 23. DESCRIPTIVE HEADINGS. The description headings of the several sections and paragraphs of this Note are inserted for convenience only and do not constitute a part of this Note. IN WITNESS OF, the Company has caused this Note to be executed by a duly authorized representative thereof as of the date first above written. MOBILITY ELECTRONICS, INC. By: ----------------------------------- -------------------------------------- 8 EXHIBIT A CONVERSION FORM To Mobility Electronics, Inc.: The undersigned, the holder of the Note that accompanies this notice, hereby irrevocably exercises its right to convert the Note, or the specified portion hereof (which is $10,000 or an integral multiple thereof) into shares of Common Stock of Mobility Electronics, Inc. (the "Company"), pursuant to the terms of the Note and directs that the shares issuable and deliverable upon conversion together with any check in payment for fractional shares and a new Note for any non-converted portion of this Note, be issued to the registered holder hereof, unless a different name has been indicated below. If shares are to be issued in the name of a person other than the undersigned, the undersigned will pay all transfer taxes payable with respect thereto. Please issue the certificate for shares of Common Stock as follows: ---------------------------------------------------------- Print or Type Name ---------------------------------------------------------- Social Security or other Identifying Number ---------------------------------------------------------- Street Address ---------------------------------------------------------- City State Zip Code Principal Amount Converted: $ ---------------------- Date: ------------------- --------------------------------------- Holder's Full Name --------------------------------------- Signature (Signature must conform in all respects to name of the holder as specified on the face of the Note) A-1 EXHIBIT B ASSIGNMENT FORM Dated ----------------- FOR VALUE RECEIVED, ____________________________ hereby sells, assigns and transfers unto ___________________________________________ (the "Assignee"), ______________________________________________________ its interest in this Note in accordance with the terms of the Note and does hereby irrevocably constitute and appoint ____________________ Attorney, to transfer the same on the books of the Company, with full power of substitution in the premises. --------------------------------------- Holder's Full Name --------------------------------------- Signature (Signature must conform in all respects to name of the holder as specified on the face of the Note)* *The Company may require that your signature be guaranteed by a commercial bank or trust company or by a member of a national securities exchange. B-1 EX-10.4 5 d01471exv10w4.txt AGREEMENT AND PLAN OF MERGER EXHIBIT 10.4 AGREEMENT AND PLAN OF MERGER This Agreement and Plan of Merger (the "Agreement"), dated as of August 20, 2002, is by and among Cutting Edge Software, Inc., a Texas corporation (the "Company"), Jeff Musa, the sole shareholder of the Company ("Shareholder"), Mobility Electronics, Inc., a Delaware corporation ("Parent"), and CES Acquisition, Inc., a Texas corporation and wholly-owned subsidiary of Parent ("Merger Sub"). WITNESSETH: WHEREAS, Parent, as the sole shareholder of Merger Sub, and the respective Boards of Directors of Merger Sub and the Company have each approved the merger of Merger Sub with and into the Company (the "Reverse Merger"), and the subsequent merger (the "Second-Step Merger") of the Company with and into CES II Acquisition, Inc., a Texas corporation ("Merger Sub II") (the Reverse Merger and Second-Step Merger are sometimes collectively referred to herein as the "Merger"), in each case, in accordance with the Texas Business Corporation Act (the "TBCA") and the provisions of this Agreement; WHEREAS, it is intended that the Reverse Merger shall constitute the first step of a two-step acquisitive transaction of the assets of the Company by Merger Sub II with the second step being the Second-Step Merger, the consummation of which shall be pursuant to a binding agreement and which shall be as promptly as practicable following the consummation of the Reverse Merger; and WHEREAS, it is intended for federal income tax purposes that the Merger qualify as a reorganization within the meaning of Sections 368(a)(1)(A) and 368 (a)(2)(D) of the Internal Revenue Code of 1986, as amended (the "Code"). NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants, promises, representations, warranties and agreements contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: ARTICLE I DEFINITIONS Section 1.1 DEFINITIONS. Certain terms used in this Agreement are defined in Exhibit A attached hereto. ARTICLE II THE MERGER, EFFECTIVE TIME AND MERGER CONSIDERATION Section 2.1 THE MERGER. (a) At the Effective Time, in accordance with this Agreement and the TBCA , Merger Sub shall be merged with and into the Company, the separate existence of Merger Sub shall 1 cease, and the Company shall continue as the surviving corporation. Subject to Section 2.1(b), the Company, as the surviving corporation after the Reverse Merger, is hereinafter sometimes referred to as the "Surviving Corporation". (b) On the day after the consummation of the Reverse Merger, Parent will cause the Company, as the surviving corporation in the Reverse Merger, to be merged with and into Merger Sub II pursuant to the Agreement and Plan of Merger, by and between the Company and Merger Sub II, in the form of Exhibit B attached hereto (the "Second Step Merger Agreement"), which will be entered into concurrently with this Agreement. There will be no conditions to the closing of the Second-Step Merger other than the closing of the Reverse Merger. Following completion of the Second-Step Merger (the "Second Effective Time"), the separate existence of the Company will cease and Merger Sub II will continue as the Surviving Corporation. In connection with the Merger, the Surviving Corporation shall change its name to "Cutting Edge Software, Inc.". Section 2.2 EFFECT OF THE MERGER. At the Effective Time, the Company, as the Surviving Corporation, shall thereafter possess all of the public and private rights, privileges, powers, assets, liabilities and obligations of Merger Sub and the Company. At the Second Effective Time, Merger Sub II, as the Surviving Corporation, shall thereafter possess all of the public and private rights, privileges, powers, assets, liabilities and obligations of Merger Sub II and the Company. Section 2.3 CONSUMMATION OF THE MERGER. As soon as practicable after the execution of this Agreement, the parties shall cause the Reverse Merger to be consummated by filing with the Secretary of State of Texas articles of merger in such form as required by, and executed in accordance with, the relevant provisions of the TBCA, the form of which shall be approved by each of the parties hereto (the date and time of such filing, or such later date as agreed by the parties and set forth therein, being the "Effective Date"). On the day after the consummation of the Reverse Merger, Parent shall cause the Second-Step Merger to be consummated by filing with the Secretary of State of Texas articles of merger in such form as required by, and executed in accordance with, the relevant provisions of the TBCA, the form of which shall be approved by each of the parties hereto. Section 2.4 ARTICLES OF INCORPORATION; BYLAWS; DIRECTORS AND OFFICERS. The Articles of Incorporation and Bylaws of the Company, as in effect immediately prior to the Effective Time, shall be the Articles of Incorporation and Bylaws of the Surviving Corporation. Following completion of the Second-Step Merger, the Articles of Incorporation and Bylaws of Merger Sub II, as in effect immediately prior to the Effective Time shall be the Articles of Incorporation and Bylaws of Surviving Corporation. The directors of Merger Sub immediately prior to the Effective Time shall be the directors of the Company following the Reverse Merger and shall also be the initial directors of Merger Sub II following the Second-Step Merger and shall serve until their successors have been duly elected or appointed and qualified or until their earlier death, resignation or removal in accordance with the Surviving Corporation's Articles of Incorporation and Bylaws and the TBCA. The officers of Merger Sub immediately prior to the Effective Time shall be the officers of the Company and the officers of Merger Sub II following the Second-Step Merger, and shall serve until their successors have been duly elected or 2 appointed and qualified or until their earlier death, resignation or removal in accordance with the Surviving Corporation's Articles of Incorporation and Bylaws and the TBCA. Section 2.5 AGGREGATE MERGER CONSIDERATION. The aggregate consideration to be received by Shareholder, as the sole shareholder of the Company's common stock, par value $0.01 per share ("Company Stock"), in connection with the Reverse Merger shall be the following (collectively, the "Merger Consideration"): (a) INITIAL CONSIDERATION. At the Closing: (i) Parent will issue an instruction letter to its transfer agent to issue to Shareholder 796,394 shares (the "Shares") of common stock of Parent (the "Parent Common Stock"), which number of Shares was determined by dividing $1,500,000 by the average closing price of the Parent Common Stock on the Nasdaq/NMS for the trading days during the 60 calendar days immediately preceding the Closing Date; provided, however, that the minimum and maximum number of Shares to be issued will be 681,818 and 1,020,408, respectively; provided further, however, that within seven (7) days after the Closing, Parent will deliver to Shareholder a stock certificate representing the Shares, which stock certificate will have only the restrictive legends thereon as set forth in Exhibit C --------- attached hereto; and (ii) Parent shall deliver to Shareholder, by wire transfer of immediately available funds, the sum of $1,547,500. (b) EARN-OUT CONSIDERATION. Shareholder will be entitled to receive the following as earn-out consideration: (i) Due to the difficulty in calculating the value of the Company as of the Closing Date that is attributable to Conference Software, for a period of five years following the Closing Date, Parent will make the following payments to Shareholder, which payments are based upon the net revenue (i.e. gross revenues minus returns) accrued by or paid to Parent and/or any of its subsidiaries, directly or indirectly, in whole or in part, from, in connection with or arising out of the Conference Software and products using or based on the Conference Software, whether the use of such technology is in whole or in part (the "Conference Revenue"): (1) $1.00 per unit on all hardware products sold, licensed or otherwise distributed by Parent and its subsidiaries which are bundled with Conference Software (which includes conference enabled Quickpoint); and (2) 20% in year 1; 10% in years 2 and 3; and 5% in years 4 and 5, in each case following the Closing Date, of the Conference Revenue not derived from a bundled sale as described in subpart (1) above; 3 the payment of which shall be 50% in Parent Common Stock and 50% in cash, with the cash component thereof being paid on a calendar quarterly basis, and the Parent Common Stock component thereof being paid on an annual basis and with the Parent Common Stock being valued at the Current Market Price for the trading days during the 60 calendar days immediately preceding the applicable one-year anniversary period. Notwithstanding anything to the contrary contained in this subsection (i): (A) in no event will any payments be made pursuant to this subsection (i) for any sales, licenses or distributions of products which do not include or utilize Conference Software (each, a "Non-Conference Product"), including, without limitation: Quickoffice, Quicksheet, Quickword, Quickpoint, Quickchart and Quickofficeserver, and any derivative products, unless such Non-Conference Products or derivative products are enhanced with Conference Software; and (B) if a customer at a later time upgrades from a Non-Conference Product to a Conference Product, then the payments to be made pursuant to this subsection (i) will be calculated based on the upgrade charge and/or incremental net revenue associated with such upgrade. (ii) If Surviving Corporation Sales (as defined below) exceed $3,000,000 during the one-year period following the Closing Date and the Net Profit (as defined below) for such period is at least $500,000, then Parent will pay to Shareholder an amount equal to between $.10 and $.50 for each incremental dollar of Surviving Corporation Sales over such $3,000,000 hurdle, the payment of which shall be 50% in Parent Common Stock and 50% in cash, with the Parent Common Stock being valued at the Current Market Price for the trading days during the 60 calendar days immediately preceding the one-year anniversary of the Closing Date. The range of amount of earn-out for each incremental dollar of Surviving Corporation Sales shall be on a sliding scale based on the amount of Net Profit, based on $.10 for each incremental dollar if $500,000 of Net Profit is achieved and $.50 for each incremental dollar if $1,500,000 of Net Profit is achieved (for example if Net Profit is $1 million, Shareholder would receive $.30 for each incremental dollar of Surviving Corporation Sales over $3 million). Only for the purpose of the calculation in this subsection (ii), Surviving Corporation Sales will be deemed to include: (A) $10.00 per unit for sales or licenses of products by Parent and its subsidiaries that are bundled with the Company's software until sales and license revenues from all current and derivative products of the Surviving Corporation reach $3,000,000; and (B) $5.00 per unit thereafter. "Surviving Corporation Sales" shall mean net sales, service and licensing revenues of the Surviving Corporation, which shall include sales, service and license revenues derived by Parent and its subsidiaries of products and services and derivative products and services of the Company (with the calculation for bundled products being as provided in the last sentence of 4 the preceding paragraph) and any sales of technology or other property of the Surviving Corporation. "Net Profit" shall mean Surviving Corporation Sales less Surviving Corporation expenses, which Surviving Corporation expenses shall include direct expenses incurred by Parent and its subsidiaries related to the administration, production, marketing and sales of current and derivative products of the Company (which amounts shall not include overhead allocation expenses or allocation for any personnel of Parent and its subsidiaries that are not included in the Business Plan (as defined below) or mutually agreed upon by Parent and Shareholder). Such expenses will include any amounts paid to Shareholder under the Employment Agreement (as defined in Section 6.1, subpart (d) below). In addition, such direct expenses of Parent will be capped at 20% of incremental net revenues from the products and services which are sold, licensed or provided by Parent or any of its Subsidiaries and the revenues of which are included in Surviving Corporation Sales. Likewise if Surviving Corporation personnel are used for Parent or its Subsidiaries projects, there would be a reduction in Surviving Corporation expenses. (iii) Subject to subsection (d) below and Section 8.6 below, Parent agrees to pay Shareholder all earn-out consideration then due and owing (cash and Parent Common Stock), in accordance with the payment schedule described in subsections (i) and (ii) above, within thirty (30) days after the end of each applicable period over which an earn-out amount is calculated, and to deliver to Shareholder therewith a detailed explanation showing the calculations used to determine such earn-out amounts (the "Earn-Out Statement"). Parent agrees to cause all shares of Parent Common Stock to be issued to Shareholder pursuant to Sections 2.5(a) and (b) hereof to be approved for listing on such exchange or market as the Parent Common Stock is then listed for trading. (c) DISPUTES REGARDING EARN-OUT CONSIDERATION. (i) In the event that within sixty (60) days following delivery to Shareholder of an Earn-Out Statement Shareholder disagrees with the determination thereof (the "Disputed Earn-Out Consideration"), then Parent and Shareholder shall have sixty (60) days thereafter to negotiate and mutually agree on the Disputed Earn-Out Consideration and Parent and Shareholder shall use all commercially reasonable efforts to reach such an agreement and/or designate a mutually agreeable Independent Financial Expert. Failing to do so, within ten (10) days following the expiration of such second sixty (60) day period Parent, on the one hand, and Shareholder, on the other hand, shall each designate an Independent Financial Expert to determine the Disputed Earn-Out Consideration. (ii) In the event that the two Independent Financial Experts cannot agree on the Disputed Earn-Out Consideration, then the two Independent Financial Experts shall mutually select a third Independent Financial Expert to 5 determine Disputed Earn-Out Consideration, and the value selected by such third party shall be binding on all parties. If either Parent or Shareholder fails to designate an Independent Financial Expert within the time period specified, then the determination of the other Independent Financial Expert shall be deemed to be that of the Independent Financial Experts. The cost of the Independent Financial Expert selected by Parent or Shareholder (as the case may be) shall be paid by such selecting party, and the cost of the third Independent Financial Expert, if any, selected by the two Independent Financial Experts shall be paid one-half by each party. (iii) As used herein, "Independent Financial Expert" shall mean any national or regional accounting firm of over 50 professionals, with a good reputation, which does not (and whose directors, officers, employees, affiliates or shareholders do not) have a material direct or indirect financial interest in the Company or Parent or any of their respective affiliates, which has not been, and, at the time it is called upon to provide services for, is not (and none of whose directors, officers, employees, affiliates or shareholders is) a promoter, director, officer, shareholder of the Company or Parent or any of their respective affiliates and which does not provide any advice or opinions to the Company or Parent or any of their respective affiliates. As used in this Agreement, an "affiliate" of any person is a person controlling, controlled by or under common control with such person. (d) LIMITATION OF SHARES OF PARENT COMMON STOCK. Notwithstanding anything in this Section 2.5 to the contrary, in no event shall Parent issue more than 3,263,800 shares of Parent Common Stock in the aggregate (i.e., 19.9% of the issued and outstanding shares as of the date hereof) under the provisions of subsections (a), (b) and (c) above (the "Share Cap"); it being agreed and understood that any excess over the Share Cap to be paid as Merger Consideration shall be paid in cash. Section 2.6 CONVERSION OF SECURITIES IN THE REVERSE MERGER. At the Effective Time, by virtue of the Reverse Merger and without any action on the part of the Company, Merger Sub, Parent or Shareholder: (a) Each share of Company Stock that is held in the treasury of the Company shall be canceled and retired and no capital stock of the Surviving Corporation or Parent, cash or other consideration shall be paid or delivered in exchange therefore. (b) Each outstanding share of the common stock of Merger Sub shall be converted into one (1) share of common stock of the Surviving Corporation. (c) Each remaining outstanding share of the Company Stock shall be converted into the right to receive, in the aggregate, the Merger Consideration. 6 Section 2.7 CLOSING OF THE COMPANY TRANSFER BOOKS. At the Effective Time, the stock transfer books of the Company shall be closed and no transfer of shares of Company Stock shall thereafter be made. Section 2.8 REORGANIZATION UNDER SECTION 368(a) OF THE CODE. The parties intend that the Reverse Merger shall constitute the first step of a two-step acquisitive transaction of the assets of the Company by Merger Sub II with the second step being the Second-Step Merger, that the Reverse Merger and the Second-Step Merger will be treated as a single integrated transaction that will qualify as a tax-free reorganization under Section 368(a) of the Code, and this Agreement is to be interpreted to that effect. Parent, Merger Sub, the Company and the Shareholder shall use all commercially reasonable efforts to cause the Merger to qualify as a reorganization under the provisions of Section 368(a) of the Code. Following the Effective Time, Parent, the Company, and Merger Sub II will not take any action that would cause the Merger not to qualify as a reorganization under Section 368(a) of the Code, and will characterize the Merger as such a reorganization for purposes of all tax returns and other relevant filings, and each party agrees to render to the other parties reasonable assistance to preserve that tax treatment, however, no representation is made by any party hereto as to whether the transactions contemplated hereby will so qualify. Notwithstanding any other provisions of this Agreement, the obligations set forth in this Section 2.8 shall survive the Effective Time without limitation as to time or in any other respect. ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND SHAREHOLDER The Company and the Shareholder, jointly and not severally, represents and warrants to Parent and Merger Sub that the following are true and correct as of the date hereof, except as set forth in the disclosure statement delivered by the Company and Shareholder to Parent and Merger Sub concurrently herewith (the "Company Disclosure Statement"). All exceptions noted in the Company Disclosure Statement shall be numbered to correspond to the applicable Sections to which such exception refers. Section 3.1 ORGANIZATION AND GOOD STANDING; QUALIFICATION. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Texas, with all requisite corporate power and authority to carry on the business in which it is engaged, to own the properties it owns, to execute and deliver this Agreement and the other documents, instruments and agreements contemplated hereby (collectively, the "Other Agreements") and to consummate the transactions contemplated hereby and thereby. The Company is duly qualified and licensed to do business and is in good standing in all jurisdictions where the nature of its business makes such qualification necessary, which jurisdictions are listed in Schedule 3.1, except where the failure to be qualified or licensed would not have a material adverse effect on the business of the Company. The Company does not have any assets, employees or offices in any state other than the states listed in Schedule 3.1. Section 3.2 CAPITALIZATION. The authorized capital stock of the Company consists of 1,000,000 shares of common stock, par value $0.01 per share, of which 1,000 shares are issued and outstanding, all of which to Shareholder, and no shares of such capital stock are held in the 7 treasury of the Company. All of issued and outstanding shares of capital stock of the Company are duly authorized, validly issued, fully paid and nonassessable. There exist no options, warrants, subscriptions or other rights to purchase, or securities convertible into or exchangeable for, the capital stock of the Company. Neither Shareholder nor the Company are parties to or bound by, nor do they have any knowledge of, any agreement, instrument, arrangement, contract, obligation, commitment or understanding of any character, whether written or oral, express or implied, relating to the sale, assignment, encumbrance, conveyance, transfer or delivery of any capital stock of the Company. No shares of capital stock of the Company have been issued or disposed of in violation of the preemptive rights of any of the Company's shareholders. All accrued dividends on the capital stock of the Company, whether or not declared, have been paid in full. Section 3.3 CORPORATE RECORDS. The copies of the Articles of Incorporation and all amendments thereto and the Bylaws of the Company that have been delivered to Parent are true, correct and complete copies thereof, as in effect on the date hereof. The minute books of the Company, copies of which have been delivered to Parent, contain accurate minutes of all meetings of, and accurate consents to all actions taken without meetings by, the Board of Directors (and any committees thereof) and the shareholders of the Company since the formation of the Company. Section 3.4 AUTHORIZATION AND VALIDITY. The execution, delivery and performance by the Company of this Agreement and the Other Agreements, and the consummation of the transactions contemplated hereby and thereby, have been duly authorized by the Company. This Agreement and each Other Agreement have been duly executed and delivered by the Company and constitute legal, valid and binding obligations of the Company, enforceable against the Company in accordance with their respective terms, except as may be limited by applicable bankruptcy, insolvency or similar laws affecting creditors' rights generally or the availability of equitable remedies. Section 3.5 SUBSIDIARIES. The Company does not own, directly or indirectly, any of the capital stock of any other corporation or any equity, profit sharing, participation or other interest in any corporation, partnership, joint venture or other entity. Section 3.6 NO VIOLATION. Neither the execution, delivery or performance of this Agreement or the Other Agreements nor the consummation of the transactions contemplated hereby or thereby will (i) conflict with, or result in a violation or breach of the terms, conditions or provisions of, or constitute a default under, the Articles of Incorporation or Bylaws of the Company or any agreement, indenture or other instrument under which the Company is bound or to which the Company Stock or any of the assets of the Company are subject, or result in the creation or imposition of any security interest, lien, charge or encumbrance upon the Company Stock or any of the assets of the Company, or (ii) violate or conflict with any judgment, decree, order, statute, rule or regulation of any court or any public, governmental or regulatory agency or body having jurisdiction over the Company, the Company Stock or the assets of the Company. The Company has complied with all laws, regulations and licensing requirements and has filed with the proper authorities all necessary statements and reports. 8 Section 3.7 CONSENTS. No consent, authorization, approval, permit or license of, or filing with, any governmental or public body or authority, any lender or lessor or any other person or entity is required to authorize, or is required in connection with, the execution, delivery and performance of this Agreement or the agreements contemplated hereby on the part of the Company. Section 3.8 FINANCIAL STATEMENTS. The Company has furnished to Parent the unaudited balance sheet and related unaudited statements of income for each of the twelve-months ended December 31, 1999, 2000 and 2001, as well as unaudited balance sheet and related unaudited statement of income for the six-month period ended June 30, 2002 (collectively, the "Financial Statements"). The Financial Statements have been prepared on a consistent basis throughout the periods indicated. The Financial Statements fairly present the financial condition and operating results of the Company as of the dates, and for the periods, indicated therein. Section 3.9 LIABILITIES AND OBLIGATIONS. Set forth on Schedule 3.9(a) of the Company Disclosure Statement is a list of the types of tangible assets of the Company as of the date hereof and the estimated value of such assets. Set forth on Schedule 3.9(b) of the Company Disclosure Statement is a list and dollar amount of the following types of liabilities of the Company that are fixed in amount, all events giving rise to such liability have occurred and are not contingent as of the date hereof: indebtedness for borrowed money, notes payable, accounts payable, unpaid and currently due contractual obligations, salaries, bonuses and benefits of employees of the Company through the Closing Date, employment taxes for the period from August 1, 2002 through the Closing Date, customer deposits, amounts already earned by any employee that such employee and the Company have agreed would be deferred and paid at a time which is after the Closing and capital lease obligations (the "Company Liabilities"). Except as set forth in the Financial Statements and Schedule 3.9(b) of the Company Disclosure Statement, the Company is not liable upon or with respect to, or obligated in any other way to provide funds in respect of or to guarantee or assume in any manner, any debt, obligation or dividend of any other person, corporation, association, partnership, joint venture, trust or other entity. Section 3.10 EMPLOYEE MATTERS. (a) COMPENSATION AND PLANS. Schedule 3.10(a) of the Company Disclosure Statement contains a complete and accurate list of the names, titles and cash compensation, including without limitation wages, salaries, bonuses (discretionary and formula) and other cash compensation (the "Cash Compensation") of (i) all employees of the Company and (ii) consultants who were paid in excess of $5,000 during the past twelve months. Schedule 3.10(a) of the Company Disclosure Statement contains a complete and accurate list of all compensation plans, arrangements or practices (the "Compensation Plans") sponsored by the Company or to which the Company contributes on behalf of its employees, other than Employee Benefit Plans listed in Schedule 3.11(a) of the Company Disclosure Statement. The Compensation Plans include without limitation employment agreements, noncompetition agreements, employee leasing agreements, plans, arrangements or practices that provide for severance pay, deferred compensation, incentive, bonus or performance awards, and stock ownership or stock options. Each of the Compensation Plans can be terminated or amended at will by the Company. 9 (b) EMPLOYEE POLICIES AND PROCEDURES. Schedule 3.10(b) of the Company Disclosure Statement contains a complete and accurate list of all employee manuals, policies, procedures and work-related rules (the "Employee Policies and Procedures") that apply to employees of the Company. (c) LABOR COMPLIANCE. The Company (i) has been and is in compliance with all laws, rules, regulations and ordinances respecting employment and employment practices, terms and conditions of employment and wages and hours, and (ii) is not liable for any arrears of wages or penalties for failure to comply with any of the foregoing. The Company has not engaged in any unfair labor practice or discriminated on the basis of race, color, religion, sex, national origin, age or handicap in its employment conditions or practices. There are no (i) unfair labor practice charges or complaints or racial, color, religious, sex, national origin, age or handicap discrimination charges or complaints pending or threatened against the Company before any federal, state or local court, board, department, commission or agency nor does any basis therefor exist or (ii) existing or threatened labor strikes, disputes, grievances, controversies or other labor troubles affecting the Company nor does any basis therefor exist. (d) UNIONS; ALIENS. The Company has never been a party to any agreement with any union, labor organization or collective bargaining unit. No employees of the Company are represented by any union, labor organization or collective bargaining unit. To the best knowledge of the Company, the employees of the Company have no intention to and have not threatened to organize or join a union, labor organization or collective bargaining unit. All employees of the Company are citizens of, or are authorized to be employed in, the United States. (e) EMPLOYEE RETENTION. Neither the Company nor Shareholder have any knowledge that any employee of the Company will not become an employee of the Surviving Corporation following the consummation of the transactions contemplated hereby or is considering or intends to seek other employment following the completion of such transactions. Section 3.11 EMPLOYEE BENEFIT PLANS. (a) Schedule 3.11 of the Company Disclosure Statement contains a complete and accurate list of all employee benefit plans (the "Employee Benefit Plans") within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA") sponsored by the Company or to which the Company contributes on behalf of its employees and all Employee Benefit Plans previously sponsored or contributed to on behalf of its employees within the three years preceding the date hereof. No unwritten amendment exists with respect to any Employee Benefit Plan. Each Employee Benefit Plan has been administered and maintained in compliance with all laws, rules and regulations. No Employee Benefit Plan is currently the subject of an audit, investigation, enforcement action or other similar proceeding conducted by any state or federal agency. No prohibited transaction (within the meaning of Section 4975 of the Code) have occurred with respect to any Employee Benefit Plan. No threatened or pending claims, suits or other proceedings exist with respect to any Employee Benefit Plan other than normal benefit claims filed by participants or beneficiaries. 10 (b) The Company has received a favorable determination letter or ruling from the Internal Revenue Service for each Employee Benefit Plan intended to be qualified within the meaning of Section 401(a) of the Code and/or tax-exempt within the meaning of Section 501(a) of the Code. No proceedings exist or have been threatened that could result in the revocation of any such favorable determination letter or ruling. No accumulated funding deficiency (within the meaning of Section 412 of the Code), whether waived or unwaived, exists with respect to an Employee Benefit Plan. With respect to each Employee Benefit Plan described in Section 501(c)(9) of the Code, the assets of each such plan are at least equal in value to the present value of accrued benefits as of the date hereof. The Company does not have any liability to pay excise taxes with respect to any Employee Benefit Plan under applicable provisions of the Code or ERISA. No facts or circumstances exist that would result in the imposition of liability against Parent by the Pension Benefit Guaranty Corporation as a result of any act or omission by the Company. Section 3.12 TITLE; LEASED ASSETS. The Company does not own any real property. The Company has good, valid and marketable title to all tangible personal property owned by it (collectively, the Personal Property"), which term does not include Conference Products, Non-Conference Products, Other Products, software, customer lists, data bases, technology and other similar assets. A list and brief description of all leases of real property and Personal Property to which the Company is a party, either as lessor or lessee, are set forth in Schedule 3.12(a) of the Company Disclosure Statement. All such leases are valid and enforceable in accordance with their respective terms except as may be limited by applicable bankruptcy, insolvency or similar laws affecting creditors' rights generally or the availability of equitable remedies. Section 3.13 COMMITMENTS. (a) COMMITMENTS; DEFAULTS. The Company has not entered into, nor are the Company Stock, the assets or the business of the Company bound by, whether or not in writing, any (i) partnership or joint venture agreement; (ii) deed of trust or other security agreement; (iii) guaranty or suretyship, indemnification or contribution agreement or performance bond; (iv) employment, consulting or compensation agreement or arrangement, including the election or retention in office of any director or officer; (v) labor or collective bargaining agreement; (vi) debt instrument, loan agreement or other obligation relating to indebtedness for borrowed money or money lent or to be lent to another; (vii) deed or other document evidencing an interest in or contract to purchase or sell real property; 11 (viii) agreement with dealers or sales or commission agents, public relations or advertising agencies, accountants or attorneys; (ix) lease of real or personal property, whether as lessor, lessee, sublessor or sublessee; (x) agreement between the Company and any affiliate of the Company; (xi) agreement relating to any material matter or transaction in which an interest is held by a person or entity that is an affiliate of the Company; (xii) any agreement for the acquisition of services, supplies, equipment or other personal property and involving more than $10,000 in the aggregate; (xiii) powers of attorney; (xiv) contracts containing noncompetition covenants; (xv) any other contract or arrangement that involves either an unperformed commitment in excess of $10,000 or that terminates more than 30 days after the date hereof; (xvi) agreement relating to any material matter or transaction in which an interest is held by any person or entity referred to in Section 3.36; (xvii) agreement providing for the purchase from a supplier of all or substantially all of the requirements of the Company of a particular product or service; or (xviii) any other agreement or commitment not made in the ordinary course of business or that is material to the business or financial condition of the Company. All of the foregoing are hereinafter collectively referred to as the "Commitments." True, correct and complete copies of the written Commitments have heretofore been delivered or made available to Parent, and true, correct and complete written descriptions of the oral Commitments, are set forth on Schedule 3.13. There are no existing defaults, events of default or events, occurrences, acts or omissions that, with the giving of notice or lapse of time or both, would constitute defaults by the Company, and no penalties have been incurred nor are amendments pending, with respect to the Commitments, except as described in Schedule 3.13. The Commitments are in full force and effect and are valid and enforceable obligations of the parties thereto in accordance with their respective terms, and no defenses, off-sets or counterclaims have been asserted or, to the best knowledge of the Company and Shareholder, may be made by any party thereto, nor has the Company waived any rights thereunder. The Company has not received notice of any default with respect to any Commitment. (b) NO CANCELLATION OR TERMINATION OF COMMITMENT. Except as contemplated hereby, neither the Company nor any Shareholder has received notice of any plan or intention of 12 any other party to any Commitment to exercise any right to cancel or terminate any Commitment or agreement, and neither the Company nor any Shareholder knows of any fact that would justify the exercise of such a right. Neither the Company nor any Shareholder currently contemplates, or has reason to believe any other person or entity currently contemplates, any amendment or change to any Commitment. Section 3.14 INSURANCE. A list and brief description of all insurance policies of the Company are set forth in Schedule 3.14. Section 3.15 PATENTS, TRADE-MARKS, SERVICE MARKS AND COPYRIGHTS. The Company owns all right, title and interest to the Conference Products, Non-Conference Products and Other Products (including, in each case, all technology and software included therein) without any known conflict with, or known infringement of, the rights of others, and all of such products were developed by the Company. All other assets utilized by the Company in its operation and business (including, without limitation, technology, software, customer lists, data bases and documentation) are owned by, leased to or licensed to the Company without any known conflict with, or known infringement of, the rights of others. Set forth on Schedule 3.15(a) of the Company Disclosure Statement is a list of all patents, patents pending, trademarks, service marks and trade names owned or used by the Company, and also a list of all related registrations and applications. The Company has no knowledge that any of such patents, patents pending, trademarks, service marks or trade names conflict with, or infringe upon, the rights of others. The Company owns or possesses sufficient title and ownership of or licenses to all copyrights, trade secrets, licenses, information and proprietary rights and processes (including, without limitation, products, tooling, technology, software, firmware and the like) necessary for its business as conducted and proposed to be conducted without any known conflict with, or known infringement of, the rights of others. Except for the licenses and agreements set forth in Schedule 3.15(b) of the Company Disclosure Statement, there are no known outstanding options, licenses or agreements of any kind relating to the Conference Products, Non-Conference Products, Other Products (and all technology and software included therein) and the other items described in the preceding sentence, nor is the Company bound by or a party to any options, licenses or agreements of any kind with respect to the patents, trademarks, service marks, trade names, copyrights, trade secrets, licenses, information and other proprietary rights and processes of any other person or entity other than such licenses or agreements arising from the purchase of "off the shelf' or standard commercial products. The Company has not received any communications alleging that the Company has violated or, by conducting its business, would violate any of the patents, trademarks, service marks, trade names, copyrights, trade secrets or other proprietary rights or processes of any other person or entity. The Company, to the best of its knowledge, is not aware that any of its employees is obligated under any contract (including licenses, covenants or commitments of any nature) or other agreement, or subject to any judgment, decree or order of any court or administrative agency, that would interfere with the use of such employee's best efforts to promote the interest of the Company or that would conflict with the Company's business. To the Company's knowledge, neither the execution or delivery of this Agreement, nor the carrying on of the Company's business by the employees of the Company, nor the conduct of the Company's business as proposed, will conflict with or result in a breach of the terms, conditions, or provisions of, or constitute a default under, any contract, covenant or instrument under which any such employee is now obligated. The Company does not believe it is or will be necessary to use any inventions of any of its employees (or persons it 13 currently intends to hire) made prior to their employment by the Company. To the knowledge of the Company and Shareholder, the Company is not using or in any way making use of any confidential information or trade secrets of any third party, including without limitation, any past or present employees of the Company. Section 3.16 TAXES. The Company has filed all tax returns and reports as required by law. These returns and reports are true and correct in all material respects. The Company has paid all taxes and other assessments due. The Company has not made any elections pursuant to the Code (other than elections that relate solely to methods of accounting, depreciation or amortization) that would have a material effect on the Company, its financial condition, its business as presently conducted or proposed to be conducted or any of its properties or material assets. The Company had never had any tax deficiency proposed or assessed against it and has not executed any waiver of any statute of limitations on the assessment or collection of any tax or governmental charge. None of the Company's federal income tax returns and none of its state income or franchise tax or sales or use tax returns has ever been audited by governmental authorities. Since the date of the Financial Statements, the Company has not incurred any taxes, assessments or governmental charges other than in the ordinary course of business and the Company has made adequate provisions on its books of account for all taxes, assessments and governmental charges with respect to its business, properties and operations for such period. The Company has withheld or collected from each payment made to each of its employees, independent contractors or other persons, the amount of all taxes (including, but not limited to, federal income taxes, federal Insurance Contribution Act taxes and Federal Unemployment Tax Act taxes) required to be withheld or collected therefrom, and has paid the same to the proper tax receiving officers or authorized depositories. Section 3.17 COMPLIANCE WITH LAWS. The Company has complied with all laws, regulations and licensing requirements and has filed with the proper authorities all necessary statements and reports. There are no existing violations by the Company or Shareholder of any federal, state or local law or regulation that could affect the property or business of the Company. The Company possesses all necessary licenses, franchises, permits and governmental authorizations to conduct its business as now conducted. Section 3.18 FINDER'S FEE. The Company has not incurred any obligation for any finder's, broker's or agent's fee in connection with the transactions contemplated hereby. Section 3.19 LITIGATION. There is no action, suit, proceeding or investigation pending or, to the best knowledge of the Company, currently threatened against the Company or any of its subsidiaries that questions the validity of this Agreement, and Other Agreement or the right of the Company to enter into them, or to consummate the transactions contemplated hereby or thereby, or that might result, either individually or in the aggregate, in any material adverse changes in the assets, condition or affairs of the Company, financially or otherwise, or any change in the current equity ownership of the Company, nor is the Company aware that there is any basis for the foregoing. The foregoing includes, without limitation, actions pending or to the best knowledge of the Company threatened in writing involving the prior employment of any of the Company's employees, their use in connection with the Company's business of any information or techniques allegedly proprietary to any of their former employers. Neither the Company nor any of its subsidiaries is a party or subject to the provisions of any order, writ, 14 injunction, judgment or decree of any court or government agency or instrumentality. There is no action, suit, proceeding or investigation by the Company or any of its subsidiaries currently pending or which the Company or any of its subsidiaries intends to initiate. Section 3.20 ACCURACY OF INFORMATION FURNISHED. All information furnished to Parent by the Company or Shareholder hereby or in connection with the transactions contemplated hereby is true, correct and complete in all respects. Such information states all facts required to be stated therein or necessary to make the statements therein, in light of the circumstances under which such statements are made, true, correct and complete. Section 3.21 CONDITION OF FIXED ASSETS. All of the plants, structures and equipment (the "Fixed Assets") owned by the Company are in good condition and repair (subject to normal wear and tear) for their intended use in the ordinary course of business and conform in all material respects with all applicable ordinances, regulations and other laws and there are no known latent defects therein. Section 3.22 INVENTORY. All of the inventory owned by the Company is in good, current, standard and merchantable condition and is not obsolete or defective. Purchase commitments for merchandise are not in excess of normal requirements and, taken as a whole, are not at prices in excess of market prices. At the date of this Agreement, the Company has the types and quantities of inventories appropriate, taken as a whole, to conduct its business consistently with past practices. Section 3.23 BOOKS OF ACCOUNT. The books of account of the Company have been kept accurately in the ordinary course of business and the transactions entered therein represent bona fide transactions. Section 3.24 CUSTOMERS. During the period from January 1, 2001 to the date hereof, none of the customers of the Company listed on Schedule 3.24 of the Company Disclosure Statement has terminated, materially reduced or threatened to terminate or materially reduce its purchases from the Company. Section 3.25 PRODUCT WARRANTIES. There is no claim against or liability of the Company on account of product warranties or with respect to the manufacture, sale or rental of defective products. Section 3.26 OWNERSHIP INTERESTS OF INTERESTED PERSONS. The Company is not indebted, directly or indirectly, to any of its officers or directors or to their respective spouses or children, in any amount whatsoever other than in connection with expenses or advances of expenses incurred in the ordinary course of business. None of the Company's officers or directors, or any members of their immediate families, are, directly or indirectly, indebted to the Company (other than in connection with purchases of the Company's stock) or to the best knowledge of the Company have any direct or indirect ownership interest in any firm or corporation with which the Company is affiliated or with which the Company has a business relationship, or any firm or corporation which competes with the Company except that officers, directors and/or shareholders of the Company may own stock in (but not exceeding two percent of the outstanding capital stock of) any publicly traded company that may compete with the 15 Company. None of the Company's officers or directors or any members of their immediate families are, directly or indirectly, interested in any material contract with the Company. The Company is not a guarantor or indemnitor of any indebtedness of any other person, firm or corporation. Section 3.27 ENVIRONMENTAL MATTERS. The Company is not in violation of any applicable statute, law or regulation relating to the environment or occupational health and safety (collectively, "Environmental Laws"), and to its knowledge, no material expenditures are or will be required in order to comply with any such existing statute, law or regulation. Section 3.28 CONFIDENTIAL INFORMATION AND INVENTION ASSIGNMENT AGREEMENTS. All officers and employees of the Company have executed an agreement with the Company regarding confidentiality and proprietary information substantially in the form or forms delivered to Parent by the Company. The Company is not aware that any of its employees or consultants is in violation thereof. Section 3.29 CERTAIN PAYMENTS. To the best knowledge of the Company, neither the Company nor Shareholder nor any director, officer or employee of the Company has paid or caused to be paid, directly or indirectly, in connection with the business of the Company: (a) to any government or agency thereof or any agent of any supplier or customer any bribe, kick-back or other similar payment; or (b) any contribution to any political party or candidate (other than from personal funds of directors, officers or employees not reimbursed by their respective employers or as otherwise permitted by applicable law). ARTICLE IV REPRESENTATIONS AND WARRANTIES OF SHAREHOLDER Shareholder represents and warrants to Parent and Merger Sub that the following are true and correct as of the date hereof, except as set forth in the Company Disclosure Statement. Section 4.1 AUTHORITY AND OWNERSHIP. (a) Shareholder has the capacity to execute and deliver this Agreement and the other agreements contemplated hereby and to consummate the transactions contemplated hereby and thereby. All necessary action required to have been taken by or on behalf of such Shareholder by applicable law or otherwise to authorize (i) the approval, execution and delivery on its behalf of this Agreement and the other agreements contemplated hereby and (ii) its performance of its obligations under this Agreement and the other agreements contemplated hereby and the consummation of the transactions contemplated hereby and thereby have been taken. This Agreement and the other agreements contemplated hereby constitute Shareholder's valid and binding agreement, enforceable against Shareholder in accordance with its terms, except (A) as the same may be limited by applicable bankruptcy, insolvency, moratorium or similar laws of general application relating to or affecting creditors' rights, including without limitation, the effect of statutory or other laws regarding fraudulent conveyances and preferential transfer, and (B) for the limitations imposed by general principles of equity. (b) Shareholder owns, beneficially and of record, good and marketable title to all of the issued and outstanding shares of Company Stock, free and clear of all security interests, liens, 16 adverse claims, encumbrances, equities, proxies, options, voting agreements, shareholders' agreements or restrictions. Section 4.2 NO BREACH. The execution and delivery of this Agreement and the other agreements contemplated hereby do not, and the consummation of the transactions contemplated hereby or thereby will not, (i) constitute a breach or default (or an event that with notice or lapse of time or both would become a breach or default) or give rise to any lien, third party right of termination, cancellation, material modification or acceleration under any agreement, understanding or undertaking to which Shareholder is a party or by which it is bound, or (ii) constitute a violation of any law, rule or regulation to which Shareholder is subject. Section 4.3 CONSENTS AND APPROVALS. Neither the execution and delivery by such Shareholder of this Agreement or the other agreements contemplated hereby nor the consummation by Shareholder of the transactions contemplated hereby or thereby will require Shareholder to obtain any consent, approval, authorization or permit of, or to make any filing with or give any notification to, any governmental or regulatory authority, any lender or lessor or any other person or entity. Section 4.4 BROKERS AND FINDERS. Shareholder has not employed any broker or finder or incurred any liability for any brokerage fees, commissions or finder's fees in connection with the transactions contemplated herein. Section 4.5 INVESTMENT REPRESENTATION. In connection with the receipt of the Parent Common Stock, Shareholder has been advised that the issuance of the Parent Common Stock has not been registered with the Securities and Exchange Commission under the Securities Act of 1933, as amended (the "Securities Act"), and the Parent Common Stock is being issued to Shareholder in reliance upon an exemption from such registration. In that regard, Shareholder is sophisticated in financial matters and is able to evaluate the risks and benefits relating to the acquisition of the Parent Common Stock. The Parent Common Stock is to be acquired for Shareholder's own account and not with a view to, or intention of, distribution thereof in violation of the Securities Act, or any applicable state securities laws, and the Parent Common Stock will not be disposed of by Shareholder in contravention of the Securities Act or any applicable state securities laws. Shareholder understands that, except as provided in Section 7.3 below, Parent is under no obligation to register the sale, transfer or other disposition of the Parent Common Stock by Shareholder or on Shareholder's behalf under the Securities Act or any state securities law, and Shareholder is able to bear the economic risk of his investment in the Parent Common Stock for an indefinite period of time because the Parent Common Stock has not been registered under the Securities Act and, therefore, cannot be sold unless subsequently registered under the Securities Act or an exemption from such registration is available. Section 4.6 INVESTMENTS IN COMPETITORS. Shareholder does not own directly or indirectly any interests or has any investment in any corporation, business or other person that is a competitor of the Company. 17 ARTICLE V REPRESENTATIONS AND WARRANTIES OF PARENT Parent represents and warrants to Shareholder that the following are true and correct as of the date hereof, except as set forth in the disclosure statement delivered by Parent to the Company and Shareholder concurrently herewith (the "Parent Disclosure Statement"). All exceptions noted in the Parent Disclosure Statement shall be numbered to correspond to the applicable section to which such exception refers. Section 5.1 ORGANIZATION AND GOOD STANDING. Parent is a corporation duly organized, validly existing and in good standing under the laws of the state of its incorporation, with all requisite corporate power and authority to carry on the business in which it is engaged, to own the properties it owns, to execute and deliver this Agreement and to consummate the transactions contemplated hereby. Merger Sub was recently formed solely for the purpose of engaging in the transactions contemplated by this Agreement and has engaged in no other business activities. Parent owns all of the capital stock of Merger Sub. Section 5.2 AUTHORIZATION AND VALIDITY. The execution, delivery and performance by Parent and Merger Sub of this Agreement and the other agreements contemplated hereby, and the consummation of the transactions contemplated hereby and thereby, have been duly authorized by Parent and Merger Sub. This Agreement and each other agreement contemplated hereby have been as of the date of this Agreement, duly executed and delivered by Parent and Merger Sub and constitute legal, valid and binding obligations of Parent and Merger Sub, enforceable against Parent and Merger Sub in accordance with their respective terms, except as may be limited by applicable bankruptcy, insolvency or similar laws affecting creditors' rights generally or the availability of equitable remedies. Section 5.3 NO VIOLATION. Neither the execution, delivery or performance of this Agreement or the other agreements contemplated hereby nor the consummation of the transactions contemplated hereby or thereby will (i) conflict with, or result in a violation or breach of the terms, conditions and provisions of, or constitute a default under, the Articles of Incorporation or Bylaws of Parent or any agreement, indenture or other instrument under which Parent is bound or (ii) violate or conflict with any judgment, decree, order, statute, rule or regulation of any court or any public, governmental or regulatory agency or body having jurisdiction over Parent or the properties or assets of Parent. Section 5.4 FINDER'S FEE. Except for fees payable to Markowitz & McNaughton, Inc., Parent has not incurred any obligation for any finder's, broker's or agent's fee in connection with the transactions contemplated hereby. Section 5.5 SEC FILINGS; PARENT FINANCIAL STATEMENTS. (a) Parent has filed all forms, reports and documents required to be filed by Parent with the SEC since the effective date of the registration statement of Parent's initial public offering, and has made available to Company such forms, reports, and documents in the form filed with the SEC. All such required forms, reports and documents (including those that Parent may file subsequent to the date hereof) are referred to herein as the "Parent SEC Reports". As of 18 their respective dates, the Parent SEC Reports (i) complied as to form in all material respects with the requirements of the Securities Act or the Exchange Act of 1934, as amended (the "Exchange Act"), as the case may be, and the rules and regulations of the SEC thereunder applicable to such Parent SEC Reports, and (ii) did not at the time they were filed (or if amended or superseded by a filing prior to the date of this Agreement, then on the date of such filing) contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein in the light of the circumstances under which they were made, not misleading, except to the extent corrected prior to the date of this Agreement by a subsequently filed Parent SEC Report. None of Parent's subsidiaries is required to file any forms, reports or other documents with the SEC. (b) Each of the consolidated financial statements (including, in each case, any related notes thereto) contained in the Parent SEC Reports (the "Parent Financials"), including any Parent SEC Reports filed after the date hereof until the Closing, (i) complied as to form in all material respects with the published rules and regulations of the SEC with respect thereto, (ii) was prepared in accordance with GAAP applied on a consistent basis throughout the periods involved (except as may be indicated in the notes thereto or, in the case of unaudited interim financial statements, as may be permitted by the SEC on Form 10-Q, 8-K or any successor form under the Exchange Act) and (iii) fairly presented the consolidated financial position of Parent and its subsidiaries as at the respective dates thereof and the consolidated results of operations and cash flows for the periods indicated, except that the unaudited interim financial statements may not contain footnotes and were or are subject to normal and recurring year-end adjustments. Section 5.6 SECURITIES EXEMPTION. Based on the representations of Shareholder in Article IV above, the issuance of the securities pursuant to this Agreement are exempt from registration under the Securities Act. Section 5.7 CAPITALIZATION. As of August 9, 2002, the authorized capital stock of Parent consists of 90,000,000 shares of common stock, par value $0.01 per share, and 15,000,000 shares of preferred stock, par value $0.01 per share, of which 16,401,088 shares of common stock are issued and outstanding and 565,179 shares of preferred stock are issued and outstanding. As of August 9, 2002, the preferred stock is convertible into 426,597 shares of Parent Common Stock. All of the issued and outstanding shares of capital stock of the Parent are duly authorized, validly issued, fully paid and non-assessable. Except as set forth on Schedule 5.7(a) of the Parent Disclosure Statement, there exist no options, warrants, subscriptions or other rights to purchase, or securities convertible into or exchangeable for, the capital stock of the Parent. Except as set forth in Schedule 5.7(b) of the Parent Disclosure Statement and in the Parent SEC Reports, Parent is not a party to or bound by any agreement, instrument, arrangement, contract, obligation, commitment or understanding of any character whether written or oral, expressed or implied, relating to the sale or issuance in the future of any shares of capital stock of the Company. The issuance of the shares of Parent Common Stock to be issued at the Closing has been duly authorized, and when issued at the Closing, will be validly issued, fully paid and non-assessable. The issuance of the shares of Parent Common Stock pursuant to Section 2.5(b) hereof, has been duly authorized, and when issued pursuant to Section 2.5(b) hereof, will be validly issued, fully paid and non-assessable. 19 ARTICLE VI CLOSING DELIVERIES Section 6.1 DELIVERIES OF THE COMPANY AND SHAREHOLDER. Simultaneously with the execution of this Agreement, the Company and Shareholder shall deliver to Parent the following, all of which shall be in form and content satisfactory to Parent and its counsel: (a) a copy of resolutions of the Board of Directors of the Company authorizing the execution, delivery and performance of this Agreement and all related documents and agreements, each certified by the Secretary of that corporation as being true and correct copies of the originals thereof subject to no modifications or amendments; (b) certificate, dated within five days prior to the date of this Agreement, of the Secretary of State of Texas and/or Comptroller of Public Accounts establishing that the Company is in existence, has paid all franchise taxes and otherwise is in good standing to transact business in its state of incorporation; (c) executed employment agreement between Surviving Corporation and Shareholder, in substantially the form attached as Exhibit D (the "Employment Agreement"); (d) executed non-competition agreement between Parent and Shareholder, in substantially the form attached hereto as Exhibit E (the "Noncompetition Agreement"); (e) executed Lock-Up Agreement between Parent and Shareholder, in substantially the form attached hereto as Exhibit F (the "Lock-Up Agreement"); (f) soft copies of the Company's customer list and related data base; (g) soft copies of all of the Company's source codes and related documentation; and (h) a legal opinion of Gardere Wynne Sewell LLP. Section 6.2 DELIVERIES OF PARENT. Simultaneously with the execution of this Agreement, Parent shall deliver the following to the Company or the appropriate party, all of which shall be in form and substance satisfactory to Shareholder, the Company and their counsel. (a) a copy of resolutions of the Board of Directors of Parent authorizing the execution, delivery and performance of this Agreement and all related documents and agreements, certified by the Secretary of Parent as being a true and correct copy of the original thereof subject to no modifications or amendments; and (b) executed Employment Agreement; (c) executed Noncompetition Agreement; (d) executed Lock-Up Agreement; 20 (e) executed representation letters of Parent, Merger Sub and Merger Sub II described in Section 7.8 below; (f) a legal opinion of Jackson Walker L.L.P.; (g) a copy of the instruction letter described in Section 2.5(a)(i) above and the cash described in Section 2.5(a)(ii) above; and (h) evidence that the Parent Common Stock to be issued as provided in Section 2.5(a)(i) above has been approved for listing on Nasdaq NMS. ARTICLE VII OTHER AGREEMENTS Section 7.1 BUSINESS PLAN. The Company and Parent have mutually agreed to a business plan of the Surviving Corporation following the Effective Time, a copy of which is attached hereto as Exhibit G (the "Business Plan"); it being understood that there can be no assurances that the plan set forth in the Business Plan will be achieved. Any material expenses or deviations from the Business Plan will require the prior written approval of both Parent and Shareholder, which approval will not be unreasonably withheld or delayed. Section 7.2 PARENT'S COVENANTS REGARDING SURVIVING CORPORATION'S OPERATIONS. Parent hereby agrees as follows: (i) For so long as Shareholder is the General Manager of the Surviving Corporation, Shareholder shall have the power and authority to manage the day-to-day operation of the Surviving Corporation within the parameters of the Business Plan (and/or future business plans developed by the Board of Directors of the Surviving Corporation), subject in any case, to the direction of the Chief Executive Officer and/or the Board of Directors of the Surviving Corporation; and (ii) During the period of determination of the earn-out consideration as provided in Section 2.5(b) above, Parent will use all commercially reasonable efforts to assist the Surviving Corporation in achieving Surviving Corporation Sales and Conference Revenues. Section 7.3 REGISTRATION RIGHTS. Within 30 days after the Closing (the "Closing") and within 30 days after any issuance of shares as earn-out consideration pursuant to Section 2.5(b) above, Parent will file a registration statement under the Securities Act of 1933, as amended, to register the re-sale of the Shares and the earn-out shares (collectively, the "Registrable Securities"), and use its best efforts to have such registration statements declared effective as soon as possible thereafter. In addition, Parent and Shareholder agree to the provisions set forth in Exhibit H attached hereto. Section 7.4 EMPLOYEES. To Shareholder's knowledge, all employees of the Company will remain as employees of Surviving Corporation following the Closing, on the same terms as their current employment with the Company (except as provided in Section 7.5 below and except 21 that such employees will participate in Parent's benefit plans and the Company's plans will be canceled); it being agreed and understood that: (i) prior to the Closing, the Company can continue to pay such employees their normal salaries and bonuses, consistent with past practices; (ii) following the Closing, such employees will remain employed at their present locations; and (iii) the Company may engage advisors and consultants as required in the normal course of business. Section 7.5 STOCK OPTIONS. Within thirty (30) days following the Closing, Parent will issue: (i) options to purchase in the aggregate 150,000 shares of Parent Common Stock under Parent's Amended and Restated 1996 Long Term Incentive Plan, in the form of Exhibit I attached hereto (the "Standard Options"); and (ii) non-qualified options to purchase in the aggregate 150,000 shares of Parent Common Stock, in the form of Exhibit J attached hereto (the "Non-Standard Options"), in each case, to the Company employees remaining with the Surviving Corporation following the Closing (excluding Shareholder). The Standard Options and Non-Standard Options shall have an exercise price equal to the fair market value of the Parent Common Stock on the date of grant, and shall be allocated among such employees as mutually determined by Parent and Shareholder; it being agreed that no employee will receive a Standard Option or Non-Standard Option until such employee executes and delivers to Parent an Employee Employment Agreement, in substantially the form of Exhibit K attached hereto. Section 7.6 FURTHER INSTRUMENTS OF TRANSFER. Following the Closing, at the request of Parent, Shareholder shall deliver any further instruments of transfer and take all reasonable action as may be necessary or appropriate to carry out more effectively the provisions of this Agreement and to establish and protect the rights created in favor of the parties hereunder or thereunder. Section 7.7 ACCOUNT RECEIVABLES. (a) Parent hereby acknowledges and agrees that, immediately prior to the Closing, the Company distributed to Shareholder all Company account receivables then outstanding, which account receivables are identified (by name, invoice number and amount) in Schedule 7.7 of the Company Disclosure Statement (the "Pre-Closing A/R's"). The parties hereto acknowledge and agree that the Pre-Closing A/R's do not include account receivables from Macmillan pertaining to Macmillan's holdback for potential products return, which amount to $116,126 in the aggregate as of the date hereof (the "Macmillan Holdback Receivables"). The Macmillan Holdback Receivables shall remain as assets of the Company. Following the Closing, Surviving Corporation shall collect the Pre-Closing A/R's on Shareholder's behalf and, in doing so, Surviving Corporation shall, and Parent shall cause Surviving Corporation to, use the same diligence in attempting to collect the Pre-Closing A/R's as the Surviving Corporation uses in attempting to collect account receivables arising after the Closing. At such point as the Surviving Corporation receives payment for a Pre-Closing A/R, Surviving Corporation shall, and Parent shall cause Surviving Corporation to, pay such collected amounts to the Shareholder within 15 days after the month in which the amount is collected. (b) Parent and Surviving Corporation shall afford the Shareholder at his request the opportunity to discuss with Parent the collection procedures employed by Parent or Surviving Corporation with respect to any Pre-Closing A/R, and to reasonably participate with 22 representatives of Parent and/or Surviving Corporation in discussions with customers with respect to the collection of such accounts. Parent and Surviving Corporation shall also permit the Shareholder to review the books and records of the Company to verify that the provisions of this Section 7.7 are being correctly implemented. In applying any payment made by an account debtor after the Closing who is at the time of such payment liable for indebtedness accrued as accounts receivable both as a Pre-Closing A/R and on the books of the Surviving Corporation or Parent after the Closing, such payment shall be applied to the oldest receivable first unless such account debtor instructs Parent or Surviving Corporation to allocate such payment differently as a result of a disputed Pre-Closing A/R. Parent and Shareholder agree that, notwithstanding anything herein to the contrary, Parent shall not be required to initiate any legal action to collect any Pre-Closing A/R. Section 7.8 TAX OPINION. The obligations of the Company and the Shareholder to effect the transactions contemplated in this Agreement are subject to receipt by the Shareholder of an opinion from Gardere Wynne Sewell LLP on the Closing Date regarding qualification of the Reverse Merger and the Second-Step Merger as a reorganization as described in Section 368 of the Code. In rendering such opinion, Gardere Wynne Sewell LLP shall require delivery of and rely upon customary representations set forth in the representation letter delivered by Parent, Merger Sub and Merger Sub II, substantially in the form of Exhibit L, and other representation letters to be delivered by the Company and Shareholder. Section 7.9 INDEMNIFICATION. Parent agrees to indemnify Shareholder, in his capacity as an officer, director or employee of the Company, Parent or any Subsidiary of Parent to the fullest extent permitted by Article 2.02-1 of the Texas Business Corporation Act, and advances expenses to Shareholder as permitted therein. ARTICLE VIII REMEDIES Section 8.1 INDEMNIFICATION BY SHAREHOLDER. Subject to the terms and conditions of this Article and Section 9.6, Shareholder agrees to indemnify, defend and hold Parent, Merger Sub and Merger Sub II and their respective directors, officers, agents, attorneys and affiliates (collectively, "Parent Indemnitees") harmless from and against all losses, claims, obligations, demands, assessments, penalties, liabilities, costs, damages, attorneys' fees and expenses (collectively, "Damages"), asserted against or incurred by any Parent Indemnitee by reason of or resulting from: (i) a breach of any representation, warranty or covenant of the Company or Shareholder contained herein (excluding the representations set forth in the second sentence of Section 3.9 above) or in any agreement executed in connection with the transactions contemplated hereby; (ii) any amounts not collected in cash or as an offsetting credit to the Company and/or Surviving Corporation with respect to the Macmillan Holdback Receivables; (iii) any Damages in excess of $25,000 pertaining to the matter described in Item 2 of Schedule 3.1 of the Company Disclosure Statement; and (iv) the matter described in Item 2 of Schedule 3.16 of the Company Disclosure Statement; provided, however, that no claim shall be made for Damages under this Section 8.1 until, and such claims may be made only to the extent that, the dollar amount of all such claims for Damages shall exceed in the aggregate $100,000 (the "Threshold"); and provided further, however, that Shareholder's aggregate liability for Damages may not exceed fifty percent (50%) of the Merger Consideration. In addition, Shareholder 23 agrees to be solely responsible for, and indemnify and hold Parent Indemnitees harmless from and against: (i) any fees, commissions or expenses of any financial advisor, investment banker, business broker or similar person or entity engaged by the Company or Shareholder; and (ii) any Company Liability not set forth on Schedule 3.9(b) of the Company Disclosure Statement (collectively, "Undisclosed Company Liabilities"), but only to the extent that such Undisclosed Company Liabilities, individually or in the aggregate, exceed the amount of any cash in the Company as of the Closing Date and not transferred to Shareholder and/or accounts receivable as of the Closing Date which are not included in Schedule 7.7 of the Company Disclosure Statement (excluding the Macmillan Holdback Receivables) and are subsequently collected; it being agreed that such indemnification is not subject to the Threshold and will be payable by Shareholder first, and not first deducted from the earn-out consideration. If Shareholder becomes liable for Damages, he shall be entitled, in his sole discretion, to satisfy any judgment or settlement of Damages, in whole or in part, by transferring Parent Common Stock to any Parent Indemnitee. For purposes of this Section 8.1, if Shareholder elects to so transfer Parent Common Stock, a share of Parent Common Stock shall be considered to have a value equal to the average closing price of the Parent Common Stock on the Nasdaq NMS for the trading days during the 60 calendar days immediately preceding the Closing Date. Section 8.2 INDEMNIFICATION BY PARENT. Subject to the terms and conditions of this Article and Section 9.6, Parent and Merger Sub agree to indemnify, defend and hold Shareholder harmless from and against all Damages asserted against or incurred by Shareholder by reason of or resulting from a breach of any representation, warranty or covenant of Parent or Merger Sub contained herein or in any agreement executed in connection with the transactions contemplated hereby; provided, however, that no claim shall be made for Damages based on a breach of a representation or warranty under this Section 8.2 until, and such claims may be made only to the extent that, the dollar amount of all such claims for Damages shall exceed in the aggregate $100,000; and provided further, however, that Parent's aggregate liability for Damages may not exceed $3 million. In addition, Parent agrees to be solely responsible for, and indemnify and hold Shareholder harmless from and against any fees, commissions or expenses of Markowitz & McNaughton, Inc. relating or pertaining to this Agreement and the transactions contemplated hereby. Section 8.3 CONDITIONS OF INDEMNIFICATION. The obligations and liabilities of Shareholder, Parent and Merger Sub (the "indemnifying party") to the other (the "party to be indemnified") under Sections 8.1 and 8.2 above with respect to claims resulting from the assertion of liability by third parties ("Third Party Claims") shall be subject to the following terms and conditions: (a) Within 20 days (or such earlier time as might be required to avoid prejudicing the indemnifying party's position) after receipt of notice of commencement of any action evidenced by service of process or other legal pleading, the party to be indemnified shall give the indemnifying party written notice thereof together with a copy of such claim, process or other legal pleading, and the indemnifying party shall have the right to undertake the defense thereof by representatives of its own choosing and at its own expense; provided that the party to be indemnified may participate in the defense with counsel of its own choice, the fees and expenses of which counsel shall be paid by the party to be indemnified unless (i) the indemnifying party has agreed to pay such fees and expenses, (ii) the indemnifying party has failed to assume the 24 defense of such action or (iii) the named parties to any such action (including any impleaded parties) include both the indemnifying party and the party to be indemnified and the party to be indemnified has been advised by counsel that there may be one or more legal defenses available to it that are different from or additional to those available to the indemnifying party (in which case, if the party to be indemnified informs the indemnifying party in writing that it elects to employ separate counsel at the expense of the indemnifying party, the indemnifying party shall not have the right to assume the defense of such action on behalf of the party to be indemnified, it being understood, however, that the indemnifying party shall not, in connection with any one such action or separate but substantially similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the reasonable fees and expenses of more than one separate firm of attorneys at any time for the party to be indemnified, which firm shall be designated in writing by the party to be indemnified). (b) In the event that the indemnifying party, by the 30th day after receipt of notice of any such claim (or, if earlier, by the 10th day preceding the day on which an answer or other pleading must be served in order to prevent judgment by default in favor of the person asserting such claim), does not elect to defend against such claim, the party to be indemnified will (upon further notice to the indemnifying party) have the right to undertake the defense, compromise or settlement of such claim on behalf of and for the account and risk of the indemnifying party and at the indemnifying party's expense, subject to the right of the indemnifying party to assume the defense of such claims at any time prior to settlement, compromise or final determination thereof. (c) Notwithstanding the foregoing, the indemnifying party shall not settle any claim without the consent of the party to be indemnified unless such settlement involves only the payment of money and the claimant provides to the party to be indemnified a release from all liability in respect of such claim. If the settlement of the claim involves more than the payment of money, the indemnifying party shall not settle the claim without the prior consent of the party to be indemnified. The indemnified party will not settle any claim without the consent of the indemnifying party, which consent will not be unreasonably withheld or delayed; provided, however, if such consent is not given, then the indemnifying party shall be responsible for all costs and expenses pertaining to such matter thereafter and all judgments, settlements or the like in excess of the amount of such settlement offer. (d) The party to be indemnified and the indemnifying party will each cooperate with all reasonable requests of the other. Section 8.4 WAIVER. No waiver by any party of any default or breach by another party of any representation, warranty, covenant or condition contained in this Agreement, any exhibit or any document, instrument or certificate contemplated hereby shall be deemed to be a waiver of any subsequent default or breach by such party of the same or any other representation, warranty, covenant or condition. No act, delay, omission or course of dealing on the part of any party in exercising any right, power or remedy under this Agreement or at law or in equity shall operate as a waiver thereof or otherwise prejudice any of such party's rights, powers and remedies. All remedies, whether at law or in equity, shall be cumulative and the election of any one or more shall not constitute a waiver of the right to pursue other available remedies. 25 Section 8.5 REMEDIES EXCLUSIVE. The remedies provided in this Article shall be the exclusive rights and remedies available to one party against the other, either at law or in equity, except in the case of fraud. Section 8.6 PROCEDURE FOR RESOLUTION OF CLAIMS. (a) If, during the Indemnification Period, any Parent Indemnitee asserts a claim for indemnification pursuant to Article VIII hereof or for breach of a representation or warranty, Parent and Shareholder shall attempt, in good faith, to resolve whether such Parent Indemnitee has a rightful claim against Shareholder in excess of the Threshold and if they agree that such Parent Indemnitee does, then to agree on the amount of Damages incurred by such Parent Indemnitee in excess of the Threshold. If Parent and Shareholder so agree, then the earn-out consideration issuable to Shareholder pursuant to Section 2.5(b) (the "Earn-Out Consideration") shall be withheld (if the Parent Indemnitee is Parent) or transferred (if the Parent Indemnitee is someone other than Parent) such that the value of the Earn-Out Consideration withheld or transferred equals the Damages incurred by such Parent Indemnitee in excess of the Threshold (with Parent and Shareholder agreeing on the amount of cash and/or Parent Common Stock to be withheld). (b) If, during the Indemnification Period, any Parent Indemnitee in good faith asserts a claim as described in subsection (a) above, but Parent and Shareholder do not agree on either that there is a rightful claim or the amount of Damages, and thereafter Shareholder becomes entitled to Earn-Out Consideration pursuant to Section 2.5(b), Parent shall be entitled, within 15 days after such Earn-Out Consideration is payable, to interplead such Earn-Out Consideration (up to the amount claimed in good faith as Damages in excess of the Threshold) to a court of competent jurisdiction rather than pay such amounts to Shareholder and such court would resolve the merits of the claims asserted. Parent shall be required to concurrently therewith notify Shareholder of such interpleader action. Any Parent Common Stock interpled would be valued at the same value as it was issued for under Section 2.5(b), and Parent shall be required to interplead Parent Common Stock issuable as Earn-Out Consideration (up to the amount claimed in good faith as Damages in excess of the Threshold) before interpleading any cash. Amounts of Earn-Out Consideration in excess of the amount claimed in good faith as Damages in excess of the Threshold shall be paid to Shareholder. (c) Each Parent Indemnitee shall be bound by any decisions made by Parent pursuant to this Section 8.6. Section 8.7 COSTS, EXPENSES AND LEGAL FEES. Whether or not the transactions contemplated hereby are consummated, each party hereto shall bear its own costs and expenses (including attorneys' fees and expenses, and specifically, Shareholder shall be responsible for all costs and expenses of Shareholder and the Company) in negotiating and consummating the transactions contemplated herein, including, without limitation, legal and accounting fees and expenses). Section 8.8 AUDITS. Parent shall promptly notify Shareholder in writing in the case of a tax audit or administrative or judicial proceeding of the Company that relates to periods ending on or before the Closing Date. Shareholder shall have the right at his expense to participate in 26 and control the conduct of such audit or proceeding. Shareholder shall keep Parent informed of the progress of any such audit or proceeding and if it appears in the reasonable discretion of Parent that such audit or proceeding may adversely affect Parent, Parent also may participate in any such audit or preceding, which shall be at Shareholder's expense as long as such proceeding is an event which Parent is entitled to be indemnified for under Section 8.1 above. Parent shall cooperate on a reasonable basis with Shareholder to enable the Shareholder to take all actions with respect to such audit or proceeding. Neither Shareholder nor Parent shall enter into any compromise or agree to settle any claim pursuant to any tax audit or proceeding which would aversely affect the other party for such year without the written consent of the other party, which consent may not be unreasonably withheld. ARTICLE IX MISCELLANEOUS Section 9.1 AMENDMENT. This Agreement may be amended, modified or supplemented only by an instrument in writing executed by all the parties hereto. Section 9.2 ASSIGNMENT. Neither this Agreement nor any right created hereby or in any agreement entered into in connection with the transactions contemplated hereby shall be assignable by any party hereto, except by Parent or Merger Sub to an affiliate of Parent, and except that Shareholder may assign all or any portion of the earn-out consideration described in Section 2.5(b) above to a trust or family limited partnership for the benefit of Shareholder or his immediate family members (parent, grandparent, spouse, children, grandchildren and siblings); provided that such trust or family limited partnership executes and delivers to Parent an agreement, in form and substance reasonably satisfactory to Parent, stating that such trust or family limited partnership's right to receive any such earn-out consideration are the same as Shareholder's right to receive the same were prior to such assignment and accordingly, that such assignee is bound by the terms and provisions of this Agreement and, accordingly takes such assignment subject to the terms and provisions of this Agreement.. Section 9.3 PARTIES IN INTEREST; NO THIRD PARTY BENEFICIARIES. Except as otherwise provided herein, the terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective heirs, legal representatives, successors and assigns of the parties hereto. Neither this Agreement nor any other agreement contemplated hereby shall be deemed to confer upon any person not a party hereto or thereto any rights or remedies hereunder or thereunder. Section 9.4 ENTIRE AGREEMENT. This Agreement and the agreements contemplated hereby constitute the entire agreement of the parties regarding the subject matter hereof, and supersede all prior agreements and understandings, both written and oral, among the parties, or any of them, with respect to the subject matter hereof. Section 9.5 SEVERABILITY. If any provision of this Agreement is held to be illegal, invalid or unenforceable under present or future laws effective during the term hereof, such provision shall be fully severable and this Agreement shall be construed and enforced as if such illegal, invalid or unenforceable provision never comprised a part hereof; and the remaining provisions hereof shall remain in full force and effect and shall not be affected by the illegal, 27 invalid or unenforceable provision or by its severance herefrom. Furthermore, in lieu of such illegal, invalid or unenforceable provision, there shall be added automatically as part of this Agreement a provision as similar in its terms to such illegal, invalid or unenforceable provision as may be possible and be legal, valid and enforceable. Section 9.6 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS. The representations and warranties contained herein shall survive the Closing and all statements contained in any certificate, exhibit or other instrument delivered by or on behalf of the Company, Shareholder or Parent pursuant to this Agreement shall be deemed to have been representations and warranties by the Company and Shareholder or Parent, as the case may be, and, notwithstanding any provision in this Agreement to the contrary, shall survive the Closing for a period of eighteen months (the "Indemnification Period") except for the representations and warranties set forth in Sections 3.1, 3.2, 3.4, 3.16, 4.1, 4.5, 5.1, 5.2 and 5.7, which shall survive the Closing until the running of any applicable statutes of limitation. Section 9.7 GOVERNING LAW. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HERETO SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE SUBSTANTIVE LAWS (BUT NOT THE RULES GOVERNING CONFLICTS OF LAWS) OF THE STATE OF TEXAS. Section 9.8 CAPTIONS. The captions in this Agreement are for convenience of reference only and shall not limit or otherwise affect any of the terms or provisions hereof. Section 9.9 CONFIDENTIALITY; PUBLICITY AND DISCLOSURES. Neither party shall make any press release or public disclosure, either written or oral, regarding the transactions contemplated by this Agreement without the prior knowledge and consent of the other parties hereto; provided that the foregoing shall not prohibit any disclosure (i) by press release, filing or otherwise that is required by federal securities laws or the rules of the Nasdaq National Market, (ii) to attorneys, accountants, investment bankers or other agents of the parties assisting the parties in connection with the transactions contemplated by this Agreement, (iii) by Parent in connection with obtaining financing for the transactions contemplated by this Agreement and conducting an examination of the operations and assets of the Company and (iv) Parent may issue to the public a press release substantially in the form of Exhibit M attached hereto. Section 9.10 NOTICE. All notices and other communications hereunder shall be in writing and shall be given by personal delivery, mailed by registered or certified mail (postage prepaid, return receipt requested), sent by facsimile transmission, sent by a nationally recognized overnight courier service or sent by electronic submission to the parties at the following addresses (or at such other address for a party as is specified by like change of address): If to Parent: Mobility Electronics, Inc., 7955 East Redfield Road Scottsdale, Arizona 85260 Attn: Chief Executive Officer Fax No.: 480-596-0349 28 With a copy (which Richard F. Dahlson, Esq. shall not constitute Jackson Walker L.L.P. notice) to: 2435 N. Central Expressway, Suite 600 Richardson, Texas 75080 Fax No.: 972-744-2990 If to the Company c/o Jeff Musa or Shareholder: 2351 W. Northwest Highway, Suite 3265 Dallas, Texas 75220 Fax No.: 214-956-9678 With a copy (which Lawrence B. Goldstein, Esq. shall not constitute Gardere Wynne Sewell LLP notice) to: 1601 Elm Street, Suite 3000 Dallas, Texas 75201 Fax No.: 214-999-3564 Notice shall be deemed received (a) on the business day following the date on which it is deposited with a nationally recognized and reputable overnight courier service, (b) on the date on which it is delivered personally, (c) when sent by facsimile with confirmation of receipt received by sender, or (d) on the third business day following the date on which it is deposited in the U. S. mail. Section 9.11 SHAREHOLDER RELEASES; CONSENT. Effective as of the Effective Date, Shareholder hereby irrevocably waives, releases, and discharges the Company and each affiliate of the Company and its subsidiaries from any and all liabilities and obligations to such Shareholder of any kind or nature whatsoever, whether as a shareholder, officer, director or employee of the Company, any of its subsidiaries or otherwise, existing as of the Effective Time including without limitation liabilities or obligations relating to rights of contribution or indemnification, in each case whether absolute or contingent, liquidated or unliquidated, and whether arising at law or in equity, and Shareholder hereby agrees that it will not seek to recover any amounts in connection therewith or thereunder from the Company, or any of its subsidiaries; provided that nothing in this Section 9.11 will constitute a waiver of any claims Shareholder may have against the Parent or Merger Sub arising under this Agreement or the agreements contemplated hereby and hereby agrees that any and all agreements to which Shareholder is a party and which relate to Shareholder's ownership or voting of Company Stock or options to acquire Company Stock or the right to designate directors are terminated and of no further force or effect. Section 9.12 COUNTERPARTS. This Agreement may be executed in multiple counterparts, each of which shall be deemed an original, and all of which together shall constitute one and the same instrument. 29 EXECUTED as of the date first above written. MOBILITY ELECTRONICS, INC. By: /s/Charles R. Mollo ---------------------------------------------- Charles R. Mollo, Chief Executive Officer CES ACQUISITION, INC. By: /s/Charles R. Mollo ---------------------------------------------- Charles R. Mollo, President CUTTING EDGE SOFTWARE, INC. By: /s/Jeff Musa ---------------------------------------------- Jeff Musa, President /s/Jeff Musa ------------------------------------------------- Jeff Musa 30 EXHIBIT A DEFINITIONS "CLOSING" shall mean the closing of the transactions contemplated by this Agreement, which shall occur at 10:00 a.m., local time, on the date hereof, in the offices of Jackson Walker L.L.P., 2435 N. Central Expressway, Suite 600, Richardson, Texas 75080, or at such other time and place as shall be mutually agreed in writing by the parties hereto. "CODE" shall mean the Internal Revenue Code of 1986, as amended. "COMMITMENTS" shall have the meaning set forth in Section 3.13. "CONFERENCE SOFTWARE" or "CONFERENCE PRODUCTS" shall mean the Company's conference technology and products, including without limitation, the technology and products listed on Exhibit A-1 attached hereto, but excluding however, Non-Conference Products and technology. "CURRENT MARKET PRICE" shall mean (i) if the principal trading market for the Parent Common Stock is a United States national or regional securities exchange, the average closing price of the Parent Common Stock on such exchange for the period indicated where this definition is used; or (ii) if sales prices for shares of Parent Common Stock are reported by the Nasdaq National Market or Small Cap Market (or a similar system then in use), the average last reported sales price so reported of the Parent Common Stock for the period indicated where this definition is used; or (iii) if neither (i) nor (ii) above are applicable, and if bid and ask prices for shares of Parent Common Stock are reported in the over-the-counter market by Nasdaq (or, if not so reported, by the National Quotation Bureau), the average of the high bid and low ask prices so reported of the Parent Common Stock for the period indicated where this definition is used. Notwithstanding the foregoing, if there is no reported closing price, last reported sales price, or bid and ask prices, as the case may be, for a particular trading day during the period in question, then the current market price for such day shall be determined as of the last trading day before the day in question during the latest period indicated where this definition is used for which such closing price, last reported sales price, or bid and ask prices, as the case may be, are available, unless such securities have not been traded on an exchange or in the over-the-counter market for the period indicated where this definition is used, in which case the current market price of a share of Parent Common Stock shall be determined in good faith by agreement between Parent and Shareholder, or if they do not agree, by appraisal. If Parent declares a stock dividend, stock split, reverse stock split or the like during any period for which Current Market Price is being determined, then the Current Market Price during such period shall be appropriately adjusted to reflect such event. "DAMAGES" shall have the meaning set forth in Section 8.1. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended. "EFFECTIVE DATE" shall have the meaning set forth in Section 2.3. M-1 "GAAP" shall mean United States generally accepted accounting principles applied on a consistent basis for all time periods. "INDEMNIFICATION PERIOD" shall have the meaning set forth in Section 9.6. "INDEMNIFYING PARTY" shall have the meaning set forth in Section 8.3. "KNOWLEDGE" "HAVE NO KNOWLEDGE OF" "BEST KNOWLEDGE" and similar phrases shall mean actual knowledge, not constructive knowledge, and shall not imply any obligation on behalf of the person whose knowledge is in question to investigate facts before concluding that such person has no knowledge of a particular fact; provided, however, for purposes of Section 3.15 "knowledge" includes what is actually known by Shareholder and all developers and engineers of the Company. "MERGER CONSIDERATION" shall have the meaning set forth in Section 2.5. "ORDINARY COURSE OF BUSINESS" means the usual and customary way in which the Company or any Subsidiary, as the case may be, has conducted its business in the past. "OTHER PRODUCTS" shall mean all products of the Company (including all technology and software included therein and all derivative products), except for Conference Products. "PARENT COMMON STOCK" shall have the meaning set forth in Section 2.5(a). "PARTY TO BE INDEMNIFIED" shall have the meaning set forth in Section 8.3. "SECOND EFFECTIVE TIME" shall have the meaning set forth in Section 2.1(b). "SEC" shall mean the Securities and Exchange Commission. "SECURITIES ACT" shall mean the Securities Act of 1933, as amended. "SUBSIDIARY" shall mean any corporation, partnership, joint venture or other legal entity of which the Company owns, directly or indirectly, 100% of the stock or other equity interests the holders of which are generally entitled to vote for the election of the board of directors or other governing body of such corporation or other legal entity; and shall include within the meaning of the term each Subsidiary, as defined above, of any Subsidiary of the Company. "SURVIVING CORPORATION" shall have the meaning set forth in Section 2.1. "TBCA" shall mean the Texas Business Corporation Act. "THIRD PARTY CLAIMS" shall have the meaning set forth in Section 8.2. M-2 EX-10.5 6 d01471exv10w5.txt LOCKUP AGREEMENT EXHIBIT 10.5 LOCKUP AGREEMENT This Lockup Agreement (this "Agreement") is made and entered into as of August 20, 2002, by and between Mobility Electronics, Inc., a Delaware corporation ("Parent"), and Jeff Musa ("Shareholder"). Terms used herein but not otherwise defined shall have the meanings ascribed thereto in the Merger Agreement (as defined below). WHEREAS, CES Acquisition, Inc., a Texas corporation and wholly-owned subsidiary of Parent ("Merger Sub"), Parent, Cutting Edge Software, Inc., a Texas corporation (the "Company"), and Jeff Musa, as the sole shareholder of the Company, have entered into that certain Agreement and Plan of Merger, of even date herewith (the "Merger Agreement"), pursuant to which, among other things, Merger Sub will be merged with and into the Company (the "Merger"); and WHEREAS, as a condition to and an inducement to Parent's agreement to consummate the Merger, Shareholder has agreed to enter into this Agreement; and WHEREAS, the agreements of Shareholder contained herein are an important aspect of the Merger, and Parent would not have entered into the Merger Agreement absent the covenant contained therein providing for the execution by Shareholder of this Agreement. NOW, THEREFORE, for and in consideration of the agreements and other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties agree as follows: 1. Lockup. Without the prior written consent of Parent, Shareholder agrees not to, directly or indirectly, offer, sell, contract to sell, grant any option to purchase, hypothecate, pledge, grant any rights with respect to or otherwise dispose of (each, a "Transfer") the following shares of Parent Common Stock acquired by Shareholder pursuant to the Agreement and Plan of Merger (the "Locked Up Shares"): (a) 597,295, which shares represent seventy-five percent (75%) of the Shares, during the first ninety (90) day period from and after from the Effective Date; (b) 398,197, which shares represent fifty percent (50%) of the Shares, during the second ninety (90) day period from and after from the Effective Date; and (c) 199,098, which shares represent twenty-five percent (25%) of the Shares, during the third ninety (90) day period from and after from the Effective Date. Notwithstanding the foregoing, Shareholder may Transfer all or any portion of the Locked Up Shares in a private transaction or a series of private transactions if the transferee or transferees execute an agreement with Parent (which agreement shall be reasonably satisfactory to Parent) to the effect that the Locked Up Shares shall be subject to the restrictions set forth in this Agreement. Shareholder agrees and consents to the entry of stop transfer instructions with the transfer agent for the Parent Common Stock against the transfer of the Locked Up Shares 1 held by Shareholder except in compliance with the foregoing restrictions. Shareholder is aware that Parent is relying upon this Agreement in entering into the Agreement and Plan of Merger. 2. Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware, without regard to its choice of law principles. 3. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original and all of which shall constitute one and the same instrument, but only one of which need be produced. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first set forth above. MOBILITY ELECTRONICS, INC. By: /S/ Charles R. Mollo Charles R. Mollo, Chief Executive Officer /S/ Jeff Musa Jeff Musa 2 EX-10.6 7 d01471exv10w6.txt PURCHASE AGREEMENT EXHIBIT 10.6 PURCHASE AGREEMENT This Purchase Agreement (this "Agreement"), dated as of November __, 2002, is entered into by and between Richard C. Liggitt ("Liggitt") and Mobility Electronics, Inc., a Delaware corporation ("Mobility"). Each of the parties hereto is sometimes referred to herein as a "Party", and collectively, as the "Parties". 1. Background. Mobility, Portsmith, Inc., a Delaware corporation ("Old Portsmith"), certain stockholders of Old Portsmith and Mobility Europe Holdings, Inc., a Delaware corporation and wholly-owned subsidiary of Mobility ("New Portsmith"), are parties to that certain Agreement and Plan of Merger, dated as of February 20, 2002 (the "Merger Agreement"). Pursuant to the terms of the Merger Agreement, among other things, Old Portsmith was merged with and into New Portsmith and the stockholders of Old Portsmith (the "Stockholders") received an aggregate of 800,000 shares of the common stock, par value $0.01 per share, of Mobility (the "Common Stock"), of which 400,000 shares are currently held in escrow by Jackson Walker L.L.P. ("JW") under a Stock Escrow Agreement, dated as of February 20, 2002, by and among Mobility, JW and Holmes Lundt as the representative of certain persons listed on Schedule I thereto (the "Escrow Agreement"). In addition, pursuant to the terms of the Merger Agreement, the Stockholders are entitled to receive under the Merger Agreement a Performance Earn Out (as defined in the Merger Agreement) and a Revenue Earn Out (as defined in the Merger Agreement). Under the Merger Agreement, Liggitt, as a Stockholder, has received 53,647 shares of Common Stock (the "Liggitt Held Stock"), is entitled to receive up to 53,646 shares of Common Stock held by JW under the Escrow Agreement (the "Liggitt Escrowed Stock"), is entitled to receive 6.1156748% (the "Liggitt Earn Out Share") of the 45.6000000% Performance Earn Out which may be paid under the Merger Agreement, and is entitled to receive 13.4115675% (the "Liggitt Revenue Share") of the 100.0000000% Revenue Earn Out which may be paid under the Merger Agreement (collectively and together with any and all rights, titles and interests related thereto, the "Liggitt Interests"). 2. Sale of the Liggitt Interests. Liggitt hereby sells, assigns and transfers to Mobility the Liggitt Interests, in consideration for which Mobility shall issue to Liggitt a Convertible Subordinated Promissory Note, in the original principal amount of $990,000.00, and otherwise in the form of Exhibit A attached hereto (the "Promissory Note"). Contemporaneously with the execution and delivery of the Promissory Note, Liggitt shall deliver to Mobility a stock certificate representing the Liggitt Held Stock, either endorsed over to Mobility or with appropriate stock powers, executed in blank. The Parties also agree that: (i) the Merger Agreement shall be amended to reflect the assignment from Liggitt to Mobility of the Liggitt Escrowed Stock, the Liggitt Earn Out Shares and the Liggitt Revenue Shares; and (ii) the Escrow Agreement shall be amended to reflect the assignment from Liggitt to Mobility of the Liggitt Escrowed Stock. 3. Representations and Warranties of the Parties. (a) Liggitt hereby represents, warrants and covenants to Purchaser as follows: 1 (i) this Agreement is a legal, valid and binding obligation of Liggitt, enforceable against Liggitt in accordance with its terms; (ii) Liggitt is the legal and beneficial owner of the Liggitt Interests, free and clear of any liens, claims or encumbrances; (iii) Liggitt has the right, power and authority to execute and deliver this Agreement and to consummate the transactions set forth herein; (iv) the delivery of the Liggitt Interests to Mobility will convey to Mobility legal, valid and marketable title to the Liggitt Interests, free and clear of all liens, security interests, or other encumbrances of any character whatsoever; and (v) Liggitt is an "accredited investor" within the meaning of Rule 501(a) of Regulation D under the Securities Act of 1933, as amended. Liggitt, by reason of his business and/or financial experience, can be reasonably assumed to have the capacity to protect his own interests in connection with this transaction. (b) Mobility hereby represents, warrants and covenants to Liggitt as follows: (i) this Agreement and the Promissory Note are legal, valid and binding obligations of Mobility, enforceable against Mobility in accordance with their respective terms; (ii) Mobility has the right, power and authority to execute and deliver this Agreement and the Promissory Note and to consummate the transactions set forth herein and therein; and (iii) Mobility has reserved from its authorized but unissued shares of Common Stock sufficient shares to be issued upon conversion of the Promissory Note. (c) THE PARTIES ACKNOWLEDGE THAT THEY HAVE HAD THE OPPORTUNITY TO OBTAIN, AND HAVE OBTAINED, ADVICE ON THE TERMS OF THIS AGREEMENT FROM INDEPENDENT LEGAL COUNSEL RETAINED TO REPRESENT THEM IN THIS MATTER AND ARE EXERCISING THEIR OWN INDEPENDENT JUDGMENT IN EXECUTING THIS AGREEMENT. EACH OF THE PARTIES HAS CONDUCTED ITS OWN ANALYSIS REGARDING, AND DUE DILIGENCE CONCERNING, THIS AGREEMENT, AND IN THE CASE OF LIGGITT, THE COMPANY, INCLUDING WITHOUT LIMITATION, ITS FINANCIAL CONDITION AND OPERATIONS. ALTHOUGH ONE PARTY OR THE OTHER MAY HAVE PREPARED CERTAIN OF THE LANGUAGE IN THIS AGREEMENT, THIS AGREEMENT IS THE PRODUCT OF ARMS-LENGTH NEGOTIATIONS BETWEEN SOPHISTICATED PARTIES. EACH PARTY WAIVES ANY RULE OF CONTRACT CONSTRUCTION WHEREBY AN AMBIGUITY WOULD BE CONSTRUED AGAINST THE DRAFTING PARTY. (d) THE PARTIES FURTHER EACH WARRANT AND REPRESENT THAT NO PROMISE OR INDUCEMENT HAS BEEN OFFERED EXCEPT AS SET FORTH HEREIN. THIS AGREEMENT IS EXECUTED WITHOUT RELIANCE UPON ANY ORAL, WRITTEN, EXPRESS OR IMPLIED REPRESENTATIONS, STATEMENTS, PROMISES, WARRANTIES OR OTHER INDUCEMENT OF ANY NATURE OR SORT MADE BY ANY PERSON OR PARTY OTHER THAN AS IS EXPRESSLY SET FORTH IN THIS AGREEMENT, THE PROMISSORY NOTE AND THE SETTLEMENT AGREEMENT 2 (AS DEFINED IN SECTION 4 BELOW). EACH OF THE PARTIES AGREES THAT ANY OMISSIONS OF FACTS CONCERNING THE MATTERS COVERED BY THIS AGREEMENT ARE OF NO CONSEQUENCE IN THE DETERMINATION TO EXECUTE THIS AGREEMENT. 4. Entire Agreement. This Agreement, the Promissory Note and the Compromise Settlement Agreement, dated ________, 2002, by and among Liggitt, the Company and certain other persons and entities (the "Settlement Agreement"), contains the entire agreement among the Parties with respect to the transactions contemplated herein, and supercedes all prior agreements, written or oral, and letters with respect hereto. This Agreement may be amended or superseded, and the terms and conditions hereof may be waived only by a written instrument signed by each of the Parties, or, in the case of a waiver, by the Party waiving compliance. 5. Governing Law and Venue. THIS AGREEMENT SHALL BE GOVERNED AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA. The Parties agree that any action arising from this Agreement shall be filed in the Superior Court of the State of California, County of Orange, and the Parties further agree to submit to the jurisdiction of that Court. 6. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be an original, but all of which together shall be considered one and the same instrument. IN WITNESS WHEREOF, the Parties have executed this Agreement on the date first written above. MOBILITY ELECTRONICS, INC. By: ------------------------------ --------------------------------- --------------------------------- Richard C. Liggitt 3 EX-10.7 8 d01471exv10w7.txt COMPROMISE SETTLEMENT AGREEMENT EXHIBIT 10.7 COMPROMISE SETTLEMENT AGREEMENT 1. PARTIES. This Compromise Settlement Agreement (this "Agreement") is executed and entered into by and between: 1.1. Mobility Electronics, Inc. ("Mobility"); 1.2. Portsmith, Inc. ("Portsmith") f/k/a Mobility Europe Holding, Inc., successor by merger to Portsmith, Inc.; 1.3. Holmes Lundt ("Lundt"); 1.4. Jess Asla ("Asla"); 1.5. Richard Neff ("Neff"); 1.6. Dan Axtman ("Axtman") (Lundt, Asla, Neff, and Axtman will be referred to collectively as the "Individual Defendants"; Portsmith and the Individual Defendants will be referred to collectively as the "Defendants"); and, 1.7. Richard C. Liggitt as an individual and as the personal representative of Portable Technologies, Inc. ("Liggitt") (Liggitt and Defendants will be referred to collectively as the "Parties.") 2. RECITALS AND DEFINITIONS. 2.1. Liggitt and the Defendants are parties to a lawsuit (the "Lawsuit"), styled Richard C. Liggitt vs. Portsmith, Inc., Holmes Lundt, Jess Asla, Richard Neff and Dan Axtman, pending in the Superior Court of the State of California, County of Orange, Case No. 02-CC-03308, wherein Liggitt has asserted against Defendants claims for fraud, breach of fiduciary duty, wrongful termination, breach of contract and alter ego and seeking, inter alia, alleged actual damages, attorney's fees, and punitive damages (collectively, the "Liggitt Causes of Action"). 2.2. In the Lawsuit, Portsmith has filed a cross-complaint against Liggitt asserting claims for securities fraud, fraud, negligent misrepresentation, breach of contract and breach of fiduciary duties (collectively, the "Portsmith Causes of Action"). 2.3. Liggitt separately is a party to a lawsuit (the "Snell Lawsuit"), styled Richard C. Liggitt vs. Snell & Wilmer, William T. Gay, and David S. Beard, pending in the Superior Court of the State of California, County of Orange. 2.4. Liggitt also has filed a complaint with the California Labor Commissioner (the "Labor Complaint") contending that he was wrongfully terminated and is owed back salary and other compensation. COMPROMISE SETTLEMENT AGREEMENT PAGE 1 2.5. The Lawsuit and the Labor Complaint arise from that certain Agreement and Plan of Merger (the "PTI Merger Agreement") dated on or about October 6, 2000, between Portsmith, an entity known as Portable Technologies, Inc. ("PTI"), and Liggitt, as the sole shareholder of PTI. The PTI Merger Agreement resulted in the merger of PTI into Portsmith effective October 12, 2000. 2.6. In connection with the PTI Merger, Liggitt and Portsmith entered into an employment agreement (the "Employment Agreement") and a noncompetition agreement (the "Noncompetition Agreement"). 2.7. On or about February 21, 2002, Mobility Europe Holdings, Inc., a wholly owned subsidiary of Mobility, entered into a merger (the "Mobility Merger") with Portsmith, Inc. and the surviving corporation was Mobility Europe Holdings, Inc., which subsequently changed its name to Portsmith, Inc. The Mobility Merger was effected pursuant to that certain Agreement and Plan of Merger (the "Mobility Merger Agreement") dated as of February 20, 2002. 2.8. Liggitt and the Defendants have denied all liability to each other in response to the respective claims made in the Lawsuit. 2.9. While continuing to deny liability and acting solely for the purposes of compromising and settling their disputes and the Lawsuit, and in order to avoid the risk, cost, and burden of further litigation and participation therein, the Parties desire to settle all matters in controversy between them. 2.10. The Parties intend for this Agreement, and all of their obligations hereunder, to be contingent and expressly conditioned upon an order from the court presiding over the Lawsuit (the "Court") that this settlement is reasonable and in good faith under and pursuant to California Code of Civil Procedure section 877.6. 2.11. The "Effective Date" of this Agreement shall be the date upon which the Court enters its determination that this settlement is reasonable and in good faith under and pursuant to California Code of Civil Procedure section 877.6. NOW, THEREFORE, in consideration of the foregoing, the obligations in this Agreement and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereby agree as follows: 3. CONDITION PRECEDENT 3.1. The Parties agree that this Agreement, and all of their obligations hereunder, are contingent and expressly conditioned upon an order from the Court that this settlement is reasonable and in good faith under and pursuant to California Code of Civil Procedure section 877.6 (hereinafter "Good Faith Settlement Determination"). In the event that the Court refuses to make a Good Faith Settlement Determination, then this Agreement, and all the Parties' obligations hereunder, shall be null and void. COMPROMISE SETTLEMENT AGREEMENT PAGE 2 4. MUTUAL RELEASES. 4.1. RELEASE BY LIGGITT. LIGGITT HEREBY FOREVER RELEASES, RELINQUISHES, WAIVES AND DISCHARGES DEFENDANTS AND MOBILITY, AND, AS APPROPRIATE, THEIR RESPECTIVE SUCCESSORS, AFFILIATES, SHAREHOLDERS, OWNERS, REPRESENTATIVES, OFFICERS, DIRECTORS, AGENTS, ATTORNEYS, CONTRACTORS, EMPLOYEES AND ASSIGNS, PAST AND PRESENT, INDIVIDUALLY AND JOINTLY, FROM ANY AND ALL CLAIMS AND CAUSES OF ACTION (WHETHER COMMON LAW, STATUTORY, STATE, FEDERAL, AND WHETHER OR NOT REDUCED TO JUDGMENT, LIQUIDATED, UNLIQUIDATED, FIXED, CONTINGENT, MATURED, UNMATURED, DISPUTED, UNDISPUTED, LEGAL, EQUITABLE, SECURED OR UNSECURED), DEMANDS, DISPUTES, DAMAGES, COSTS, LOSSES, DETRIMENTS, INTEREST, EXPENSES, ATTORNEYS' FEES, ACTIONS, DEBTS, CONTROVERSIES, SUITS, AND CHOSES IN ACTION) OF WHATEVER NATURE, RELATING TO, IN CONNECTION WITH, ARISING, OR TO ARISE, DIRECTLY OR INDIRECTLY, OUT OF (i) LIGGITT CAUSES OF ACTION, AS WELL AS THE EVENTS, TRANSACTIONS, OR OCCURRENCES DESCRIBED IN OR WHICH COULD HAVE BEEN DESCRIBED IN THE LAWSUIT, (ii) THE EVENTS, TRANSACTIONS, OR OCCURRENCES DESCRIBED IN OR WHICH COULD HAVE BEEN DESCRIBED IN THE LABOR COMPLAINT, (iii) THE PTI MERGER, (iv) THE MOBILITY MERGER, (v) THE EMPLOYMENT AGREEMENT, (vi) THE NONCOMPETITION AGREEMENT, (vii) THE PTI MERGER AGREEMENT, AND, (viii) THE MOBILITY MERGER AGREEMENT. NOTWITHSTANDING THE FOREGOING, LIGGITT DOES NOT INTEND TO RELEASE DEFENDANTS OR MOBILITY FROM THEIR OBLIGATIONS UNDER SECTIONS 5, 6, 7 AND 8 OF THIS AGREEMENT, THE AGREED PROTECTIVE ORDER ENTERED INTO IN THE LAWSUIT, THE PURCHASE AGREEMENT, EXECUTED CONTEMPORANEOUSLY HEREWITH, BY AND BETWEEN MOBILITY AND LIGGITT (THE "PURCHASE AGREEMENT"), OR THE PROMISSORY NOTE, EXECUTED CONTEMPORANEOUSLY HEREWITH, BY AND BETWEEN MOBILITY AND LIGGITT, IN THE AMOUNT OF $990,000 (THE "PROMISSORY NOTE"). 4.2. RELEASE BY DEFENDANTS AND MOBILITY.DEFENDANTS AND MOBILITY, AND EACH OF THEM, HEREBY FOREVER RELEASE, RELINQUISH, WAIVE AND DISCHARGE LIGGITT, AS WELL AS LIGGITT'S SUCCESSORS, AGENTS, ATTORNEYS, CONTRACTORS, EMPLOYEES AND ASSIGNS, PAST AND PRESENT, INDIVIDUALLY AND JOINTLY, FROM ANY AND ALL CLAIMS AND CAUSES OF ACTION (WHETHER COMMON LAW, STATUTORY, STATE, FEDERAL, AND WHETHER OR NOT REDUCED TO JUDGMENT, LIQUIDATED, UNLIQUIDATED, FIXED, CONTINGENT, MATURED, UNMATURED, DISPUTED, UNDISPUTED, LEGAL, EQUITABLE, SECURED OR UNSECURED), DEMANDS, DISPUTES, DAMAGES, COSTS, LOSSES, DETRIMENTS, INTEREST, EXPENSES, ATTORNEYS' FEES, ACTIONS, DEBTS, CONTROVERSIES, SUITS, AND CHOSES IN ACTION) OF WHATEVER NATURE, RELATING TO, IN CONNECTION WITH, ARISING, OR TO ARISE, DIRECTLY OR INDIRECTLY, OUT OF (i) PORTSMITH CAUSES OF ACTION, AS WELL AS THE EVENTS, TRANSACTIONS, OR OCCURRENCES DESCRIBED IN OR WHICH COULD HAVE BEEN DESCRIBED IN THE LAWSUIT, (ii) THE EVENTS, TRANSACTIONS, OR OCCURRENCES DESCRIBED IN OR WHICH COULD HAVE BEEN DESCRIBED IN THE LABOR COMPLAINT, (iii) THE PTI MERGER, (iv) THE MOBILITY MERGER, (v) THE EMPLOYMENT AGREEMENT, (vi) THE NONCOMPETITION AGREEMENT, (vii) THE PTI MERGER AGREEMENT, AND, (viii) THE MOBILITY MERGER AGREEMENT. NOTWITHSTANDING THE FOREGOING, DEFENDANTS AND MOBILITY DO NOT INTEND TO RELEASE LIGGITT FROM HIS OBLIGATIONS UNDER SECTIONS 6, 7 AND 8 OF THIS AGREEMENT, THE AGREED PROTECTIVE ORDER ENTERED INTO IN THE LAWSUIT, THE PURCHASE AGREEMENT OR THE PROMISSORY NOTE. 4.3. The Parties hereby waive any and all provisions, rights and benefits conferred by section 1542 of the California Civil Code or any comparable statutory or common law provision of any other jurisdiction. Section 1542 reads as follows: Certain Claims Not Affected By General Release: A general release does not extend to claims which the creditor does not know or suspect COMPROMISE SETTLEMENT AGREEMENT PAGE 3 to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor. Although the releases granted under this Agreement are not general releases, the Parties nonetheless expressly acknowledge that they are waiving the protections of section 1542 and of any comparable statutory or common law provision of any other jurisdiction. 5. SETTLEMENT CONSIDERATION 5.1. Upon execution of this Agreement by the Parties and dismissal of the Lawsuit and the Labor Complaint, Mobility shall pay to Liggitt Ten Thousand and No/100 dollars ($10,000.00) (the "Settlement Consideration."), which payment shall be made by wire transfer of immediately available funds. 5.2. Contemporaneous with the execution of this Agreement by the Parties, Liggitt and Mobility have executed and delivered to the law firm of Jackson Walker L.L.P. c/o Richard Dahlson, Esq., the executed Purchase Agreement, pursuant to which Liggitt has sold to Mobility all stock and other economic interests Liggitt has or is entitled to received from Mobility as a result of the Mobility Merger, and, Mobility has executed and delivered to the law firm of Jackson Walker L.L.P. c/o Richard Dahlson, Esq., the Promissory Note, in the principal amount of $990,000. The executed Purchase Agreement and the executed Promissory Note shall be held in trust by the law firm of Jackson Walker L.L.P. until such time as the Court enters a Good Faith Settlement Determination, at which point the executed Purchase Agreement shall promptly be delivered to Mobility and to Liggitt and the executed Promissory Note shall promptly be delivered to Liggitt. However, in the event that the Court refuses to enter a Good Faith Settlement Determination, then Jackson Walker L.L.P. shall destroy the executed Purchase Agreement and the executed Promissory Note. 6. THIRD PARTY CLAIMS 6.1. The Parties agree that they shall promptly seek entry by the Court of an order that this settlement is reasonable and in good faith under and pursuant to California Code of Civil Procedure section 877.6. A motion requesting a Good Faith Settlement Determination shall be prepared by counsel for Defendants and promptly filed with the Court and served upon counsel for Liggitt. Counsel for Liggitt will promptly file a joinder in Defendants' motion or shall file a motion on behalf of Liggitt seeking the same relief. 6.2. If the Court enters a Good Faith Settlement Determination under and pursuant to California Code of Civil Procedure Section 877.6, then Liggitt shall indemnify and hold Defendants and Mobility completely harmless from any and all liability, claims, and responsibility of any nature, including attorney's fees, arising or that may arise in the future as a result of or relating to the Liggitt Causes of Action being released by this Agreement including, without limitation, any claims that have been or may be asserted in the Snell Lawsuit, or which have been or may be made by the law firm of Snell & Wilmer or any attorney associated with the law firm of Snell & Wilmer, or their assigns, successors or anyone in privity with them. This indemnification expressly excludes any and all liability, claims, and responsibility of any nature, including attorney's fees, arising or that may COMPROMISE SETTLEMENT AGREEMENT PAGE 4 arise in the future as a result of or relating to the Portsmith Causes of Action being released by this Agreement. 6.3. Notwithstanding anything in this Section 6 to the contrary, if an Event of Default (as defined in the Promissory Note) has occurred and is continuing, then the indemnity provided in Section 6.2 shall be excused during the period of default. 7. PTI TAX LIABILITY 7.1. Liggitt agrees to indemnify and hold Defendants and Mobility completely harmless of and from any liability for PTI taxes, or interest or penalties thereon, for the tax periods prior to January 1, 2000. 7.2. The Parties agree that Liggitt and Mobility shall each be liable for fifty percent (50%) of any federal or state income taxes, or penalties or interest thereon, if any, on PTI's income for the tax period from January 1, 2000, to October 12, 2000 7.3. The Parties further agree that Mobility shall be liable for all federal and state income taxes, if any, on PTI"s income, or Portsmith's income attributable to the operations of PTI, from and after October 13, 2000. 7.4. The Parties agree that within sixty (60) days of the Effective Date, Mobility shall prepare any required tax returns for the tax period January 1, 2000, to December 31, 2000, with respect to PTI's income or Portsmith's income attributable to the operations of PTI during that tax period. A copy of the tax returns prepared pursuant to this paragraph shall be provided to Liggitt before filing with the appropriate taxing authority. The Parties shall confer in good faith to finalize the proposed returns promptly. Notwithstanding the foregoing, Mobility retains the right of final approval with respect to any dispute concerning the tax returns and shall file the returns with the appropriate taxing authority when, in its sole discretion, they have been finalized. 7.5. The Parties agree that, upon the filing of the final tax returns as specified in paragraph 7.4, Mobility shall pay all taxes due and Liggitt's share of the tax liability shall be deducted from the principal due on the Promissory Note as set forth in the Promissory Note. 8. DISMISSAL OF LAWSUIT AND LABOR COMPLAINT 8.1. Within ten (10) days of the Effective Date, Liggitt and the Defendants agree that the Lawsuit, including all Liggitt Causes of Action and all Portsmith Causes of Action, shall be dismissed with prejudice, pursuant to the form attached hereto as Exhibit A. 8.2. Within ten (10) days of the Effective Date, Liggitt shall submit to the California Labor Commissioner a proposed order of dismissal with prejudice, in the form attached hereto as Exhibit B. Liggitt shall take all steps necessary to ensure the dismissal of the Labor Complaint. 8.3. All Parties shall bear all of their own costs and attorney's fees incurred up to the dismissals of the Lawsuit and the Labor Complaint. Thereafter, costs and fees shall be determined in accordance with paragraph 10.13 of this Agreement, the Promissory Note and the Purchase Agreement. COMPROMISE SETTLEMENT AGREEMENT PAGE 5 9. WARRANTIES AND REPRESENTATIONS. 9.1. Each of the Parties warrants and represents that: (i) he/it is the sole owner of each and every claim, cause of action, right and obligation released pursuant to this Agreement and that he/she/it has not previously assigned, sold, transferred, or conveyed same; (ii) he/it has the full right, power and authority to enter into and execute this Agreement; and (iii) the claims are free of encumbrance. 10. MISCELLANEOUS. 10.1. This document sets forth the entire consideration for this Agreement and said consideration is contractual and not a mere recital. 10.2. This Agreement shall inure to the benefit of and shall be binding upon the Parties and their respective heirs, executors, administrators, trustees, successors, assigns, and all parties in privity with or claiming under them. 10.3. This Agreement, together with the Purchase Agreement and the Promissory Note, embodies, merges and integrates all prior and current agreements and understandings of the Parties hereto with respect to the subject matter hereof, and may not be clarified, modified, changed or amended except in writing signed by each and every one of the signatories hereto or their other authorized representatives. 10.4. All representations and warranties contained herein shall survive the execution and delivery of this Agreement and the execution and delivery of any other document or instrument referred to herein. 10.5. In addition to the acts recited in this Agreement, the Parties hereto agree to perform or cause to be performed on the date of this Agreement or thereafter, any and all such further acts as may be reasonably necessary to consummate the transactions contemplated hereby. 10.6. THE PARTIES ACKNOWLEDGE THAT THEY HAVE HAD THE OPPORTUNITY TO OBTAIN, AND HAVE OBTAINED, ADVICE ON THE TERMS OF THIS AGREEMENT FROM INDEPENDENT LEGAL COUNSEL RETAINED TO REPRESENT THEM IN THIS MATTER AND ARE EXERCISING THEIR OWN INDEPENDENT JUDGMENT IN EXECUTING THIS AGREEMENT. EACH OF THE PARTIES HAS CONDUCTED ITS OWN ANALYSIS REGARDING, AND DUE DILIGENCE CONCERNING, THIS AGREEMENT. ALTHOUGH ONE PARTY OR THE OTHER MAY HAVE PREPARED CERTAIN OF THE LANGUAGE IN THIS AGREEMENT, THIS AGREEMENT IS THE PRODUCT OF ARMS-LENGTH NEGOTIATIONS BETWEEN SOPHISTICATED PARTIES. EACH PARTY HERETO WAIVES ANY RULE OF CONTRACT CONSTRUCTION WHEREBY AN AMBIGUITY WOULD BE CONSTRUED AGAINST THE DRAFTING PARTY. 10.7. THE PARTIES FURTHER EACH WARRANT AND REPRESENT THAT NO PROMISE OR INDUCEMENT HAS BEEN OFFERED EXCEPT AS SET FORTH HEREIN. THIS AGREEMENT IS EXECUTED WITHOUT RELIANCE UPON ANY ORAL, WRITTEN, EXPRESS OR IMPLIED REPRESENTATIONS, STATEMENTS, PROMISES, WARRANTIES OR OTHER INDUCEMENT OF ANY NATURE OR SORT MADE BY ANY PERSON OR PARTY HERETO OTHER THAN AS IS EXPRESSLY SET FORTH HEREIN. EACH OF THE PARTIES AGREES THAT ANY OMISSIONS OF FACTS CONCERNING THE MATTERS COVERED BY THIS AGREEMENT ARE OF NO CONSEQUENCE IN THE DETERMINATION TO EXECUTE THIS AGREEMENT. COMPROMISE SETTLEMENT AGREEMENT PAGE 6 10.8. The Parties agree that this is a compromise, resolution and settlement of their respective claims, primarily to avoid the uncertainty, time, trouble and exposure of litigation, and that such compromise, resolution and settlement shall not be taken as an admission of liability, but rather such liability has been expressly denied. 10.9. This Agreement is intended to be severable. If any term, covenant, condition or provision hereof is determined to be illegal, invalid or unenforceable, for any reason whatsoever, such illegality, invalidity or unenforceability shall not affect the legality, validity or enforceability of the remaining parts of this Agreement. 10.10. This Agreement may be executed in counterparts or with detachable signature pages and shall constitute one agreement, binding upon the Parties thereto as if all parties had signed the same document. A copy of this Agreement or of an original signature to this Agreement shall have the same force and effect as the original. 10.11. The headings used in this Agreement are intended solely for the convenience of reference and should not in any manner amplify, limit, modify or otherwise be used in the interpretation of any of the provisions of this Agreement. 10.12. It is the intent of the Parties to this Agreement to give the broadest release and discharge possible under the law and the provisions hereof should be interpreted and construed so as to give effect to such intent. 10.13. In any claim or action between the Parties involving this agreement, the prevailing party shall be entitled to recover from the adverse party, in addition to damages or other relief, if any, all costs and expenses (whether or not allowable as cost items by law) reasonably incurred in the course of such claim or action, including without limitation, attorney's fees, witness fees (expert or otherwise), deposition costs, copying charges, and other expenses. 10.14. The Parties agree that in any dispute giving rise to a claim or action between the parties, venue is proper in the Superior Court of California, County of Orange. The Parties further agree to submit to the jurisdiction of that court, and that such venue shall be the exclusive venue for the filing of any claim or action arising from this Agreement. 10.15. All notices, requests, demands and other communications given or required to be given hereunder shall be in writing and personally delivered or sent by U.S. registered or certified mail, return receipt requested, or sent by a nationally recognized courier service, such as Fedex, duly addressed to all Parties as follows: COMPROMISE SETTLEMENT AGREEMENT PAGE 7 IF TO RICHARD LIGGITT: RICHARD LIGGITT 7 MARQUETTE WAY COTO DE CAZA, CALIFORNIA 92679 COPY TO: SMITH, CHAPMAN & CAMPBELL 1800 N. BROADWAY SANTA ANA, CA 92706 IF TO MOBILITY: CHARLES R. MOLLO MOBILITY ELECTRONICS, INC. 7955 EAST REDFIELD ROAD SCOTTSDALE, ARIZONA 85260 COPY TO: RICHARD DAHLSON JACKSON WALKER L.L.P. 2435 N. CENTRAL EXPRESSWAY SUITE 600 RICHARDSON, TX. 75080 IF TO PORTSMITH: CHARLES R. MOLLO MOBILITY ELECTRONICS, INC. 7955 EAST REDFIELD ROAD SCOTTSDALE, ARIZONA 85260 COPY TO: RICHARD DAHLSON JACKSON WALKER L.L.P. 2435 N. CENTRAL EXPRESSWAY SUITE 600 RICHARDSON, TX. 75080 IF TO HOLMES LUNDT: HOLMES LUNDT 960 BROADWAY SUITE 300 BOISE, IDAHO 83706 COPY TO: RICHARD DAHLSON JACKSON WALKER L.L.P. 2435 N. CENTRAL EXPRESSWAY SUITE 600 RICHARDSON, TX. 75080 COMPROMISE SETTLEMENT AGREEMENT PAGE 8 IF TO JESS ASLA: JESS ASLA 960 BROADWAY SUITE 300 BOISE, IDAHO 83706 COPY TO: RICHARD DAHLSON JACKSON WALKER L.L.P. 2435 N. CENTRAL EXPRESSWAY SUITE 600 RICHARDSON, TX. 75080 IF TO RICHARD NEFF: RICHARD NEFF 960 BROADWAY SUITE 300 BOISE, IDAHO 83706 COPY TO: RICHARD DAHLSON JACKSON WALKER L.L.P. 2435 N. CENTRAL EXPRESSWAY SUITE 600 RICHARDSON, TX. 75080 IF TO DAN AXTMAN: DAN AXTMAN 960 BROADWAY SUITE 300 BOISE, IDAHO 83706 COPY TO: RICHARD DAHLSON JACKSON WALKER L.L.P. 2435 N. CENTRAL EXPRESSWAY SUITE 600 RICHARDSON, TX. 75080 [REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] COMPROMISE SETTLEMENT AGREEMENT PAGE 9 IN WITNESS WHEREOF, the Parties have caused this Agreement to be duly executed on the ___ day of November, 2002. ----------------------------------- RICHARD C. LIGGITT PORTSMITH, INC. By: -------------------------------- -------------------------------- MOBILITY ELECTRONICS, INC. By: -------------------------------- -------------------------------- ----------------------------------- HOLMES LUNDT ----------------------------------- RICHARD NEFF ----------------------------------- DAN AXTMAN ----------------------------------- JESS ASLA COMPROMISE SETTLEMENT AGREEMENT PAGE 10 APPROVED AS TO FORM: JACKSON WALKER L.L.P. 901 Main Street Suite 6000 Dallas, Texas 75202 (214) 953-6000 (214) 953-5822 (Facsimile) - ----------------------------------- Alan N. Greenspan ATTORNEYS FOR MOBILITY ELECTRONICS, INC., PORTSMITH, INC., HOLMES LUNDT, JESS ASLA, RICHARD NEFF, AND DAN AXTMAN SMITH, CHAPMAN & CAMPBELL 1800 North Broadway Suite 200 Santa Ana, California 92706 - ----------------------------------- William Chapman Stephanie Alexander ATTORNEYS FOR RICHARD C. LIGGITT COMPROMISE SETTLEMENT AGREEMENT PAGE 11 EX-99.1 9 d01471exv99w1.txt CERTIFICATION TO SECTION 906 - CHARLES R. MOLLO EXHIBIT 99.1: CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 The undersigned, the Chief Executive Officer of Mobility Electronics, Inc. (the "Company"), certifies that, to his knowledge on the date of this certification: 1. The quarterly report of the Company for the period ending September 30, 2002 as filed with the Securities and Exchange Commission on this date (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. November 19, 2002 /s/ Charles R. Mollo ---------------------------------------- Charles R. Mollo President and Chief Executive Officer EX-99.2 10 d01471exv99w2.txt CERTIFICATION TO SECTION 906 - JOAN W. BRUBACHER EXHIBIT 99.2: CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 The undersigned, the Chief Financial Officer of Mobility Electronics, Inc. (the "Company"), certifies that, to her knowledge on the date of this certification: 1. The quarterly report of the Company for the period ending September 30, 2002 as filed with the Securities and Exchange Commission on this date (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. November 19, 2002 /s/ Joan W. Brubacher ----------------------------------- Joan W. Brubacher Executive Vice President and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----